Press Releases - Final Results for the 52 Weeks to 29 March 2014

Final Results for the 52 Weeks to 29 March 2014

12 June 2014

Record results and continued dividend growth

Halma, the leading safety, health and environmental technology group, today announces its preliminary statement for the 52 weeks to 29 March 2014.

• Growth in continuing operations: revenue up 9%, adjusted¹ pre-tax profit up 9%. Organic growth⁵ at constant currency: revenue up 6%, profit up 5%.
• 7% increase in total dividend; 35th consecutive year of dividend increases of 5% or more.
• Widespread revenue growth: Asia Pacific up 11% including China up 26%, USA up 10%, Europe up 8% and UK up 11%. Organic growth in all regions.
• Revenue and profit growth in all four sectors. Strong growth in Medical supported by prior year acquisitions. Good progress in Process Safety and Infrastructure Safety. Environmental & Analysis showing improved performance, final phase of restructuring on track. Organic constant currency revenue and profit growth in all sectors.
• Acquisition pipeline remains healthy. Three acquisitions and one disposal completed since year end for a net cost of £78m, in addition to one acquisition in April 2013.
• Strong cashflow and significant financial capacity for investment in organic growth and value adding acquisitions. Net debt of £74.5m at year end (2013: £110.3m) and increased borrowing facilities of £360m extended until 2018.
• Simplified management structure in place, capable of scaling up Halma’s business model while maintaining our unique operating culture.

Andrew Williams, Chief Executive of Halma, commented:

"Halma has performed strongly, achieving record revenue and profit for the eleventh consecutive year. We achieved revenue and profit growth in all four of our business sectors and in all four major geographic regions even though market conditions were variable.

"We expect this varied trading environment to continue, providing both opportunities and challenges including a currency headwind resulting from the increased strength of Sterling. Our ongoing investment in new products, people development and international expansion will continue to open up new market niches and applications for our businesses. Our proven ability to achieve organic growth and regularly complete good quality acquisitions gives us confidence that Halma will make further progress in the year ahead."

Notes:

1. Adjusted to remove the amortisation of acquired intangible assets, acquisition items, the effects of closure to future benefit accrual of the Defined Benefit pension plans (net of associated costs), and profit or loss on disposal of operations totalling £1.6m (2013: £8.4m). See Note 2 to the Preliminary Statement.
2. Adjusted to remove the amortisation of acquired intangible assets, acquisition items, the effects of closure to future benefit accrual of the Defined Benefit pension plans (net of associated costs), profit or loss on disposal of operations and the associated tax thereon. See Note 6 to the Preliminary Statement.
3. Total dividend paid and proposed per share.
4. Return on Sales is defined as adjusted¹ profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
5. Organic growth rates, Return on Total Invested Capital and Return on Capital Employed are non-GAAP performance measures used by management in measuring the returns achieved from the Group’s asset base. See Note 11 to the Preliminary Statement.
6. The Group adopted IAS 19 (revised) in 2013/14, which changed the accounting for Defined Benefit pension plans. The prior year has been restated resulting in a £2.1m reduction in its adjusted profit. The consequent change to the prior year’s earnings per share² is shown in Note 6 to the Preliminary Statement. Results prior to 2012/13 have not been restated.

For further information, please contact:

Halma plc: +44 (0)1494 721111
Andrew Williams, Chief Executive
Kevin Thompson, Finance Director

MHP Communications: +44 (0)20 3128 8100
Rachel Hirst/Andrew Jaques

NOTE TO EDITORS

1. Halma develops and markets products used worldwide to protect life and improve the quality of life. The Group comprises four business sectors:
   • Process Safety
     Products which protect assets and people at work.
   • Infrastructure Safety
     Products which detect hazards to protect assets and people in public spaces and commercial buildings.
   • Medical
     Products used to improve personal and public health.
   • Environmental & Analysis
     Products and technologies for analysis in safety, life sciences and environmental markets.
   The key characteristics of Halma's businesses are that they are based on specialist technology and application knowledge, offering strong growth potential. Many Group businesses are market leaders in their specialist field.
2. High resolution photos of Halma senior management, including Chief Executive Andrew Williams, and images illustrating Halma business activities can be downloaded from the Image Library. Photo queries: David Waller +44 (0)1494 721111, e-mail: [email protected].
3. You can view or download copies of this announcement and the latest Half Year and Annual Reports from the website at www.halma.com or request free printed copies by contacting [email protected].
4. A copy of the Annual Report and Accounts will be made available to shareholders on 24 June 2014 either by post or online at www.halma.com and will be available to the general public online or on written request to the Company’s registered office at Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE, UK.
5. This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.

