halma plc full year results 2019/20/media/files/h/halma/corp/... · page 2 summary of analysts’...

Halma plc, Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE, UK. Registered in England number 40932. Tel: +44 (0)1494 721111 Fax: +44(0)1494 728032 Email: [email protected] Web: www.halma.com

Halma plc Full Year Results 2019/20

Summary of analysts’ presentation by: Andrew Williams, Group Chief Executive Marc Ronchetti, Chief Financial Officer 14 July 2020

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Summary of analysts’ presentation 14 July 2020


Andrew Williams, Halma’s Group Chief Executive, introduced the presentation of the full year results. Good morning and welcome to our full year results presentation. Halma has delivered another year of record results, but clearly it hasn’t been ‘business as usual’ and so today we hope to give you:

o an insight into what we have achieved over the past year and how we have responded to the global COVID19 crisis;

o a greater understanding of how we see the new financial year panning out; and

o a shared confidence in our ability to sustain record growth and returns for all stakeholders in the long term.

Let me start by setting some context for the long-term sustainable value that Halma creates for all our stakeholders. As a society, we are facing profound and global challenges, not only in the immediate term from COVID-19, but also from longer-term trends such as climate change, and the growing, ageing and urbanising populations.

These challenges further reinforce the importance of many of Halma’s strengths:

o Halma’s purpose, ‘Growing a safer cleaner healthier future for everyone, every day’;

o our growth strategy to grow and acquire businesses in global niche safety, health and environmental markets with long-term growth-drivers, giving us opportunities to grow sustainably for many years into the future;

o our business model, including our organizational design and culture which gives us huge agility through local autonomy with accountability;

o our recent strategic investment focus – e.g. Diversity and Inclusion in our high calibre teams; digital & technology.

These are underpinned by our robust financial model, and high levels of cash generation which allows is to invest in growth while maintaining modest leverage.

These charts illustrate how these elements have sustained value creation over a long period.

Record results and sustainable value creation




In each of the past 17 years, we have delivered record revenue and profitability.

Over this period, revenue has grown by more than £1 billion to £1.3 billion, a 10% compound annual growth rate, while profit has increased more than five-fold to £267m, an 11% CAGR. This has been driven by a disciplined choice of valuable product niches in markets with long term drivers and where there is a strong element non-discretionary spend e.g. due to regulation. And this is only part of the story because our growth is also boosted by continuous increases in strategic investment, for example:

o R&D spend has grown from £10m to over £70m in the period, to over 5% of sales;

o we have increased investment in our physical assets…;

o … as well as in our Growth Enablers which support our companies, especially in leadership talent.

We have a disciplined and highly productive allocation of capital and talent which has maintained strong growth and returns and is reflected in our Post-Tax Return on Total Invested Capital or ROTIC, which has been consistently and substantially above our Weighted Average Cost of Capital (WACC) for each of these 17 years. This year our ROTIC was 15.3%, double our WACC.

So, bringing things back to the here and now, these elements are now more crucial than ever, supporting further progress in last full year, our ability to respond rapidly to the emergence of COVID-19 in the final quarter of the year to deliver a resilient performance in the first quarter of the current financial year, and positioning us to deliver a resilient performance for the full year – expected to be in the range of just 5%-10% below last year. Importantly, we will achieve this in a way which ensures we continue to balance the value created for all stakeholders including employees, customers and suppliers, investors and communities and society in general – and to ensure that we can sustain that value creation in the future too. So, turning now to the headlines of our latest record full year performance.

It was another year of widespread organic growth, plus a particularly strong contribution from M&A.




Revenue grew 10.5% to over £1.3bn, while profit increased by 8.7% to £267m and Return on Sales remained strong at 19.9%, even after increased investment and provisions for COVID-related customer bad debts of £5m - Marc will give you more detail on this shortly. Turning to that increased strategic investment across our Growth Enablers, which is led by our operating companies with selected central investment to support their growth:

o in innovation, R&D spend increased by 14%, to £72m, up as a percentage of revenue to 5.4%, maintaining a high level of investment in new products and solutions;

o we continued to support our growth

through further facility expansions and fixed asset additions, with capex growing 9% to £34m, well ahead of depreciation excluding leases;

and it was a record year for

acquisitions, with Halma acquiring 10 companies, across all four sectors, bringing new innovative technologies, digital capabilities, and further expanding our geographical reach.

Operationally, we delivered a very strong cash performance, with cash conversion of 97% of adjusted profit, against our KPI of 85%, to support investment and returns to shareholders. And we are recommending an increase in the total dividend for the year of +5%. This reflects our performance in 2020, a resilient start to the new financial year, continued confidence in our future prospects and an equitable approach to the Group’s stakeholders given the effects of COVID-19.

If the final dividend is approved, Halma will have delivered 41 years of dividend growth of 5% or more, maintaining our long-term track record and policy. Finally, we have maintained a robust balance sheet and strong liquidity position, with net debt at the period end being £375m, including IFRS16 leases, and net debt to EBITDA at 1.1 times. Overall you can see that it has been a successful year providing us with an excellent platform to navigate through the current health and economic crisis successfully. However, it is worth reiterating that these results would not be achieved without the tremendous commitment and determination of the high calibre teams in our companies, sectors and Halma centrally. I would like to say how proud I am of what they have achieved so far and how they have positioned Halma to continue to deliver strong value for stakeholders in the future.

More from me on how we’ve responded to COVID-19 and a strategic update later - now Marc.

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Marc Ronchetti, Chief Financial Officer, reviewed the full year financial performance.

