Press Releases - Half Year Results 2015-16

Half Year Results 2015-16

17 November 2015

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 27 weeks to 3 October 2015.

Financial Highlights

• Revenue increased 11% with Adjusted¹ pre-tax profit up 8%. Organic constant currency growth⁵: revenue up 7%, profit up 4%.
• Organic constant currency revenue growth⁵ in all major regions. Strong growth in the US and Europe; solid progress in UK and Asia Pacific.
• Revenue growth in all sectors. Strong organic constant currency revenue and profit growth in Infrastructure Safety, Medical and Environmental & Analysis. Lower profit in Process Safety, reflecting a balance of tighter overhead control with a need to invest for market diversification.
• Firetrace acquisition completed since half year end for £73m, in addition to one acquisition in May 2015. Acquisition pipeline becoming more balanced across all sectors.
• Strong cash flow and increased financial capacity for investment in organic growth and acquisitions. Net debt of £93m (March 2015: £101m).
• Interim dividend up 7% to 4.98p per share (2014/15: 4.65p).

Andrew Williams, Chief Executive of Halma, commented:

“Halma has made strong progress in the first half, achieving record revenue and profit in varied market conditions. The diversity of our products, customers and end market niches is a cornerstone of our success. Since the period end, order intake has continued to be ahead of revenue and order intake last year. We have also completed the purchase of Firetrace, demonstrating our ability to supplement organic growth with high quality acquisitions. Halma remains on track to make progress in the second half of the year in line with our expectations.”

Pro-forma information:

1. Adjusted to remove the amortisation of acquired intangible assets, acquisition items and profit or loss on disposal of operations of £10.4m charge (2014/15: £7.8m charge). See Note 2 to the Condensed Financial Statements for details.
2. Adjusted to remove the amortisation of acquired intangible assets, acquisition items, profit or loss on disposal of operations, and the associated tax 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 and Return on Total Invested Capital (ROTIC) are non-GAAP performance measures used by management in measuring the returns achieved from the Group’s asset base. ROTIC is now calculated using the average Total Invested Capital. The prior period has been restated. See note 9 to the Condensed Financial Statements for details.

For further information, please contact:

Halma plc:+44 (0)1494 721 111
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. 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
Halma has made excellent progress during the first half of this year. Revenue for the half year increased by 11% to £380m (2014/15: £341m) including a positive currency translation impact of 3%. Organic revenue growth at constant currency was an impressive 7%.

Adjusted¹ profit before taxation increased by 8% to £74.7m (2014/15: £69.0m) after a positive currency translation impact of 2%. Organic constant currency profit growth was 4%.

Profitability remained strong with Return on Sales¹ of 19.7% (2014/15: 20.2%), well within our 18% to 22% target range. Gross margin (revenue less direct material and direct labour) also remained strong across the Group.

These results once again demonstrate Halma's ability to sustain growth and high returns. Demand for our products is underpinned by the long-term market growth drivers of increasing safety regulation, increasing demand for healthcare and increasing demand for life-critical resources. These external growth drivers are supplemented by a relentless commitment to increasing investment in innovation, international expansion and talent development enabling us to grow above our end-market rates.

7% dividend increase
The Board declares an increase of 7% in the interim dividend to 4.98p per share (2014/15: 4.65p per share). The interim dividend will be paid on 10 February 2016 to shareholders on the register on 4 January 2016. For the past 36 years we have increased our full year dividend by 5% or more each year.

Revenue growth in all major 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 revenue growth in all major regions. The USA performed very strongly and increased by 20% with Mainland Europe, the UK and Asia Pacific also showing good progress.

Revenue from outside our traditional home markets in the USA, Mainland Europe and the UK grew by 9%, contributing 26.0% of total revenue (2014/15: 26.5%). There was strong growth in Near and Middle East while revenue was lower in South America, mainly due to weakness in the energy markets impacting our Process Safety sector. In Asia Pacific, good growth in India, South Korea and China more than offset a weaker performance in Australasia.

Revenue growth in all four sectors
The Infrastructure Safety and Medical sectors continued their well-established record of growth. Tough trading conditions in Process Safety were more than compensated for by the expected recovery in our Environmental & Analysis sector.

