Full year results 2019

We have achieved record revenue and profit for the 16th consecutive year, and double digit-organic constant currency revenue growth for the second year running. Our strategic investment is wide-ranging, including creating innovative new technology, products and services, extending our international reach, strengthening our talent base, and acquiring strong businesses in, or adjacent to, our existing markets.

Halma’s purpose is to grow a safer, cleaner and healthier future for everyone, every day. Consequently, we address some of the world’s most fundamental needs and challenges: safety at work and in public spaces; a cleaner, more sustainable environment; and improved medical care. These needs are both global and long-term in nature, and they will continue to gain importance as populations increase, urbanise and age, and as regulation continues to tighten. We expect these factors to drive demand for our solutions far into the future.

We have a clear and focused growth strategy of growing and acquiring businesses in niche markets with global reach in our chosen market areas of safety, health and the environment. We also have a simple financial model, with strong organic growth, high returns and cash generation allowing us to continuously increase investment to drive future organic and acquired growth, while providing progressive dividends for shareholders. We set ourselves challenging targets, aspiring to double our earnings every five years, while maintaining modest levels of financial gearing without being reliant on seeking further equity.

Halma’s definitive organisational model and culture have provided a stable foundation for over 40 years. They are becoming increasingly important as Halma continues to grow and expand internationally, and as our businesses constantly evolve and adapt to address changing market needs. I believe it is crucial that we are clear on how our purpose, strategy, organisation and culture interact, and how they continue to be the foundation of our success. A description is set out in the Annual Report and Accounts 2019 and on www.halma.com, so that all our stakeholders can understand how our organisation and culture are at the heart of ensuring that we align our purpose with continued strong performance.

Record revenue and profit with higher returns

Revenue increased by 13% to £1,211m (2018: £1,076m), including 10% organic constant currency revenue growth for the second consecutive year. Adjusted¹ profit rose by 15% to £245.7m (2018: £213.7m) including 11% organic constant currency growth. Acquisitions contributed 3% to revenue growth (2% net of disposals) and 3% to adjusted profit growth (4% net of disposals). There was a small benefit to revenue and profit from currency in the full year, with a negative impact in the first half more than offset by a positive effect in the second half. Statutory profit before taxation increased by 20% to £206.7m (2018: £171.9m).

Returns remained at a high level. Return on Sales¹ increased to 20.3% (2018: 19.9%), within our target range of 18% – 22%. The post-tax Return on Invested Capital improved to 16.1% (2018: 15.2%), well above our estimated Weighted Average Cost of Capital of 7.9%, with the increase primarily reflecting the strong earnings growth achieved.

Strong cash generation and balance sheet to support future investment

Cash generation was excellent and resulted in net debt reducing to £182m (2018: £220m) after spending £68m on acquisitions and £31m on capital expenditure, as well as paying dividends of £57m to shareholders and £41m of tax.

Gearing (net debt to EBITDA) reduced to 0.63 times from 0.87 times. This is lower than our targeted range of 1-2 times, and therefore our balance sheet has significant capacity to support investment in both organic and acquisitive growth, in line with our strategic objectives.

Final dividend to increase by 7%

The Board is recommending a 7% increase in the final dividend to 9.60p per share (2018: 8.97p per share). The final dividend for 2019 is subject to approval by shareholders at the AGM on 25 July 2019 and is expected to be paid on 14 August 2019 to shareholders on the register at 12 July 2019.

Together with the 6.11p per share interim dividend, this would result in a total dividend for the year of 15.71p (2018: 14.68p), also up 7%, making this the 40th consecutive year of dividend per share growth of 5% or more.

Revenue growth in all major regions

We delivered revenue growth in all major regions, reflecting the sustainable and global growth opportunities offered by safety, environmental and health markets. Our companies are increasingly leveraging our regional hubs, and collaborating with other companies to develop new products and services and to expand internationally.

The USA, Mainland Europe and the UK performed strongly. Our largest region, the USA, achieved the strongest revenue growth of 18%, both on a reported and on an organic constant currency basis. Mainland Europe and the UK grew revenue by 12% and 16% respectively (6% and 11% on an organic constant currency basis).

Asia Pacific growth was slower, at 5%, against a strong performance last year which benefited from some large contracts. In our major markets in the region, China grew 8% following 20% growth last year, and Australasia improved by 16%. We continue to see good growth potential in Asia Pacific, by leveraging our growth hubs in the region, and we continue to strengthen our local management teams.

In the Rest of the World, performance was mixed. Revenue was broadly flat overall, with a challenging second half following good first half growth. In the larger markets, Africa and Brazil delivered good growth, while Near and Middle East and Canada were broadly flat.

Revenue and profit growth in all sectors

Revenue and profit increased in all sectors, with three out of four sectors reporting double digit organic revenue and profit growth.

Process Safety delivered good growth, although reorganisations in our Industrial Access Control and Safe Storage and Transfer businesses, to improve their competitive position and performance, softened profit growth.

Revenue increased 7% to £198m (2018: £185m), while profit grew 5% to £45.5m (2018: £43.3m). Organic constant currency growth for revenue and profit was also 7% and 5% respectively, given a minimal currency effect and no acquisitions in the year. Revenue growth was slower in the second half, primarily due to less favourable conditions in the US energy sector. Return on Sales remained strong at 23.0% (2018: 23.5%), with the decline in the year reflecting the reorganisation costs. R&D spend increased by 10% to £7.0m (2018: £6.3m). The Gas Detection and Industrial Access Control businesses performed strongly, while the performance of Pressure Management was challenged by adverse end market conditions and profit mix, but nonetheless delivered flat revenue. Our Safe Storage and Transfer businesses reported a single-digit decline in revenue during their period of restructuring which included strengthening their leadership and consolidating manufacturing operations.

There was strong organic constant currency growth in the USA supported by a major logistics contract for our Industrial Access Control subsector, despite less favourable energy market conditions. The UK also performed well, with good progress in Gas Detection and Industrial Access Control. There was solid progress in Asia Pacific and Mainland Europe, while other regions declined, including in energy related markets in the Middle East.

Process Safety will continue to invest in broadening its markets and improving its product innovation and leadership. We expect this to make it less sensitive to changes in its largest market, oil and gas, and deliver more consistent growth in the future.

Infrastructure Safety had a very impressive year, with strong organic growth and a significant contribution from acquisitions.

Revenue increased by 17% to £409m (2018: £349m), including 11% organic constant currency growth and a 6% contribution from acquisitions. Profit grew by 21% to £88.9m (2018: £73.3m), which included 16% organic constant currency growth and a 5% contribution from acquisitions. Return on Sales increased to 21.8% (2018: 21.0%). R&D spend increased by 22% to £24.9m (2018: £20.4m). The sector’s strong performance was broadly-based, with all five subsectors performing well.