We’ve delivered a good set of results and executed well against our growth strategy and our key performance indicators. For me this reinforces the benefits of our clear purpose and strong culture, our agile and responsive business model, and the long-term growth drivers in our end markets. This performance was underpinned by our continued focus on capital allocation, in ensuring continued organic investment to support future growth, in managing our diverse portfolio of companies through acquisitions and disposals, and in maintaining a robust financial position, with modest leverage and substantial liquidity. Let’s take a more detailed look at the drivers behind this performance starting with the Group revenue growth.

As you can see there was good organic constant currency revenue growth of 4.8%, which reflected growth in three of our four sectors. While we saw some impact from COVID-19 in the fourth quarter, this was not material for the Group overall, given that the downside impact from China and a site closure in March was largely offset by a pull-forward of orders ahead of the wider global lockdown. Acquisitions contributed a healthy 4.8% to revenue growth, with a record ten acquisitions made in the year. There was a small negative of 0.7% from disposals, principally from the sale of Accudynamics that we completed in the second half of last year. Total constant currency growth was therefore +8.9%. There was a positive effect of 1.6% from currency translation, mainly in the first half, as Sterling weakened This completes the bridge to our reported growth of 10.5% reflecting the value inherent in the diversity of our portfolio and the long-term growth drivers in our markets in varied economic conditions. Looking now at revenue by destination




The chart on the left shows the reported revenue split by destination in addition to the reported growth by region, 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 organic constant currency basis. This included double digit reported growth in the USA, Asia Pacific and the UK. Starting with the USA which remains our largest sales destination at 38% of revenue. It is positive to see that the region continues to grow strongly, with 15% reported growth. This was driven by good performances in all sectors with strong growth in Environmental & Analysis and Infrastructure Safety, which benefitted from a positive contribution from the Rath acquisition. There were also good performances in Medical and Process Safety, both of which benefited from acquisitions including NovaBone, Maxtec and NeoMedix in Medical, and Sensit in Process Safety. Moving to the UK, which grew well at 8% organic constant currency, driven by a strong performance in Environmental & Analysis, which delivered very strong organic constant currency growth of 26%.

Mainland Europe grew 4% with a solid performance in Infrastructure Safety, which included a good contribution from Navtech and Limotec which were acquired in 2019. Process Safety was weaker given the non-recurrence of some larger contracts, and we saw mixed performances in the other sectors. Asia Pacific growth was 16% on a reported basis, benefitting from the Ampac acquisition which closed in July 2019. Growth was 4% on an organic constant currency basis, reflecting good performances in Process Safety and Medical. We saw a 4% decline in China driven by the impact of COVID-19 in the fourth quarter. Completing the geographic split… In the smaller rest of the world segment, reported revenue was marginally ahead. There was a decline in the Africa, Near and Middle East territory as a result of a planned reduction in lower margin business, but this was offset by strong growth in other territories, which was broadly spread across all four sectors.

We delivered solid profit growth with return on sales at 19.9%, making this the 35th consecutive year of return on sales of over 16%.




Organic constant currency growth was 2.2%, and included £5.0m of sector provisions for increased customer bad debt risk given Covid 19. Without these, growth would have been 4.2%. There was a strong contribution from acquisitions, as with revenue, reflecting good margins in businesses we have acquired in the last year, while disposals were a small negative, mainly from the Accudynamics sale. As with revenue, there was a positive effect from currency translation for the period. Which completes the bridge to the headline profit growth of 8.7%. To put some colour on the Group performance…I will now take you through more detail at the sector level – turning first to Infrastructure Safety.

Which made good progress, with revenue up 14% and profit up 21%. This included an impressive 10% revenue and 14% profit contribution from acquisitions, including Ampac and FireMate in the year, and, in the prior year Rath, Navtech, and Limotec. Organic constant currency revenue growth was more modest at 3%. This reflected a solid underlying performance offset by planned reductions in lower margin business in the second half.

The three largest subsectors, Fire Detection, People and Vehicle Flow and Elevator Safety, delivered double digit revenue and profit growth, benefiting from recent acquisitions, but also from strong organic growth in People and Vehicle Flow and good growth in Fire Detection. Organic constant currency profit growth was stronger at 7%, despite a £2.1m increase in sector provisions for potential customer bad debt. The increase in ROS driven by increased gross margins as a result of past investment in automation and the planned revenue reduction. Looking at the revenue by destination. There was a good performance in all major regions with strong headline growth in the USA and Asia Pacific, benefitting from current and prior year acquisitions. The UK and Mainland Europe also saw good rates of growth, with the Fire Detection and People and Vehicle Flow businesses being the key contributors to this improvement. There was 14% growth in R&D investment representing 6.1% of revenue. Turning now to Process Safety…




Where revenue grew by 1% to £200m, which included a positive effect of 1.9% from the Sensit acquisition and a 1.0% benefit from currency. There was good progress in some markets such as Industrial Access Control and Gas Detection, but these were more than offset by challenging US onshore oil and gas market conditions, in addition to customer project delays and a site closure in the fourth quarter due to COVID-19. As a result, despite proactive overhead management, profit declined -3% and -6% OCCY. The reduction in Return on Sales reflected a small reduction in gross margin given the mix shift away from the higher margin oil and gas sector, as well as an increase in sector bad debt provisions of £0.9m, and in R&D spend to support future growth. There was a positive effect on profit of 1.5% from acquisitions and 1.1% from currency. Looking at revenue by destination… There was good growth in the USA, despite the weakness in the US onshore oil and gas market, driven by a good contribution from the Sensit acquisition and continued benefits from a large US logistics contract.

UK and Mainland Europe were weaker driven by the timing of large customer contracts and the phasing of a 5 year utility contract within Gas detection. There was strong growth in Asia Pacific driven by Gas Detection’s investment in sales leadership and resource. We saw a 7% increase in R&D spend, with continued investment in innovation and marketing activity to deliver more consistent growth in the future.

