Infrastructure Safety revenue increased by 18% to £197.6m (2017/18: £167.9m). This included 13% organic constant currency growth, a 1% negative effect from currency translation and 6% growth from acquisitions completed in the prior year. There was growth in all major market segments. Strong growth in our Fire businesses contributed to high rates of organic constant currency growth in the USA, the UK and Other regions. Although Asia Pacific saw slower growth overall, there were good increases in China and Australasia. Profit2 grew by 17% to £41.7m (2017/18: £35.8m) including 12% organic constant currency growth, a 1% negative effect from currency translation and 6% growth from acquisitions completed in the prior year. Return on Sales was a healthy 21.1% (2017/18: 21.3%). R&D expenditure increased by 31% to £12.4m (2017/18: £9.4m). The sector is expected to make continued progress in the second half, in line with historical trends, with solid organic growth and recent acquisitions contributing to a strong full year performance. In the first half, we acquired LAN Control Systems Limited, to strengthen our cloud-based system capabilities and to support tighter integration between fire, security and other building systems. After the period end, we announced two further acquisitions: in October, we announced the acquisition of Limotec bvba, a leading fire control panel designer and fire system seller in the Belgian market, to strengthen our continental European presence; and in November, we purchased Navtech Radar Limited, a UK-based designer and manufacturer of innovative radar surveillance solutions. Navtech builds on our existing capabilities in sensing vehicles, people and assets for safety and control applications, and provides new opportunities in the highway and critical infrastructure safety markets. Process Safety revenue increased by 10% to £97.9m (2017/18: £88.8m). There was organic constant currency growth of 12% and a 2% negative effect from currency translation. The Safety Interlocks and Gas Sensors segments grew most strongly, with the former benefiting from a large contract for logistics safety from a major retailer in the USA. Pressure Relief and Pipeline Management grew at a slower rate. All major regions delivered organic constant currency growth, with particularly high growth in the USA. The UK, Asia Pacific and Other regions saw good growth, while there was more modest growth in Mainland Europe. Profit2 increased by 9% to £22.2m (2017/18: £20.2m) including 11% organic constant currency growth and a 2% negative effect from currency translation. Profit in the half year included some reorganisation costs in our Safety Interlocks and Pipeline Management businesses in order to improve performance in the longer-term. These will total between £1.5m - £2.0m for the full year with £0.7m in the first half. Return on Sales was consistent with the first half of last year at 22.6% (2017/18: 22.8%). R&D spend was up 11% to £3.4m (2017/18: £3.1m). With the planned reorganisation costs, the sector is expected to have a lower profit growth rate in the second half, albeit with solid organic revenue growth, to deliver a good full year performance. Medical revenue was up by 10% to £147.2m (2017/18: £133.3m). There was 14% organic constant currency growth, a 2% benefit from acquisitions in the last year and negative effects of 2% and 3% respectively from disposals and currency translation. The Diagnostics device business progressed very well and there was also good progress in the Ophthalmology, Sensor Technology and Patient Assessment segments, with the latter benefiting from last year's acquisitions. There was organic constant currency revenue growth in all major regions, led by a strong increase in the USA, which represents over half of the sector's revenue. There was also healthy revenue growth in Mainland Europe and good progress in Asia Pacific and Other regions. Profit2 was £35.0m (2017/18: £28.7m), a 22% increase over a relatively weak performance in the first half of last year. This comprised a 22% organic constant currency increase, a 2% uplift from last year's acquisitions, a 1% contribution from disposals this year, and a 3% negative impact from currency translation. Return on Sales increased to 23.8%, up from 21.6% in 2017/18. R&D spend was £5.5m (2017/18: £5.9m), although in-line with the comparative period after excluding disposals. In the first half, we made two small acquisitions for our Sensor Technology business, CenTrak, expanding its technology and distribution capabilities in the USA and Mainland Europe. We also sold one of our Diagnostic businesses, Accudynamics. We expect more normal rates of organic growth from our Medical sector in the second half of the year, against a tougher second half comparative, to deliver a strong full year performance. Environmental & Analysis revenue rose by 23% to £143.0m (2017/18: £116.5m) including 19% organic constant currency growth, a 6% benefit from acquisitions and a 2% negative effect from currency translation. There was growth in all main business segments with a particularly strong performance in Environmental Monitoring. Organic constant currency revenue from the USA, UK and Mainland Europe increased significantly, with the USA benefitting from large projects in the Photonics businesses. Asia Pacific and Other regions grew more steadily, with the former reflecting a tough comparative against a strong performance in the first half of last year. Profit2 improved by an impressive 33% to £29.0m (2017/18: £21.8m). Organic constant currency profit growth was 21% and there was a 15% benefit from the Mini-Cam acquisition completed last year. Currency translation had a 3% negative effect. Return on Sales saw a further significant improvement from 18.7% to 20.3%, which continues the positive trend of margin improvement over recent years. There was continued increased strategic investment, with R&D spend rising by 9% to £9.6m, representing 6.8% of revenue (2017/18: £8.9m). After an exceptional first half, the sector is expected to deliver more typical rates of growth in the second half of the year and achieve a strong