There was exceptionally strong growth in the USA, partly reflecting a recovery from last year’s weaker performance. The sector’s Fire businesses were key contributors to this improvement. The Africa, Near and Middle East region also performed strongly, and there were good rates of growth in the UK and Mainland Europe. Growth in Asia Pacific was slower. The Other regions, which accounts for around 3% of sector revenue, saw a decline as larger contracts, which contributed to last year’s strong performance, came to an end.

Given the widespread growth, and a full year contribution from this year’s acquisitions, Infrastructure Safety is expected to make good progress in the coming year.

The Environmental & Analysis sector achieved strong organic growth, and also benefited from the acquisition of Mini-Cam in 2018.

Revenue grew by 15% to £299m (2018: £259m) which included organic constant currency growth of 11% and a 3% contribution from acquisitions. Profit increased by 21% to £66.4m (2018: £55.0m) including organic constant currency growth of 13% and a 7% contribution from acquisitions. There was a benefit from currency to both revenue and profit of just under 1%. Return on Sales improved to 22.2% (2018: 21.2%). R&D spend increased by 8% to £19.2m (2018: £17.8m). All three subsectors delivered good revenue and profit growth, with a particularly strong contribution from the Environmental Monitoring subsector, which benefited from double-digit organic growth and the acquisition of Mini-Cam.

There was impressive revenue growth in the UK and also in the USA, the sector’s largest market, which benefited from large Spectroscopy and Photonics projects. Mainland Europe grew well, while Asia Pacific saw more modest growth. Other regions, which account for only 4% of sector revenue, reported a decline.

With continued investment to drive collaboration, technology and the extension of its digital and data management capabilities, the Environmental & Analysis sector is expected to make further progress in the year ahead.

The Medical sector achieved a good performance, with revenue growing in all subsectors and all major geographic regions.

Revenue increased by 8% to £306m (2018: £284m), including 10% organic constant currency growth. Profit grew by 15% to £76.9m (2018: £67.1m), including 13% organic constant currency growth. There was a small benefit to revenue and profit from acquisitions. The disposal of Accudynamics in the year had an adverse effect on revenue but benefited profit. Return on Sales increased to 25.1% (2018: 23.6%). R&D spend declined by 3% to £11.5m (2018: £11.8m) but grew by 2% excluding the effect of the disposal of Accudynamics during the year.

The Diagnostics subsector performed very well, after adjusting for the Accudynamics disposal. The Ophthalmology and Sensor Technology subsectors delivered strong growth, the former through continued international expansion, and the latter from further penetration into their core market of location services in acute care facilities in the USA.

There was a strong revenue performance in the USA, the sector’s largest region, with Mainland Europe and Asia Pacific also delivering good growth. There was solid growth in the UK, with Other regions showing a small decline following a strong increase last year.

The Medical sector is expected to make continued progress in the coming year, through increased penetration into developing markets, further product and service development and continued investment in talent.

Four acquisitions and one disposal completed

Halma’s sector-focused organisational model gives us the scalability to continue acquiring small-to-medium-sized businesses to achieve our strategic growth objectives. We are also able to sell and merge businesses relatively easily should specific market dynamics change. This enables us to continue to grow rapidly without becoming significantly more complex. For example, in 2009, Halma had revenue of £502m from 38 operating companies, while today we have revenue of over £1.2bn from 42 operating companies.

Our core acquisition strategy is to find privately owned businesses operating in niches which are aligned with our purpose of “Growing a safer, cleaner, healthier future for everyone, every day”. We focus the majority of our search efforts on our core, or closely adjacent, market niches although each sector board has the freedom to find new niches which might have the right product, market and financial characteristics. In most cases we acquire 100% of an entity but we also consider minority investments to gain access to potentially valuable intellectual property if an outright purchase is not appropriate or possible. Every transaction is approved by the Group Chief Executive and Chief Financial Officer, with all deals £10m or over requiring Halma plc Board approval.

We entered the year with a healthy acquisition pipeline and this translated into four acquisitions being completed in the Infrastructure Safety sector, as well as two small asset purchases in the Medical sector, for a total initial cash consideration of £66.1m. We made one small disposal in the year, of Accudynamics, as it no longer had the future growth and returns characteristics we require. These acquisitions contributed in line with expectations during the year and we expect good performances from them in the future. Full details are given in the Financial Review and in the notes to the Financial Statements.

I am pleased with the number of acquisitions made during the year and with the high levels of prospecting activity in our sector M&A teams. Although we did not meet our KPI of acquiring profit of 5% or more, delivering 3.2% (excluding the effect of the Accudynamics disposal), this was more than compensated for by strong organic growth. However, increasing the contribution from acquisitions will be a focus for improvement. Consequently, we have increased our capability, with new talent at the Divisional Chief Executive and Managing Director levels and the addition of further resources to our sector M&A teams. We have also added expertise to support minority investments that can bring new capabilities to Halma without taking 100% ownership. We continue to build long-term relationships with business owners so that they see Halma as the right home for their business when they decide to sell, or as a strong investment partner to help them grow their businesses, and have a good pipeline for the year ahead.

Further investment in our Growth Enablers

Our Growth Enablers are resources available to our companies to help them to grow. Our strong progress in the year was supported by their further development, for example in the expansion of the resources in our M&A teams, as discussed above, and the strengthening of the leadership teams in our international hubs. We also increased our Innovation and Digital programmes, and set out a new vision for how Finance & Risk can enable our companies to grow. Our Strategic Communications team has been active in supporting our companies in telling their story, thereby better connecting them with their customers.

This month we are launching a new brand design and website to better communicate the Halma story to our stakeholders, particularly how we are accomplishing our purpose through our unique culture.

Talent and culture are critical components of every business’ success. The change we made at the end of 2017 to streamline our Executive Board, reducing the number of Sector Chief Executive roles from four to two, has been a great success. It has re-established the importance of the Divisional Chief Executive (DCE) role, reduced complexity, shortened lines of communication, improved decision-making and eased networking across Halma. This has enabled us to attract stronger talent with greater autonomy and responsibility. Our DCEs now play a more significant leadership role in Halma with increased interaction with the Executive Board.

Good progress on executing our strategy

It is over a year since we launched our Halma 4.0 strategy, which provided our companies with a clear strategic framework including how to address the diverse challenges and opportunities presented by the digital age. We have made good progress in developing our digital growth strategies, although their current contribution to revenue growth is modest. We expect them to play a more significant role in the future.

We have three elements to our growth strategy:

- Core growth, for example, through new product development or the international expansion of existing companies, remains our main focus. We have continued to increase investment to support it, with R&D spend up by 11% to £63m (2018: £57m).

- Convergence growth helps Halma companies to unlock value by creating new solutions, and often new business models, by combining the capabilities and technologies of more than one Halma company, or by a Halma company doing the same through an external partnership. During the year, nine projects involving over 20 Halma companies went through our Convergence Accelerator programme and the commercialisation of some of them will continue in the coming year.