Chairman’s Statement

"…a strong dedication to the business model with a large reliance on the autonomy of the operations."

When I was first approached about the opportunity to chair Halma, I have to admit that I knew very little about the Company. That in itself tells you something about the business, as Halma has always been somewhat understated, relying on the natural evolution of its business fundamentals to grow. Halma’s ambitions to grow are clearly communicated in its engagement with the investment community. There are no hidden principles guiding the Group, just a strong dedication to the business model with a large reliance on the autonomy of the operations. This approach is rewarded with shareholders who share the same values as Halma and who reinforce our dedication to our business model through their longer-term investment. Therefore in this, my first report as your Chairman, I am delighted to report another strong performance by Halma achieving record revenue and profit for the eleventh consecutive year.

Structured for sustainable growth
During this last year the Board spent time discussing how the business should be organised to maximise the growth opportunities in our marketplaces. We considered the breadth of management control across the Group and concluded that the time had come to align our Executive Board with the four market sectors that we are engaged in. We continue to believe that it is important to maintain the flat management structure that has played a large part in underpinning the operational excellence and control of the Group for many years. Halma’s growth in recent years has demonstrated that it is possible to replicate the Group’s traditional management structure within each sector – after all, our sectors are now roughly the size that Halma was just 10 years ago!

Structuring management and the businesses in this way will broaden our M&A search activity as well as making Halma a more transparent prospect for the owners and management of potential acquisition opportunities. The ability to identify suitable acquisitions is an important part of our long-term business model. I am satisfied that we have maintained, and indeed enhanced, what makes Halma an attractive home for successful businesses.

These changes also mean that additional internal collaboration opportunities are more likely to be pursued. I plan to report on the additional ‘added value’ from internal collaboration in next year’s annual report.

During the year we created the new role of Group Talent Director reporting to Andrew Williams and with a position on the Executive Board. This will improve the Company’s ability to identify talent both internally and externally, ensuring that we have strong teams in all of our businesses coupled with an effective management succession planning culture. I am delighted to welcome Jennifer Ward to Halma who was appointed to this role in March 2014.

Governance
As Chairman of Halma, I am tasked with ensuring that the Board maintains a focused and disciplined approach to governance and I am delighted to say that the task is made easier by the leadership evidenced at all levels of the Group. In saying that, I do acknowledge that we need to improve on our diversity objectives across all of our businesses in the Group and that this will continue to be a focus for both the plc and Executive Boards.

Due to recent changes in their business commitments, Lord Blackwell and Steve Marshall will not be seeking re-election to the Board at the forthcoming AGM. I would like to thank them both for the significant contribution they have made to the Halma Board and also the support that they have provided to me in my first year as Chair.

I am delighted to announce that Roy Twite will be joining the Board following the conclusion of the AGM on 24 July 2014. Roy is an executive director at IMI plc and brings very relevant engineering experience to the Halma Board. Stephen Pettit has agreed to the Board’s request to remain on the Halma Board up until the 2015 annual general meeting. The Board is in the process of seeking to identify an additional non-executive Director.

Further information on Corporate Governance is set out in the Annual Report and Accounts.

Acquisitions and disposal
The Group concluded only one acquisition this year after acquiring six businesses in the previous year on which we spent £137m. Our acquisition pipeline remains good. The three acquisitions concluded after our financial year end demonstrate that we cannot predict when our efforts will come to fruition although this also gives me comfort that the disciplines and due diligence surrounding acquisitions are not unduly accelerated, but fully performed and considered. As a Board, we evaluate each investment opportunity on its merits and ensure that each is the right use of our financial resources.

Pensions
During the year, the Board authorised the cessation of future benefit accrual in the two remaining UK Defined Benefit pension plans in operation in the Group. Whilst this provides the Company with a less volatile financial impact in the years ahead, I wanted to let each of the long-serving Group employees affected by this change know that this was not an easy decision to reach. The Board considered the volatility of pension funding and accounting alongside market practice outside Halma, harmonisation of Group benefits and upcoming changes to National Insurance contributions. We concluded that discontinuance of this benefit, balanced with transitional measures, was in the best interests of shareholders.

