Press Releases - Half Year Results 2014/15

Half Year Results 2014/15

18 November 2014

Record first half results and continued dividend growth

Halma, the leading safety, health and environmental technology group, today announces its half year results for the 26 weeks to 27 September 2014.

Financial Highlights

• Organic growth⁵ at constant currency: profit up 7%, revenue up 4%.
• Growth with higher returns: adjusted¹ pre-tax profit up 6%, revenue up 2%, with adverse currency translation impact of 5% on revenue and profit. Return on Sales⁴ increased to 20.2%.
• Organic constant currency revenue growth in all regions. Good performance in the USA; steady progress in the UK, Asia Pacific and Europe.
• Strong profit growth maintained in Process Safety, Infrastructure Safety and Medical. Lower profit in Environmental & Analysis with improvement expected in the second half of the year.
• £87m net cash spend on three acquisitions. Acquisition pipeline remains healthy. One disposal completed at a small gain.
• Strong cash flow and significant financial capacity for investment in organic growth and value-adding acquisitions. Net debt of £136m (March 2014: £74m).
• Interim dividend up 7% to 4.65p.
• New Executive Board structure operating well, with an initial focus on sector growth strategies and development of management talent.

Andrew Williams, Chief Executive of Halma, commented:

"Halma has made strong progress in the first half, achieving record revenue and profit despite the varied market conditions and adverse currency translation impact. We are particularly pleased to report organic constant currency revenue growth across each of our regions. Order intake since the period end has continued to be ahead of revenue and order intake last year. Halma remains on track to make further progress in the second half of the year in line with our expectations."

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 of £7.8m charge (2013/14: £9.1m charge). See note 2 to the Condensed Financial Statements for details.
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 taxation thereon. See note 6 to the Condensed Financial Statements for details.
3. Interim dividend declared 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 9 to the Condensed Financial Statements for details.

For further information, please contact:

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

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

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 on this website. 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 this website or request free printed copies by contacting [email protected].
4. 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.

Review of Operations

Record half year results
Revenue for the half year increased by 2% to £341m (2013/14: £333m) after an adverse currency translation impact of 5%. Acquisition and disposal activity contributed 3% to revenue and therefore organic revenue growth at constant currency was 4%.

Adjusted¹ profit before taxation increased by 6% to a record level of £69.0m (2013/14: £65.1m) also after an adverse currency translation impact of 5%. Organic constant currency profit growth was 7%.

Profitability increased with Return on Sales¹ growing to 20.2% (2013/14: 19.5%), well within our 18% to 22% target range. Gross margin (revenue less direct material and direct labour) remained strong across the Group.

These results once again demonstrate Halma’s ability to sustain growth and high returns with demand for our products underpinned by the long-term market growth drivers of increasing safety regulation, increasing demand for healthcare and increasing demand for life-critical resources such as energy and water.

7% dividend increase
The Board declares an increase of 7% in the interim dividend to 4.65p per share (2013/14: 4.35p per share). The interim dividend will be paid on 4 February 2015 to shareholders on the register on 30 December 2014. For the past 35 years we have increased our full year dividend by 5% or more each year.

Organic constant currency revenue growth in all regions
The table below shows the pattern of revenue growth in each region including the underlying rates of organic growth at constant currency which are calculated by excluding the effect of currency, acquisitions and disposals. Despite varied market conditions we achieved underlying revenue growth in all regions. The USA performed strongly and increased by 7% with Mainland Europe, the UK and Asia Pacific all showing steady progress.

Revenue from outside our traditional home markets in the USA, Mainland Europe and the UK increased to 26.5% of total revenue (2013/14: 25.2%) boosted by recent acquisitions, representing another step toward our target of 30% by 2015.

Sector performances
Our Process Safety, Infrastructure Safety and Medical sectors all achieved organic revenue growth at constant currency during the period with the Environmental & Analysis sector seeing a small decline. At the headline revenue level, the two Safety sectors benefited from M&A during the period, with the other two sectors being hardest hit by currency impacts due to the largest element of their operations being US-based.

