Halma plc

Good morning everyone and welcome to our full year results presentation. I'm pleased to be here to report a strong set of results. My first is Chief Executive. As you'll hear, once again they show the strength of our sustainable growth model and the value of having exceptional talent and teams across our organisation. I'd like to start by thanking everyone at Halma for their hard work and dedication and their contributions to our significant progress over the last 12 months. I'd also like to welcome Steve Gunning, who joined as Helmer's fourth ever CFO in January. Steve was most recently CFO at IAG, and I'm delighted that he's here with me today and is a part of my leadership team going forward. In a few moments, Steve will give you more insight into our financial performance. But first, I wanted to share a few reflections on what's driving Houma's success and the substantial opportunities that I see ahead of us. And if I start by going back to 2016, when I was first introduced to Houma, I remember then being really impressed by so many things. The purpose-driven nature of the group, the positive impact that we had on the world, the clarity and success of our sustainable growth model, the culture and the diversity of the talented people that I met. And I knew then that this was a special company and something that I wanted to be a part of moving forward. And it's this feeling that's grown stronger over the past seven years and has really deepened over the past six months as part of the... CEO transition, I've had the opportunity to spend more time out in our individual companies. Every time I visit one of our companies, I'm always inspired by our fantastic people, the quality of our companies and the technologies, the scale of those problems that we're solving for our customers and the lives and environments that we protect and enhance. As you'll see, innovation and creativity remain core to the group and every individual plays their part in the group's success. I stand here immensely privileged to be leading an organisation with such a strong purpose and inclusive culture and I'm excited about the opportunities ahead of us. And as I think about the future, it's often the case that a new CEO has been appointed to make fundamental shifts in strategy or significant changes in portfolio. In fact, when we last changed our CEO 18 years ago, that was exactly the same. Andrew's brief, and that many significant changes happened in his first couple of years. Today, I believe we're in a very different position in terms of our portfolio, our capabilities, our people, the momentum we have in growth, investment and returns. In short, I believe We're in a position of strength with our sustainable growth model at its foundation. And it's a dynamic system and its strength lies in the way each of the elements are interlinked and reinforce each other. At its heart, our unifying and ambitious purpose. This drives us to have a positive impact on people and the planet. Our purpose drives us to those niches within markets that are addressing long-term needs and at Houma we've always focused on those long-term growth drivers and this underpins both our organic and inorganic growth. And all of this comes together to give us confidence in delivering our sustainable financial model. Our strong organic growth returns and high levels of cash generation allow us to constantly reinvest in growth opportunities, both organically and through acquisition, and deliver those increasing dividends to our shareholders. Our ability to capture those opportunities over decades is underpinned by the agility of our business model. This puts talent close to those niche markets who can leverage our entrepreneurial and collaborative culture to innovate and solve high value problems. I believe that this agility is especially critical now. Think about those challenges facing our customers, whether from climate change or ensuring our health and safety, or indeed facing up to economic and social volatility. Therefore, as we've done consistently since our foundation, 50 years ago, we must continue to evolve and enhance our model to capture the significant opportunities for growth and positive impact. And it's in this context that there are four areas that I see as key priorities for Houma as I start my first year. First up, organic growth. it's critical that we have clarity on the customer problems that we're solving, the value that we're creating and our ability to capture that value. Organic growth is the cornerstone of our financial model and is therefore our top priority. To do this, we'll keep our talent close to our customers and we'll maintain high high levels of continuous investment in our products and services and continue to seek a strong return on those investments. Secondly, inorganic growth, the other half of our growth model. Again, in a fast-changing world with many emerging trends, it's important that we remain disciplined in our approach to acquisition. with a relentless focus on purpose alignment and only those market niches that offer those long-term growth returns and cash flows. And it's this same lens through which we'll continue to review the existing portfolio and investments. And we'll need to act decisively when required. I don't believe that there's any fundamental outliers today. However, this must be a continuous process. My third area of focus is that of