Press Releases - Half Year Results 2018/19

Half Year Results 2018/19

20 November 2018

Record first half results and continued dividend growth

Halma, the global group of life-saving technology companies focused on safety, health and the environment, today announces its half year results for the 6 months to 30 September 2018.

Highlights

• Strong first half growth: Revenue up 16% with Adjusted¹ pre-tax profit up 19% and statutory profit before tax up 23%.
• Organic constant currency revenue growth⁴ up 14%, reflecting continued robust performances in all four sectors, as well as benefits from phasing of some major orders.
• Organic constant currency profit growth⁴ of 16%, driven by revenue growth and significantly improved profitability in Medical. Continued strength in Environmental & Analysis.
• Revenue growth in all major regions. Very strong performance in the USA, good growth in the UK and continued progress in Mainland Europe and Asia-Pacific.
• Sustained high returns with Return on Sales³ of 19.3% and ROTIC5 of 14.9%. R&D expenditure up 14%, representing 5.3% of revenue.
• Good cash generation, with cash conversion of 86%; strong balance sheet with net debt to EBITDA of 0.7x, supporting sustained investment in organic growth, acquisitions and talent.
• Healthy acquisition pipeline with three acquisitions completed in the first half and two further acquisitions completed since the period end.
• Interim dividend increased by 7%.

Andrew Williams, Group Chief Executive of Halma, commented:

“Halma made excellent progress in the first half, delivering record revenue, profit and dividends for shareholders, while continuing to invest in our strategic growth enablers for the longer term. Although the pace of technological and geopolitical changes is impacting economies and industries worldwide, we continue to benefit from the agility and resilience of our business model, as well as our geographic diversity, financial strength and focus on global niche markets.

Following a very strong first half, order intake continues to be ahead of both revenue and order intake for the comparable period last year. We remain on track to deliver more typical rates of constant currency organic growth in the second half, resulting in a strong full year performance.”

Notes:

1. Adjusted to remove the amortisation and impairment of acquired intangible assets, acquisition items, significant restructuring costs and profit or loss on disposal of operations, totalling £18.4m (2017/18: £17.7m). See note 2 to the Condensed Interim Financial Statements.
2. Adjusted to remove the amortisation and impairment of acquired intangible assets, acquisition items, significant restructuring costs, profit or loss on disposal of operations, and the associated taxation thereon. See note 6 to the Condensed Interim Financial Statements.
3. Return on Sales is defined as Adjusted1 profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
4. 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 Interim Financial Statements for details.

For further information, please contact:

Halma plc:+44 (0)1494 721 111
Andrew Williams, Group Chief Executive
Marc Ronchetti, Chief Financial Officer
Charles King, Head of Investor Relations +44 (0) 7776 685948

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

NOTE TO EDITORS

1. Halma is a global group of companies, focused on creating a safer, cleaner and healthier future for people worldwide. Our innovative products and solutions address many of the key issues facing the world today. 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 Group Chief Executive Andrew Williams, and images illustrating Halma business activities can be downloaded from its website the Media Gallery.
3. You can view or download copies of this announcement and the latest Half Year and Annual Reports 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 16% to £585.5m (2017/18: £506.3m) including a negative currency translation effect of 2%. Organic revenue growth at constant currency was 14%, and there was a 4% contribution from acquisitions completed in the prior year.

Adjusted¹ profit before taxation increased by 19% to £112.9m (2017/18: £94.5m), also including a negative currency translation effect of 2%. Organic profit growth at constant currency was 16% with a 5% contribution from prior year acquisitions. Statutory profit before taxation increased by 23% to £94.5m (2017/18: £76.8m).

Return on Sales¹ improved to 19.3% (2017/18: 18.7%) even though, as planned, there was increased investment to drive strategic growth. Our companies increased R&D expenditure by 14% to £31.1m (2017/18: £27.3m) representing 5.3% of Group revenue (2017/18: 5.4%).

The Board has declared an increase of 7% in the interim dividend to 6.11p per share (2017/18: 5.71p per share). The interim dividend will be paid on 6 February 2019 to shareholders on the register on 28 December 2018.

Widespread revenue growth

We achieved organic revenue growth at constant currency in every major region, which reflected good performances across all four of our business sectors.

The USA remains our largest sales destination contributing 37% of total revenue. It grew 19% in the half year (23% at organic constant currency), driven by increases in all sectors, as well as a benefit from the phasing of the delivery of some large orders received in the second half of last year.

