Halma plc

Good morning and welcome to our half-year results presentation. I'm pleased to report good progress in the first half. We've delivered record results in continued strategic investment. The group performance once again demonstrating the strength and success of our sustainable growth model and the long-term growth drivers that underpin our diverse portfolio. It's been a period with multiple economic and geopolitical challenges, and our companies have responded with great skill and agility to overcome these whilst also addressing new growth opportunities. And for this and their continued dedication and commitment, I wanted to start today by saying thank you to everyone at Halma that has contributed to these results. we can all be proud of what we've achieved. Steve will provide more details with regard our financial performance shortly. However, in summary, great to report that we delivered record revenue at £951 million, record profits at £178 million, and an interim dividend increase of 7%, reflecting our confidence in the future. Also positive to see our recent M&A momentum reflected in these results, with both revenue and profit benefiting by over 5%. And this growth delivered with a resilient operating margin at 20%, while further enhancing our growth opportunities through increased strategic investment, with over £150 million invested in R&D, CapEx and M&A during the six-month period. We invested over £50 million in R&D. This reflects our individual company's confidence in developing new products and services for their customers, supporting their long-term growth prospects. And excellent to see that momentum in M&A continue, with three acquisitions in the first half and a further two announced since the half year end, which brings our maximum total consideration in the year to date to £126 million. This continued strategic investment, supported by strong cash conversion at 96%, and the continued strength of our balance sheet. The current operational environment presents both challenges and opportunities. Our continued success in these varied market conditions is enabled by our sustainable growth model. This model is a well-established system and it means that we continue to benefit from our focus on those markets aligned to our purpose. All of these markets underpinned by resilient long-term growth drivers which present substantial opportunities for growth. We benefit from the strength of our financial model. enabling continued high levels of investment, both organically and through M&A, to drive future growth. We benefit from the agility that comes from our devolved autonomous operating model. This alongside our continued focus on ensuring that we have the best talent and that we enable their success through our collaborative and entrepreneurial culture. And finally, We see the benefits from the end market and geographic diversity across our portfolio. The core elements of our model remain the same. And within it are paradoxes that our leaders are having to constantly navigate. The delivery in the short term and continuing to invest for the long term. Consistent performance and innovating to disrupt. relishing their full accountability for strategy through to execution and leveraging the support and expertise that they have access to across the Howman network. And it's easy in volatile times like these to become consumed by the needs of today. And in that distraction, forget the help and inspiration that can come from such a powerful network. Our company leaders have access to a significant knowledge and experience base across our portfolio of nearly 50 companies. This in addition to that experience and knowledge from those in our sector teams and central functions. Our leaders can augment or complement their own market and operational capabilities. And this balance between maximizing the benefits of our autonomous model and leveraging our scale was the focus of our latest annual leadership event, Accelerate, at which we brought together over a hundred of our senior leaders. And you'll hear more about that later in the presentation about just how valuable this combination of our autonomous model, diversified portfolio, and our scale are to the leaders around our group and how this, alongside our model, gives us continued confidence for the future. But first, let me hand over to Steve for more details on our financial performance in the first half.