ensuring that we maintain the agility of our business model. This through our decentralized organization model. entrepreneurial and collaborative culture and ensuring that we have the very best talent in our leadership teams across the group. Allocating our capital in the right markets provides a solid foundation. However, in a world where we're seeing the increasing opportunity, the increasing pace of change and volatility, it's that agility and our talent that's going to ensure delivery of our ambitious growth targets. Put simply, talented teams close to their customers making great decisions supported by being a part of a global group will deliver sustainable growth and impact aligned to our purpose. I'll come back to this in the second part of my presentation. My final priority alongside growth is maintaining a disciplined approach to optimize the returns on the substantial investments that we make. Whilst I'm not signaling a change to our current KPIs, I do. We believe that it's critical that we maintain them as we continue to grow. And I know that this is an area that Steve will take the lead on. As I say, I'll cover strategy in a little bit more detail later. So before I hand over to Steve, let me just summarise our progress over the last 12 months. we've reported another set of record results with continued strong growth, high returns and substantial investment aligned to both our sustainable growth model and the priorities that I've just described. We've delivered record revenue and our 20th consecutive year of record profit. And it's great to see our ambition reflected in the record levels of investment of over half a billion pounds. This also reflecting the scale of the opportunities that we see in our markets. This investment is strengthening our capabilities both organically and through our acquisition. Organically we've continue to build the strength and diversity in our teams to foster our entrepreneurial spirit by building on the power of the Howman network. And for our acquisitions, we've had a record year for both spend and acquired revenue and profit. As always, this investment is supported by our strong financial position and high levels of cash generation. Really pleasing to see our cash conversion back to targeted levels in the second half. And our growth has been delivered with continued high returns. While return on sales was below last year's unusually high level, it was well within our target range, as was Rotic, which also remained substantially above. above our cost of capital and all of this supporting a proposed seven percent increase in the dividend this representing our 44th year of annual dividend increases of five percent or more another strong signal of our confidence in the future So this performance, together with a good start to the new financial year, means that we're well positioned for further progress in 2024 and beyond. So with that, let me hand over to Steve for more details on the financial performance in the year.

Good morning. It's a pleasure to be presenting my first... This investment is absolutely fundamental to maintaining and improving our market positions. Finally, we've continued to invest. When the opportunity came to work with Mark and the rest of the team to take Houma forward, I jumped at it. I'm now in my fifth month and I've received a great welcome. I've visited 20 subsidiaries so far and I look forward to visiting many more for the remainder of the year. Overall, I've been impressed with how the sustainable growth model drives the culture, the decision making and the governance of the group. The focus being to create value in the long term. At the same time, I've been impressed by how the group companies and the group as a whole look to deliver year in, year out. And that's what they've done this year as well. So let's take a look at their results. As Mark has already stated, there are a strong set of results with record revenue and record profit. Revenue of 1.85 billion, up 21.5%. Adjusted profit of 361 million, up 14.2%. All this with continued high returns. Return on sales of 19.5%, well within the 18 to 22% range. At the same time, we've made record investment. In terms of M&A, we've made seven acquisitions, four standalone and three bolt-ons, and invested nearly 400 million sterling. It is great to see the strong pipeline converting into quality acquisitions. spend has exceeded 100 million for the first time. And this investment is absolutely fundamental to maintaining and improving our market positions. Finally, we've continued to invest in our infrastructure. This includes capital expenditure and also the group IT programs. All of this investment is only possible with a strong balance sheet and strong cash generation. So let's look at some of the metrics that support that. Net debt to EBITDA is at 1.38 times. And that's very comfortable for us. It was also good to see cash conversion reach 90% in half two. It was much lower in half one because some of our companies have made this strategic decision to invest in inventory because of supply chain issues. It's good to see those issues easing in the second half and going into FY24. As a consequence, in FY24, we would expect cash conversion to be ahead of the 90% target. And finally, we are proposing a dividend increase of 7% this year. This is the 44th consecutive year where we've increased the dividend by more than 5%. So now let's