Press Releases - Half Year Results 2017/18

Half Year Results 2017/18

21 November 2017

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 6 months to 30 September 2017.

Highlights

• Revenue up 15% with Adjusted¹ pre-tax profit up 13%. Organic constant currency growth⁵: revenue up 9%, profit up 8%.
• All four sectors achieved good organic constant currency revenue growth.
• Revenue growth in all major regions. Significant growth in Asia Pacific where revenue exceeded the UK for the first time; good progress in the USA, Mainland Europe and Other regions.
• Strong profit growth in the Process Safety, Infrastructure Safety and Environmental & Analysis sectors; Medical sector profit marginally lower although on track to improve profitability in the second half.
• Strong returns with Return on Sales⁴ of 18.7% and ROTIC⁵ of 13.4%. R&D expenditure up 19%, representing 5.4% of revenue.
• Interim dividend up 7%.
• Good cash generation and strong balance sheet support sustained strategic investment; healthy acquisition pipeline with two acquisitions completed in the first half and two further acquisitions completed since the period end.

Andrew Williams, Chief Executive of Halma, commented:

“Halma has continued to make strong progress, delivering record revenue, profit and dividends for shareholders. The diversity of our business and the evolution of our organisational model through our four sectors is enabling us to sustain growth in varied market conditions. Since the period end, order intake has continued to be ahead of revenue and order intake last year. Halma remains on track to make progress in the second half of the year in line with the Board’s expectations.”

Notes:

1. Adjusted to remove the amortisation and impairment of acquired intangible assets, acquisition items, restructuring costs and profit or loss on disposal of operations, totalling £17.7m (2016/17: £18.4m). See note 2 to the Condensed Financial Statements for details.
2. Adjusted to remove the amortisation and impairment of acquired intangible assets, acquisition items, restructuring 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. Adjusted¹ Profit before Taxation, Adjusted¹ Earnings per Share, organic growth rates and Return on Total Invested Capital (ROTIC) are alternative performance measures used by management. See notes 2, 6 and 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 and services that improve the safety and mobility of people and protect commercially and publicly owned infrastructure.
   • Medical - Products which enhance the quality of life for patients and improve the quality of care delivered by providers.
   • Environmental & Analysis - Products and technologies for analysis in environmental safety and life sciences markets.
   The key characteristics of Halma's businesses are specialist technology and application knowledge for markets offering strong long term 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.
3. You can view or download copies of this announcement and the latest Half Year and Annual Reports from the Reports & Presentations Archive 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 made strong progress during the first half of the year. Revenue increased by 15% to £506m (2016/17: £442m) including a positive currency translation impact of 5%. Organic revenue growth at constant currency was 9%.

Adjusted¹ profit before taxation increased by 13% to £94.5m (2016/17: £83.6m) including a positive currency translation impact of 5%. Organic profit growth at constant currency was 8%.

Return on Sales¹ remained strong at 18.7% (2016/17: 18.9%). The Gross Margin % was very slightly below the prior year, with two sectors up and two down.

Our companies increased R&D expenditure by 19% to £27.3m (2016/17: £23.0m) representing 5.4% of Group revenue (2016/17: 5.2%) with higher rates of investment in the Medical and Environmental & Analysis sectors.

The Board has declared an increase of 7% in the interim dividend to 5.71p per share (2016/17: 5.33p per share). The interim dividend will be paid on 7 February 2018 to shareholders on the register on 29 December 2017. For the past 38 years we have increased our full year dividend by 5% or more each year.

Widespread revenue growth

We achieved revenue growth across all major regions including organic growth at constant currency in each region.

Asia Pacific revenue increased by 20%, including 14% organic constant currency growth. All sectors grew with Infrastructure Safety and Environmental & Analysis sectors delivering the strongest growth. Sales to Asia Pacific exceeded those to the UK for the first time.

The USA remains our largest sales destination contributing 36% of total revenue, growing 13% in the half year, 6% at organic constant currency.