Thanks, Mark. Good morning. As you've already heard from Mark, we have delivered good first half results, achieving record levels of revenue and profit. Given the varied market conditions that have prevailed in the period, they demonstrate the strength of the Halmer model. In particular, the diverse portfolio that the group has built up. Due to the first half performance and the momentum we take into the second half, we are on track for the full year. So let's take a look at the first half results. We've delivered good growth and returns. Revenue, 951 million, which is up a healthy 9%. In terms of profit, you can see that we've added earnings before interest and tax to the slide for the first time. This is to more clearly show the underlying performance and aid comparison with our sector peers. The adjusted EBIT is up 7%, with the margin resilient at 20%. If we look at profit after interest costs, then the adjusted profit before tax is up 3.4%, resulting in a return on sales of 18.7%, which is well within our 18 to 22% range. Interest costs are up due to higher interest rates and the higher average net debt levels. In the half year, the company has invested over £150 million to support future growth. The R&D spend was up 5% to $52 million. Such investment is fundamental to maintaining and improving our market positions over the medium term. This level of R&D investment equates to a strong 5.5% of total group revenue and reflects the confidence our operating companies have in the future. Also in half one, we made three acquisitions, two standalones and one bolt-on, and invested nearly £80 million. It is good to see the healthy M&A pipeline converting into quality acquisitions. We've made two further bolt-on acquisitions since the end of September, and so the total acquisition spend for the year to date is now at £126 million. It is also great to see the acquisitions we've made in the past 12 months contributing more than 5% to both revenue and profit growth in the half itself. These investments are enabled by the group's strong cash generation and healthy balance sheet. So let's look at some of the metrics behind these. Cash conversion at 96% is well above our target level, and as we guided last year. We expect cash conversion to continue to stay ahead of 90% for half two. Net debt to EBITDA at 1.4 is at a comfortable level despite the continued investment and higher interest rates. Finally, our continued growth, cash generation and healthy balance sheet support an interim dividend increase of 7%. This maintains our long-term progressive dividend policy, signalling our confidence in the future. So now let's look at revenue in more detail. This slide provides a bridge of the year-on-year revenue growth of 75 million, or 8.6%. Organic revenue growth was 5.4%. If we look at price and volume, price increases provided around 2% of the growth, and that is at the upper end of our historical typical range of 1-2%. The price causal was higher in the safety sector, in particular in some of those companies most exposed to electronic components. We expect the benefit of price increases to the group to be a little bit lower in the second half as we cycle against price increases that were made last year. Volume increases were well within the historic range, driven by continued underlying demand and supported by our order intake, which remains ahead of last year. Next, acquisitions, including the likes of IZI, FIRE Pro and VTech, made a good contribution to revenue growth of 5.5%. Finally, there was a small currency drag of 2% due to the strengthening of sterling. Based on latest currency rates, we expect a similar headwind in the second half. Now let's look at the revenue through a different lens. This slide analyses the revenue growth by region. On the left-hand side, you have reported revenue, and on the right-hand side, you have organic constant currency revenue, OCCY. It is pleasing to see broad-based revenue growth, with revenue growing in all regions except Asia Pacific on both a reported and an OCCY basis. If we now focus on the chart on the right that analyses OCCY, we saw strong growth in our two largest sales regions, the US and Europe. which make up around two-thirds of the group revenue. In the US, the key driver was the environmental and analysis sector, with very strong performance in photonics, which more than offset the decline in spectroscopy. In Europe, the key driver was the healthcare sector, with a very strong performance in the eye health therapeutics. The performance was supported by the safety sector, which also delivered a good performance in both the US and Europe. UK growth at 3% reflected a strong performance in the environmental and analysis sector, which was then partially offset by the safety and healthcare sectors. Asia Pacific was 7% lower, reflecting weaker trends in China, but partially offset by strong growth in Australasia. For context, China now represents 5% of group revenue. If we move from revenue to profit, Profit was up 3.4% at the reported level and flat on an OCCY basis. OCCY growth was flat during the period due to the good performance in both safety and healthcare being offset by the adverse E&A performance. I was particularly pleased to see the safety sector recover from a difficult half two last year and that recovery was in line with our expectations. I will take you through the individual sector commentaries in a few moments. Moving on to acquisitions. They made a good contribution to the half year profit of 5.2%. This reflects the strength of the businesses