full year performance. Five acquisitions and one disposal completed this financial year Our sector M&A teams have been strengthened significantly over the past year and this has contributed to us developing a more robust acquisition pipeline. Three acquisitions were completed during the period, with a further two early in the second half of the year. The three acquisitions in the first half were relatively small technologically-driven bolt-on acquisitions, for a total consideration of £3m. These included the Infrastructure Safety sector's acquisition of LAN Control Systems Limited and, in our Medical division, the purchase of the trade and assets of Awarepoint and Elpas to expand CenTrak's technology and market reach. In October 2018, we acquired Limotec bvba for a cash consideration of €9.3m (£8.2m), on a cash and debt free basis. Limotec's revenue in its last financial year to the end of December 2017 was €6.7m (£5.9m). In November 2018, we acquired Navtech Radar Limited for an initial cash consideration of £21m on a cash and debt free basis. Further earn-out considerations, capped at a total of £18m in cash, are payable dependent on profit growth in each of the three financial years to the end of March 2021. Navtech's revenue in the year to 31 March 2018 was £6.2m. There was one disposal in the period. In June 2018, our Medical sector sold the Accudynamics Fluid Technology business for US$5.4m, resulting in a small loss on disposal of US$1.2m. The original US$31.8m consideration on acquisition in December 2010 primarily related to goodwill and customer intangibles, which have now been successfully transferred to strengthen the product offering and market positions of other Halma Fluid Technology businesses. These transactions demonstrate Halma's ability to find attractive, high quality businesses both in and adjacent to our existing sectors as well as to maintain a portfolio of growing, high return companies through disposals. Good progress on the Halma 4.0 growth strategy Halma's commitment to making a positive difference to people's lives, is encompassed in our purpose of 'Growing a safer, cleaner and healthier future for everyone, every day'. This central purpose has helped us to build a group of businesses with common values and strong competitive positions in market niches with long-term growth drivers. Over many years, these fundamentals have been strengthened further by a relentless determination to increase investment in our strategic Growth Enablers, both centrally and within each sector. These include M&A, Innovation Network, Talent & Culture, Finance & Risk and International Expansion, together with the two recent additions of Strategic Communications and Digital Growth Engines. As well as helping us to continue to grow our Core business, these Growth Enablers support exploration of new ways to grow, for example in growth opportunities which require a Convergence of technologies and capabilities between two or more businesses and/or new business models. In addition, we are building a stronger network of internal and external partnerships to provide us with a greater insight into new digital growth strategies and technologies at the Edge of our current business horizons. Recent examples of this include our Medical sector company, Bio-Chem Fluidics' development of condition monitoring and data collection capabilities to improve the reliability of their miniature valves and pumps used in analytical instruments. In the Environmental & Analysis sector, Ocean Optics has created a spin-off business, called WAVE, which has developed a cloud-based lighting solution to improve wellbeing and commercial outcomes in public infrastructure. As we continuously evolve our growth strategy, we are increasingly building a network of internal and external partnerships to leverage our access to diverse skills and assets to create even more value for the Group. Currency impacts We report our results in Sterling with 46% of Group revenue denominated in US Dollars and 12% in Euros during the period. Average exchange rates are used to translate results in the Income Statement. Sterling strengthened against the US Dollar during the first half of 2018/19, but was broadly unchanged against the Euro. This resulted in a 2% negative currency translation impact on Group revenue and profit in the first half of 2018/19 relative to 2017/18. In the second half of 2018/19, if exchange rates remain at current forecast levels, we expect the currency effect seen in the first half to reverse, resulting in a broadly neutral effect on the year as a whole. Pension deficit On an IAS19 basis the deficit on the Group's defined benefit plans at the half year end reduced to £20.7m (31 March 2018: £53.9m) before the related deferred tax asset. The values of the plans' liabilities reduced due to an increase in the discount rate used to value those liabilities, while further employer contributions also reduced the plans' deficit. The plans' actuarial valuation reviews, rather than the accounting basis, determine any cash payments by Halma to eliminate the deficit. The triennial actuarial valuation of the main Halma Group Pension Plan is now complete and a cash contribution of £8.6m has been agreed with the trustees for the 2018/19 financial year (2017/18: £8.2m), which will increase by 7% per annum. We expect the Apollo scheme triennial valuation to be finalised during the second half of the year, and for overall contributions across both schemes in the 2018/19 financial year to be consistent with our previous guidance of £12m. On 26 October 2018, the High Court reached a judgment in relation to Lloyds Banking Group's defined benefit pension schemes which concluded that the schemes should equalise pension benefits for men and women as regards guaranteed minimum pension benefits. The issues arising from the judgment will apply to most other UK defined benefit pension schemes. We are working with the trustees of our pension schemes, and our actuarial and legal advisers, to understand the extent to which the judgment will crystallise additional liabilities for Halma's pension schemes. Current industry