Revenue in Mainland Europe increased by 14% and in the UK by 9% with both regions achieving 9% organic constant currency growth. Growth in the Near and Middle East, Canada and Brazil contributed to the strong growth in Other regions.

The tables below summarise revenue growth by destination and by sector, including the underlying rates of organic growth at constant currency. Organic constant currency rates exclude the effect of currency translation and acquisitions.

External revenue by destination

External revenue by sector

Strong revenue growth in all sectors

Infrastructure Safety revenue increased by 13% to £167.9m (2016/17: £148.0m) including 10% organic constant currency growth and a 3% positive impact from currency translation. There was growth in all major market segments with strong growth in People & Vehicle flow. These trends contributed to double-digit organic constant currency increases in Asia Pacific, Mainland Europe and Other regions with steady growth in the UK.

Weaker demand in our Fire businesses resulted in a mid single-digit organic constant currency revenue decline in the USA.

Profit² grew by 12% to £35.7m (2016/17: £32.0m) including 9% organic constant currency growth and a 3% positive impact from currency translation. Return on Sales was a healthy 21.4% (2016/17: 21.6%). R&D expenditure increased by 7% to £9.4m (2016/17: £8.8m). The sector is expected to make continued progress in the second half.

In November 2017, following the period end, we acquired Setco as a bolt-on for our global Elevator Safety business, Avire. Setco is based in Barcelona, Spain and adds new wireless communications technology which is highly complementary to Avire’s existing product range and new product development roadmap.

Medical revenue was up by 12% to £133.3m (2016/17: £118.7m) including 5% organic constant currency growth, a 1% benefit from acquisitions in the last year and a 6% positive impact from currency translation. Our Ophthalmology and Sensors businesses progressed well. We saw weaker performance in our Patient Assessment businesses but our acquisitions of CasMed and Cardios during the first half add new blood pressure monitoring technology and geographic presence to this market segment. The integration of both businesses is proceeding well.

There was healthy single-digit organic constant currency revenue growth in the UK, the USA and Other regions. Organic constant currency revenue was slightly up in Asia Pacific and slightly down in Mainland Europe.

Profit²was £28.7m, which was marginally below the prior year’s £28.9m. This included 6% organic constant currency decline and a 6% positive impact from currency translation. Return on Sales reduced from 24.3% in 2016/17 to 21.6%, due to both a drop in Gross Margin % mainly due to mix effects and an increase in overhead spend. The majority of this overhead spend was targeted investment in sales, marketing and new product development, where R&D spend grew by 25% to £5.9m (2016/17: £4.7m).

The sector has taken action to control discretionary costs, which is expected to improve profitability during the second half of the year.

Environmental & Analysis revenue rose by 18% to £116.5m (2016/17: £98.8m) including 11% organic constant currency growth, a 2% benefit from acquisitions and a 5% positive impact from currency translation. There was growth in all main business segments with a strong performance in Spectroscopy & Photonics. Organic constant currency revenue from the UK and Asia Pacific increased significantly. There was steadier organic growth from the USA and small organic declines from Mainland Europe and Other regions.

Profit² improved by an impressive 36% to £21.8m (2016/17: £16.0m). Organic constant currency profit growth was 27% and there was a 2% benefit from acquisitions in the last year. Currency translation had a 7% positive impact. Return on Sales improved significantly from 16.2% up to 18.7%, as a result of revenue growth this year and the trading impact (and benefit) of restructuring completed in the first half of last year. There was an improvement in the Gross Margin % and increased investment in new product development. R&D spend increased by 33% to £8.9m (2016/17: £6.7m) to represent 7.6% of revenue.

The integration of FluxData, acquired in January 2017, is proceeding well. Companies both inside and outside the sector are exploring collaborative projects using their multi-spectral imaging technologies. Following the half year end, the acquisition of Mini-Cam in October 2017 added new waste water pipeline monitoring solutions to our group of Water businesses.

The sector is well positioned to make progress in the second half, albeit with a stronger prior year comparator.

