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Edited Transcript of HLMA.L earnings conference call or presentation 19-Nov-19 9:30am GMT

Half Year 2020 Halma PLC Earnings Presentation

Bucks Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Halma PLC earnings conference call or presentation Tuesday, November 19, 2019 at 9:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Andrew J. Williams

Halma plc - Group CEO, Member of Executive Board & Executive Director

* Marc A. Ronchetti

Halma plc - Group CFO & Executive Director


Conference Call Participants


* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* Mark Davies Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Richard Paul Paige

Numis Securities Limited, Research Division - Analyst

* William Turner

Goldman Sachs Group Inc., Research Division - Research Analyst




Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [1]


Well, good morning, everyone. Welcome to this morning's half year results presentation. As you'll see, once again, Halma's made good progress in the first half of the year. We delivered record revenue, profits and dividends, while continuing to increase our strategic investment. I was really pleased that the growth has been widespread. So we've had growth in each of our 4 sectors and also in each of our 4 major geographic regions, together with a positive contribution from the recent acquisitions.

All of this was achieved against a tough prior year comparator and just underlines to me, the strength of the diversity of our business, but also the way in which we've chosen safety, health and environmental market niches, which offer us really good long-term sustainable growth opportunities.

Halma's also been a business that's always had a strong sense of purpose. And I know when I became CEO, I was very keen to do that through our purpose at that time of protecting life and improving the quality of life. And as you know, we've sharpened that up. We've evolved that more recently into a more ambitious and inclusive purpose of growing a safer, cleaner, healthier future for everyone every day.

At the moment, our sense that there's a perceived need for every business to have a purpose and to show how it's aligned with their business. And certainly, I feel that there's some skepticism some quarters around whether that's real and whether it's real for employees, for customers and partners, indeed for investors. Does it really drive the business decisions, the behaviors and the way in which people behave across the business.

Whatever you stand on this, I do believe that those businesses, though, that do that well, but do have a clear purpose, which is authentic, which is motivational for their employees, for their customers, for their investors are going to become successful. And I think we're seeing that becoming an increasingly important element of Halma's success. And really today, we hope to give you some real examples of that in action in our business, particularly showing the impact of our Gift of Sight campaign, where I'll show you a short film at the end of this presentation, which shows how that effort has changed people's lives in Ghana, as well as changing the people who work in our business.

Now before I hand over to Marc, let's look at the highlights of the first half of the year.

Another record first half with widespread growth. And as I said, a good contribution from acquisitions. Our revenue was up by 12% to GBP 654 million, and our profit was up by 14% to GBP 129 million. Return on sales was up by 40 basis points and I'd say that was despite increased investment by our companies and also increased investment at the center in our central growth enablers.

I'll talk a little bit about our growth enablers later on in the presentation, but just pick out a few highlights. In innovation, our R&D spend was up by 12% to GBP 35 million. That's 5.3% of revenue. So maintaining at a very good level, and all 4 of our sectors increased their R&D investment during the period.

In international expansion, our rest of the world revenue, that's revenue from outside U.K., Europe and U.S. is up by 10% to GBP 164 million, and that reflects both the ongoing investment in our businesses in developing markets, where we still see good long-term growth opportunities, both organically and through acquisition.

And finally, I'm pleased to say we completed 5 acquisitions during the first half of the year for GBP 88 million -- sorry, 3 in the first half of the year, 2, since the half year-end. I think what was pleasing for me was they covered 4 geographic regions and also 3 of our sectors. So again, good to see the activity spread across the business.

And there was a good solid cash performance to support that investment and returns to shareholders. Our cash conversion was 82% of adjusted profit relative to our 85% KPI, and Marc will give you more details on that in a few moments. Our dividend -- our interim dividend up by 7%, maintaining our long-term progressive dividend policy, and we ended the period with net debt at GBP 310 million. That includes a GBP 57 million noncash increase as a result of IFRS 16. So our net debt-to-EBITDA ratio at the end of the half was still at 0.98x, which obviously leaves us with substantial capacity to support investment organically and through acquisition in the future.

So overall, I've been very pleased with our performance during the first half of the year. We've had a good start to the second half of the year with order intake ahead of revenue and ahead of order intake for the same period last year, and we remain on track to deliver another good full year performance.

So with that, I'd like to hand over to Marc, who's going to take you through the financial review.


Marc A. Ronchetti, Halma plc - Group CFO & Executive Director [2]


Thank you, Andrew. Good morning, everyone. A really pleasing set of results against what was an exceptional first half of the year last year. And as Andrew says, you take a little bit of time to think through why is that? What are the benefits? And for me, this really reflects the benefits of our organizational design, the underlying long-term drivers in our end markets, and our continued focus on managing our diverse portfolio of companies with acquisitions, disposals and mergers, all having an impact during the period.

As Andrew stated, record revenue and adjusted profit with revenue up 12% and profit up 14%, continuing our strong trend of year-on-year growth. As I said, this performance is particularly pleasing, given the exceptionally strong first half of the year last year, where we have revenue up 16% and profit 19%. Let's take a more detailed look at the drivers behind the performance, starting with group revenue growth.

As you can see, there was good organic constant currency revenue growth of 5.1%, which reflected growth across all 4 sectors. Acquisitions contributed a healthy 4% to revenue growth, benefiting from 3 acquisitions in the period and from last year's acquisitions of Limotec, NavTech and RATH Communications. The disposal of Accudynamics that we completed in the second half of last year was a small negative of 0.6%. Total constant currency growth was, therefore, 8.5%.

There was a positive effect from currency translation as sterling weakened of 3.2%, which completes the bridge to our reported growth of 11.7%. As usual, we've included more detail on currency effects in the appendix slides.