we acquired over the last 12 months. As with revenue, there was a small currency drag of 1.8% from the strengthening of sterling. Now let's return to the return on sales performance on the next slide. This bridge slide reconciles the half one return on sales performance of last year to this year's performance. Last year's ROS of 19.6% was unusually strong due to the effects of exiting the COVID period. In fact, it was 30 basis points ahead of the average of the half year position for the five years prior to COVID, which you can see as a line on the chart. Year on year ROS moved 90 basis points lower. Two thirds of that was due to higher interest rate costs. If the impact of the higher interest costs is excluded, then our return on sales in the first half is in line with the pre-COVID average of 19.3%. The higher interest costs are the result of both higher interest rates and higher average levels of net debt. This is the first year of substantially higher interest rates, and it is our objective to absorb these higher costs in the medium term. Let's now move on to the sector commentaries, and I'll start with the safety sector. I was pleased the safety sector's performance improved in the first half in line with our guidance. As you'll recall, the sector achieved good top line performance last year but experienced a significant ROS contraction due to supply chain issues. We expected to see ROS improvement throughout this year and that has come through in the first half. ROS is up 110 basis points versus last year and up 260 basis points versus the previous six months. In half one, the sector continued to see good revenue momentum. Revenue growth was strong at 13% and positive across all regions. It has also included a good contribution from acquisitions. Europe, safety's largest region, stands out as having seen the most benefit from recent acquisitions, in particular from VTech and FirePro. Good OCCY revenue growth of 7% was also broadly spread across regions and subsectors. All regions grew well on an OCCY basis, except the UK. There was a modest decline in the UK, which reflected the end of a significant road safety contract in the urban safety subsector. In other, we saw strong contributions from FirePro in Africa and near Middle East. There was also a healthy organic performance in industrial safety in the near Middle East and fire safety in Canada. Profit was 19% higher and included good OCCY growth and strong benefit from recent acquisitions. It was also great to see that the companies within the sector remained well invested to support future growth. Turning now to the environmental and analysis sector. The environmental and analysis sector saw good reported and OCCY revenue growth of 8% and 9% respectively. By region there was a very strong growth in the US, driven by the photonics segment, which is experiencing an acceleration of demand for technologies that support the transformation of data and digital capabilities. The strong photonics performance was partially offset by substantial revenue declines in spectroscopy. This reflected weaknesses in a number of its end markets, including biopharma, quality testing of semiconductors, particularly in the Chinese market, and consumer electronics. These effects were amplified by disruption arising by the deployment of a new IT system in one of our spectroscopy companies. This has since been stabilised. Performance in the Asia-Pacific region, which was down 26% on an OCCY basis, primarily reflected these weak spectroscopy trends. UK growth was strong, benefiting from momentum in water infrastructure arising from the increase in project tenders as part of the UK regulatory water cycle. Europe saw overall modest growth, with good performance in most business segments, partially offset by the decline in spectroscopy. In terms of profitability, ROS declined a substantial 390 basis points to 20.9%. This decline in margin largely reflected the significant revenue decline in the higher margin spectroscopy segment. We'd expect a significant improvement in half-two ROS, with continued momentum in photonics and water infrastructure, and in spectroscopy from the actions taken on the cost base and the stabilisation of the IT system. During the first half, the sector continued to invest at a good level. In particular, the sector made two acquisitions, VIR, a bolt-on for Minicam, and Suatronics, a standalone company. Following the period end, the sector made a further bolt on acquisition of Alpha Instramatics. Now let's turn to the healthcare sector. Overall, the healthcare sector has seen modest reported revenue growth, but a good profit performance. The 4% revenue growth in the period included a positive contribution from IZI Medical, which was acquired last year. the overall organic revenue growth was flat, and this reflected a diverse range of performances at the sub-sector level, which I'll explain before moving on to the performance by region. Our companies in eye health therapeutics and analytics and sensors perform well due to the high patient caseloads and the demand from healthcare providers for communication and software systems to improve the efficiency and patient outcomes. However, the acute therapeutic subsector was adversely impacted by OEMD stocking and by the budgetary caution of healthcare providers. These adverse trends also affected our smaller life sciences subsector, which declined substantially. These impacts were compounded in life sciences by global macroeconomic headwinds and low demand in China, where we have a significant life