estimates are for incremental liabilities of affected pension schemes to be in the range of zero to three per cent of total liabilities, and we currently expect any liability for Halma's schemes to be in the lower end of that range. Cash flow and funding Cash conversion (adjusted operating cash flow as a percentage of adjusted operating profit - see note 9) was 86% (2017/18: 84%), ahead of our cash conversion target of 85%. The increase in working capital of £10.6m was lower than the first half of the prior year, despite the strong growth in the business. As well as greater organic investment, dividend and tax payments also increased this half year. Capital expenditure of £14.9m (2017/18: £10.1m) was 47% higher than the comparative period due to increased investment in facility and site expansion, manufacturing capabilities, and IT and system upgrades. Net debt at the end of the period was £194.6m (31 March 2018: £220.3m). Gearing (the ratio of net debt to EBITDA) at half year end was 0.7 times (31 March 2018: 0.9 times), which is within our typical operating range of up to 2 times gearing. In October 2018 we extended the £550m Revolving Credit Facility, put in place in November 2016, by a further year to 2023. The combination of good cash generation, a healthy balance sheet and committed external financial resources provides us with the capacity we need to invest in organic growth and acquisitions to meet our growth objectives as well as to sustain our progressive dividend policy. Principal risks and uncertainties A number of potential risks and uncertainties exist which could have a material impact on the Group's performance over the second half of the financial year and could cause actual results to differ materially from expected and historical results. The Group has processes in place for identifying, evaluating and managing key risks. These risks, together with a description of our approach to mitigating them, are set out on pages 52 to 57 of the Annual Report and Accounts 2018, which is available on the Group's website at www.halma.com. See note 15 to the Condensed Financial Statements for further details. The UK referendum decision in June 2016 and the subsequent triggering of Article 50 in March 2017 mean that the UK is now scheduled to leave the European Union on 29 March 2019 ('Brexit'). This decision has created a new dimension to the uncertainties surrounding global economic growth and trading conditions between the UK and the EU during the transition process. Halma has an executive working group to assess and monitor the potential impact on the Group of Brexit, to communicate updates and support our businesses in preparing for the range of possible outcomes. In 2017/18, approximately 9% of Group revenue came from direct sales between the UK and the EU. To date, the following Brexit risks have been identified as having an actual and/or potential impact on our business: - Economic conditions: increased overall uncertainty including the specific impacts on growth, inflation, interest and currency rates - Defined benefit pension liability: movements in bond yields affecting discount rates which may increase the liability - Laws and regulations: potential changes to UK and EU-based law and regulation including product approvals, patents and import/export tariffs - Talent: mobility of the workforce and availability of talent Depending on the nature of Brexit, our business could also experience shorter-term disruption around the time of Brexit in its supply chain, including disruption associated with customer buying patterns, customs and border clearances and uncertainty over UK and EU product approvals. Halma also continues to monitor closely, through working groups in the USA and China, the effects of changes to US trade policy, including the imposition of tariffs on imported goods, and related trade measures taken by China and other countries. In 2017/18, approximately 5% of Group revenue came from direct sales between the USA and China. The following key risks have been identified as having an actual and/or potential impact on our business: - Volatility of order flow from customers - Increased costs, which could in turn make the pricing of our products uncompetitive, resulting in a loss of market share - Effects from changes in economic activity in the countries concerned, and more globally While Brexit and US trade policy changes could adversely affect our business, we consider that our decentralised model, with businesses in diverse markets and locations, will enable each Halma company to adapt quickly to changing trading conditions. This agility, together with the regulation-driven demand for many of our products and services, will help us to mitigate any adverse impact and also take advantage of any opportunities presented. The Directors do not consider that the principal risks and uncertainties have changed since the publication of the Annual Report and Accounts 2018 and confirm that they remain relevant for the second half of the financial year. As part of their ongoing assessment of risk throughout the period, the Directors have considered the above risks in the context of the Group's delivery of its financial objectives. Going concern After conducting a review of the Group's financial resources, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Condensed Interim Financial Statements. Outlook Halma made excellent progress in the first half, delivering record revenue, profit and dividends for shareholders, while continuing to invest in our strategic growth enablers for the longer term. Although the pace of technological and geopolitical changes is impacting economies and industries worldwide, we continue to benefit from the agility and resilience of our business model, as well as our geographic diversity, financial strength and focus on global niche markets. Following a very strong first half, order intake continues to be ahead of both revenue and order intake for the comparable period last year. We remain on track to deliver more typical rates of constant currency organic growth in the second half, resulting in a strong full year performance. |