Moving onto Environmental & Analysis …

Which I am pleased to report continues to perform strongly, having now delivered double digit reported and organic constant currency revenue and profit growth for three consecutive years. Revenue grew 16%, and by 14% on an organic constant currency basis with strong growth in Environmental Monitoring, driven by new product development and regulatory requirements in the UK water market, and in Optical Analysis driven by delivery of some larger photonics projects in the second half of the year. Reported profit grew 15% to £69m, with organic constant currency growth an impressive 13%. There was a small benefit from acquisitions of +0.4% revenue and +0.1%




profit, and a currency benefit of 2.1% to revenue and 2.4% to profit Turning to sales by destination. It was positive to see continued strong growth in the two largest regions, the USA and the UK, led by Optical Analysis and Environmental Monitoring respectively. In other smaller regions, revenue in the relatively small Mainland Europe region was broadly stable, while Asia Pacific revenue saw a small decline, principally as a result of COVID-19 impacts in the second half. This was more than offset by strong growth in the Africa, Near & Middle East and Other countries, led by the Water Analysis and Treatment subsector. Return on Sales was stable year-on-year, with a reduction in gross margin, mainly driven by the mix of business, balanced by good control of overheads which also included a £0.9m increase in sector provisions for customer bad debt. We continue to invest in the opportunities in the sector, and R&D increased by 9% to £19.3m, representing 6.0% of revenue.

The Medical sector delivered solid revenue growth of 7%. This included a small negative impact in the fourth quarter from COVID -19, with

the high demand for products in respiratory and vital signs monitoring being offset by order delays and deferrals of procedures in other sub-sectors. Reported revenue growth included organic growth of 3% against a strong organic comparative of +10% and the benefit from the 5 acquisitions made in the year, with currency also contributing 2.6% to revenue growth. Profit increased by 1%, comprising a 3% organic constant currency decline, a 2.0% contribution from acquisitions (1.4% net of the Accudynamics disposal) and a 2.7% benefit from currency translation. Profit also included a first half charge of £2.5m relating to the merger of two of our ophthalmology companies that I flagged in those results, and a £1.1m increase in sector bad debt provisions in the second half. Excluding these, organic profit growth would have been broadly in line with revenue growth. Looking at the revenue by destination…. The USA, the sector’s largest geographical end market, delivered good revenue growth, which included organic constant currency growth of 4% against a strong comparative of 14% last year, and a good contribution from recent acquisitions. There was good growth in the Asia Pacific region driven by strong OEM sales in Life Sciences with their launch of new IVD instruments. There was modest growth in Mainland Europe, with good progress in Life Sciences and the sensor technology market, but underperformance of one of




the ophthalmology companies which we are addressing through the merger I referred to, and a mixed performance in Health Assessment. Return on Sales remained strong at 24.3%, underpinned by a slightly higher gross margin and good control of underlying overhead costs, in addition to an increase of 28% in R&D investment to £16.5m to support future growth.

Looking now at cash flow and focussing on the larger movements. Firstly, IFRS 16. This was the first full year in which IFRS16 applied which increased starting net debt by £50m and introduced for the first time lease additions, a non-cash movement, the majority of which relates to renewal or extension of leases and the Ampac acquisition. Turning now to the larger cash impacts on net debt. Headline cash conversion was excellent at 97%, significantly ahead of our KPI target of 85%, this reflected a strong underlying performance of 90%, driven by good working capital control, as well as the benefits of the implementation of IFRS 16 (approximately 5%) and from the additional provisions made in the year (approximately 2%) Capex, cash tax and cash pension costs were broadly in line with our guidance,

and we have included more detail on these areas in the appendix slides, including guidance for the 2021 financial year. As stated, it was a record year for acquisitions, with acquisition spend of £238m. We paid £61m in dividends, continuing our policy of delivering progressive and sustainable returns to shareholders We therefore, ended the year with IFRS 16 adjusted year end net debt, of £375m…….

This represents a net debt to EBITDA ratio of approximately 1.00 times excluding the impact of IFRS 16, well within our typical operating range of up to 2 times gearing. With continued good cash generation in the first quarter, our net debt has reduced to circa £320m. We therefore continue to have a robust financial position, strong cash generation and substantial available liquidity of circa £500m, and over £300m of capacity within an operating range of up to 2x gearing.




To conclude … Looking at our performance against our Financial KPI’s This was a pleasing performance with 7 out of 8 metrics meeting and exceeding our target, and while organic profit growth was below our target, this principally reflected the sector provisions taken for customer bad debts as a result of COVID-19. To sum up, a good performance over the year, with record revenue, profit and acquisition activity with continued high returns and cash generation. Andrew Williams, Group Chief Executive, then gave an update on strategy.

Thank you, Marc. Turning first to our response to COVID-19 and then an update on Strategic progress.

Throughout the pandemic, our response has been led by our purpose, and our aim has been to ensure the continued delivery of critical safety, health and environmental products. It is indicative of Halma’s culture that this has gone well beyond our core products, with many individual employees across the group taking the initiative to support the fight against COVID-19 by re-purposing existing resources and capabilities to produce PPE and other critical healthcare supplies. I am very proud of what they have achieved and would like to thank them for their efforts as they have led the way in Living Our Purpose. The current crisis has many unique characteristics compared to previous downturns, which Halma has been well positioned to address. Our agility and diversity have been major assets. Over many years, we have built an organisation and culture which has been created for fast, decentralised decision-making by those closest to our stakeholders, accompanied with clear lines of accountability. This has been vital. As I said earlier from an early stage it was clear that our ability to respond rapidly needed to be tempered with the understanding that major decisions had to be taken with a holistic view,




balancing the positive and negative impacts across all of Halma’s key internal and external stakeholders. So, what did this mean in practice? First, we rapidly created virtual support groups for our companies, sometimes functional but often regional, enabling each of them to address challenges and set a plan suited to their own market and local circumstances.

o over 30 of our 44 companies received permission to operate during the lockdown, because of their delivery of critical ‘non-discretionary’ safety, health and environmental solutions.

o only three of our 54 principal facilities had an extended shutdown

o all are currently operational.