- Edge growth is created from new digital business opportunities via partnerships with external companies which have many leading-edge capabilities that we do not wish to acquire. We have been very active in building these partnerships, with discussions initiated by companies across all our sectors from a number of events in Singapore and Israel (the latter in collaboration with OurCrowd, an equity crowdfunding platform). We have also launched a collaboration with Hitatchi to help us to scale and execute some of our digital business ideas, with two Halma companies already participating and further projects being planned.

We will continue to refine our digital strategy and policies to create a robust framework for our digital growth. This will include how we will organise and share data, define its ownership and comply with regulatory requirements with a structured and systematic approach.

We are developing key performance indicators to track our Innovation & Digital progress and will report on these in the coming year.

Outlook

Halma had a successful year, achieving record revenue and profit, delivering our 40th consecutive year of dividend per share growth of 5% or more and making further increased strategic investment supported by our strong balance sheet. We have a strong purpose, culture and growth strategy focused on niches in a diverse range of markets where demand is supported by resilient long-term growth drivers, offering us both organic and acquisition growth opportunities.

The new financial year has started well, and order intake has continued to be ahead of both revenue and order intake for the comparable period last year. We expect to make good progress in the year ahead.

Andrew Williams
Group Chief Executive

¹ See highlights.

Record results

Halma made strong progress in the period, delivering record revenue and profit for the 16th consecutive year. We continued to execute well against our growth strategy and our key performance indicators, leveraging our sustainable financial model and organisational structure across our global niche markets.

Revenue increased by 12.5% to £1,210.9m (2018: £1,076.2m), and adjusted¹ profit was up by 15.0% to £245.7m (2018: £213.7m), while statutory profit before taxation increased by 20.2% to £206.7m (2018: £171.9m). Cash generation was strong, and our financial position remains robust, allowing us to continue to support investment in growth, both organically and by acquisition. The Board is proposing a further dividend increase of 7%, the 40th consecutive year of dividend per share growth of 5% or more.

The revenue growth of 12.5% included a 10.0% increase in organic constant currency revenue. Acquisitions contributed 3.1% to growth (2.1% net of disposals).

The adjusted profit increase of 15.0% included 11.1% organic constant currency profit growth. Both organic revenue and adjusted profit growth were substantially ahead of our KPI target of 5% growth or more, and more than compensated for the rate of growth from acquisitions, which, at 3.2% (3.6% net of disposals), was lower than our KPI of 5% growth or more.

There was a small net currency translation impact on revenue and adjusted profit, with revenue benefiting by 0.4% and adjusted profit by 0.3%.

Statutory profit before taxation of £206.7m is calculated after charging the amortisation of acquired intangible assets of £35.6m (2018: £34.7m), and other items of a net £3.4m (2018: £7.1m), which included a charge of £2.1m in relation to the equalisation of pension benefits for men and women in the Group’s defined benefit pension plans (see “Pension update” below). Further detail on these items is given in note 1.

Revenue and profit growth

Strong revenue and profit growth

Revenue grew by 15.6% in the first half and 9.7% in the second half. There was a 1.8% negative effect from currency translation in the first half which reversed in the second half to give a small benefit of 0.4% for the year. Organic revenue growth at constant currency was an exceptionally strong 14.2% in the first half reflecting good performances across all four of our sectors as well as a benefit from the phasing of the delivery of some large orders received in the second half of the prior year. As expected, we also delivered good organic constant currency growth rate of 6.3% in the second half to give an impressive 10.0% growth rate for the year as whole.

Adjusted profit growth was 19.4% in the first half and 11.5% in the second half. As with revenue, the negative effect from currency translation in the first half reversed in the second half, giving a small benefit of 0.3% for the year. Organic profit growth at constant currency was again exceptionally strong at 16.1% in the first half and, at 7.2% in the second half, was slightly ahead of our expectations at the half year. The first half/second half split of adjusted profit was 46%/54%, compared to our typical 45%/55% pattern, reflecting the strong first half performance and a better risk profile for the year.

Growth in all four sectors

All four sectors delivered revenue and profit growth, both on a reported and organic constant currency basis. All sectors grew revenue on an organic constant currency basis in both the first and the second half.

We delivered double-digit organic constant currency profit growth in three of our four sectors. Infrastructure Safety was the strongest performer, with profit growth accelerating in the second half. Environmental & Analysis and Medical delivered strong growth, which comprised a slower second half following an exceptionally good first half. Process Safety achieved mid-single-digit growth, which included reorganisation costs of £1.5m to improve its competitive position and performance in the future.

Central and growth enabler costs increased, as expected, to £22.0m (2018: £15.3m) excluding the one-off charge of £2.1m for equalising pension benefits between men and women. This principally reflected increased investment to support our companies’ growth over the medium-term, mainly in the digital transformation and innovation Growth Enablers, as well as in governance and compliance. We expect a further increase, albeit at a lower rate, in 2019/20, principally in Growth Enabler costs, and in the medium-term, these costs are expected to grow no faster than revenue.

Growth in our major regions

All major regions reported revenue growth, with the USA, Mainland Europe and the UK, performing strongly, with double-digit percentage increases. Following strong performances in 2018, growth in Asia Pacific and Africa, Near and Middle East slowed, with Other regions showing a small decline.

The USA delivered very strong growth of 18.5%, and remains our largest revenue destination, accounting for 37% of Group revenue, an increase of two percentage points compared to the prior year.

All sectors performed well, with Infrastructure Safety growing very strongly and Process Safety and Environmental & Analysis also delivering excellent growth. Mainland Europe revenue increased by 12.0%, driven by good performances in Infrastructure Safety and Environmental & Analysis. The UK also grew well with revenue increasing by 16.0% and all sectors except Medical, which accounts for only 7% of UK revenues, growing at a double-digit percentage rate.

Asia Pacific grew 5.2%, with good growth in Process Safety, Infrastructure Safety and Medical, while Environmental & Analysis growth was slower following a strong performance last year. Our largest markets in the region grew well, with revenue in China increasing 8% against a tough comparative of 20% growth last year, and Australasia growing 16%. Performance in smaller markets was variable.

In the rest of the world, performance was mixed and revenue was broadly flat overall. In Africa, Near and Middle East, Infrastructure Safety grew strongly, but this was offset by declines in the other three sectors, notably in Environmental & Analysis. Other regions saw challenging conditions for the Safety sectors, but growth in Environmental & Analysis and Medical. Of the larger markets in the rest of the world, Brazil delivered good growth.

Revenue from territories outside the UK/ Mainland Europe/the USA grew by 3.2%, below our 10% KPI growth target. Delivering more consistent growth in these regions will be a key focus in 2019/20, even though we achieved 16.0% growth in revenue in the UK/Mainland Europe/the USA to deliver a strong overall result.

On an organic constant currency basis, the USA was the fastest growing region, with 18.3% revenue growth with all sectors delivering double-digit organic revenue growth. Mainland Europe grew revenue by 6.5%. The UK grew 11.5%, with all sectors except Medical growing by more than 10%. Asia Pacific growth was 4.5%, while Africa, Near and Middle East and Other regions had a challenging second half across the sectors resulting in flat revenue and a decline, respectively, for the full year.