Process Safety revenue increased by 6% to £78m (2014/15: £74m) with positive contributions of 1% from currency translation and 6% from prior year acquisitions. Organic constant currency revenue declined by 1%, reflecting the tougher conditions in the oil and gas market, which contributes just under half of the sector revenue. Geographically, organic constant currency revenue growth was strongest in the USA and Near and Middle East with organic revenue decline in Asia Pacific and South America.

Profit² was 7% lower at £19.1m (2014/15: £20.4m), including an organic constant currency decline of 14%. Despite this, Return on Sales remained strong at 24.5% (2014/15: 27.8%), with those businesses already serving diverse markets, such as Gas Detection and Trapped-Key Interlocks, performing well. We do not expect the oil and gas market to improve in the near future and therefore we are balancing tight control of overheads with the need to invest to further increase diversification both regionally and by end market.

Infrastructure Safety had a good first half with revenue up by 9% to £122m (2014/15: £113m) with organic constant currency growth of 8%. The Fire and Automatic Door Sensor businesses made good progress, while Elevator Safety and Security performed less well. Overall, the rates of organic constant currency growth were higher in the USA, Mainland Europe and the UK than the less mature markets, such as Asia Pacific and South America, although market conditions were stronger in Near and Middle East.

Profit² improved by 8% to £24.6m (2014/15: £22.8m) including organic constant currency growth of 7%. Return on Sales was 20.1% (2014/15: 20.3%). The sector achieved volume growth while maintaining gross margins, reflecting the benefits of increasing investment in new product development. In addition to this, the recent acquisition of the fire suppression business, Firetrace (see below), gives us confidence for growth to continue in the second half.

The Medical sector performed strongly. Revenue grew by 18% to £92m (2014/15: £78m) including organic constant currency revenue growth of 12%. All three businesses (Ophthalmology, Vital Signs Monitoring and Fluidics) made excellent progress. There was revenue growth in all major geographic regions including double-digit growth in Mainland Europe, Asia Pacific and the USA, which represents almost half of sector revenue.

Profit² rose by a very impressive 18% to £24.6m (2014/15: £20.9m) including an organic constant currency increase of 13%. Return on Sales was unchanged at 26.6% (2014/15: 26.6%) with a slight improvement in gross margins. This encouraging underlying trading momentum should enable our Medical sector to continue to make good progress in the second half.

Environmental & Analysis made an encouraging recovery after a tough time last year. Revenue increased by 14% to £87m (2014/15: £76m) including organic constant currency growth of 10%. The Water, Photonics and Environmental Monitoring businesses all increased revenue. There was also growth in all major geographic regions, with double-digit organic growth rates in the USA and Mainland Europe (at constant currency).

Profit² increased by 25% to £14.8m (2014/15: £11.9m) including organic constant currency growth of 18%. As with revenue, there was a useful contribution from all three business segments even though the benefit from the UK water utilities beginning their next five-year investment cycle will not start to be felt until the second half of the year. Consequently, this sector is well placed to continue its encouraging recovery in the second half.

VAS LLC and Firetrace USA LLC acquisitions completed
In May 2015, we completed the purchase of Value Added Solutions, LLC (VAS), based in Connecticut, USA, which designs and manufactures fluidic assemblies for life sciences and analytical instruments. VAS has been integrated with one of our Medical sector companies, Diba Industries, which is also based in Connecticut, USA. The initial cash consideration was US$5m (£3m).

In October 2015, Halma acquired Firetrace USA, LLC, based near Phoenix, Arizona. Firetrace designs and manufactures customised fire suppression systems for confined spaces serving a range of end markets including transportation, process machinery, computer server hubs, defence and aerospace. This stand-alone addition to our Infrastructure Safety sector brings fire suppression technology to our long-standing and successful fire detection business. The initial consideration was US$110m (£73m).

These transactions demonstrate our ability to find attractive, high quality businesses within our existing sectors which fit both our financial and operating characteristics. Under the leadership of our four Sector Chief Executives, our acquisition pipeline is steadily becoming more balanced across all sectors. This more focused effort should strengthen further the current acquisition pipeline and ensure we continue to deliver this important component of our growth strategy.