turn and talk about revenue. This slide provides a bridge of year-on-year revenue growth of over 300 million or 21.5%. Organic revenue growth was 10.2%, which follows on from... 17.5% the previous year. Price increases provided 4% of the growth, which was consistent across all three sectors and above our typical historic average of 1% to 2%. Volume increases at 6% were also at the high end of the historic range. All of this indicating the strong demand for our products. Next, we see acquisitions contribute 4.3%, and then we see an FX benefit of 8.1% as a consequence of the strong dollar compared to sterling. If we now look at the revenue through a different lens, we will now look at revenue growth in the regions, and these are destination regions. This slide on the left hand shows the reported revenue growth and on the right hand the organic constant currency growth. For today's purposes we'll focus on the organic constant currency growth. It was good to see strong growth in our two largest markets, the US where the growth was across all three sectors and in Europe we saw strong growth in the safety and the healthcare sector. UK growth at 6% was in line with our long-term expectations and pleasing given the fact that it was 25% growth in the prior year. Asia Pacific saw strong growth in India and Australia, but this was partially offset by the decline in China due to the various lockdowns through the year. Now let's move to adjusted profit. As Mark outlined, we delivered record profit whilst making substantial investments to support our future growth. Profit was up 14.2%, and at the OCCY level, it was up at 3.1%. The organic level was held back by the half-two ROS performance, and I'll touch a bit more on that in a minute. There was a good contribution from acquisitions of 2.8%, And once again, an FX benefit due to the strong dollar compared to sterling in the year. I said I'd say a little bit more about the half two return on sales performance and we'll turn to that now. This chart shows the half one and the full year return on sales performance for three periods. The first period is the five year average leading up to COVID. The second period is the two-year average during the course of the COVID pandemic. And the last period is for FY23, the year that we're actually reporting on today. The key observations we would make from looking at this graph, one, in all three periods, our return on sales was within our targeted range. Secondly, during the COVID years, our return on sales actually increased because we cut cut back on non-manipulatory spend. Then if we look at FY23, in half one, you'll see the return on sales was at 19.6%. So that was above the historic average, albeit starting to normalise towards it. However, the full year result for FY23 was below that historic average, and that was because the half two return on sales was at 19.6%. 19.4%. So why was the half-two return on sales below the historic trend for half-two? There were two reasons. Firstly, the safety sector was impacted by supply chain disruptions. And secondly, the interest expense was up due to the record level of investment and the higher interest rates. So what was the issue in the safety sector? Some of the semiconductor components used in our products have been deprioritized by the manufacturers. This has affected a number of our companies in two ways. The cost of the components has increased considerably due to their scarcity. And secondly, the effective companies have had to invest in recertifying their products with newer, cheaper components. The good news is the impacted companies are making good progress through this challenge. And we are starting to see the safety sectors return on sales recover. So if we consider the main drivers for the fiscal year 24 return on sales for the group, we have the operating leverage of the business coming out of FY23 going into FY24. We see the... Recovery in the safety sectors, return on sales, and we see the highly profitable acquisitions we made during the course of the year. These three factors offsetting the increased interest expectations. And so as a consequence of that, we're giving guidance today for FY24 that our return on sales will be about 20% for the year, and it will have a more typical half-one, half-two split, where the half-two return on sales is higher than half-one. Now let's turn to cash flow performance. This chart effectively summarizes the cash flow statement for the group. And I'll just pick out four items here. The two largest items, EBITDA and acquisitions. The strong EBITDA generation is typical for the group and testimony to the growth model. The acquisition spend reflects the seven acquisitions we made during the year. And these companies clearly will be a source of further EBITDA in future years. Working capital was higher than normal due to the strategic investment in inventory during the year. But we would expect that to ease in FY24. And so the cash conversion improved to 90%. and we would expect it to be ahead of 90% in FY24. Finally, it's worth mentioning pension contributions. We will expect pension contributions to reduce by 11 million in FY24 because agreement's been made with the Helmer pension plan trustees to defer contributions until the triennial valuation has been completed. The scheme is already very well funded and we don't want to put further contributions in there which aren't