Geographic revenue growth

Increased returns

Halma’s Return on Sales has exceeded 16% for 34 consecutive years. Our KPI target is to deliver Return on Sales in the range of 18–22%. This year Return on Sales increased to 20.3% (2018: 19.9%), with an improvement in all sectors except Process Safety, where Return on Sales remained strong at 23.0%, even though there was a decline of 0.5% due to reorganisation costs.

We successfully achieved our objective of continuing to invest in our businesses while delivering growth. This enables us to maintain a high level of Return on Total Invested Capital (ROTIC), the post-tax return on the Group’s total assets including all historical goodwill. ROTIC improved to 16.1% (2018: 15.2%), once again well ahead of our KPI target of 12% and substantially in excess of Halma’s Weighted Average Cost of Capital (WACC), estimated to be 7.9% (2018: 7.7%).

Currency impacts well managed

Halma reports its results in Sterling. Our other key trading currencies are the US Dollar, Euro and to a lesser extent the Swiss Franc and Chinese Renminbi. Over 45% of Group revenue is denominated in US Dollars and approximately 13% in Euros.

The Group has both translational and transactional currency exposure. Translational exposures are not hedged, while, for transactional exposures, after matching currency of revenue with currency costs wherever practical, forward exchange contracts are used to hedge a proportion (up to 75%) of the remaining forecast net transaction flows where there is a reasonable certainty of an exposure.

We hedge up to 12 months and, in certain specific circumstances, up to 24 months forward. At 31 March 2019 approximately 68% of our next 12 months’ currency trading transactions were hedged. There is a good degree of natural hedging within the Group in US Dollars but we spend less in Euros than we sell and this year had a net exposure of approximately €35m.

We saw continued volatility in currencies throughout the year although by year end this had a relatively limited impact on the Consolidated Income Statement. Sterling strengthened on average in the first half of the year, giving rise to a negative currency translation impact of 1.8% on revenue and 2.2% on profit. However, Sterling was weaker on average in the second half of the year, and for the year as a whole, currency translation had a small positive effect of 0.4% on revenue and 0.3% on adjusted profit.

Based on the current mix of currency denominated revenue and profit, a 1% movement in the US Dollar relative to Sterling changes revenue by £5.5m and profit by £1.1m. Similarly, a 1% movement in the Euro changes revenue by £1.5m and profit by £0.3m.

If currency rates through the 2019/20 year were US Dollar 1.30/Euro 1.16 relative to Sterling, and assuming a constant mix of currency results, we would expect no material effect on revenue and profit in 2019/20 compared with 2019. On this basis there would be a positive effect in the first half of the year, which would broadly reverse in the second half.

Increased financing cost

The net financing cost in the Income Statement of £10.0m was slightly above the prior year (2018: £9.7m). Average net borrowings were marginally lower this year, despite acquisition expenditure, but the average cost of financing was higher due to the currency mix of debt and higher US dollar interest rates (see the ‘Average debt and interest rates’ in the table below.

Interest cover (EBITDA as a multiple of net interest expense as defined by our Revolving Credit Facility) was 33 times (2018: 32 times) which was well in excess of the four times minimum required in our banking covenants.

The net pension financing charge under IAS 19 is included within the net financing cost. This year the cost decreased to £1.2m (2018: £1.7m), reflecting the reduction in the deficit on our defined benefit plans.

Group tax rate

The Group has major operating subsidiaries in 10 countries and the Group’s effective tax rate is a blend of these national tax rates applied to locally generated profits. A significant proportion (approximately one fifth) of Group profit is generated and taxed in the UK.

The Group’s effective tax rate on adjusted profit was lower than the prior year at 18.6% (2018: 19.7%) mainly due to the decrease in the US federal tax rate in addition to some one-off credits in the year.

For the year to 31 March 2020 we currently anticipate (based on the forecast mix of adjusted profits) a Group effective tax rate on adjusted profits of approximately 20%, with the increase compared to this financial year mainly driven by the mix of adjusted profits, including the full year effect of prior year acquisitions, and lower interest deductibility relative to profits.

On 2 April 2019, the European Commission published its final decision that the UK controlled Finance Company Partial Exemption (FCPE) constituted State Aid. In common with a number of other UK companies, Halma has benefited from the FCPE, and the total benefit in 2019 and prior periods is approximately £15.4m in respect of tax and approximately £0.6m in respect of interest. We are currently evaluating whether to appeal the European Commission’s decision and the UK Government may also appeal, and therefore at present we believe that no provision is required in respect of this issue, although a cash payment of some, or all of, the amount due may be required in the next year which we would expect to be refundable in the event of a successful appeal.

Strong cash generation

Cash generation is an important component of the Halma model, underpinning further investment in our businesses, supporting value-enhancing acquisitions and funding an increasing dividend. Our cash conversion in 2019 was strong. Cash generated from operations was £259.6m (2018: £214.4m) and adjusted operating cash flow was £225.2m (2018: £190.4m) which represented 88% (2018: 85%) of adjusted operating profit, ahead of our cash conversion KPI target of 85%.

A summary of the year’s cash flow is shown in the table above. The largest outflows in the year were in relation to acquisitions, dividends and taxation paid. Working capital outflow, comprising changes in inventory, receivables and creditors, totalled £16.3m (2018: £24.4m) and debtor days have reduced year-on-year, reflecting our continuing focus on cash management.

Dividends totalling £57.2m (2018: £53.4m) were paid to shareholders in the year. Taxation paid was £40.6m (2018: £41.1m). In the 2019/20 financial year, an acceleration of the payment timetable for UK Corporation Tax payments for larger companies will result in a one-off increase in cash taxation payable of approximately £5m.

Capital allocation and funding

Halma aims to deliver high returns, measured by ROTIC, well in excess of our cost of capital. We invest to deliver the future earnings growth and strong cash returns which underpin this ambition, and our capital allocation priorities are as follows:

Investment for organic growth

Organic growth is our first priority and is driven by investment in our existing businesses, including through capital expenditure, innovation for digital growth and in new products, international expansion and the development of our people.

Value-enhancing acquisitions

We supplement organic growth with acquisitions in current and adjacent market niches. This brings new technology, intellectual property and talent into the Group and expands our market reach, keeping Halma well-positioned in growing markets over the long-term.

Regular and increasing returns to shareholders

We have maintained a progressive dividend policy for over 40 years and this is our preferred route for delivering regular cash returns to shareholders.

Increased investment for organic growth

All sectors continue to innovate and invest in new products, with R&D spend determined by each individual Halma company. This year R&D expenditure grew by 11.2%, a similar rate to revenue growth. R&D expenditure as a percentage of revenue was 5.2% (2018: 5.2%), well in excess of our KPI target of 4% or more. In the medium term we expect R&D expenditure to continue to increase broadly in line with revenue growth.