So looking now at revenue by destination. The chart up there on the left shows the reported revenue split by destination, in addition to the reported growth by region around the outside, with the chart on the right showing the regional organic constant currency growth. It was great to see growth in all our major regions on both a reported and an organic constant currency basis. This included very strong reported growth in Asia Pacific, in the U.S.A., which included the benefit of recent acquisitions and good performances in Asia Pacific, the U.K. and U.S.A. on an organic constant currency basis. So starting with the U.S.A., which remains our largest sales destination at 38% of revenue. It's positive to see that region continues to grow strongly with 15% reported growth even against the comparative of 19% growth in the same period last year. This performance was driven by strong performances from infrastructure safety and environmental analysis, both delivering double-digit organic growth and a positive contribution from RATH Communications.

Moving to the U.K., which grew well at 8% in organic constant currency, driven by strong performance in environmental and analysis, which delivered very strong organic constant currency growth of 25%. Mainland Europe's growth was solid and benefited from good organic growth with infrastructure safety and environmental analysis. And at a reported level benefited from Limotec and NavTech acquisitions from 2018-'19.

Asia Pacific grew well with 9% organic constant currency growth reflecting strong performances in Process Safety and Medical. On a reported basis, growth was 21%, which benefited from the Ampac acquisition, which closed in July. Completing the geographical split in the Rest of the World revenue declined, driven by the African near and Middle East territory, which was impacted by the timing of project-based business.

In total, revenue grew 12%, underscoring in varied market conditions, the value inherent in the diversity of our portfolio and the long-term structural growth drivers in our markets.

Switching to adjusted profit. As stated earlier, another record performance with good organic constant currency profit growth at 6.5%, above our 5% KPI. This was driven by the top line growth and margin improvement in 3 of the 4 sectors, largely a result of actions that we've taken in previous periods, which is always positive to see.

Acquisitions contributed 4.4% profit, reflecting good margins in the businesses we acquired in the last year, while the Accudynamics disposal was a small negative. Total constant currency profit growth was, therefore, 10.4%, above our combined profit KPIs even when set against very strong growth of 21.6% in the first half of last year.

As with revenue, there was a positive effect from currency translation for the period, which completes the bridge to the headline profit growth of 14.1%. So to put some color on the group performance. I'll now take you through more detail at the sector level, turning first to infrastructure safety.

We made strong progress with revenue increasing by an impressive 18%, including 4% organic constant currency growth and a 12% contribution from acquisitions, including Limotec, NavTech and RATH Communications in the prior year and Ampac in the current year. Very strong profit growth at 25% to GBP 52 million, including 9% organic constant currency growth. Even more impressive considering the strong reported and organic growth in the first half of last year. It was also great to see the acquisitions adding 12% to our growth in the period.

Looking at the regional performance, always good to see growth in all major regions, with a very strong performances in the U.S.A., Asia Pacific and Europe, benefiting from current and prior year acquisitions. The U.S.A. also grew strongly on an organic constant currency basis driven by a good contribution from our Elevator Safety and Fire detection businesses and new product innovation in the people and vehicle flow segment.

Underlying performance in Europe and the U.K. was good with broadly spread growth across the subsegments. Organic Asia Pacific growth is very strong, and the reported level at 37% benefiting from the Ampac acquisition. Organic growth in the region was flat largely driven by the removal of historic cells to Ampac following its acquisition, with underlying growth in the Asia Pacific region at circa plus-5%.

Completing the regional review, the decline in the Rest of the World mainly reflected less project-based business in the Middle East. From an end market segment perspective, again, good to see spread of growth across market segments, with the Fire, People and Vehicle flow and Elevator safety businesses performing strongly.

Return on sales increased 1.4 percentage points to 22.5% largely driven by the impact of manufacturing process automation investment that we made in the first half last year. It's good to see this flow through into the first half following the upside that we had already seen in H2 last year. That said, given the timing of the investment, we don't expect a further year-on-year increase in the remainder of the year. We continue to increase investment to support future growth, with R&D spend up 15% to GBP 14.2 million, representing 6.1% of revenue.

In summary, the sector had a good half year with solid organic growth and a positive contribution from prior and current year acquisitions. Looking forward, we expect further progress in the second half with continued organic revenue growth and continued benefit from acquisitions to deliver a strong full year performance.

Moving to process safety, which delivered a solid performance, in line with the trend from the second half of last year, with revenue up 3% to just over GBP 100 million on a reported basis and up 1% on an organic constant currency basis, following last year's very strong 12% organic growth. Revenue growth reflected strong growth in some regions and markets. For example, in industrial access and control in the U.S.A. and impression management and safe storage and transfer in Asia Pacific. These performances more than offsetting more challenging conditions in oil and gas-related markets in the U.S.A. and timing of projects in the Middle East.

Profit performance was stronger, growing GBP 2.7 million to GBP 24.9 million, representing 12% reported growth and 9% on an organic constant currency basis largely reflecting the nonrecurrence of last year's reorganization costs.

There was a positive effect of 2% on revenue and 3% on profit from currency translation, and there were no effects from acquisitions or disposals.

So looking at revenue by destination. There was good growth in our largest region, the U.S.A., despite less favorable energy market conditions, with the continued growth in our safety interlock subsector supported by a major logistics contract.

In our other major regions, we saw declines in the relatively small U.K. segment driven by timing of projects and largely flat performance in Europe, strong growth in Asia Pacific driven by investments in our routes to market in China and finally, declines in other regions driven by timing of projects in the Middle East.