Revenue in the UK increased by 21%, including 13% at organic constant currency, with good growth in Environmental & Analysis and Infrastructure Safety. Mainland Europe revenue increased by 14% and by 8% at organic constant currency, with Medical and Environmental & Analysis contributing strongly. Good progress in the Near and Middle East in Infrastructure Safety underpinned strong growth of 17% in Other regions (14% at organic constant currency).

Asia Pacific’s revenue growth of 5% on a reported and an organic constant currency basis reflected a good underlying performance against a tough comparative, with large projects having been delivered in China and Korea in the first half of last year. China grew revenue 8% on an organic constant currency basis.

The tables below summarise revenue growth by destination and by sector, including the rates of organic growth at constant currency. Organic constant currency rates exclude the effect of currency translation, as well as acquisitions and disposals from the time of completion.

External revenue by destination

External revenue by sector

Strong revenue growth in all sectors

Infrastructure Safety revenue increased by 18% to £197.6m (2017/18: £167.9m). This included 13% organic constant currency growth, a 1% negative effect from currency translation and 6% growth from acquisitions completed in the prior year. There was growth in all major market segments. Strong growth in our Fire businesses contributed to high rates of organic constant currency growth in the USA, the UK and Other regions. Although Asia Pacific saw slower growth overall, there were good increases in China and Australasia.

Profit² grew by 17% to £41.7m (2017/18: £35.8m) including 12% organic constant currency growth, a 1% negative effect from currency translation and 6% growth from acquisitions completed in the prior year. Return on Sales was a healthy 21.1% (2017/18: 21.3%). R&D expenditure increased by 31% to £12.4m (2017/18: £9.4m). The sector is expected to make continued progress in the second half, in line with historical trends, with solid organic growth and recent acquisitions contributing to a strong full year performance.

In the first half, we acquired LAN Control Systems Limited, to strengthen our cloud-based system capabilities and to support tighter integration between fire, security and other building systems. After the period end, we announced two further acquisitions: in October, we announced the acquisition of Limotec bvba, a leading fire control panel designer and fire system seller in the Belgian market, to strengthen our continental European presence; and in November, we purchased Navtech Radar Limited, a UK-based designer and manufacturer of innovative radar surveillance solutions. Navtech builds on our existing capabilities in sensing vehicles, people and assets for safety and control applications, and provides new opportunities in the highway and critical infrastructure safety markets.

Process Safety revenue increased by 10% to £97.9m (2017/18: £88.8m). There was organic constant currency growth of 12% and a 2% negative effect from currency translation. The Safety Interlocks and Gas Sensors segments grew most strongly, with the former benefiting from a large contract for logistics safety from a major retailer in the USA. Pressure Relief and Pipeline Management grew at a slower rate.

All major regions delivered organic constant currency growth, with particularly high growth in the USA. The UK, Asia Pacific and Other regions saw good growth, while there was more modest growth in Mainland Europe.

Profit² increased by 9% to £22.2m (2017/18: £20.2m) including 11% organic constant currency growth and a 2% negative effect from currency translation. Profit in the half year included some reorganisation costs in our Safety Interlocks and Pipeline Management businesses in order to improve performance in the longer-term. These will total between £1.5m - £2.0m for the full year with £0.7m in the first half. Return on Sales was consistent with the first half of last year at 22.6% (2017/18: 22.8%). R&D spend was up 11% to £3.4m (2017/18: £3.1m).

With the planned reorganisation costs, the sector is expected to have a lower profit growth rate in the second half, albeit with solid organic revenue growth, to deliver a good full year performance.

Medical revenue was up by 10% to £147.2m (2017/18: £133.3m). There was 14% organic constant currency growth, a 2% benefit from acquisitions in the last year and negative effects of 2% and 3% respectively from disposals and currency translation. The Diagnostics device business progressed very well and there was also good progress in the Ophthalmology, Sensor Technology and Patient Assessment segments, with the latter benefiting from last year’s acquisitions.

There was organic constant currency revenue growth in all major regions, led by a strong increase in the USA, which represents over half of the sector’s revenue. There was also healthy revenue growth in Mainland Europe and good progress in Asia Pacific and Other regions.

Profit² was £35.0m (2017/18: £28.7m), a 22% increase over a relatively weak performance in the first half of last year. This comprised a 22% organic constant currency increase, a 2% uplift from last year’s acquisitions, a 1% contribution from disposals this year, and a 3% negative impact from currency translation. Return on Sales increased to 23.8%, up from 21.6% in 2017/18. R&D spend was £5.5m (2017/18: £5.9m), although in-line with the comparative period after excluding disposals.