Under IFRS accounting rules we are required to capitalise certain development projects and amortise the cost over an appropriate period, which we determine as three years. In 2019 we capitalised and acquired £11.6m (2018: £9.7m), impaired £0.7m (2018: £0.7m) and amortised £8.5m (2018: £6.9m). This results in an asset carried on the Consolidated Balance Sheet, after a £0.6m gain (2018: £1.0m loss) relating to foreign exchange, of £33.1m (2018: £30.0m). All R&D projects and particularly those requiring capitalisation, are subject to rigorous review and approval processes.

Capital expenditure on property, plant, equipment, computer software and other intangible assets was £31.3m (2018: £22.1m) or £29.1m excluding the Awarepoint and Elpas asset purchases made in the year. The expenditure on fixed assets was spread across all four sectors, supporting our operating capability, capacity and growth including investment in IT and systems upgrades. There was increased spend in three of our sectors with reduced spend only in Environmental & Analysis which had the highest spend in the prior year. In addition, we expanded our head office space this year to accommodate the increased investment in Growth Enablers. We anticipate capital expenditure of £35m in the coming year, reflecting significant new operating site, plant and equipment and IT investment in Infrastructure Safety and new operating capability in Environmental & Analysis.

Value-enhancing acquisitions

Acquisitions and disposals are an important part of our growth strategy, as they keep our portfolio focused on growing markets over the medium and long-term.

In the year we spent £64.5m on four acquisitions (net of cash acquired of £5.3m including acquisition costs). In addition, we paid £3.6m in contingent consideration for acquisitions made in prior years, giving a total spend of £68.1m. We made one disposal, realising £3.1m, net of transaction costs.

In addition to the four business acquisitions, our Medical division acquired various assets from Awarepoint and Elpas for total consideration of £2.6m to expand CenTrak’s technology and market reach.

In our half year results, we reported on three acquisitions in the Infrastructure Safety sector: LAN Control Systems Limited, a relatively small technologically driven bolt-on for an initial cash consideration of £1.0m; Limotec bvba for a cash consideration of €9.3m (£8.2m), on a cash and debt-free basis; and Navtech Radar Limited for an initial cash consideration of £21m on a cash and debt-free basis, with further earn-out considerations, capped at a total of £18m in cash, payable dependent on profit growth in each of the three financial years to the end of March 2021.

In January 2019, we acquired Business Marketers Group Inc., trading as Rath Communications, a provider of emergency communication systems for areas of refuge in the USA, for a cash consideration of US$42.4m (£32.8m), on a cash- and debt-free basis.

There was one disposal in the period. In June 2018, the Medical sector sold the Accudynamics Fluid Technology business for US$5.4m (£4.2m), resulting in a small loss on disposal of US$1.2m (£1.0m). The original US$31.8m consideration on acquisition in December 2010 primarily related to goodwill and customer intangibles, which have now been successfully transferred to strengthen the product offering and market positions of other Halma Diagnostic device businesses.

The acquisitions completed in the current and prior year contributed to revenue in 2019 in line with expectations. We expect a good performance from these acquisitions in the coming year and in the long term.

Regular and increasing returns for shareholders

Adjusted earnings per share increased by 16.5% to 52.74p (2018: 45.26p). Statutory earnings per share increased by 10% to 44.78p (2018: 40.69p), lower than the increase in Adjusted earnings per share largely as a result of the one-off credit last year arising from revisions to US taxation rates.

The Board is recommending a 7.0% increase in the final dividend to 9.60p per share (2018: 8.97p per share), which together with the 6.11p per share interim dividend gives a total dividend per share of 15.71p (2018: 14.68p), up 7.0% in total. Dividend cover (the ratio of adjusted profit after tax to dividends paid and proposed) is 3.36 times (2018: 3.08 times).

The final dividend for 2019 is subject to approval by shareholders at the AGM on 25 July 2019 and will be paid on 14 August 2019 to shareholders on the register at 12 July 2019.

We aim to increase the per share dividend amount each year, while maintaining a prudent level of dividend cover, with approximately 35–40% of the anticipated total dividend being declared as an interim dividend. The Board’s determination of recommended annual dividend increases takes into account the medium-term rate of organic constant currency growth and the financial resources required in executing our strategy, including organic investment needs and acquisition opportunities, whilst maintaining moderate debt levels.

Funding capacity extended

Halma operations are cash generative and the Group has access to competitively priced debt finance providing good liquidity for the Group. Group treasury policy remains conservative and no speculative transactions are undertaken.

In October 2018 we extended the £550m Revolving Credit Facility, put in place in November 2016, by a further year to 2023. The combination of good cash generation, a healthy balance sheet and committed external financial resources provides us with the capacity we need to invest in organic growth and acquisitions to meet our growth objectives as well as to sustain our progressive dividend policy.

At the year end, net debt was £181.7m (2018: £220.3m), a combination of £262.9m of debt and £81.2m of cash held around the world to finance local operations. The gearing ratio at year end (net debt to EBITDA) was 0.63 times (2018: 0.87 times). Although we are comfortable operating at this level of gearing, we would increase to two times gearing if the timing of acquisitions required it. Net debt represented 3% (2018: 5%) of the Group’s year-end market capitalisation. The Group continues to operate well within its banking covenants with significant headroom under each financial ratio.

Pensions update

We closed the two UK defined benefit (DB) plans to new members in 2002. In December 2014 we ceased future accrual within these plans with future pension benefits earned within the Group’s Defined Contribution (DC) pension arrangements.

The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net deficit on our pension plans at 31 March 2019 based on the market value of assets at that date and the valuation of liabilities using year end AA corporate bond yields.

On an IAS 19 basis the deficit on the Group’s DB plans at the 2019 year end had decreased to £39.2m (2018: £53.9m) before the related deferred tax asset. The value of plan assets increased to £292.2m (2018: £271.7m). In total, over 55% of plan assets are invested in return seeking assets providing a higher expected level of return over the longer term.

Plan liabilities increased to £331.4m (2018: £325.6m) due to the impact of equalisation of guaranteed minimum pension contributions for men and women and an increase in the inflation rate, partly offset by updated member experience data.

The plans’ actuarial valuation reviews, rather than the accounting basis, determine any cash deficit payments by Halma. In 2019 these contributions amounted to £11.7m and following a triennial actuarial valuation of the two UK pension plans, cash contributions increasing at 7% per annum aimed at eliminating the deficit were agreed with the trustees, consistent with our expectations.

On 26 October 2018, the High Court reached a judgment in relation to Lloyds Banking Group’s defined benefit pension schemes which concluded that the schemes should equalise pension benefits for men and women as regards Guaranteed Minimum Pension benefits. The judgement has resulted in a one-off charge of £2.1m to the Income Statement which has been treated as an exceptional item and so excluded from adjusted profit.