sciences footprint. Turning to revenue performance by region on an OCCY basis, we saw the US experience a modest decline, reflecting the subsector trends I've just described. Europe grew strongly, mainly reflecting the momentum in eye health therapeutics. The Asia-Pacific region declined, reflecting the high life sciences footprint to China. In terms of profitability, ROS increased 140 basis points to 23.4%. primarily reflecting a higher gross margin as a result of portfolio mix and ongoing pricing discipline. It was also good to see the continued high levels of investment in R&D. We now turn to the company's cash flow performance. This chart effectively summarizes the group's cash flow for the first half. I'll just pick out three key items. The strong EBITDA generation of 218 million is typical for the group and an important part of the sustainable growth model. Next, the net acquisition spend mainly reflects the three acquisitions and the one disposal made in the period. Just as we've seen in this half year, these acquisitions will become a source of incremental EBITDA in future periods. Working capital outflow was much improved as expected because we were cycling against the significant inventory build-up in the previous year. Other comments I would make regarding working capital. The first half typically has seasonally higher working capital demands due to the timing of bonus payments. Cash conversion was strong at 96% and ahead of our 90% KPI target. Strong working capital control is an important activity within the group, and for me personally, a focus area as we look to maintain our high returns. Now let's look at our financial KPIs. I've considered most of these KPIs already, so I'll limit myself to a few points. Organic profit contribution was flat in the half due to the mix of sector performance but we expect this to be positive at the full year. It was good to see a strong acquisition profit contribution of 7.1% on a pre-interest basis and 4.5% on a post-interest basis. EPS is up 3.5%, driven by the reported profit growth, which includes the benefit of the acquisitions made. Rotick at 13.2% remained high and well above our weighted average cost of capital, which is around 9%. The change from 13.8% in the prior year mainly reflects the impact of higher interest rate costs and flat OCCY profit growth in the period. I'd expect to see a stronger number for the full year. Moving on to my last slide. These graphs show the 10-year performance of the group at the reported revenue and adjusted profit level. It's excellent to see the 10-year CAGR above 10% for both metrics. It demonstrates the effectiveness of the sustainable growth model, which is at the heart of our business. As a group, we have a relentless focus on delivering strong growth and continued high returns. We constantly scrutinise our own performance and find ways to improve it. This is especially important in the new macroeconomic environment, which is characterized by higher interest rates. I've been encouraged, now 11 months into the business, by the openness with which the group critiques its own performance. And that's what we need to do in order to maintain the trends that are on these graphs. A small example of our focus on returns. In recent months we have increased our emphasis on repatriating cash to the centre from the operating companies. This is now a greater priority due to the higher cost of capital. This has included a renewed focus on cash pooling arrangements, cash flow forecasting and liquidity requirements. Optimising returns is an area of focus for me and one of Mark's four priorities as outlined in the full year results. I will now hand you back to Mark to provide a further update on the business and those four priorities.

Thanks, Steve. Always great to see that growth in revenue and profit over a 10-year period that has had a number of varied market conditions. And as Steve says, enabled by our model, which gives us that ability to continuously evolve as markets change. And our model also underpins the priorities that I highlighted at the full year. First, organic growth, our top priority. Second, inorganic growth, remaining disciplined in our approach to acquisitions. And third, maintaining our agility and making sure we have the very best talent close to our customers. And then fourth, as you've just heard from Steve, maintaining high returns as we invest for growth. I remain confident that we can deliver against all four of these priorities. And I wanted to share with you today the reasons why. So let's start with organic growth. Organic growth is the cornerstone of our financial model. but its heart is our purpose to grow a safer, cleaner, healthier future for everyone every day. Our purpose is the start point of everything we do. It provides a north star for the group and is consistent throughout the individual drivers of our growth. And if we start with our markets, Our purpose points us to our chosen markets of safety, health, and the environment. They all have global potential for long-term growth and consistently high returns. And they provide end market and geographic diversity in our portfolio. And their growth underpinned by resilient long-term growth drivers, such as changing demographics, increasing demand for healthcare, environmental pressures and ever-increasing regulation. And these markets with returns supported by our leading market positions in those carefully chosen niche markets where we can offer significant value added to our customers through our differentiated products and