In the first half, we made two small acquisitions for our Sensor Technology business, CenTrak, expanding its technology and distribution capabilities in the USA and Mainland Europe. We also sold one of our Diagnostic businesses, Accudynamics.

We expect more normal rates of organic growth from our Medical sector in the second half of the year, against a tougher second half comparative, to deliver a strong full year performance.

Environmental & Analysis revenue rose by 23% to £143.0m (2017/18: £116.5m) including 19% organic constant currency growth, a 6% benefit from acquisitions and a 2% negative effect from currency translation. There was growth in all main business segments with a particularly strong performance in Environmental Monitoring. Organic constant currency revenue from the USA, UK and Mainland Europe increased significantly, with the USA benefitting from large projects in the Photonics businesses. Asia Pacific and Other regions grew more steadily, with the former reflecting a tough comparative against a strong performance in the first half of last year.

Profit² improved by an impressive 33% to £29.0m (2017/18: £21.8m). Organic constant currency profit growth was 21% and there was a 15% benefit from the Mini-Cam acquisition completed last year. Currency translation had a 3% negative effect. Return on Sales saw a further significant improvement from 18.7% to 20.3%, which continues the positive trend of margin improvement over recent years. There was continued increased strategic investment, with R&D spend rising by 9% to £9.6m, representing 6.8% of revenue (2017/18: £8.9m).

After an exceptional first half, the sector is expected to deliver more typical rates of growth in the second half of the year and achieve a strong full year performance.

Five acquisitions and one disposal completed this financial year

Our sector M&A teams have been strengthened significantly over the past year and this has contributed to us developing a more robust acquisition pipeline. Three acquisitions were completed during the period, with a further two early in the second half of the year.

The three acquisitions in the first half were relatively small technologically-driven bolt-on acquisitions, for a total consideration of £3m. These included the Infrastructure Safety sector’s acquisition of LAN Control Systems Limited and, in our Medical division, the purchase of the trade and assets of Awarepoint and Elpas to expand CenTrak’s technology and market reach.

In October 2018, we acquired Limotec bvba for a cash consideration of €9.3m (£8.2m), on a cash and debt free basis. Limotec’s revenue in its last financial year to the end of December 2017 was €6.7m (£5.9m).

In November 2018, we acquired Navtech Radar Limited for an initial cash consideration of £21m on a cash and debt free basis. Further earn-out considerations, capped at a total of £18m in cash, are payable dependent on profit growth in each of the three financial years to the end of March 2021. Navtech’s revenue in the year to 31 March 2018 was £6.2m.

There was one disposal in the period. In June 2018, our Medical sector sold the Accudynamics Fluid Technology business for US$5.4m, resulting in a small loss on disposal of US$1.2m. 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 Fluid Technology businesses.

These transactions demonstrate Halma’s ability to find attractive, high quality businesses both in and adjacent to our existing sectors as well as to maintain a portfolio of growing, high return companies through disposals.

Good progress on the Halma 4.0 growth strategy

Halma’s commitment to making a positive difference to people’s lives, is encompassed in our purpose of ‘Growing a safer, cleaner and healthier future for everyone, every day’.

This central purpose has helped us to build a group of businesses with common values and strong competitive positions in market niches with long-term growth drivers. Over many years, these fundamentals have been strengthened further by a relentless determination to increase investment in our strategic Growth Enablers, both centrally and within each sector. These include M&A, Innovation Network, Talent & Culture, Finance & Risk and International Expansion, together with the two recent additions of Strategic Communications and Digital Growth Engines.

As well as helping us to continue to grow our Core business, these Growth Enablers support exploration of new ways to grow, for example in growth opportunities which require a Convergence of technologies and capabilities between two or more businesses and/or 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 and technologies at the Edge of our current business horizons.

Recent examples of this include our Medical sector company, Bio-Chem Fluidics’ development of condition monitoring and data collection capabilities to improve the reliability of their miniature valves and pumps used in analytical instruments. In the Environmental & Analysis sector, Ocean Optics has created a spin-off business, called WAVE, which has developed a cloud-based lighting solution to improve wellbeing and commercial outcomes in public infrastructure.

As we continuously evolve our growth strategy, we are increasingly building a network of internal and external partnerships to leverage our access to diverse skills and assets to create even more value for the Group.