Process Safety revenue increased by 16% to £88.8m (2016/17: £76.7m). There was organic constant currency growth of 12% and a 4% benefit from currency translation. The Safety Interlocks and Pressure Relief segments had good growth. Gas Detection was in line with the prior year. There was organic constant currency growth in all major regions, with particularly high growth in the USA and Other regions. There was good progress in Mainland Europe and Asia Pacific with steadier growth from the UK.

Profit² increased by 16% to £20.2m (2016/17: £17.4m) including 13% organic constant currency growth and a 3% positive impact from currency translation. Return on Sales improved marginally to 22.8% (2016/17: 22.7%). R&D spend was up 11% to £3.1m (2016/17: £2.8m). The sector continues to benefit from increased market diversification and improved demand from the USA onshore energy market while other segments of the Oil and Gas market remain depressed. Despite the tougher comparators, the sector is well placed to make progress in the second half.

Four acquisitions completed

In July 2017, we acquired Cas Medical Systems, Inc’s (CasMed) non-invasive blood pressure monitoring product line for an initial cash consideration of $4.5m (£3.4m) with up to a further $2m (£1.5m) payable based on achievement of certain sales targets.

In August 2017, we completed the acquisition of Cardios Sistemas Comercial e Industrial Ltda (Cardios) located in Brazil. The initial cash consideration was R$50m (£12.4m) with further payment of up to R$5m (£1.2m) payable based on future growth.

In October 2017, following the period end, we acquired Mini-Cam Enterprises Limited and its subsidiaries (Mini-Cam). The initial consideration was £62m, on a cash and debt-free basis, with up to a further £23.1m payable based on annualised profit growth to the end of March 2020.

In November 2017, we acquired Setco S.A. for a cash consideration of €17m (£15.1m). Consolidated 31 December 2016 profit, adjusted to IFRS, was €1.7m (£1.5m).

These transactions demonstrate our ability to find attractive, high quality businesses both in, and adjacent to, our existing sectors. The pipeline of potential acquisitions has continued to build across all sectors during the year.

Growing a safer, cleaner and healthier future for everyone, every day

Halma has always had a strong sense of purpose to make a positive impact on people’s lives.

This core belief has helped us to build strong competitive positions in market niches with long-term growth drivers and has contributed to our sustained success.

Over many years, these fundamentals have been strengthened further by a relentless determination to increase strategic investment in innovation, international expansion and talent development, both centrally and within each sector.

The desire to make a positive difference to people’s lives is encompassed in our newly articulated purpose of ‘Growing a safer, cleaner and healthier future for everyone, every day’. This refined purpose statement will help to provide greater alignment across the Group as we confront the challenges and opportunities of the 4th Industrial Revolution, where technologies and industries are converging to create new value.

Our portfolio of companies means that we are uniquely positioned to take advantage of these opportunities. As we continue to evolve our strategy we will ensure that we use our ecosystem to leverage the diverse skills and assets we have at our disposal to create even more value for the Group.

This means that in addition to our commitment to continuing to grow our Core, we are exploring new ways to help our companies to add growth opportunities which require a Convergence of technologies and capabilities between two or more businesses and new business models.

In addition, we are building a stronger network of internal and external partnerships to provide us with a greater insight into new digital growth strategies or technologies at the Edge of our current strategic horizons.

Currency impacts

Currency translation had a positive impact on the half year results. We report our results in Sterling with approximately 45% of Group revenue denominated in US Dollars and approximately 15% in Euros. Average exchange rates are used to translate results in the Income Statement. Sterling weakened during the first half of 2017/18 and has remained relatively weak in the period since. This resulted in a 5% positive currency translation impact on Group revenue and profit in the first half of 2017/18 relative to 2016/17. In the second half of 2017/18, if exchange rates remain at current levels, we expect the positive currency impact seen in the first half to reverse, resulting in a small positive impact for the year as a whole.