required. Now let's turn to sector performance. And before we get into the details of the safety sector, it's worth noting that because of the FX and the acquisitions creating a significant difference between reported revenue growth and OCCY revenue growth, we have provided detailed bridges in the back of the presentation deck. So what about the safety sector? The safety sector achieved a strong revenue growth and record investment in FY23. The strong revenue growth of 11% was broadly spread across the regions and really reflected good underlying demand for our products. In terms of profitability, the ROS was lower at 20.5% and this was primarily due to the supply by chain issues I've already mentioned. The good news is we're starting to see that return on sales recover as we go into FY24. Safety had a really good year in terms of M&A with four acquisitions. In fire safety, it purchased Thermacable and FirePro. In power safety, it purchased VTech and a bolt-on for Centric ZoneGreen. It was also great to see our companies investing in R&D to support their future top-line growth. Let's turn to environmental and analysis sector. This sector saw good organic revenue and profit growth and healthy levels of investment during the course of the year. The revenue growth included strong performances in the US, Asia Pacific and other regions. In terms of profitability, the gross margin improved slightly due to good management of pricing and business mix. But return on sales declined 50 basis points to 24.3%. But this was reflecting variable overhead returning back to pre-COVID levels. Fantastic again to see building momentum in M&A performance with two acquisitions during the year, Deep Tracker and a bolt-on for Ocean Insight. And then shortly after the year end, the Suratronics acquisition and a bolt-on for Minicam. Now let's turn to probably the star performer in the year, which is the healthcare sector. The healthcare sector performance in the year was really strong, with double-digit revenue and profit growth at the organic constant currency level. Organic revenue grew 10%, and this included a recovery in patient caseloads in the second quarter. year post-COVID. By geography, all regions except Asia-Pacific reported double-digit revenue growth. Asia-Pacific declined on an organic basis due to the lockdowns in China. In terms of profitability, the sector achieved a slightly higher gross margin, and the ROS increased by 90 basis points to 23.4%, which does represent an element of recovery towards pre-COVID levels. It was good to see continued investment in the businesses. Organically, in terms of new product development, R&D spend was 5.9% of revenue. And also to see a larger acquisition in IZI with a maximum consideration of 151 million. If I turn now to the performance against financial KPIs, I think I've covered most of these, so I'll just pick out three which I think are worthy of note. A strong acquisition profit contribution of 5.5%, especially as this metric is on a post-interest basis. On a pre-interest basis, the figure would have been over 9%. This pre-interest basis has validity given the self-sustaining funding model that Houma has. EPS, great to see it up 17%, driven by the strong reported growth. And in terms of return on total invested capital at 14.8%, a strong level, just slightly up on the prior year, and well above our weighted average cost of capital of 8.9%. This was delivered at a time of record investment, which is supported by a strong cash generation and strong balance sheet. It's fantastic to see the strong returns from our past investments. And now if I come on to my last slide, This slide shows the 10-year performance of the group at the revenue and adjusted profit level. And it's excellent to see that the 10-year CAGR is over 10% for both of these metrics. It demonstrates the effectiveness of the sustainable growth model, which is at the center of the business. The group invests to achieve sustained long-term value creation and you can see this in the slide. A key focus of my role will be working with Mark to see those returns continue to come through from the investments that the businesses have made and will continue to be making. That's both at the organic and at the inorganic level. I will now hand you back to Mark who will give you an update on our priorities for the rest of the year. Over to you, Mark.

Great stuff. Thanks, Steve. So to get us started on the second half of my presentation, let me just remind you of those four priority areas that I outlined at the beginning. First up, organic growth, our top priority. organic growth, remaining disciplined in our approach to purpose-aligned acquisitions in the right end markets. Maintaining the agility of our business model, ensuring that we've got the very best talent close to our customers and empowered to capitalize on opportunities. Optimizing the returns on the investments that we're making. I like to keep things simple. At the most basic level, we acquire great companies aligned to our purpose and culture. And we expand their growth and positive impact over decades. This at a rate over and above what they could achieve on their own. But let's just not take that from me. Let's hear from some of our companies, both ones that are... New to the group and others that are more established about how for them being a part of HALMA has helped them achieve their strategic ambitions.