Currency impacts

We report our results in Sterling with 46% of Group revenue denominated in US Dollars and 12% in Euros during the period. Average exchange rates are used to translate results in the Income Statement. Sterling strengthened against the US Dollar during the first half of 2018/19, but was broadly unchanged against the Euro. This resulted in a 2% negative currency translation impact on Group revenue and profit in the first half of 2018/19 relative to 2017/18. In the second half of 2018/19, if exchange rates remain at current forecast levels, we expect the currency effect seen in the first half to reverse, resulting in a broadly neutral effect on the year as a whole.

Pension deficit

On an IAS19 basis the deficit on the Group’s defined benefit plans at the half year end reduced to £20.7m (31 March 2018: £53.9m) before the related deferred tax asset. The values of the plans’ liabilities reduced due to an increase in the discount rate used to value those liabilities, while further employer contributions also reduced the plans’ deficit. The plans’ actuarial valuation reviews, rather than the accounting basis, determine any cash payments by Halma to eliminate the deficit. The triennial actuarial valuation of the main Halma Group Pension Plan is now complete and a cash contribution of £8.6m has been agreed with the trustees for the 2018/19 financial year (2017/18: £8.2m), which will increase by 7% per annum. We expect the Apollo scheme triennial valuation to be finalised during the second half of the year, and for overall contributions across both schemes in the 2018/19 financial year to be consistent with our previous guidance of £12m.

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 issues arising from the judgment will apply to most other UK defined benefit pension schemes. We are working with the trustees of our pension schemes, and our actuarial and legal advisers, to understand the extent to which the judgment will crystallise additional liabilities for Halma’s pension schemes. Current industry estimates are for incremental liabilities of affected pension schemes to be in the range of zero to three per cent of total liabilities, and we currently expect any liability for Halma’s schemes to be in the lower end of that range.

Cash flow and funding

Cash conversion (adjusted operating cash flow as a percentage of adjusted operating profit – see note 9) was 86% (2017/18: 84%), ahead of our cash conversion target of 85%. The increase in working capital of £10.6m was lower than the first half of the prior year, despite the strong growth in the business. As well as greater organic investment, dividend and tax payments also increased this half year. Capital expenditure of £14.9m (2017/18: £10.1m) was 47% higher than the comparative period due to increased investment in facility and site expansion, manufacturing capabilities, and IT and system upgrades.

Net debt at the end of the period was £194.6m (31 March 2018: £220.3m). Gearing (the ratio of net debt to EBITDA) at half year end was 0.7 times (31 March 2018: 0.9 times), which is within our typical operating range of up to 2 times gearing.

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.

Principal 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 52 to 57 of the Annual Report and Accounts 2018, which is available on the Group’s website at www.halma.com. 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 on 29 March 2019 (‘Brexit’). This decision has created a new dimension to the uncertainties surrounding global economic growth and trading conditions between the UK and the EU during the transition process.

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

In 2017/18, approximately 9% of Group revenue came from direct sales between the UK and the EU.

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 and availability of talent

Depending on the nature of Brexit, our business could also experience shorter-term disruption around the time of Brexit in its supply chain, including disruption associated with customer buying patterns, customs and border clearances and uncertainty over UK and EU product approvals.

Halma also continues to monitor closely, through working groups in the USA and China, the effects of changes to US trade policy, including the imposition of tariffs on imported goods, and related trade measures taken by China and other countries. In 2017/18, approximately 5% of Group revenue came from direct sales between the USA and China. The following key risks have been identified as having an actual and/or potential impact on our business:

• Volatility of order flow from customers
• Increased costs, which could in turn make the pricing of our products uncompetitive, resulting in a loss of market share
• Effects from changes in economic activity in the countries concerned, and more globally

While Brexit and US trade policy changes could adversely affect our business, we consider that 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 any opportunities presented.

The Directors do not consider that the principal risks and uncertainties have changed since the publication of the Annual Report and Accounts 2018 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.

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 Interim Financial Statements.

Outlook

Halma made excellent progress in the first half, delivering record revenue, profit and dividends for shareholders, while continuing to invest in our strategic growth enablers for the longer term. Although the pace of technological and geopolitical changes is impacting economies and industries worldwide, we continue to benefit from the agility and resilience of our business model, as well as our geographic diversity, financial strength and focus on global niche markets.

Following a very strong first half, order intake continues to be ahead of both revenue and order intake for the comparable period last year. We remain on track to deliver more typical rates of constant currency organic growth in the second half, resulting in a strong full year performance.

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 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); 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 Group Chief Executive
Marc Ronchetti Chief Finance Officer

20 November 2018

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

File download Half Year Report for the 6 months to 30 September 2018 (1.9 MB, PDF)