Performance and dividend
I would like to thank Andrew Williams, the Executive Board and each of Halma’s employees around the world; each has played their part this year in delivering value for shareholders in another chapter in the story of Halma.

I am pleased to report that revenue for the year increased by 9% to £677m with adjusted¹ profit before tax increasing by 9% to £140m. In a year in which there were fewer acquisitions, this is a commendable performance.

The Board’s confidence in the Group is reflected in us recommending a final dividend of 6.82p per share giving a total dividend for the year of 11.17p, an increase of 7%. The final dividend is subject to approval by shareholders at the AGM on 24 July 2014 and will be paid on 20 August 2014 to shareholders on the register at 18 July 2014. This marks the 35^th consecutive year of dividend increases of 5% or more.

Summary
2014 has been another successful year for Halma with solid organic growth and positive contributions from recent acquisitions helping to achieve record results for the eleventh successive year. The restructuring of our Executive Board, aligning it more closely with our four sectors, will give us a clearer market focus. I believe this will continue to help us to achieve our longer-term strategic objectives as well as continuing to drive organic growth in the business.

Paul Walker, Chairman

1. See Financial Highlights.

Strategic Review

Record revenue and profit growth
Halma has performed strongly, achieving record revenue and profit for the eleventh consecutive year. We achieved revenue and profit growth in all four of our business sectors demonstrating the benefit of sustained investment in new product innovation and people development. We increased revenue in all major geographic regions, rewarding our commitment to increasing resources in developing countries and reflecting the opportunities for growth in developed markets.

The consistency of Halma’s strong performance over a long period is the product of a good strategy together with the creativity, commitment and talent of Halma’s employees. Once again, I would like to thank them for their contributions to our continued success.

Good organic revenue and profit growth
Revenue from continuing operations increased by 9% to £676.5m (2013: £619.2m). Organic revenue growth was 6% and also 6% at constant currency. Adjusted¹ profit from continuing operations increased by 9% to £140.2m (2013 restated¹: £128.5m). Organic profit growth was 6% and 5% at constant currency.

There were similar rates of organic revenue growth at constant currency in the first-half and second-half years. Profit growth was stronger in the second half as some ‘one-off’ reorganisation and quality costs in the first half were not repeated. Product margins remained steady throughout the year reflecting good control of both pricing and manufacturing costs.

High returns and strong cash generation
High returns were maintained with Return on Sales of 20.7% (2013 restated¹: 20.8%) and Return on Capital Employed at the operating level increased to 76% (2013 restated¹: 71%). Return on Total Invested Capital (post-tax) rose to 16.1% (2013 restated¹: 15.6%). Strong cash generation ensured we ended the period with net debt of £74m (2013: £110m) after spending £17m on capital expenditure, £17m on acquisitions (2013: £148m of which £137m was for businesses acquired in the year) and paying out £40m and £28m on dividends and tax respectively. In November 2013, we increased and extended our revolving credit facilities up to £360m until November 2018 and we are in an excellent financial position to support our future growth.

Growth in all major geographic regions
Widespread growth in all major geographic regions once again showed Halma’s ability to succeed amid a range of local economic conditions. This reflects both the benefit to us of the diversity of our end markets and also the agility of our operating structure. Each subsidiary company is able to adjust investment priorities quickly as market conditions vary. We have seen the value of this, particularly during recent years when macro-economic circumstances have been changeable.

Revenue from our largest market, the USA, grew by 10% to £214m (2013: £195m) including organic growth at constant currency of 6%. UK revenue improved by 11% to £128m (2013: £116m) while Mainland Europe revenue was up by 8% to £164m (2013: £152m). Constant currency organic revenue growth in these regions was 6% and 5% respectively. Therefore, total revenue from these three developed markets grew by a very healthy 9%, including 6% organic growth at constant currency.

We maintained strong growth in China: revenue was up by 26% to £47m (2013: £37m), which is 7% of the Group. This included a successful first full year for Longer Pump, our first stand-alone acquisition in China. This excellent performance in China contributed to revenue from Asia Pacific increasing by 11% to £112m, including 7% organic growth at constant currency.

Organic revenue and profit growth in all sectors

Process Safety grew revenue by 1% to £126.7m (2013: £125.7m) and profit² by 8% to £34.9m (2013: £32.3m). Excluding the contribution of Tritech, which was sold in August 2012, revenue increased by 5% and profit by 11%. These were also the sector’s organic growth rates.