Supported by advice from central and regional groups, our organisational structure of strong, local and empowered management teams, mean that we benefited from short lines of communication and feedback with employees, and collaborative sharing of best practices, while still ensuring measures taken by each company were suited to their particular situation – the experience of the pandemic and the needs in China, Italy, and the UK, for example, were all very different.

Throughout the pandemic, it has been our priority to ensure that our employees have a safe working environment, and we have implemented a wide range of measures, including enhanced hygiene protocols, home working and staggered shifts, and safe social distancing measures. Secondly, we also acted quickly to reduce costs and protect balance sheet and decided not to access the UK

Government CCFF scheme, so that in Q1 we achieved a reduction in the run-rate of variable costs of more than £20m compared to the fourth quarter of last year. We also implemented companywide salary reductions and a freeze on hiring and promotions, mandated close management of working capital, while maintaining productive relationships with customers and suppliers, and limited investment to essential projects and R&D only – which included not completing any acquisitions in Q1. Given the essential nature of many of our products and services, only a small percentage of our companies’ workforces has been furloughed and we decided to fund this without any recourse to UK Government schemes. However, some companies have seen significant declines in demand, and this may result in a small number of redundancies until demand recovers. So, we have committed to providing additional financial support to those companies and employees affected by furlough and redundancy, at an estimated cost of £5m in the first half of this year. Finally, it became increasingly clear that our strategy and investment priorities coming into the crisis have not only served us well during it but are even more relevant to our future success and so we will be doubling-down and accelerating these investments in the future.




Our strategic investment framework is reflected in our 7 Growth Enablers. I will look at a couple in more detail but areas of focus during the year included:

o new programmes to accelerate the commercialisation of Innovation projects, including a Digital Execution Accelerator and Agile New Product Development, which now include over 20 projects across all sectors;

o M&A capabilities, adding resource in Asia-Pacific, supporting International Expansion;

o Strengthening our finance, legal and risk teams to support continued strong governance, compliance and reporting as the Group grows;

o Adding new Talent acquisition capabilities to accelerate ability to attract great new talent into Halma as we grow.

This brings us on nicely to how our strategic focus and investment has been led by the evolution of our Executive Board where we have built a diverse and high calibre team with deep functional knowledge and capabilities.

There have been several changes this year to the Executive Board.

Catherine Michel joined as our first Chief Technology Officer, to ensure that we have the right technology capabilities to commercialise ideas including those generated by Inken’s Digital Innovation team, for example common approaches to the Internet of Things, and to data capture, storage and use – areas of even greater importance in world where remote working and monitoring of systems is likely to become much more important. In other changes, Adam Meyers succeeded Paul Simmons as the Sector Chief Executive for the Safety sectors in July, having handed his role as Sector Chief Executive of Medical and Environmental over to Laura Stoltenberg earlier this year, as planned. Also, worth noting, Funmi Adegoke will join later in the year as our General Counsel, continuing our work to maintain a strong legal and compliance capability as we grow. We have put a lot of effort in recent years into making our Executive Board a team of group leaders rather than individual contributors and that has really paid dividends during this crisis. Now moving on to M&A in a little more depth….




It has been a record year for acquisitions, with 10 completed across all four of our sectors, for a total initial consideration of £238m. These acquisitions have opened new market niches and brought leading technologies to Halma, such as Sensit’s gas detection capabilities, NovaBone’s orthopaedic bone graft technology and Maxtec’s medical ventilator and oxygenation products. They have also enhanced digital capabilities in core markets, such as FireMate’s fire protection maintenance software and Spreo, which added indoor mapping tech to CenTrak’s real time location monitoring solutions in healthcare. And they have continued to expand our geographical reach, most notably with the Safety sector’s Ampac acquisition in Australia. We continue to add to our pipeline of potential acquisitions, and see good opportunities for future

Finally, a few words about Halma’s approach to ESG and sustainability. Our purpose of growing a safer, cleaner, healthier future for everyone, every day, is already aligned with many of the various ESG elements and has been given even greater clarity and focus by the COVID-19 pandemic. We’ve taken further steps this year in advancing our ESG agenda, across a wide range of initiatives – to pick up on a few examples:

In terms of quantifying our positive impact, we have identified that two-thirds of our revenue is aligned with our four chosen UN Sustainable Development Goals, which are focused on health, water and sustainable industrialisation and cities. This has also been evident in our M&A activity, with all 10 acquisitions highly aligned to these goals.

Concerning reducing environmental impacts and specifically addressing the challenge of climate change, we have substantially exceeded our existing target to reduce intensity of carbon emissions, and taken steps to further reduce our carbon footprint, that will reduce our annual Scope 1 and 2 emissions by around 2000 tonnes, or about 10%. for example, by contracts for renewable electricity and gas. These carbon reductions put us on track to adopt a Science-Based Target in the coming year, and we are also preparing to report in line with the recommendations of the Task Force for Climate Related Financial Disclosures, or TCFD, by 2022. From a Social and Society perspective, you have already heard how we have balanced our decisions carefully during the COVID crisis, and I will now look at




three aspects with a longer-term perspective:

Firstly, Halma’s diverse and inclusive culture is a crucial asset in our success. One aspect of this is gender diversity, and we have a new ambition for all senior management teams across our business to have a gender balance range of 40% – 60%. We have already achieved this on our plc and Executive Boards and our Divisional Chief Executive roles are also now 44% female. This represents substantial progress since the new sector structure was introduced in 2014 when the plc Board comprised fewer than 20% women, and there were no women at all on the Executive Board and in our Divisional Chief Executives. Over the past year we have also begun to measure national and ethnic diversity. As a global business we already benefit from this but need to make improvements in our leadership groups – companies and centrally. The improvement made in gender gives us confidence that we can make real improvements here too, and we will report on our progress in future years. Secondly, at the start I talked about creating value for all our stakeholders – a key one is our supply chain. The nature of our business model means these supply chains are relatively short, and are managed at a local level by each company, which reduces the risks inherent our procurement activities. This has been a crucial asset as we have responded to COVID-19 and our business resilience in the future. However, we are also looking at the aggregated risks in our supply chain, and this year completed an analysis of modern slavery risks across our global supply chain.

As a result, we have created a better methodology for the analysis of potential risks with both direct and indirect suppliers of good and services. Thirdly, following the success of the Gift of Sight charitable campaign, we will be launching our next global community campaign later this year. It will once again be aligned to one of our four chosen UN Sustainable Development Goals – ‘Clean Water and Sanitation’. Overall believe that there is an increasing recognition and appreciation of the value of ESG and that it is well aligned with Halma. I am very pleased that the success of these initiatives is being recognised externally, including by CDP in the improvement of our score in their latest survey. I’ll finish now by turning now to our performance in the first quarter of this financial year and the outlook.

Group revenues were just [4]% lower than in the first quarter of last year, with prior year acquisitions partly offsetting a [13]% organic constant currency decline. This resilient performance reflects the essential nature of many of our products and services during a period of lockdown in all of our major regions. Our order book has remained strong, with order intake marginally ahead of




revenue and ahead of the same period last year. There was a wide variation of performances in our companies, reflecting significant changes in demand in individual end markets, for example within the Medical sector vital signs monitoring saw a strong performance while elective procedures and ophthalmology were weaker; in Infrastructure Safety, we saw weakness in Fire Detection caused by limitations of physical access to sites (something Firemate will help with in the future!). The revenue decline and additional cost challenges due to safe working requirements, were partially offset by the Q1 savings in variable costs resulting in Group’s Q1 profit trends similar to revenue. Cash generation remains good and we continue to have a strong balance sheet and liquidity position. This has enabled us to alleviate some of the more stringent cost saving measures implemented in the first quarter including reversing employee salary reductions.

In conclusion, you have heard today how Halma’s good performance is sustained by our clear purpose, a focused growth strategy supported by increased investment in market niches with resilient, long-term growth drivers, and an agile organisational model enabled by a strong focus on investing in building

diverse and high-calibre teams as we grow. This has resulted in a good performance last year and a resilient start to the new financial year. As we announced in April, it remains our view that the COVID-19 pandemic is expected to have a net adverse impact on our markets and our full year results, As I stated at the start, based on recent trading and internal forecasts and assuming no further substantial lockdown in reaction to a second wave, we currently expect profit for the year to be 5%-10% below that achieved in the last financial year and, due to revenue trends and the increased costs of our employee support programmes in the second quarter, we expect a greater second half weighting to the year’s results than usual. These are challenging times and the world is changing, but I am confident that our agility, continued investment and focus on growing a safer, cleaner, healthier future for everyone everyday will enable us to create value for all our key stakeholders in the future. And now, we have time for some questions.

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Q&A Artem Tokarenko, Credit Suisse: On the guidance of 5-10% decline in profits this year, could you elaborate a bit on how much conservatism is baked into this guidance considering only a 4% revenue decline in Q1? And on emerging stronger on the other end of the downturn, which is what we have seen from quality companies in previous downturns, could you elaborate on the cost actions and other efficiency actions you have taken




to emerge stronger on the other end of this downturn? Andrew Williams: On the first part of the question around forecasts, just to remind you that our forecasts are “bottom up” driven, so these are the forecasts coming from the 44 individual operating companies according to what they are seeing in their individual markets, and the reality is, across the Group, as we alluded to in the presentation, there’s a very wide range of different dynamics, whether from a geographic or market perspective, and so for example as we have said in Medical, the vital signs businesses have done very well in the first quarter, but you’d expect some of that demand to tail off as we go through the year, and on the other hand you’ve got the elective products like the ophthalmic surgical products, which as healthcare systems normalise, should come back strongly later in the year. It is a real mix and a blended average of growth across the Group. In general as a group the companies are realistic in their forecasts – they understand their markets very well, and clearly as we go through the year we will have the opportunity to update the market on that progress. In broader terms, the two uncertainties are firstly the second quarter: some of the businesses in the first quarter have been living off the order book they had coming into the first quarter, as you go into the second quarter there’s a question mark about whether you’ve missed the first quarter opportunity to generate that new business for the second quarter, so it will be interesting to see how quickly that demand, that order intake, comes back as our sales teams are more active than they were during the height of lockdown. And as we look to the second half of the year, there are the question marks as to what extent there is a second wave, to what