Continued strategic investment for growth
Despite the varied and challenging trading environment, Halma has continued to deliver organic growth above the rate of its end markets for more than a decade through our businesses gaining market share, growing internationally and diversifying into new market niches. Achieving this sustained success over such a long period has required a relentless determination to increase strategic investment in innovation, international expansion and talent development both centrally and within individual sectors.

Our companies increased R&D expenditure by 21% to £19.8m (2014/15: £16.4m) with increases in all sectors, and representing 5.2% of Group revenue. However, our investment in innovation is not restricted to new product development and we encourage our businesses to collaborate and share best practice in all areas of their businesses as we believe this is a very effective catalyst for broader business innovation. This is exemplified by the biennial Halma Innovation and Technology Exposition (HITE) event which was held in April this year in Barcelona.

Currency volatility
Halma reports its results in Sterling with approximately 40% of Group revenue denominated in US Dollars and 10% in Euros. In the half year, Sterling weakened on average by 8% relative to the US Dollar and strengthened 12% against the Euro, resulting in a 3% positive currency translation impact on revenue and 2% positive impact on profit as noted above. If exchange rates continue at current levels for the full year, we estimate that the currency translation impact will be broadly neutral year on year.

Funding capacity increased via US Private Placement
Cash generation remains strong. Cash conversion (adjusted operating cash flow as a percentage of adjusted operating profit) was 88% (2014/15: 87%), ahead of our 85% cash conversion target. Net debt at the end of the period reduced to £93m (March 2015: £101m) having continued organic investment, increased dividend and taxation payments and completed one acquisition. Capital expenditure of £9.0m (2014/15: £9.9m) showed a good underlying increase but was lower due to greater property expenditure in the prior year. Gross cash balances were untypically high at £134m due mainly to holding cash at the half year end for completion of the Firetrace acquisition immediately after.

On 2 November 2015 a US Private Placement was agreed for $250m, in a mix of Sterling, US Dollars, and Euros, at a weighted average interest rate of 2.5% over the outstanding borrowing period of five, seven and ten years. Funds will be drawn down in January 2016. This underpins Group funding with the diversification of term debt in addition to the existing syndicated bank facility of £360m which runs to November 2018.

Gearing (the ratio of net debt to EBITDA) at half year end was 0.5 times, increasing to 0.9 times following the Firetrace acquisition. We feel comfortable operating with up to 1.25 times gearing, and would be prepared to exceed this level temporarily if the timing of acquisitions required it.

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 28 to 31 of the 2015 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 15 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 2015 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.

The Directors have adopted the requirements of the updated UK Corporate Governance Code which are relevant for the first time for the current reporting period and will be reporting their first Viability Statement in the Annual Report and Accounts for the year ending 2 April 2016.

Board changes
Stephen Pettit retired from the Halma Board at our Annual General Meeting in July 2015. Stephen joined Halma in 2003 and served as our Senior Independent Director and Chairman of the Remuneration Committee. We would like to thank Stephen for his contribution over more than a decade, during which time our business has grown and changed substantially. His willingness to support both the Board and the businesses in any way he could is greatly appreciated. Tony Rice succeeds Stephen as Senior Independent Director and Remuneration Committee Chairman.

Outlook
Halma has made strong progress in the first half, achieving record revenue and profit in varied market conditions. The diversity of our products, customers and end-market niches is a cornerstone of our success. We continue to capitalise on this foundation by increasing our investment in innovation, international expansion and talent development every year. This, together with our agile organisational model, enables us to grow faster than our markets over the medium term for example by gaining market share or entering new market niches.

Since the period end, order intake has continued to be ahead of revenue and order intake last year. We have also completed the purchase of Firetrace, demonstrating our ability to supplement organic growth with high quality acquisitions. Halma remains on track to make 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 that to the best of our knowledge:

1. these Condensed Financial Statements have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union;
2. this Half Year Report includes a fair review of the information required by Disclosure and Transparency Rule (DTR) 4.2.7R (indication of important events during the period and description of principal risks and uncertainties for the remainder of the financial year); and
3. this Half Year Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board

Andrew Williams, Chief Executive
Kevin Thompson, Finance Director

17 November 2015

File download Half Year Report for the 27 weeks to 03 October 2015 (0.5 MB, PDF)