Average debt and interest rates

New accounting standards

The Group adopted a number of new accounting standards and interpretations with effect from 1 April 2018, including IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 9 ‘Financial Instruments’. There has been no material effect on the Group’s accounts from these changes.

Further new standards and interpretations will be adopted for the Group’s financial year commencing 1 April 2019. We do not expect their adoption to have any material impact on the Group’s financial statements, with the exception of IFRS 16 ‘Leases’, the most significant effect of which will be to bring the Group’s land and building leases on to the balance sheet. IFRS 16 is expected to result in a small reduction in net assets of approximately £4m, comprising an increase in assets of approximately £45m, and an increase in liabilities (from the lease liability) of approximately £49m. Due to the varying time left to run-off the leases, we expect the net effect on the Group’s profit and loss account to be immaterial, and there will be no impact on the Group’s cash flow.

Further details of these new accounting standards and their application to the Group’s accounts can be found in the notes to the financial statements in the Annual Report and Accounts 2019.

Update on Brexit and USA/China tariff increases

We continue to closely monitor and assess any potential effects from the UK’s exit from the European Union, and from tariff increases on certain goods by the USA and China. In 2019, approximately 9% of Group revenue came from direct sales between the UK and Mainland Europe, and approximately 4% between the USA and China. We have not seen any material effects to date, and consider that our decentralised model, with businesses in diverse markets and locations, enables our companies to adapt quickly to changing trading conditions. We expect that our companies’ agility, and the support we are providing from the centre to help them prepare for these changes, will help them to mitigate any potential effects, as well as enabling them to take advantage of opportunities that arise.

Finance and Risk as a Growth Enabler

We have delivered a strong financial performance this year, and in my first year as Chief Financial Officer, I am also pleased with the further development of the Finance and Risk function within Halma.

During the year, we reset our expectations, to be a team which not only ensures excellent financial controls and risk management but also truly enables the Halma 4.0 growth strategy.

We will achieve this through having the best talent, providing insightful and actionable data, maintaining appropriate risk frameworks and controls, supporting M&A activity, and ensuring we maximise the benefits from our external advisors and the use of new technology.

I would like to thank all my colleagues in Finance and Risk for their hard work which has contributed to another successful year for Halma.

Marc Ronchetti
Chief Financial Officer

¹ In addition to those figures reported under IFRS Halma uses alternative performance measures as key performance indicators, as management believe these measures enable them to better assess the underlying trading performance of the business by removing non-trading items that are not closely related to the Group’s trading or operating cash flows. Adjusted profit excludes the amortisation and impairment of acquired intangible assets; acquisition items; restructuring costs; profit or loss on disposal of operations; and the effect of equalisation of benefits for men and women in the defined benefit pension plans. All of these are included in the statutory figures. Note 3 to the Accounts gives further details with the calculation and reconciliation of adjusted figures.
² See highlights.

Process Safety Sector Review

Process Safety’s technologies protect people and assets at work, across a range of critical industrial and logistics operations.

Sector progress summary

The sector delivered good revenue and profit growth while investing for improved performance. Revenue growth was 7%, on both a reported and organic constant currency basis, with the UK and the USA performing well, somewhat offset by a decline in the Africa, Near and Middle East region. With stable gross margins and investments to strengthen the sector’s competitive position and improve performance, profit increased 5% on both a reported and organic constant currency basis. Return on Sales remained strong, although there was a decline as a result of reorganisation costs.

Gas Detection and Industrial Access Control performed strongly. Pressure Management’s profit growth was affected by a combination of end market conditions and product mix. Safe Storage and Transfer underwent a reorganisation, including the addition of strong leadership and the consolidation of manufacturing operations. These steps position the sector for growth in 2019/20 and beyond.

Early in the year, the sector M&A strategy was reviewed to ensure better alignment with our purpose and key market growth drivers, resulting in a redefinition of our subsectors. Subsequently, we have developed a stronger pipeline of prospects.

Strategy

Process Safety plays an important part in delivering Halma’s purpose of making the world safer and cleaner in critical industrial operations.

We are investing in Core growth to develop new, differentiated products that address specific needs in selected industry sectors. Examples include connected gas detection products that allow our customers access to safety-critical data, and the launch of a high temperature H2S detector specifically addressing needs of Middle Eastern customers in the Oil and Gas industry. We are expanding into adjacent markets, for example through new pressure safety units focused on the food, pharmaceutical and industrial markets.

Partnerships are playing an increasingly important role in our strategy. In Gas Detection, we are utilising Halma’s Convergence Accelerator and working with external partners to generate revenue from an early stage venture in China, focused on air quality and odour monitoring solutions. Industrial Access Control is augmenting its mechanical and electromechanical products with software and data solutions to meet the safety and productivity needs of warehouse operators and factory production lines.

We have invested in our M&A capability to fuel growth into new, adjacent subsectors which are aligned with Halma’s purpose and have strong long-term growth drivers. Increasingly there is the potential for digitisation, through technology enhancements to our existing portfolio, and for international growth, with Asia as a key focus.

Market trends and growth drivers

Our Process Safety businesses continue to benefit from increasing health and safety regulation, a growing population and urbanisation. With an estimated 340 million injuries and 2.3 million fatalities in the workplace each year, it is likely that health and safety regulations will continue to tighten. Our ability to find new applications in adjacent industrial markets is broadening our growth opportunities, both organically and through acquisition.

Several of our businesses, notably in Pressure Management, operate in markets driven by the increasing need for energy and other critical resources. Global energy demand is expected to grow by over 25% between 2017 and 2040, with developing country demand expected to increase by 45%. The diversification of energy resources means we are repurposing our solutions to alternative energy markets, where we expect good growth: the global renewable energy market is expected to grow at a compound annual growth rate of 4.9% between 2017 and 2025.

In Gas Detection, the market is expected to grow by over 7% pa to 2025, driven by ongoing industrialisation, increased regulation, greater demand for continuous monitoring of harmful substances to protect worker safety, and the accelerated use of wireless sensors and connected devices.

Performance

Revenue grew by 7% to £198m (2018: £185m). Profit grew by 5% to £46m (2018: £43m). On an organic constant currency basis, revenue and profit grew by 7% and 5% respectively.

In Industrial Access Control, progress was very strong, particularly in US logistics. We expect further growth to come from that industry’s focus on safety and productivity. We have also invested in sales and marketing resources in Asia to accelerate the potential adoption of our products in the region.

In Gas Detection, we delivered strong growth in China, from both our traditional gas detectors and from a newly developed odour monitoring solution. We made significant investments in product development and people, while maintaining strong returns.

Pressure Management delivered revenue similar to last year with a small decline in profit. US oil and gas market conditions were not favourable, particularly in the second half, due to pipeline constraints in the Permian Basin.

Safe Storage and Transfer has invested in streamlining operations and leadership to build a stronger platform for growth in this solid market.

Return on Sales was 23.0%, a decline from 23.5% in 2018 as a result of reorganisation costs, and Return on Capital Employed remained strong. R&D investment increased by 10.2% to £7.0m (2018: £6.3m).