extent lockdowns are going to impact on our businesses again globally. So it is a pragmatic view, a prudent view as to where we think we’ll end up at the full year, and it’s very much based on our view of the top line. As I alluded to in the presentation, although we took a lot of cost action in the first quarter, we’ve actually fortunately because of the resilience been able to reverse some of the more stringent steps we took in the first quarter, for example around employee salary cuts, so I think I see that as quite a resilient forecast, and if the revenue isn’t quite where we thought it would be, we’ve still got the opportunity to take some more costs out if we needed to. Equally, if the revenue is better than we are forecasting, we could be on the upside of that forecast, so we see it as a prudent/realistic forecast at this point in time. Mark Davies-Jones, Stifel: On Infrastructure Safety, obviously there’s been disruption as you’ve not been able to access customer facilities, but the big end market there is non-residential buildings, to what extent are you concerned about more structural themes around retail or office buildings – how quickly do you think that returns? Is it just an access issue or is there something else longer-term potentially lurking behind that? Andrew Williams: If I think of the two biggest businesses in that sector, I think it is quite interesting as to how that is going to play out. Now on the one hand you’ve got our fire detection business, which is the largest business in the group and in that sector, and there’s no doubt in my mind that there’s going to be no let up in terms of fire regulation globally and the need to ensure that all types of buildings that the public use continue to be safe from a fire perspective, so I see that as a hiatus that is going to recover




quite quickly when access is renewed because people have to comply and maintain their buildings in accordance with regulation. An extension of that which I mentioned in the presentation is that a couple of the acquisitions we have done in recent years, have been to add on the ability to remotely monitor the condition of fire systems in those commercial buildings – so we made the acquisition of LAN Controls a couple of years back and then FireMate more recently. We recognise the direction of travel in the ability to remotely monitor and service some of these installations is going to have benefit from a technology point of view and I think the impact of the COVID-19 pandemic and the lack of access to sites has only accelerated that. In our second largest business, our People and Vehicle Flow business BEA, the ability to access facilities and get around buildings without having to touch doors, in other words through automatic door sensors, whether it is in a healthcare facility or indeed in a retail environment, is going to be more important in the future and interestingly enough that is a part of the Group where we have seen more resilient demand in the first quarter, so I am confident that the combination of the technological changes happening and the track we are already on, the regulatory environment, and the ability to get around buildings without touching doors or opening doors physically is going to be helpful for us so I don’t anticipate any structural changes in those two largest businesses in that sector and I am confident about the longer-term opportunities there. Mark Davies Jones, Stifel: A follow up for Marc, on the helpful appendix on your guidance for FY21, both the central costs and the finance costs seem surprisingly modest, particularly give the increased debt – could you just run through the thinking behind those?

Marc Ronchetti: I’ll pick up on finance costs first. Of the back of a year of record M&A, we’ve seen increased interest costs from the borrowing. In that forecast to date, we don’t have significant M&A, certainly in the first half, so that will drive down financing costs. You’re absolutely right to pick up on the head office costs – a couple of things in there as to why do we see a relatively large downturn year-on-year: one is just a follow-up in terms of some of the savings we made in the first quarter around discretionary spend, so the pace, if you like, of recovery around travel, entertainment, around the use of consultants, there’s very much that mindset in terms of our central costs in terms of the Growth Enablers and the governance costs that we need to play our part in terms of the recovery in the second half. Another large chunk in there year-on-year will be around bonuses, and of course the key thing there is that we are not fundamentally changing the structure of our bonus scheme, so everybody is remunerated on growth – in a year when you are forecasting a 5-10% decline, then clearly that number comes down. Offsetting that, we do have investment in IT for the balance of the year, so if I split central costs into governance and control, we won’t be making any savings there that will bring any risk into the Group, in terms of the Growth Enablers, that’s all been about prioritisation, and making the appropriate investments, with some backing of IT in the second half as Andrew alluded to in the presentation. Andrew Wilson, JP Morgan: Just thinking about the Q2 expectations, and not really trying to draw you on the numbers so much as getting an indication as to how to think about it, you made a comment about orders being slightly better than revenue in terms of the Q1, I guess I would assume that given some easing lockdowns, that Q2 would




be a little bit better than Q1, but thinking through your divisions it’s perhaps easier to see that trajectory in Infrastructure Safety than in Process Safety for example, where the oil price might have more of an impact. How good a guide for the Q2 is the Q1 if orders and revenues have been in a similar place, just trying to get a bit of help on the trajectory on that. Andrew Williams: A couple of points: from a revenue point of view, I think you are right, I do think it will vary across the sectors, we’ve already talked about within the Medical sector itself you might see a slight weakening of demand off a peak for vital signs and come back in demand for the elective products. I think you are right, you could draw a comparison between Process Safety and Infrastructure Safety, and say that as site access does come back, Infrastructure Safety has the ability to bounce back quite quickly, and in fact some of those businesses have the shortest order books in the Group, so we’ll really be matching demand as it comes through, whereas Process Safety is the one part of the Group where we have some larger projects which have longer lead times and, to your point, with about 30% of that sector focused on oil and gas, it may be a while before that demand comes back. And then Environmental & Analysis is a bit of a mix, really, it’s always been quite a diverse sector and so we’ve got UK Water, some positive signs there, from the recent announcements around UK water and reduced leakage, so you’d say they’re going to keep the pressure up on that as we go through the second quarter, but again second-guessing the timing once you get that granular is quite difficult and I think it’s more a question that we’re asking from a revenue point of view and I think the likelihood is that we will see diversity benefiting us but at the same time a

slightly different story playing out in each of the sectors. The one other point that I’d mention about the second quarter, and I mentioned it in the presentation, is that we have around a £5m profit charge by choosing not to access UK Government support for furloughing and also providing additional financial support for any employees who are going to be made redundant, so from a profitability point of view we’ve also got an additional headwind factor in there above the revenue trends. Andrew Wilson, JP Morgan: On Environmental & Analysis, it’s been a very good performer in recent years, and from the commentary Q1 has certainly been very good on a relative basis, and a stand-alone basis, any indication within that of a change in phasing of orders we should be thinking about, or the difficult comps, just to get a sense of how sustainable is still growing for Environmental & Analysis: at the moment it seems like it is just going to continue to grow through this year? Andrew Williams: You have to say that long term trends have to be positive there in terms of, for example, environmental monitoring, you got air quality, odour monitoring, we’re doing water leak detection, water pressure monitoring, water treatment, so long-term trends in the context of ESG and climate change, it’s got to be a good place to be. Within the water business, we’ve got a focus on the UK, so to the extent to which the UK water utilities are investing, particularly as I mentioned earlier on in leakage, is helpful to us as we go through the year. The Optical Analysis businesses tend to be quite widespread in terms of who they serve and the markets they serve, research and development in the US is quite important to us. It’s also been one of the more volatile parts of the Group, but at the moment things seem to be well aligned