Pension deficit

On an IAS19 basis the deficit on the Group’s defined benefit plans at the half year has reduced to £66.8m (1 April 2017: £74.9m) before the related deferred tax asset. The value of plan liabilities reduced due to an increase in the discount rate used to value those liabilities and further employer contributions also reduced the plan deficit. There will be a triennial valuation of the two UK defined benefit pension plans as at December 2017 and April 2018, leading to a review of the amount and timing of future employer contributions to reduce the pension deficit.

Cash flow and funding

Cash conversion (adjusted operating cash flow as a percentage of adjusted operating profit) was 84% (2016/17: 84%) just below our cash conversion target of 85%. Working capital increased more than in the first half of the prior year with higher rates of underlying revenue growth and inventory for new products. As well as continued organic investment, dividend and tax payments increased this half year. Capital expenditure of £10.1m (2016/17: £11.4m) was 12% lower than the prior year due primarily to less property related expenditure.

Net debt at the end of the period was £181m (1 April 2017: £196m). Gearing (the ratio of net debt to EBITDA) at half year end was 0.8 times (1 April 2017: 0.86 times), comfortably within our typical operating range of up to 2 times gearing.

In November 2017 we extended the £550m Revolving Credit Facility, put in place in November 2016, by a further year to 2022. 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.

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 processes in place for identifying, evaluating and managing key risks. These risks, together with a description of our approach to mitigating them, are set out on pages 22 to 27 of the Annual Report and Accounts 2017. The principal risks and uncertainties relate to operational, strategic, legal, financial, cyber, people and economic issues. See note 15 to the Condensed Financial Statements for further details.

The UK referendum decision in June 2016 and the subsequent triggering of Article 50 in March 2017 mean that the UK is now scheduled to leave the European Union by the end of March 2019. This decision has created a new dimension to the uncertainties surrounding global economic growth.

In 2016/17, approximately 10% of Group revenue came from direct sales between the UK and Mainland Europe. To date, the following Brexit risks have been identified as having an actual and/or potential impact on our business:

• Economic conditions: increased overall uncertainty including the specific impacts on growth, inflation, interest and currency rates
• Defined benefit pension liability: movements in bond yields affecting discount rates which may increase the liability
• Laws and regulations: potential changes to UK and EU-based law and regulation including product approvals, patents and import/export tariffs
• Talent: mobility of the workforce

Halma has an executive working group to assess and monitor the potential impact on us of Brexit, to communicate updates and support our businesses in preparing for the range of possible outcomes.

Our decentralised model, with businesses in diverse markets and locations, will enable each Halma company to adapt quickly to changing trading conditions. This agility, together with the regulation driven demand for many of our products and services, will help us to mitigate any adverse impact and also take advantage of the opportunities presented by the decision to leave the European Union.

In 2017/18, the Board commissioned an external review of Halma’s cyber related control framework. This review highlighted the strengths of our existing structure and identified further improvements in cyber controls and assurance.

The Directors do not consider that the principal risks and uncertainties have changed since the publication of the Annual Report and Accounts 2017 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 Group’s delivery of its financial objectives. 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

In July 2017, the Board announced that Marc Ronchetti, currently Group Financial Controller, will succeed Kevin Thompson as Group Finance Director. The transition process is underway and it is anticipated that it will be completed no later than 31 July 2018.

Outlook

Halma has continued to make strong progress, delivering record revenue, profit and dividends for shareholders. The diversity of our business and the evolution of our organisational model through our four sectors is enabling us to sustain growth in varied market conditions. Since the period end, order intake has continued to be ahead of revenue and order intake last year. Halma remains on track to make progress in the second half of the year in line with the Board’s expectations.

Responsibility statement

We confirm that to the best of our knowledge:

a) these Condensed Financial Statements have been prepared in accordance with International Accounting Standard 34 ‘Interim Financial Reporting’ as adopted by the European Union;

b) this Half Year Report includes a fair review of the information required by Disclosure Guidance 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);

c) 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 ThompsonFinance Director

21 November 2017

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

File download Half Year Report for the 6 months to 30 September 2017 (3.4 MB, PDF)