Return on sales improved by 1.9 percentage points to 24.5%, benefiting from the nonrecurrence of last year's reorganization costs and therefore, returning to the longer-term average for the process safety sector.

R&D spend was up 4%, slightly ahead of revenue, reflecting continued investment in innovation and marketing activity to deliver more consistent growth in the future.

Looking forward, we expect the sector to make further progress in the second half and deliver a solid full year result, with revenue momentum steadily improving as it benefits from the actions taken over the past year to improve performance.

Moving to environmental and analysis, which I'm pleased to report continues to perform strongly. Revenue increased 14% or 10% on an organic constant currency basis. Reported profit grew 21% to GBP 35 million, with organic constant currency growth an impressive 16% against a very strong comparative last year. There was benefit from currency of 4% of revenue and 5% profit.

Again, positive to see revenue growth in all of our major regions. This included further strong growth in the U.S.A., the sector's largest market, which continued to benefit from some large spectroscopy and photonics projects. This, in addition to an impressive performance from the U.K. notably in environmental monitoring driven by new product innovation and an increasingly robust regulatory requirements.

Mainland Europe also grew well, with broad-based growth, resulting in a 10% increase in reported revenue and 8% on an organic constant currency basis. Asia Pacific's growth was more modest, with a 5% reported and 2% organic increase. This included the end of a contract with one of our larger customers, which masks a more positive performance in the region overall. From a subsector perspective, growth was broadly spread across all 3 subsectors, with particularly good contributions from spectroscopy and photonics and environmental monitoring, which both delivered double-digit organic growth.

Return on sales improved by 1.2 percentage points to 21.5% mainly driven by a one-off restructuring cost at the sector level in the prior year. Therefore, we don't expect to see such an uplift in the second half. We're continuing to invest in the opportunities in the sector, and R&D grew 2% to GBP 9.8 million, representing 6% of revenue.

Overall, this was a strong half for environmental analysis and the sector is expected to continue to perform well in the second half of the year and deliver a strong full year performance.

Turning to Medical. Revenue grew 6% and 4% on an organic constant currency basis against a strong comparative of 14% in the prior year. Profit increased by 2% to GBP 36 million comprising a 1% organic constant currency decline, a 2% negative effect from Accudynamics disposal and a 5% positive effect from currency translation.

As part of our ongoing portfolio management, profit in the period included a net charge of GBP 2.5 million relating to the write-off of capitalized R&D and inventory following the merger with 2 ophthalmic companies to improve their combined profitability over the medium term. Excluding this charge, profit growth would have been broadly in line with revenue growth.

Looking at the revenue by destination. The U.S.A., the sector's largest geographical end market delivered modest organic growth against a comparative of 18% growth in the first half of last year. This was influenced by the timing of orders and product launches, in addition to certain customers moving their operations from the U.S.A. to Asia Pacific, the impact of which can be seen in strong revenue growth of 22% or 19% on an organic basis in the Asia Pacific region.

Mainland Europe revenue declined reflecting the underperformance of one of the ophthalmology companies, which we're addressing through the merger I referred to. And finally, other regions performed strongly, led by the Sensor Technology segment. In terms of the subsectors, the diagnostics and Sensor Technology segments performed well, while there were weaker trends in ophthalmology and patient assessment.

Return on sales decreased 90 basis points to 29 -- 22.9%, largely as a result of the one-off charge in the period. Excluding the effect of Accudynamics, R&D spend increased to GBP 7.2 million, notably in Sensor Technology and Ophthalmology businesses, representing 4.6% of revenue. Due to the phasing of projects, we expect a modestly lower level of R&D spend in the second half, albeit still resulting in a strong increase in investment for the year as a whole.

Looking forward, we expect a stronger performance following the reorganization, the investment made, resulting in a solid full year performance.

So moving now onto net debt. This was the first financial period in which IFRS 16 applied for Halma. And whilst not a cash impact, it has resulted in lease liabilities being included in the net debt for the first time. This increased our starting net debt by GBP 50.3 million to GBP 232 million. Lease additions in the period, again, not a cash movement, increased by GBP 12.6 million, the majority of which relates to facility expansion in Asia Pacific and the Ampac acquisition.

Turning now to the cash impacts on net debt. Cash conversion was solid at 82%, reflecting the expected pattern of slightly lower cash conversion in the first half. The working capital increase in the period was GBP 25.2 million, which was up year-on-year. This primarily a result of a reduction in creditors from the year-end driven by the timing and relative quantum of payments in addition to continued strong growth of the group.

It was positive to see that the underlying focus on debt and stock remains strong, with stocks growing in line with revenue, debt today is improving, resulting in debtors broadly flat overall. As a result, I expect a more modest increase in working capital in the second half.

CapEx at GBP 13.7 million was GBP 1.2 million below the same period last year, reflecting the timing of spend on some larger projects, and we expect CapEx for the full year to be in line with the guidance given in June of GBP 35 million.

Looking at tax, the effective tax rate forecast at 19.9% remains in line with our previous forecast. The increase over the 2019 full year rate of 18.6%, being driven by changes to our profit mix with the inclusion of higher tax rate profits, including Australian profits following the Ampac acquisition.

In terms of cash tax, as expected, the first half included 2 extra U.K. corporation tax payments totaling GBP 5.4 million, following the U.K. government's announcement to pull forward the timing of corporation tax payments. Again, as flagged at our full year results, it's likely that there'll be an incremental tax payable of up to GBP 16 million in the second half of the year. This reflects the recent European commission ruling regarding U.K. Finance Company Partial Exemption constituting state aid. Of course, any cash payment would be refundable on a successful appeal against the ruling.