Process Safety revenue increased by 18% to £74m (2013/14: £62m) including 8% organic growth at constant currency. Profit² improved by an impressive 27% to £20.4m (2013/14: £16.1m) including 17% organic growth at constant currency. Return on Sales improved to 27.8% (2013/14: 26.0%). The acquisition of Rohrback Cosasco Systems Inc. (RCS) in May 2014 further boosted a strong underlying performance, particularly in the USA where the oil and gas market continues to provide good opportunities. Excellent progress was also made in South America following the establishment of a commercial hub office for this sector in Brazil last year.

Infrastructure Safety revenue was up by 5% to £113m (2013/14: £107m) with organic constant currency growth of 6%. Profit² growth was even healthier, increasing by 11% on last year to £22.8m (2013/14: £20.6m). Despite an adverse currency translation impact of 4%, strong organic constant currency profit growth of 12% and the acquisition of Advanced Electronics Limited in May 2014 ensured a very positive first half performance. Return on Sales improved to 20.3% (2013/14: 19.2%). This sector achieved organic constant currency revenue growth in all regions with an encouraging recovery in the UK market across almost all businesses. We expect to see a continuation of this sector’s well-established balance between growth in developed and developing markets.

Medical sector revenue was 3% lower than last year at £78m (2013/14: £81m) due to a 7% adverse currency impact. Underlying organic constant currency revenue growth was 4% with momentum improving as the period progressed. Profit² improved by 6% from £19.6m to £20.9m with excellent organic constant currency growth of 12% more than offsetting a 7% adverse currency impact. Excellent operational cost control ensured that Return on Sales improved from 24.2% to 26.6%. A useful recovery in the US market contrasted with weaker performances in the UK and Mainland Europe. There was modest growth outside these three developed markets at constant currency.

Environmental & Analysis had a disappointing first half year, particularly in profitability terms. Revenue was 8% lower than last year at £76m (2013/14: £83m) with an organic constant currency decline of less than 2% and an adverse currency impact of 6%. Profit² reduced to £11.9m from £15.0m, a reduction of 21% of which 15% represented an organic constant currency decline. Return on Sales was 15.6% (2013/14: 18.2%). As expected, there was lower demand from the UK water utilities as this is the final year of their five-year investment cycle; we expect this market to pick up as we progress through 2015. In addition, the final transfer of certain customer contracts into our new consolidated photonics coating facility in Florida from Colorado was delayed resulting in increased costs. This transfer is now complete and therefore we expect profitability to recover in the second half. The revenue decline in the USA, UK and Mainland Europe contrasted with a more encouraging 10% organic constant currency revenue growth outside these markets. Overall, based on management actions already taken, we expect significant improvement in the second-half performance, broadly in line with last year.

Significant currency impact
Halma reports its results in Sterling with approximately 40% of Group revenue denominated in US Dollars and 15% in Euros. In the half year, Sterling strengthened on average by 9% relative to the US Dollar and 6% against the Euro, resulting in a 5% adverse currency translation impact on revenue and profit as noted above. In recent weeks, the US Dollar has strengthened relative to Sterling. If exchange rates continue at current levels, our latest estimate is that there will be an adverse impact of 3% on full year revenue and profit.

Strong cash generation
Cash generation was very good with cash conversion (adjusted operating cash flow as a % of adjusted operating profit – see note 9 to the Condensed Financial Statements for details) of 87% (2013/14: 86%), ahead of our 85% target. Good control of working capital, increased organic investment, acquisition expenditure and increased dividend and taxation payments, resulted in net debt of £136m (March 2014: £74m) at the end of the period. We remain in a strong financial position with our £360m revolving credit facility in place until 2018 and we have good capacity to make further value-adding acquisitions as well as continuing investment in organic growth.

Three acquisitions and one disposal completed
In the first half we spent £87m (excluding £1m of loan notes issued and debt acquired) (2013/14: £17m) purchasing three new companies and also paying earn-outs of £6m (2013/14: £14m) for the growth of acquisitions made in current and prior years. We completed a small disposal continuing our active approach to portfolio management.

We are continuing to refine our M&A search efforts. In particular we are providing improved support to our Sector Chief Executives appointed in April 2014 to ensure that we have resources appropriately focused in each sector covering a wide range of key regional markets. The acquisition pipeline remains healthy.