Outlook

Process Safety continues to benefit from its long-term market growth drivers, and diversity of its end markets, and has strengthened the leadership in many of its businesses.

Increasing innovation, stronger marketing activity, together with increased strength in leadership, are expected to deliver further progress in the coming year.

Infrastructure Safety Sector Review

Infrastructure Safety’s technologies save lives, protect infrastructure and enable safe movement.

Sector progress summary

The sector delivered a very strong performance with revenue growing 17% and profit 21%. All subsectors delivered double-digit revenue and profit growth, with progress in all major geographical regions. Together with a small improvement in gross margins, this led to higher Return on Sales even after an increase in R&D investment.

The sector made four acquisitions in a productive year for M&A. Navtech Radar has enhanced our People and Vehicle Flow business, building on our radar technology expertise. The Elevator Safety subsector, already benefiting from last year’s Microkey acquisition, was further enhanced by the purchase of Rath Communications, which moves it into high growth adjacent markets such as ‘area of refuge’. The Fire Detection subsector added Limotec, a leading Belgian fire control panel manufacturer and system seller, together with LAN Controls, a software focused business that enables remote monitoring of fire systems and ensures their correct maintenance.

Strategy

Infrastructure Safety makes the world a safer place by protecting commercial, industrial and public buildings and spaces. It addresses increasing life safety concerns, more stringent regulatory requirements and accelerating demand for connected infrastructure systems globally both by product and digital innovation, and by acquiring companies with technological expertise, strength in new geographies and a presence in adjacent markets. Our focus is on less cyclical, niche applications, with high barriers to entry.

We seek to expand our geographic footprint organically, utilising hubs in Asia Pacific, and through acquisitions, such as the Limotec and Rath Communications acquisitions.

Our strategy is supported by relentlessly focusing on talent, both by developing our people and attracting new talent from outside.

Our companies make excellent use of the Digital Growth Engines. This includes the Convergence Accelerator programme to drive new business concepts, particularly in connected systems. This will move us up the digital value chain and provide opportunities to deliver value from data. By leveraging the Microkey acquisition, we are providing new connected elevator solutions that bring together insights gained from data generated by the many safety components we supply to elevator manufacturers and maintenance companies. We are also acquiring companies with digital business models and knowhow, such as LAN Controls.

Market trends and growth drivers

Our Infrastructure Safety markets are driven by an expanding and ageing population, urbanisation and increasing regulation, with increasing demand for digital innovation. According to a recent UN report, the world’s urban population is expected to increase by 2.5 billion by 2050. We expect this to drive demand for better infrastructure and transportation safety and security, as more people live in more densely populated areas.

These long-term trends are particularly relevant in developing economies. For example, the fire detection market is forecast to grow at 4% pa globally between 2017 and 2022, with a greater increase of 8% pa in India and 5% pa in China.

The growth of intelligent building solutions offers further opportunities. The market is expected to more than quadruple by 2027, as digital technology allows building owners to have greater access to data across all building services at a lower cost. Our Fire and Security businesses are well placed to take advantage of this trend, with their fast-developing data, remote monitoring and control capabilities.

The elevator maintenance market is faster growing with higher profitability than the OEM elevator market which continues to be highly competitive. Growth is driven by increasing urbanisation and regulation. There are opportunities to enhance efficiency through remote monitoring and preventative maintenance. We also see strong growth opportunities in related niches, such as the ‘area of refuge’ market we entered with the Rath Communications acquisition.

Similar trends are creating new opportunities for our People and Vehicle Flow companies. An example is the greater demand being placed on road infrastructure, where the limited scope to physically expand capacity is driving the demand for Navtech Radar’s technology to improve road safety and capacity.

Performance

Revenue grew by 17% to £409m (2018: £349m) and profit by 21% to £89m (2018: £73m). Organic constant currency revenue grew by 11% and profit by 16%. There were strong performances in the UK, Europe, USA and the Africa, Near and Middle East region, with lower growth in Asia Pacific. Acquisitions accounted for 6% of revenue and profit growth. Currency had a positive effect on both revenue and profit growth.

Return on Sales improved to 21.8% (2018: 21.0%) and Return on Capital Employed remained above Group targets. R&D investment increased by 22% to £24.9m (2018: £20.4m).

The People and Vehicle Flow business was particularly buoyant in Europe and Asia. This subsector also benefited from the Navtech Radar acquisition.

Fire Detection made good progress in all geographies, with double-digit growth in the UK, Europe and Asia Pacific. The addition of LAN Controls brought new connected technology capability.

Fire Suppression and Security Sensors both contributed good growth, with Elevator Safety continuing its transition to becoming a partner which makes elevators smarter, simpler and safer. Rath Communications strengthens our position in the USA and provides access to a new niche, the regulation driven ‘area of refuge’ market.

Outlook

Our growth drivers of increasing regulation, population growth, urbanisation and digitisation are expected to sustain growing demand for our products and services worldwide. We enter the year with good momentum and a solid M&A pipeline.

Environmental & Analysis Sector Review

Environmental & Analysis provides technologies that monitor and protect the environment and ensure the quality and availability of life-critical resources.

Sector progress summary

The sector achieved record results, with strong revenue growth of 15% and profit increasing 21%. Organic constant currency revenue and profit growth were a very good 11% and 13% respectively. There was strong growth in the USA and UK, and good growth in Mainland Europe. Return on Sales increased from 21.2% to 22.2%, as we extended our product and solutions range and invested in markets that benefit from long-term growth drivers.

Strategy

Our solutions improve the availability and quality of life-critical natural resources such as air, water and food, and improve the environment and wellbeing. Leveraging Halma’s Growth Enablers, we focus on developing new market-led solutions and increasing our geographical reach organically and through partnerships, especially in emerging markets.

Our R&D effort includes developing new sensors that capture accurate and effective environmental and scientific information. We are enhancing this technology by investing in digital systems that provide real-time and remote management information.

We continually seek to attract, develop and promote high quality, talented people and ensure that our teams represent our diverse end markets and are enhanced to match our strategic capability needs.

Market trends and growth drivers

The Environmental & Analysis sector’s long-term growth is sustained by three key drivers:

- rising demand for life-critical resources such as air, water and food.
- increasing environmental monitoring and regulations.
- worldwide population growth, urbanisation and rising standards of living.

Population growth continues to outpace the availability of key resources. By 2050, water shortages are expected to affect over 50% of the global population and this will be exacerbated by increasing urbanisation. We expect these trends to drive demand for our water testing and disinfection technologies, and our water network monitoring solutions which help to ensure integrity of networks.

Air pollution is a growing health risk in both developing and developed countries. Airborne particulates are a top cause of premature deaths in the EU, contributing to an estimated 391,000 deaths in 2016. Our spectroscopy systems assist in the precise detection of contaminates, while our environmental companies support emissions and air quality monitoring and calibrate pollution monitoring equipment.