Return on Sales improved from 25.7% to 27.5% due to continued strong product margins and good operational management. New product introductions contributed to both this margin expansion and to revenue growth through diversification into new application niches. Examples included new pressure relief devices for shale gas production and a wide-area gas detection system which incorporates wireless technology developed by one of our Infrastructure Safety businesses. This combination of focused product innovation and a continued increase in Health & Safety regulation globally is delivering sustained success for our Process Safety sector.

Excluding the prior year disposal, there was growth in all major geographic regions except the UK, where revenue declined by 1%. There was double-digit growth from the USA (up 13%) and Asia Pacific (up 12%). Mainland Europe revenue increased by 1%. The sector hub established in Brazil in 2013 is now firmly established and promises to boost Process Safety revenue from this territory in the future.

Infrastructure Safety performed strongly, growing both revenue and profit² by 7% to £220.3m (2013: £205.3m) and £44.4m (2013 restated: £41.5m) respectively. At constant currency, organic revenue growth was 6% and profit growth was 5% demonstrating the resilience of demand for our products which is underpinned by increasing Health & Safety regulation.

Return on Sales remained strong at 20.2% (2013 restated: 20.2%) due to successful new product launches and an effective balance between investment and cost control to maintain strong product margins. We continue to achieve good growth for our wireless smoke detectors into the home automation market in the USA, while a new safety sensor for automatic swing doors is increasing our market share with global pedestrian door OEMs.

Revenue increased in all major geographic regions, including 12% growth in Mainland Europe. Healthy mid-single digit growth in the UK, USA and Asia Pacific reflected the global reach of our products, whether selling into major multinational OEMs or through local distribution partners. Our strategy of increasing investment in locally based sales and technical resources continues to pay dividends.

Our Medical sector grew revenue by 20% to £163.2m (2013: £136.1m) and profit² by 16% to £41.8m (2013: £35.9m), including a sizeable contribution from acquisitions completed in the prior financial year. Organic revenue growth at constant currency was 7% and organic profit growth was 1%.

Return on Sales remained strong at 25.6%, albeit slightly below last year’s record 26.4%. A combination of minor factors contributed to this, including the full-year effect of the new medical device tax in the USA and the acquisitions made in the prior year having lower returns than the sector average. Typically, we increase investment in newly acquired businesses during the first couple of years of ownership to build management strength, international sales resources and new product development capability. In the medium term, this not only increases revenue, but also drives up profitability.

There was strong revenue growth in all geographic regions. Asia Pacific growth of 52% benefited from a good first year’s performance from Longer Pump in China and strong organic growth of 22% (constant currency). Our focus on new medical product registrations is slowly paying dividends and is enabling us to build stronger market positions in key developing territories in Asia and South America. Elsewhere, organic revenue growth (constant currency) from the UK was up 8%, Mainland Europe grew by 6% and the USA increased 3%.

Environmental & Analysis achieved a pleasing full-year performance after a disappointing prior year and some reorganisation in the first half. Revenue increased by 9% to £166.5m (2013: £152.4m) and profit² grew by 4% to £31.7m (2013: £30.4m). At constant currency, organic revenue growth was 5% and profit was up 2%.

Return on Sales was 19.1% (2013: 19.9%) which represented a useful improvement from 18.2% at the end of the first half. The consolidation of our two optical coating business facilities has gone to plan with a newly expanded facility now operational in Florida and product lines being transferred from Colorado. In addition, our main photonics business, Ocean Optics, has spun-off a new Halma subsidiary in China while our water UV companies have restructured their distribution channels in the USA. The total cost of these restructuring projects was below £1m in the year.

Revenue grew by 53% in the UK, dominated by large sales of flow/pressure data loggers to UK water utilities as part of their preparation for the deregulation of the UK commercial water market in 2017. There was mid-single digit growth in Mainland Europe and the USA whilst revenue from Asia Pacific declined by 5% as major contracts for certain water and photonics businesses last year came to an end. Restructuring completed during the year and additional senior management changes made shortly after year end should improve the consistency of this sector’s performance in the medium term.