solutions. Next, our decentralized business model, which gives our companies autonomy to take the best decisions based on their market expertise and the specific factors that are impacting their markets at any given time. It empowers them to act rapidly without having to ask for permission first. It places our people close to our customers, allowing them to respond quickly to those changing needs, new market opportunities and new technologies. And our business model also accelerates our company's growth through our central enablers and our company networks. supporting our companies to grow internationally, to deploy technology effectively, and to recruit and retain the very best talent. And having the best talent is a critical component in delivering superior performance, especially so in a decentralized autonomous model. And in the same way that we choose our markets with care, we're highly selective in the talent that we recruit. We want leaders who are passionate about making the world a safer, cleaner and healthier place. We want them to have bold ambitions and to be competitive in wanting to succeed. They should be happy to be accountable for their own performance. But we also want them to work together as leaders, driving the power of collaboration and innovation across their teams and Hauma as a whole. So our culture is entrepreneurial and high performance, but it's also highly collaborative and inclusive. grounded in our DNA, recognizing the power of diverse teams and networks between companies to share best practices, to share insights, to share knowledge and experience. More to come on this shortly. And it's these cultural drivers that are underpinned by transparent incentivization, which is aligned to our long-term ambitions. Our company leaders are rewarded on an EVA basis, and this is a consistent basis across all levels of our senior leadership. It rewards both the delivery of consistent long-term growth and also the returns that our companies drive above the cost of capital. And alongside that, to ensure that we're maintaining that longer term outlook and ensuring that we're aligned to the wider interests of the group, a part of that award is deferred and paid in how much shares. This drives our leaders to balance strong performance in the short term with a longer term view. It encourages them to continually invest to maintain their company's strong positions in innovative solutions to the problems facing our customers, or investing in talent and infrastructure to support their future growth. This investment ensures that they retain their competitive differentiation over the long term. They're doing this through product innovation, technology, and deep application knowledge. And then finally, we relentlessly monitor performance. This allows us to allocate capital to maximise growth and returns. We're constantly challenging ourselves and asking, are our companies aligned to our purpose? Do they continue to benefit from our long-term growth drivers in the niches in their markets? And can they deliver the growth and returns that we require over the medium term? And if required, we can move quickly and effectively. And it's this combination and interaction of each of these separate elements that's driven our historic growth. And I'm confident that they'll drive further strong growth in the future. So looking now at our inorganic growth, the other half of our growth ambition, which has many of the same fundamentals as our organic growth. We want to acquire great businesses in niche markets aligned to our purpose. We ensure that they have strong leadership teams, and then we invest in them and support their growth and returns over decades to come. There's a number of reasons supporting my confidence that we can continue to drive strong M&A growth over the medium term. And the first of those is just the sheer scale of the opportunity. We've got a healthy pipeline of well over 600 companies. In any one year, we're actively assessing around 10% to 15% of these companies. And of those that we're assessing, we acquire on average about 10%, a highly selective process, meaning we never feel compelled to do a deal. Next, our track record. We've completed over 150 acquisitions in the last 40 years. And in my time on Halmer's board, we've bought more than 40 companies. Not only does this give us deep experience, increasing our likelihood of success, but it also builds our reputation with company owners for buying and successfully investing in and growing companies. Prospective sellers can talk directly with founders who have sold their companies to Houma about their own individual experiences. Third, our deep market knowledge. Typically, the companies that we buy are in or adjacent to markets that we already know well. This means that we can capitalize on the expertise of our people who are living and breathing them every single day. And ahead of entering new markets, we invest a lot of time in building up our knowledge and understanding of those markets and how they operate. Next, our financial and organisational models. They've been designed to incorporate high levels of M&A activity. Our substantial financial capacity and our strong cash flows allow us to fund our M&A activity from internally generated funds. And we have a highly scalable structure. It allows us to incorporate new companies without significant integration hurdles. The next element is our experienced teams. We have significant M&A resources with nine divisional chief executives who chair our groups of operating companies spending