All transactions during the half year were completed in May 2014:

• Plasticspritzerei AG, a strategic supplier to one of our businesses in the Medical sector, was acquired for a net cash consideration of CHF6m (£4m).
• Advanced Electronics Limited, a manufacturer of networked fire detection and control systems, was acquired for our Infrastructure Safety sector. We paid an initial consideration of £14m (excluding cash and debt acquired of £2m) and a contingent consideration of up to £10.1m is payable on earnings growth for the period to March 2015.
• Rohrback Cosasco Systems Inc. (RCS), a manufacturer of pipeline corrosion monitoring products and systems, was acquired for US$108m (£64m), net of cash acquired of US$9m (£5m). RCS adds valuable new technology and application know-how to the Process Safety sector.

We sold Monitor Elevator Products Inc., a business within the Infrastructure Safety sector, for a consideration of US$6m (£4m). A gain of £1m before tax resulted from the transaction. Monitor’s narrow regional sales focus in the increasingly competitive US elevator maintenance market meant that we were no longer confident in its ability to sustain good growth and returns under Halma ownership.

Pension plan changes
Following consultation with all stakeholders, we announced in March 2014 that the Defined Benefit (DB) sections of the Group’s UK pension plans will cease future accrual as at 1 December 2014. Members will earn future benefits within the Group’s Defined Contribution (DC) section of the pension plan with agreed transitional arrangements. This change reduces Group risk for the future.

Strategic investment for growth
In April 2014, we reorganised our Executive Board to align it with our four reporting sectors and continued with strategic investment in talent development, innovation and international expansion. The new structure is operating well, with an initial focus on developing and communicating new sector growth strategies together with improving the ways we identify, attract and develop management talent. This streamlined board with clearer accountability is also starting to improve collaboration both within and between sector companies.

We continue to increase investment in line with our focus on sustained long-term growth and returns. Our companies increased R&D expenditure by 4% (when measured at constant currency) to £16.4m, representing 4.8% of revenue, which is well above our 4% KPI target. In addition, capital investment in operations increased by 26% to £9.9m (2013/14: £7.9m) in line with guidance given at the start of the year.

Risks and uncertainties
A number of potential risks and uncertainties exist which could have a material impact on the Group’s performance over the second half of the financial year and could cause actual results to differ materially from expected and historical results. The Group has in place processes for identifying, evaluating and managing key risks. These risks, together with a description of the approach to mitigating them, are set out on pages 30 to 33 of the 2014 Annual Report and Accounts, which is available on the Group’s website at www.halma.com. The principal risks and uncertainties relate to operational, strategic, legal, financial, people and economic issues. See note 14 to the Condensed Financial Statements for further details. The Directors do not consider that the principal risks and uncertainties have changed since the publication of the 2014 Annual Report and Accounts and confirm that they remain relevant for the second half of the financial year. As part of their ongoing assessment of risk throughout the period the Directors have considered the above risks in the context of the new Executive Board structure and the Group’s delivery of its financial objectives. Macro-economic uncertainty and movements in foreign exchange rates continue to remain a risk to financial performance.

Going concern
After conducting a review of the Group’s financial resources the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Condensed Financial Statements.

Board changes
Roy Twite, an executive director of IMI plc, was appointed as a non-executive Director effective 24 July 2014. Roy brings a wealth of relevant experience to the Board, having worked in all sectors of this multi-industry FTSE 100 company.

On 8 August 2014, we welcomed Tony Rice to the Board as a non-executive Director. Tony was formerly CEO of Cable & Wireless Communications plc and brings to us strong commercial, financial and international experience.

Outlook
Halma has made strong progress in the first half, achieving record revenue and profit despite varied market conditions and adverse currency translation impact. We are particularly pleased to report organic constant currency revenue growth across each of our regions. Order intake since the period end has continued to be ahead of revenue and order intake last year. Halma remains on track to make further progress in the second half of the year in line with our expectations.

1. See Financial Highlights.
2. See note 2 to the Condensed Financial Statements.

Responsibility statement

We confirm to the best of our knowledge:

By order of the Board

Andrew Williams, Chief Executive
Kevin Thompson, Finance Director

File download

Half Year Report for the 26 weeks to 27 September 2014 (0.5 MB, PDF)