and we seem to have more of the businesses able to sustain year-on-year growth which is something we struggled with in the past. So overall I’d say positive long-term. The only other factor I can think of is in the first quarter we had one of two of the businesses that happened to be in Environmental & Analysis which repurposed some of their technology to be used in some Medical applications again that boosted the Q1 result but in the same that we talk about vital signs in Medical, maybe not being so strong in the remainder of the year as they healthcare system normalises – we’ll see a little bit of that effect too. Thinking about it, that’s probably the only unusual event in the first quarter, that repurposing to Medical applications. Andrew Wilson, JP Morgan: Just interested in how COVID-19 and the impact of it, how it’s made you think about the existing portfolio and directionally are there any changes in terms of how you might be thinking about the portfolio going forward in terms of where you choose to allocate capital? Anything that’s informed your thinking around certain aspects of the current portfolio? Andrew Williams: The initial view, and the widespread view, is actually doubling down in terms of what we are doing. So our focus on Safer, Cleaner, Healthier, there’s no doubt that those have to be three very strong themes coming out of the COVID 19 experience in all sorts of different ways. So clearly around the edges we would continue to say whether we have markets here that can continue to give us strong growth and returns, or not, and as we have discussed many times before, from an oil and gas point of view, is that the right long-term market to be in, but we’ve been asking that question for different reasons for the last five or ten years. More broadly than that, we think we’re very well

positioned, both from an organic growth point of view and from an acquisition opportunity perspective, and if you think about the other acquisitions we are making from a diversity and inclusion perspective within our business, the focus on technology and ramping up the digital innovation, all those themes we believe are even more important coming out of the COVID-19 experience. So, as I said in the presentation, it’s almost a case of doubling down on what we were doing. I think you are probably right, I think perhaps later in the year, you really take a deep dive on the portfolio and say has anything changed structurally here, equally are there any new areas or new niches that are emerging that we should be participating in – so I’m really positive about the future coming out of this and also how were positioned coming in. Robert Davies, Morgan Stanley: Can you give some additional colour around customer commentary and regional differences in the Process Safety business? Where are you most optimistic or concerned on the Process Safety business in FY21? Marc Ronchetti: As a reminder, about 30% of the sector, albeit about 4% of the Group, is exposed to oil and gas, so there was most definitely downward pressure on that part of the business. In addition to that, we did have a closure of a site within the sector in the fourth quarter which was probably about the equivalent of about £3m of revenue and just over £2m of profit, so again a chunk of downward pressure. That then [was[] partially offset by some good underlying growth in our non oil and gas sectors, which included continued benefit from the logistics contract, and of course then the contribution from the Sensit acquisition, which was just under 2%. So a portfolio within the Process Safety business and that’s reflected in terms of what we saw in terms of the




geographical split, with the USA largely flat, with the logistics contracts benefit offsetting the US onshore oil and gas, the UK down largely due to timing of contracts, but then good growth out in Asia Pacific, as we continue to make progress in the non oil and gas sub-sectors. Robert Davies, Morgan Stanley: How much of the pull back in planned M&A run rate in the first half this new financial year is due to a more conservative approach to cash management versus transactions being more difficult to convert in the current environment, and what are the key signals we are looking for before M&A resumes at a more normalised level for Halma? Andrew Williams: Very much the former in terms of cash management, certainly early on in that first quarter as reflected in our cost reduction efforts as well. We were very mindful about protecting cash, conserving cash, protecting the balance sheet, until we got a much clearer view on how the whole cash side of things, the liquidity side of things was going to play out in the year. So initially very much the former, however, as we are already now moving our thinking towards what capacity do we have and what kind of deals do we want to do, we’re now going to start understanding whether there’s an issue on how quickly we can convert these deals, these opportunities. When I recall what happened in 2008/2009, we did exactly the same thing, we had a three month, six month hiatus in terms of completing deals but continued looking hard in terms of opportunities and coming out of the downturn which was probably six months plus from the initial hit we very quickly got comfortable with first of all being able to look at a target company’s books and knowing what good looked like. In other words we knew how we had performed

during the downturn, and, bearing in mind that we’re buying related businesses, we knew how we had done and therefore when we were looking at a target, we could then see that they do appear to have the same kind of characteristics that we’re looking for in terms of resilience and growth and return. I would anticipate us getting to that position, as we alluded to in the announcement, as we go into the second half of this year, and based on the outlook that we’ve given for the full year, we will have the financial capacity to continue with our M&A effort at a more normalised level for Halma, so I would see the opportunity picking up in the second half of the year. I think we’ll be in a position to judge that these are the kind of deals that we want to do, what we haven’t tested yet, and I am sure all of us will want to know, is what does it mean in terms of valuations for these deals, both from a vendor side and from the acquiror side. I don’t know the answer to that yet, this is something we will find out as we go through the second quarter into the second half of the financial year. Jonathan Hurn, Barclays: First quarter was down 13% organically on revenue – can you give us an idea of what the exit rate was for June? For Process Safety, the margin the second half was down about 500bps sequentially with the first half, with around 30% of the division exposed to oil and gas, do you think the margin in Process Safety can recover to the level of the mid 20s< How fast do you think you can diversify the end market exposure? Marc Ronchetti: On the exit rate in June, we are giving guidance on the first quarter as opposed to any individual month. For us as a business and certainly for Halma and our investors, a view over the medium to long-term feels more appropriate than that monthly run rate,