According to the World Health Organisation, one in ten people fall ill each year from eating contaminated food and 420,000 people die each year as a result. Some of our more recent development activities are focused on ensuring the quality of the food supply chain.

Environmental regulations and actions move at a different pace around the world. Differential rates of growth in governmental and academic research spend cause the near-term dynamics of regional/market segments to vary. We continue to invest globally and across our segments in anticipation of sustained growth over the medium-term, even if we experience some short-term volatility.

Performance

Revenue grew by 15% to £299m (2018: £259m) and profit by 21% to £66m (2018: £55m). At constant currency, organic revenue growth was 11% and organic profit growth was 13%. Acquisitions made in the prior year accounted for 3% of revenue growth and 7% of profit growth. Currency had a small positive effect of 1% on both revenue and profit.

Return on Sales improved to 22.2% (2018: 21.2%) as we generated operating leverage from strong revenue growth and gross margins, while continuing a focused investment strategy. Return on Capital Employed was strong.

First half performance was very strong, with growth of 23% in revenue and 33% in profit. This included a contribution from Mini-Cam, acquired in late 2017, and delivery of some larger Photonics projects. There was a more typical performance in the second half, with good growth of 9% in revenue and 10% in profit.

There was revenue and profit growth in all three subsectors, with the Environmental subsector contributing strongly due to a combination of very good organic growth and the Mini-Cam acquisition. We saw significant progress in the USA, which benefited from the larger Photonics projects, and also the UK. There was good growth in Mainland Europe and more moderate growth elsewhere, which was expected given a particularly strong prior year in Asia Pacific. We have continued to invest in the quality and diversity of our teams to allow us to better address the evolving needs of our markets and customers.

We further increased R&D spending which remains well above the Group average as a percentage of sales. This is spread across our core business, as well as developing new Convergence and Edge opportunities. This included the development and commercialisation of more digital sensors and solutions in our Water and Environmental subsectors, which will continue to generate growth in the future. There was also investment in some internal startups focusing on digital applications with good growth potential.

Outlook

We will continue to increase investment to drive collaboration, technology development, and development of digital and data management capabilities that have begun to demonstrate commercial success through some new business models.

Our acquisition pipeline is growing as we have improved engagement with businesses complementary, or adjacent, to our existing portfolio.

We expect to continue to deliver revenue and profit growth, while maintaining our existing high level of returns, as our solutions are increasingly focused on the long-term growth drivers in our markets.

Medical Sector Review

Medical’s technologies enhance the quality of life for patients and improve the quality of care delivered by healthcare providers.

Sector progress summary

The sector achieved record results, with strong growth. Revenue increased 8% and profit 15% (10% and 13% respectively on an organic constant currency basis), and there was growth in all major geographies and all subsectors. Return on Sales increased, even though there was increased investment in talent and new capabilities, with further underlying growth in R&D spend.

Strategy

The Medical sector is focused on growing a healthier future by enhancing the quality of life for patients and improving the quality of care delivered by providers.

We serve niche applications in global markets. We aim to continue growing by investing in our existing portfolio and acquiring additional companies.

Key strategic initiatives to support this growth include:

- increasing collaboration to drive geographic expansion and product and service innovation, with an increasing focus on data and digital solutions.
- increasing R&D investment to adapt to quickly changing market needs and population trends.
- acquiring businesses in both existing and adjacent market niches.
- recruiting and retaining high-calibre, diversified talent.

Market trends and growth drivers

The sector’s long-term growth is supported by increasing demand due to worldwide population growth and ageing, increasing life expectancy, and the greater prevalence of chronic illnesses such as diabetes, obesity, hypertension and cancer. The development and availability of new medical diagnostic and surgical technologies are important market trends, as is the increasing access to healthcare in developing economies.

The world’s population is expected to increase by almost one billion in the next 30 years, and the number of people aged over 60 is expected to double, increasing the prevalence of significant health risk factors.

An ageing population is a key driver for our ophthalmology and hypertension management businesses. Cataract surgery is one of the most frequent operations carried out worldwide, with more than 25 million operations annually, creating ongoing demand for our surgical instruments. In China, about 325 million adults have high blood pressure, with only one-third treating it.

The market for our critical fluidic components is projected to grow 6% annually, in part being led by more directed and personalised diagnostic methods combined with increased testing efficiency. North America and Europe continue to be our largest markets, with Asia exhibiting the fastest growth rate.

Healthcare facilities are seeking to improve patient outcomes, reduce costs and ensure the safety of patients and staff. This is driving the global market for our real-time location Sensor Technology business.

The growth of the global medical device market is resulting in further regulatory tightening, especially in China and Europe. Our regulatory experience and our niche focus allow us to adjust to these trends and direct resources towards areas that provide the best opportunity for sustained growth.

Performance

Revenue grew by 8% to £306m (2018: £284m). Organic constant currency revenue growth was 10%. Profit grew to £77m (2018: £67m), an increase of 14.8%. This included a 13% organic constant currency increase. Following a very strong first half with revenue growth of 10% and profit growth of 22%, as expected we delivered a more typical rate of growth in the second half, with revenue up 6% and profit ahead 10%.

Return on Sales improved from 23.6% to 25.1%, due to an improvement in gross margin and good control of overheads. We continued to increase our investment in new product development, and in digital growth engine projects aimed at adding data and services capabilities. R&D spend declined by 2.6% to £11.5m (2018: £11.8m) but grew by 1.7% excluding Accudynamics. Return on Capital Employed remained strong, and above Group targets.

We saw revenue growth in all subsectors, with Diagnostics performing very well, benefiting from new OEM customer product launches. The Ophthalmology and Sensor Technology subsectors also delivered strong growth; the former through continued international expansion and growth in core products and the latter from greater penetration into its core market of real-time location services, particularly in acute care facilities.

There were revenue increases in all major regions, with strong growth in the USA, our largest geographic market. We also saw good growth in the UK, Mainland Europe and Asia Pacific.

We made two small asset acquisitions for CenTrak, adding new technology and improved distribution capabilities in the USA and Mainland Europe. We sold Accudynamics, one of our Diagnostics businesses.

We have continued to improve the calibre and diversity of our leadership talent at both our operating company and sector management levels, to support delivery in our core markets as well as adding new capability for growth in adjacent niches.

Outlook

Strong demographic trends, and continued advances in diagnostic and surgical techniques are driving demand for our products and services. Through increased penetration into developing markets, continued new product and service development and investment in our talent, we expect to continue to outperform the market. The pressure to reduce healthcare costs coupled with changing payor systems and outcome measures provide ongoing challenges.

Our acquisition pipeline is improving as we continue to assess targets adjacent to, and within, our existing niches. The combination of acquisitions and continued organic revenue and profit growth momentum positions us well for continued progress.

11 Jun 2019

Full Year Results 2018/19

Announcement

Presentation summary

Slides

Webcast