half of their time on M&A. The M&A process is led by our DCEs. And we now also have company MDs and presidents who are more familiar with M&A. They've been increasingly active in acquiring companies as bolt-ons that enable them to expand their market reach or extend their technology. And these DCEs and our MDs are supported by our three dedicated sector-specific M&A teams. And these teams ensure the quality and consistency in our M&A processes, and they make sure that we drive that focus on pipeline management and market mapping of targets that are aligned to our sector strategies. Our approach is relationship-led. That combined effort from our DCEs, MDs and the dedicated M&A teams means that we're able to build strong long-term relationships with those companies in our pipeline. And they're typically small privately owned businesses that we're looking to acquire in private transactions. We build that deep understanding of their markets and their culture, and we also make sure that they're clear about the benefits of joining Hauma. We offer a long-term home for companies which are looking to benefit from that continued autonomy, but also want support to achieve their growth ambitions through our growth enablers and our company networks. So to bring it to life, let's just look at two examples that bring out many of these themes. And I wanted to start with Apollo, a business that many of you know. We acquired Apollo in 1983 for around £700,000, a fire safety business. Fire safety offers us substantial growth opportunities, and that's driven by increasing urbanization, growing needs for safety and efficiency, and of course, ever stronger regulation. And all of these have been consistent drivers behind Apollo's growth for the last 40 years. And that growth has been impressive, with compound annual revenue growth of 8% over that 10-year period that Steve shared earlier. And Apollo now today has over £150 million of revenue annually. Not a bad return on investment. Not only has Apollo been a fantastic business in its own right, it's also helped us build on knowledge around the fire market. And this has given us the understanding of new market opportunities within fire across a variety of technologies and in different geographies. And if we look today, we have wired, wireless and temporary fire detection businesses and a range of fire suppression technologies. Our geographical reach ranges from Europe to the Americas and to Asia Pacific and Australia. All these companies benefiting from those same long-term growth drivers as Apollo. And today our fire companies, united by that common purpose around fire safety, represent just under 20% of the group's revenue. And we continue to see substantial opportunities for future growth within the segment. Our M&A strategy is, as I say, driven by our purpose. It's aligned with our growth strategy, and this allows us to target new acquisitions in markets that our companies already operate in, but at the same time also explore new and adjacent market spaces in line with our sector strategies. And our acquisitions this year are great examples of this strategy, and they demonstrate the opportunities that we can access with this approach. If I just take LaserSafe, for example, it further broadens our position in industrial safety. And the Apriomed adds bone biopsy technologies to IZI, a company which we acquired only a year previously. But let me just focus in on Sewertronics, a great example of another subsector that we have around water. And we're really pleased to welcome Sewertronics to Halma in May of this year. As we look back, we bought our first water company, Hanover, in 1981, which was focused on water treatment. This, at the time, highly aligned with Hamer's already long-established focus on environmental monitoring. And as we did back then in the 80s, we still see water as an attractive area for growth. It's a life-critical resource. It's increasingly polluted, more than ever in short supply, and especially given climate change, and of course subject to high levels of regulation. And over time, as we've added a number of businesses to our portfolio that have all been focused on water network monitoring and testing, we also identified wastewater as an adjacent segment where we wanted to operate. And this led us to our first interaction with Sewertronics in 2019. One of our divisional chief execs met the Sewertronics team at a trade show. They then developed the relationship over the next few years as Sewertronics established a solid track record of growth and performance. And as I say, it was then great to complete the deal this year, adding the efficient and safe repair of wastewater pipes to our existing capabilities. And if we look today, we now have a cluster of seven individual companies in E&A formed from over 15 acquisitions, each focused on that core problem of water scarcity and pollution. And together they represent around 10% of the group's revenue. And as with FIRE, we remain excited about the opportunities for further growth in both existing and adjacent markets. So turning now to agility and talent. As you've heard, our focus on talent culture and maintaining our agility is a critical element in the successful delivery of growth and high returns. And this topic was also a specific focus of our recent Accelerate Leadership event. I believe it's a significant asset in continuing to build our competitive advantage, but don't take it from me. Let's hear from some of our leaders and share some footage from our Accelerate management conference.