so we have not given any guidance for the stand-alone month of June. On Process Safety margin in H2, there’s a couple of key points: there has been a small reduction in gross margin given the mix shift away from the oil and gas sector, but more relevant here is the sector level bad debt provision which within Process Safety was £0.9m and that equates to c2% profit for the year and therefore o a half year basis c400bps of the c500bps that you picked up. Do we think it can recover to a level in the mid 20s? Based on having no further one-offs that I talked to, the underlying rate as I say was slightly down due to the mix shift, but yes, back up to normal run rates that we have seen. Andrew Williams: The only thing that I’d add on that first question on the first quarter and the trending in the first quarter, from our start point at the end of March when we set out expectations and actions, it has been encouraging that each month the businesses in total have exceeded their forecast, so it has felt like more encouragement as we have gone through the quarter, rather than less encouragement, but as I have said it is a real mixture across the Group so we need to see how that plays out in the second quarter. And if I think about diversification of the market exposure in Process Safety, as you know over the last decade we’ve reduced the oil and gas exposure from around 50% of that sector to around 30% so we’ve already gone a long way to doing that. How much further we need to go is difficult to tell, how quickly we can get there is difficult to tell. All I can say is from the point of view of organic product development, as much as the M&A effort, both of those are moving us to become less dependent on that oil and gas market so I think over the longer term you are likely to see that reducing rather than increasing, both from the organic side and the companies that we are acquiring.

Richard Paige, Numis: Just on China, because you give us a -4% organic decline for the year, obviously impacted by COVID, and I don’t think we have numbers for the first half but I assume that was on the Q4 impact. You also mention on the Environmental Monitoring market penetration has been slower than expected. Just wondering where we were in Q1 – has that market started to grow again, are you seeing pent up demand anywhere? Just trying to understand what’s going on there? I’ve always seen this as a big opportunity for you and I’m a bit surprised we are not seeing better growth? Andrew Williams: I think that’s fair and it’s still sluggish in the first quarter. We’ve got some businesses that are picking up faster than others, but it is certainly not universal across that economy, so within Environmental & Analysis selling into some of the R&D applications is slower, clearly we’ve got higher hopes for areas such as environmental air monitoring and water quality, but it has not been a universal recovery across the Group in China in the first quarter – the recovery is still emerging I think it is fair to say, across the Group overall. And as you went through the last financial year, we certainly weren’t seeing, although we were getting growth in the first half, and you’re right, it’s mainly a final quarter impact that’s resulted in revenue being lower in China for the whole year, the reality is it wasn’t at the rate of growth we were seeing three or four years ago which was comfortably double digit – it was much more mid-high single digit during last year. So a slower recovery story there, and it will be interesting to see how some of the Western markets recover and compare the two.

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Definitions:

Adjusted items are adjusted to remove the amortisation of acquired intangible assets, acquisition items, significant restructuring costs, profit or loss on disposal of operations and in the prior year the effect of equalising pension benefits for men and women in the defined benefit pension plans, and, where applicable, the associated taxation thereon.

Return on Sales is defined as Adjusted profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations. Organic growth measures the change in revenue and profit from continuing Group operations. This measure equalises the effect of acquisitions by removing from the year of acquisition their entire revenue and profit before taxation, in the following year, removing the revenue and profit for the number of months equivalent to the pre-acquisition period in the prior year and removing from the year prior to acquisition any revenue generated by sales to the acquired company which would have been eliminated on consolidation had the acquired company been owned for that period. The results of disposals are removed from the prior period reported revenue and profit before taxation.

Constant currency measures the change in revenue and profit excluding the effects of currency movements. The measure restates the current year’s revenue and profit at last year’s exchange rates.

Return on Total Invested Capital (ROTIC) is defined as profit for the year from continuing operations before amortisation of acquired intangible assets, acquisition items, restructuring costs and profit or loss on disposal of operations but after taxation; expressed

as a percentage of average shareholders’ funds, adding back net retirement benefit obligations, cumulative amortisation of acquired intangible assets and historic goodwill. See the Full Year report published on 14 July 2020 for more details. A webcast of this full year results presentation will be available on Halma’s website www.halma.com from 14 July 2020. CAUTIONARY NOTE. This document contains statements about Halma plc that are or may be forward-looking statements. Forward-looking statements include statements relating to (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; (ii) business and management strategies and the expansion and growth of Halma plc’s operations and potential synergies; and (iii) the effects of government regulation on business. These forward-looking statements are not guarantees of future performance. They have not been reviewed by the auditors of Halma plc. They involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by such statements. They are based on numerous assumptions regarding present and future business strategies and the future operating environment. All subsequent oral or written forward-looking statements attributable to Halma plc or any of its shareholders or any persons acting on its behalf are expressly qualified in their entirety by this cautionary statement. All forward-


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looking statements included in this document speak only as of the date they were made and are based on information then available to Halma plc. Investors should not place undue reliance on such forward-looking statements, and Halma plc does not undertake any obligation to update publicly or revise any forward-looking statements. No representation or warranty, express or implied, is given regarding the accuracy of the information or opinions contained in this document and no liability is accepted by Halma plc or any of its directors, members, officers, employees, agents or advisers for any such information or opinions. This information is being supplied to you for information purposes only and not for any other purpose. This document and the information contained in it does not constitute or form any part of an offer of, or invitation or inducement to apply for, securities. The distribution of this document in jurisdictions other than the United Kingdom may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of laws of any such other jurisdiction.

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