Moving to pensions. The deficit on our defined benefit pension schemes reduced to GBP 27.6 million on an IAS 19 basis, down from GBP 39.2 million at the last year-end. This reduction, a result of the return on the scheme's assets and the contributions made in the period, outweighing an increase in liabilities as a result of a lower discount rate.

As previously guided, we expect to make cash contributions of GBP 12.7 million in the year as part of our agreement aimed at eliminating the deficit on a technical provisions basis.

We continued our strategy of making value-enhancing acquisitions with a total spend of GBP 88 million in the period, including earn-out payments from prior year acquisitions and all associated acquisition costs. We paid out GBP 36 million in dividends, continuing our policy of delivering progressive and sustainable returns to shareholders. And finally, finance costs, currency and other movements totaling GBP 19 million, increased net debt by GBP 78 million when compared to the IFRS 16 adjusted year-end net debt to a figure of GBP 310 million.

As Andrew stated, this represents a net debt-to-EBITDA ratio of 0.98x. This compares to an IFRS 16 adjusted figure of about 0.8x, well within our typical operating range of up to 2x gearing. We continue to have a strong liquidity position with more than GBP 400 million of liquidity available in our facilities, and over GBP 300 million of capacity within our operating range up to 2x gearing.

So to summarize, looking at our performance against our financial KPIs. This is a good first half against our targets, and overall, a really pleasing first half performance. We delivered good organic revenue and profit growth against strong comparatives in the first half of last year. Acquired profit growth improved to above our target, supported by a strong M&A pipeline, and we saw stronger momentum in revenue growth outside the U.K., U.S.A. and Europe, where we continue to see good potential for growth.

Returns remained strong, with an improvement in return on sales and ROTIC remaining well above our target. And while we expect a stronger working capital performance in the second half, the group continues to be strongly cash generative, with high levels of balance sheet capacity.

To sum up, a good first half with record revenue and profit growth, continued portfolio management and strong returns while further increasing investment to support growth, all of which supports my confidence in our ability to make further progress in the second half of the year and beyond.

I'll now hand you back to Andrew for a strategy update.


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [3]


Thanks, Marc. And as Marc said, I'd now like to start thinking about how we're investing for the future, and the areas where we're sort of placing our priorities.

You'll all be familiar by now with our, what we call, our growth enablers, our 7 growth enablers, and they really define how we bring value to the companies in the group. And we've made good progress in the first half of the year, both in terms of the increased activity, but also one of the things being clear to me is how some of these growth enablers need to and are evolving according to the changing needs of the business. I'll just give you a few examples of that in the first half of the year.

So if we take international expansion, we're transitioning our local resources in Asia Pacific, for example, to be more aligned with our growth enablers. So if you're running one of the larger businesses of ours in the region, you'll have access to a local talent director, or maybe we're adding more local M&A resource to help you search for opportunities to bolt-on to your business.

As I said at the beginning, I really see a good opportunity for Halma over the next 10 to 15 years in safety, health and environmental markets in Asia Pacific, both organically and through acquisitions.

Then the finance and risk enablers now called Finance, Legal and Risk, it just reflects the fact that now we can provide much stronger legal and compliance support globally to our businesses following the appointment of our group general counsel to the executive team.

And in our digital growth engines, we're focusing more on the commercialization of ideas rather than generating new ideas. Already, we're getting the company's thinking of new ways they can grow their businesses digitally. Just sort of 2 ways we're doing that. We're piloting a new, what we call Execution Accelerator program. So helping companies take an idea through to the market. And that program leverages a lot of the existing digital project experience we've got now across the group. Some of you would have seen some of our digital capabilities when you visited HWM earlier in the year.

And the other way we're looking at it is how we can help them with the IT and digital architecture they need to go-to-market. And certainly, our newly appointed Chief Technology Officer is going to be a real help with helping the companies achieve that.

On Strategic Communications and Innovation Network, one of the things we've done during the first half of the year is launched a new version of the collaboration tool, which we call the Halma Hub. This new version just provides our employees with easier access, so they can connect with each other. They can use a more advanced search features to find out who in the group knows what, find out new content, join some of the shared interest groups that we've got going on. And this is becoming a really powerful way in which we're building our innovation network. In fact, over half of Halma employees are now registered on the Hub and sharing those ideas. So it really is becoming a key collaboration tool for us.

Now I'd like to look at the next 2 talent and culture and also M&A in a bit more detail. As I say, we continue to involve our growth enablers. And I think the other impact I'm seeing of that is on our leadership teams and the skills and capabilities we need amongst our leadership. And the Executive Board is no exception. And as you know, we announced 3 changes to our Executive Board in the first half of the year, 2 of those were also part of planned succession processes. So in the medical and environmental sector, Laura Stoltenberg was -- succeeded Adam Meyers as our Sector Chief Executive at the beginning of October. Laura actually joined Halma at the beginning of 2019, and she brings a very strong background in the medical sector, having held senior roles at Medtronic, Exact Sciences and also GE Healthcare.

And Adam is also helping us with this transition. He announced, as you know, in July, his intention to retire. But he's supporting Laura with the transition through to mid-2020, when he'll step down from the Executive Board and the plc board. But has also agreed to support us for another year should we need that with the transition.

In August, Ruwan De Soyza joined Halma as our Group General Counsel and Company Secretary, following Carol Chesney's retirement as Company Secretary at the back end of 2018. Ru joins us from Worldpay, but also has -- where he was group General Counsel, but also prior to that was working with Standard Chartered, Accenture and also Clifford Chance. And in his role, he will be bringing -- has global responsibility for the group's legal, compliance, governance as well as company secretarial affairs.