Executive Board changes enhance the scalability of Halma’s business model
In April 2014, Halma’s Executive Board was reorganised to be more clearly aligned with our four reporting sectors and provide a management structure which gives each sector the potential to become as large as the whole of Halma today. Each of our four sectors is now led by a Sector Chief Executive (SCE), each of whom has already proven successful in delivering both organic and acquisition growth as a Halma Divisional Chief Executive (DCE). As each sector grows, the SCEs will appoint Sector Vice Presidents to chair small groups of companies in much the same way as Halma DCEs did successfully for many years in the past.

Halma’s long track record of success is built on careful selection of markets and product niches complemented by an unstinting commitment to improve the quality of management. This need to have a strong talent pipeline to support future growth is an ever-increasing challenge and, with that in mind, we recruited Jennifer Ward to the Halma Executive Board as Group Talent Director. Jennifer will lead the development of a more rigorous approach to identifying, assessing, developing and attracting diverse management talent working in a partnership with the SCEs.

This new management structure will result in clearer growth strategies for each sector, clarifying the investment, collaboration and acquisition priorities. As Group CEO, I will maintain a close relationship with both the SCEs and our individual operating subsidiaries through their regular reporting, meetings and my ongoing programme of company visits. I am confident that we have a management structure which is capable of scaling up Halma’s successful business model over the next decade (or more) while maintaining our unique operating culture.

Three acquisitions completed recently; pipeline is good
Following a very busy 2012/13, when Halma spent £137m on six businesses (excluding net cash acquired of £5m), we completed one acquisition this financial year. Talentum, a flame detector manufacturer, was acquired by our Infrastructure Safety sector in April 2013 for £3m (excluding net cash acquired).

Despite a quiet year, we remain confident about acquisition prospects, having come close to completing a number of additional deals during the year. Although the current M&A market is more competitive than it has been for the past few years, we are still finding high quality companies in good markets at sensible prices. To support this confidence, we have completed three acquisitions since the period end:

• Plasticspritzerei AG was acquired in May 2014 for a net cash consideration of CHF4.8m (£3.2m). Plasticspritzerei manufactures plastic components including critical parts for Medicel’s ophthalmic products and joins our Medical sector.
• Advanced Electronics Limited (Advanced) was acquired in May 2014 for an initial cash consideration of £14.1m. Advanced manufactures networked fire detection and control systems and joins our Infrastructure Safety sector.
• Rohrback Cosasco Systems Inc. (RCS) was acquired in May 2014 for a cash consideration of $108m (£64.7m) excluding cash acquired. RCS is a world leader in the design, manufacture and sale of pipeline corrosion monitoring products and systems and is a strong addition to our Process Safety sector.

We made one disposal following the year end, selling our US-based elevator control panel manufacturing business, Monitor Elevator Products Inc., to another industry player, Innovation Industries for $6m (£3.6m). Halma will record a gain before tax of approximately £1m on this transaction in 2014/15.

The net spend on the acquisitions and disposal in May 2014 was £78.4m.

Creating growth through strategic investment
Our strategy is to sustain consistent rates of organic growth by focusing on three areas of investment: innovation, people development and international expansion.

We are strongly cash generative and our medium-term organic growth rate determines our ability to fund the acquisition of new businesses and increase dividends each year. These cash resources are supplemented by income from disposals and external financing facilities, although our strategy is always to maintain a strong balance sheet with modest levels of debt. In the longer term, our ability to shift our portfolio mix also ensures that we can change our exposure to particular end markets as economic circumstances evolve.

Increased investment in innovation
Halma businesses build market leadership, gain market share and create opportunities in new markets through innovation of products and processes. This innovation comes from leveraging the deep market knowledge and application know-how residing within each Halma business.

There is a significant benefit to be gained from Halma companies collaborating and sharing know-how with their sister companies. We are building a culture which encourages these behaviours in a variety of ways including diverse company representation at Halma training programmes and holding a biennial Halma Innovation and Technology Exposition (HITE). Network groups focused on functional areas such as manufacturing, HR and IT also foster regular benchmarking and drive continuous improvement.

In May 2013, we held our third HITE event in Florida, USA. HITE brings together senior managers from all Halma companies and acts as a catalyst for collaboration and sharing know-how thereby increasing subsidiaries’ rates of innovation and competitive advantage. Plans are already underway for HITE 2015 which will be held during April 2015 in Barcelona, Spain and, once again, we intend to invite institutional investors and analysts to join us. Innovation is formally recognised in Halma through the annual Halma Innovation Award which includes a first prize of £20,000 for the winning employees.

The Halma Innovation Award 2