And then most recently, in September, Catherine Michel joined us as our first Chief Technology Officer. She has global responsibility for all of our IT and digital architecture, both operationally and also in the customer-facing side of that. Catherine started her career at Accenture and then founded a business called Tribold, which she was acquired by Sigma Systems in 2013 since -- when she was -- she has been Sigma's CTO and also Chief Strategy Officer. And as I say, she's bringing that knowledge of IT systems and architecture, and therefore, already is working very closely and effectively with Inken, who is obviously driving the role -- has a role of driving the execution of our digital growth strategy and also our innovation network.

So I think you can see now with the group we've got there that they've added important new capabilities to our executive team as well as improving the diversity of our leadership group.

Let's move on to M&A because it's been a busy period. We continue to find value-enhancing acquisitions in the core markets and also adjacent markets to expand our future growth opportunities as well as our geographic reach. We continue to find new opportunities. Our pipeline, we have a good pipeline coming into 2020, all aligned with our purpose of growing a safer, cleaner, healthier future. And we've also continued to strengthen our sector M&A teams globally to support this, including in Asia Pacific.

I think another thing that has been apparent to me in the first half of the year is as we grow and as the average size of our companies have grown, more of them are now finding their own value-added bolt-on acquisition opportunities, and they both have the critical mass and -- the leadership talent to do a good job of both finding them and also integrating them when they come through, and we'll see that a number of the deals we've done so far this year have been bolt-on acquisitions for existing companies.

So what have we done? Well, the largest deal this half in the first half was the acquisition of Ampac. Ampac is the leading fire evacuation system supplier in Australia and New Zealand. We acquired them in July. And so they really do help us again to extend our geographic reach as well as bringing new technologies to our existing fire businesses within the infrastructure safety sector. They have a particularly strong presence in areas such as voice evacuation systems. So a very nice addition of business, again, that we've known for probably 10, 20 years. So we're very familiar with. I'm very pleased that they've now come on board to join the group.

The other 4 deals we've done during the year, are those bolt-on deals for existing companies. So those of you who came to the HWM visit in South Wales in October will have already heard about Invenio. Invenio brings customer side leak detection technology to HWM, which already has a very strong position in leak detection and the rest of the water network.

Next, we've got Enoveo, another company in our environmental analysis sector, the French-based Hydreka have acquired Enoveo, which bring to them expertise in environmental monitoring and also real-time pollution monitoring. And then following the half year-end, we had 2 medical acquisitions, NeoMedix, which expands the ophthalmic surgical product offering of our U.S.-based business MST into the fast-growing glaucoma market. And then finally, Infowave, which further expands the addressable market and also the data analytic capabilities of our U.S.-based business CenTrak, which provides real-time location monitoring in health care facilities. So a really nice combination of deals across 3 of our sectors. Overall, pleased with the progress, but also pleased with the pipeline that we have going into 2020.

So to finish, I'd just like to turn to Halma's approach to sustainability, which is very clearly defined by our purpose, as I mentioned at the beginning of the presentation. As I said, I think Halma's always has a -- or played a positive role in society, both through the product offerings, the solutions that we provide, but also by behaving responsibly. However, I do think that we can do more to both measure and communicate the impact that we're having. And I think we're looking to do that in a variety of ways. So one of the ways is by select -- we selected 4 of the UN sustainable development goals, which we believe are most closely aligned with our business and with our purpose, and they provide a very good framework for us to think about initiatives looking into the future. So the ones we've selected there, good health and well-being; clean water and sanitation; industry innovation and infrastructure; and then finally, sustainable cities and communities. And as I said, we've begun to develop measures to track our impacts to relation to each of these and we will start to communicate our progress over the coming year.

And then in terms of the environment and specifically addressing the challenges of climate change, we're developing new long-term carbon emission targets, and we also expect them to be aligned with climate science and initially to cover our scope 1 and scope 2 emissions. And we're also beginning the evaluation of the steps we would need to take to report on our climate change strategy and governance and risk in line with the TCFD framework. And again, we'll update you on progress of all of that in our full year results announcement in June 2020.

In diversity and inclusion, I'm committed to ensuring Halma continues to be a diverse and inclusive organization, and it's certainly been a specific focus for me and the board over the last 5 or 6 years.

I think looking back, it's fair to say that the appointment of a group Talent Director, Jennifer Ward, back in 2014, has acted as a real catalyst to make that happen, both at the center of the group and also in the operating companies.

We've clearly seeing the benefit of that coming through in terms of the wider and better talent pool that's available to us, it's attractive to us. And through that, we're now seeing greater diversity of thinking and capabilities shown by the people across our business. I think if you looked at the executive board structure and capabilities that we now have, I think that's a great example of how we're bringing that to reality by middle part of 2020, when Adam steps down, we'll actually have gender balance on our Executive Board. But also importantly, as I said, with a much wider range of capabilities. We're bringing legal capabilities, new digital capabilities, new technology innovation expertise to our leadership group as the needs of our business change.

And then finally, I was particularly pleased very recently that our progress is recognized through Inken, Jennifer and one of our nonexecutives, Daniela being included in the FT's top 100 most influential women in U.K. engineering. Because not only does that recognize the contributions that they're making to Halma, but also it raises our profile as a place where talented people can come and join us and be successful from all different walks of life with all different types of capability.

So finally, I want to pick up on what I said at the start of this morning's presentation, that I'm very proud and fortunate to be leading a business where I believe we've got an authentic connection between our purpose at all levels, whether that's an operator on a factory for building a gas detector, or indeed, the plc board having a conversation about what are the kind of businesses we should be acquiring or indeed selling. I think it really came home to me this half year because I was really pleased and energized with the impact of our first ever group-wide charitable campaign, which is called Gift of Site and just how that has helped make the connection very real to all of our employees.

Just to remind you, as part of the campaign, we screened the eyesight of over 1/3 of our employees, over 2,500 employees, using Halma's ophthalmic technology. And that involved over 33 companies across the U.S.A., U.K., India, China, Brazil, so all over the world. And in doing so, we not only protected the health of our employees, but also collectively raised over $200,000 for our campaign partner, the Himalayan Cataract Project. And this has already transformed the lives of over 8,000 people by giving them back their sights through the removal of their cataracts. And cataract is the biggest source of treatable blindness in the developing world.

We're posting a film on our website shortly, which follows a team of Halma employees into Ghana following and looking at the work the charity does there, and I really encourage you to watch that. What I've got here is just a short taster film to give you an idea of what this campaign is all about.



Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [4]


So I'm sure, you agree, I mean, it's moving to see the impact you can have through campaigns like that, both on the people's lives, but also on our employees. And I think it's these kind of initiatives, they are a very simple way in which we can just make the importance of our purpose and things like the ESG efforts become very real for our employees, for our customers, for our partners, for our investors, rather than just another reporting requirement for the Board. And that's something we will look to continue. So looking ahead to 2020, we've already got a new team who are looking at projects we could do very much aligned with one of those U.S. sustainable development goals. And I'm very hopeful, we'll see a very similar impact of that new project, as we've seen with Gift of Sight this past year.

Okay. So let's get back to what we've heard today and what we've achieved in the first half of the year. So it's been -- as we said, a very good first half, with record revenue and profits and dividends, and we've continued to invest in our companies and in our 7 growth enablers, all aligned with our purpose and strategy, all of which will underpin our long-term success.

Looking in the shorter term, the order intake has been -- continued to be ahead of both revenue and also order intake for this comparable period last year. And we continue to expect to make further progress in the second half of the year and are on track to deliver another good full year performance.

That's the end of the presentation. With that, we now got some time for questions.

So as always, can you please wait for the mic and introduce yourself before asking the question. Thank you.


Questions and Answers


William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [1]


William Turner from Goldman Sachs. A couple of questions from me. The first one is on your guidance for the second half, given the comments that you make around improvements in revenue momentum for Process Safety and Medical. Is it fair to expect that you expect an acceleration in organic sales growth for the second half?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [2]


No. I think our overall view across all the diverse markets that we're in that we expect a continuation of similar rates of growth in the second half of the year, globally across the group. As always, the individual rate of growth across each sector will be somewhat dependent on the timing of some of the larger projects there. But yes, we're expecting sort of a continuing improvement. Clearly, we've got some benefit from not having the reorganization costs that we had in the first half of the year in medical. But otherwise, a lot of it will come down to -- yes, that project and product mix as to where we finish up at the end of the year.


William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [3]


Okay. Great. And in Environmental & Analysis, this is one of your more cyclical businesses, given some of the regulatory drivers and the cycles there. However, it has been strong for quite a while. Could we expect there to be a more cyclical downturn in maybe 2021? Or has this kind of -- is it diversified away enough to not have this impact anymore?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [4]


Yes, the -- I think there's 2 elements that give that sense of, as you say, historically, some volatility in that sector. What's been interesting is actually one of those has been less cyclical this time around. So again, we touched on this at the investor visit to HWM, one of our water businesses in October. Typically, we've seen -- because of the 5-year investment cycle by the U.K. utility, water utilities, we've seen a weaker period of investment by them in the fifth year of the cycle. What's been interesting is we're in the fifth year now, and they've maintained a good rate of investment in our leakage detection equipment. So that particular business has continued to do well.

The other area which gives us that sort of slight volatility is in more the photonics in spectroscopy side. And part of that is to do with the timing of new product introductions and also then some larger projects that are out there in the customer base. That side of it, I think, we will continue to be a component of the sector looking forward. So hopefully, slightly less volatility on the water side, but continuing the same on the other side of the sector.


William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [5]


Okay. Great. And then my final question on process safety. The growth has been a bit more inconsistent compared to some of the other divisions. And how do you think about investing in this business? Have you kind of allocated less capital to that, realizing that maybe the longer-term growth prospects are to stronger, say, medical or infrastructure safety? And then could you just talk a bit more about what drove the large margin expansion in this half for the business?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [6]


Yes. First of all, I think the 90% of the story in process safety over the last 3 to 5 years has been what's been going on in the oil and gas market because that's still around 30% to 40% of that sector. So for example, this past half year, we've seen weaker demand in U.S. onshore than we saw a comparable period a year ago. So to some extent, that's driving that revenue growth.

Having said that, we -- our businesses are doing a great job of diversifying into other process markets. And therefore, we've certainly not held back in terms of where we're in terms of the M&A activity, the search effort. But possibly deemphasizing oil and gas as a target market to go for. So there's still a lot of effort going into that.

In terms of the margin expansion in the first half of the year, as Marc said, actually, the reason for that is that in prior half year, in H1 last year, we had a reasonably significant reorganization charge in that period last year. And obviously, that's not repeated this year. And so you've seen the higher profit growth relative to revenue growth.


Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [7]


Mark Davies Jones at Stifel. Could you talk a little bit more about Medical? You talked about a merger of 2 ophthalmology companies there, has been a very profitable niche for you. What sits behind that? And more broadly, we're going through a management change of Medical. Are you happy with the mix of opcos you've got in there because they're quite diverse segments within the Medical segment? Are you happy that you're still in the right niches?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [8]


Yes. I think the former is just a simple case of believing that the technology combination, as you know, we've got a very decentralized model to start with, and we need to see a better opportunity for combining some of the technologies together into a single business, where they were in separate businesses before. So through that merger of those 2 businesses, we've obviously rationalized, as Marc said, rationalized the product development road map for that combined business, and that's had an impact, both in terms of inventory write-off, as well as some of the capitalized R&D previously. So you could argue both the strategic and tactical decision behind that, the kind of thing we do, we do regularly, probably every year, we're looking at some of those opportunities.

In terms of the leadership change, clearly, Laura comes to the group with a lot of medical experience. So certainly, she's already brought a lot of structure to thinking around how do we put the quite diverse range of medical business that we have into, let's say, a bit more of a structured approach. So clearly, we've got a group of ophthalmic businesses, for example, well, to what extent can they work together or indeed, to what extent we keep them working separately. The same goes in terms of our diagnostic businesses. We've got some flu technology businesses. We've got some what we call patient assessment businesses, so blood pressure monitoring. So actually, the Medical business we have today, probably group themselves into about 4 or 5 subsectors. I think what I'm going to do is make sure that we now structure our M&A efforts in and around those 5 subsegments. And just give that greater clarity to the M&A search team, but no major feed in that we have to either get out of something we're already in? Or indeed, initially that we have to sort of diversify into a new area immediately.


Richard Paul Paige, Numis Securities Limited, Research Division - Analyst [9]


Richard Paige at Numis. Just wanted to dive a bit more into the performance infrastructure safety in the U.S. because, obviously, up against a very tough comparative and grew significantly. Again, if you could just provide a bit more meat behind that and whether Firetrace was part of that activity level -- sorry, whether there's any project activity within that for Firetrace?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [10]


Will you do that, Marc, on that?


Marc A. Ronchetti, Halma plc - Group CFO & Executive Director [11]


Yes. I mean, as you say, I guess, firstly, closing off, very strong at the reported level at plus 40% and that was driven by rough communications in terms of the acquisition, going underneath that 13% organic growth. Yes, it was driven by fire detection. But also, as I've mentioned, really, the performance in the people and vehicle flow. So it wasn't any particular company, it wasn't any particular segment, it was just pleasing to see it across all of the subsectors.


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [12]


And in particular Firetrace, yes, I mean, it's just on its road to steady growth now. As you know, at the time of acquisition, that's a big project, but that was a big project. We're now moving on to more sort of blended rate of growth geographically and in terms of end markets.


Unidentified Analyst, [13]


Been a few transport issues this morning, so I'm asking a question on behalf of Robert Davis at Morgan Stanley. So he has 3 actually. So can you discuss the current dynamics within process safety, given the recent trend for project pushouts across large heavy industry projects globally? The second one is, do you see further scope for potential merging businesses within the portfolio? And thirdly, how is the acquisition pipeline developing, given the current valuation levels across the industrial space?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [14]


Just take those 3. I think the first one was around larger projects, I think, we touched on that a little bit with the answer around process safety in the oil and gas industry. But to be honest with you, I think that dynamic of larger projects being pushed out, has been around for the last sort of 3, 4 years. And I don't see any particular change on that. It's obviously a bit more uncertain, and we're seeing that reflected in some of the growth rates that we've got there.

Second point then, around are there more merger opportunities? Our decision around whether we merge businesses together are very much looking at it from the customer and the market point of view rather than let's merge it together because it's going to be easier to manage 1 company than 2. So if you look back over the last decade, on average, we've probably been acquiring 3 or 4 companies a year. On average, you've probably been selling one, and we've been merging 2 or 3 together. So it is the kind of thing that we need to do each year. And we're very active in managing the portfolio in that way. And I think that's been really helpful to our long-term growth. But no particular increase or decrease in that trend going forward.

And then finally, in terms of acquisition pipeline, I think, if you've seen there, we're still finding very good companies that fit very nicely alongside our existing activities. And the multiples, in general, are pretty much aligned with what we've paid before, maybe slightly higher. Again, if you go back 10 years ago, on average, probably we're paying 9 to 10x EBIT. Now we're probably paying near maybe 11x EBIT. But on the other hand, we've got a much clearer view about how we bring value to these businesses through those growth enablers. So it feels to me, still that we can be very confident that there's going to be enough opportunities on the M&A side of things, to keep that side of the growth strategy going for some time to come.


Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [15]


It's Andre from Crédit Suisse. I had a kind of broader question on portfolio management, but I think you've answered it now that -- can we kind of safely take away that there hasn't been a clear step-up in our focus on this. It's always been an area of focus and it continues to be rather than -- because I see you've got reorganization within a division, kind of 2 years in a row, there's more mergers now. So I don't know, can I try that one more time, is there...


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [16]


No, no. I think we -- one of the things that we did as a business 12 months ago was reinforced what we call Halma DNA and a key part of that is just recognizing the value of having, let's say, small to medium sized businesses that do have autonomy that do have local management teams, close to their customers, making the right decision. I still think that is a key driver of our growth and success. So we're very as -- in general, we're quite very cautious around merging businesses together. And obviously, very careful in terms of the kind of business we bring into the group because they've got to be able to thrive under that kind of organizational structure.


Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [17]


Right. And a couple of specifics on M&A. So in Asia and China, in particular, have you now got the talent in place to be able to execute deals there? And would you envisage an acquisition in Mainland China in the next 12 months?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [18]


Well, I think what I said was we're starting to add resources in the region. I would see that happening over probably a 2- or 3-year period to get to a place where, if you like, we've got the equivalent infrastructure there as we have maybe, say, in the U.S. and elsewhere in the world. But bear in mind, we have already made acquisitions in China. In the relatively recent past, we bought a business called Longer Pump relatively recently, which has continued to do well. So although we recognize the -- that every region, every territory has got unique challenges that we -- which is one of the reasons why you need to have a local resource in place. We've certainly already learned some of the lessons we'll need to learn to do more of that in the future. I think for me, the bigger message is that just the markets there in Safety, Health and the Environment are becoming more mature. And therefore, the kind of businesses that we would typically buy are getting also to a state of maturity, where there'd be a more natural fit for Halma and for the Halma Group.


Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [19]


Great. And the very last one on approach to bolt-on deals like the 4 that you mentioned earlier. Is it any different to buying a company out of as a stand-alone company, i.e., do you still buy them as a stand-alone asset to be one of the 45 or 50 operating companies? Or is there from the start or more of an approach of your bolt-on to an existing larger company, so you'll be inherently more integrated from the start?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [20]


Yes. Yes. So I mean, the -- first of all, they -- by definition, they tend to come to us through the operating company rather than through the central M&A team. So generally, that relationship has already been established between the target and the operating company. However, we still use the same valuation model, the same decision-making process at the center for a bolt-on as we would for a stand-alone acquisition, with the added nuance that we've got to make sure that the receiving company has the capability to actually generate value from that deal. And so the due diligence is not just on the target, but also is element of due diligence on the receiving company to make sure that they can actually execute on that deal because it's got some additional risks in some respects to just bring in a stand-alone business into the group.


Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [21]


It's Andy Wilson, JPMorgan. Actually, just a quick follow-up from Andre's question there. It feels like there's been a shift in kind of the way that M&A is perhaps been getting more responsibility to people at the local level. And this isn't intended to be a, it's just another change in the way you're thinking about the model or look at different things. Just interested in terms of has that brought different perspective in the type of things that you're actually looking for? Because I think historically, it's turning to be good businesses which come in and done very well straight away? And whether actually, because maybe people at the local level are getting a bit more autonomy that actually you're finding maybe even more exciting opportunities where, okay, that isn't perfect. Yes, it's really early stages, but we can actually do more of that. I was interested if there's been any tilt in kind of the kind of things that come in on your desk?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [22]


Well, I'll come back to what I said before. I think there's a large degree of truth of what you said. However, if you go back, I mean, 15 years -- I'm doing the job 15 years now as CEO, 15 years ago, we had the same number of companies in the group then as we have today. So by definition, the size of those companies is greater. The big risk with bolt-on acquisitions are actually the risk on knocking the receiving company off track as it puts that new opportunity into its organization and having a greater critical mass and the depth of talent in those companies means that they can do more of it. So I'm more confident, if you like, in terms of the execution risk on that. They themselves have also then because they're large, we've got more, I suppose, feelers out there in terms of opportunity.

And whilst we have always done a fair amount of those smaller deals, I think there's certainly a more proactive mindset in the minds of the company leaders as a way in which they can grow their business than was there, probably 10 or 15 years ago. And from my point of view, I think that's good news because, to your point, it means probably that we can find those maybe slightly earlier stage businesses with some exciting new technology, which an individual company can do something that will be very difficult for us at the center to do were that business to be brought into the group as a stand-alone entity.


Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [23]


Yes. I guess, kind of on that, it feels to me that if there are some of these early-stage in technology and digital obviously has become a big part of the story as you kind of allude to in the presentation, it just feels that given as the groups got bigger, you can probably take a chance on some of these smaller ones a bit more easily. And it seems to be encouraging that kind of uptake?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [24]


Yes. I think almost the evidence is there, is it in the first half of the year because they are earlier stage businesses with newer technology. But with the receiving company that's got the channel to market, the expertise to do something with that. And as I say, we use exactly the same criteria when we're assessing these opportunities. But yes, I'd like to think that they will become a bigger part of the growth story in the future. Because ultimately, they'll drive the organic growth if the subsidiary is stronger.


Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [25]


And kind of the other side of the equation, we sort of talked about multiples in the market. Does where prices are in the market, encourage you to think about divestments more proactively?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [26]


No. I think, first of all, every -- at least every year, we're doing a full sort of drains up view of the portfolio and a kind of dispassionate view around what should be in and what should we be maybe thinking about getting out of. As I said earlier on, the same with mergers, the decision is always a market-led decision. Do we still see the growth and return opportunities over the longer-term with that business? And to some extent, we're not trying to time the cycle as far as multiples or anything else is concerned. It's a very, very pragmatic view, do we see the growth in returns over the longer term. And if the answer to that is no, well, can we innovate our way out of that? Is there an issue there with leadership that we need to change? And if those are both no, then that's when we start thinking about our disposal process.


Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [27]


And maybe just one quick one. Just on the oil and gas side you mentioned a couple of times, part of, obviously, U.S. onshore. I don't think that's any surprise that's been weaker. Is there any part of oil and gas which are -- you're seeing actually good development, just thinking kind of whether it's pipelines, refineries, I know you have sort of bits and pieces kind of through the oil and gas supply chain. Just interested if there's any better way you can kind of, I guess, draw the opposite conclusion?


Andrew J. Williams, Halma plc - Group CEO, Member of Executive Board & Executive Director [28]


Well, it's just -- I mean, I suppose it's just steadily -- steady market conditions really because we're set -- I mean, bear in mind, we're selling safety equipment. So if a plant is operating, then they've got to comply with regulation, and we're selling our products. So what -- it's just you don't see those superior rates of growth, I think, is the way I describe it. There is still growth there, but it's a much more sort of steady-state position to start with.

Any other questions? Okay. Thanks, everyone. Thank you very much.