Chief Executive's Review
Halma made good progress during the period, achieving record revenue and proﬁt and strong returns. Our focus on safety, health and environmental markets with long-term growth drivers is enabling us to continue to ﬁnd growth opportunities.
We achieved strong revenue growth of 17% in Asia Paciﬁc and Australasia including 32% revenue growth in China. Revenue growth of 6% in Africa, Near and Middle East and the Americas (ex-USA) contributed to the proportion of revenue from outside the UK/Europe/ USA increasing to 25% of the Group total (2011/12: 23%), making further progress towards our goal of 30% by 2015. In absolute terms, half of our revenue growth during the period was generated from those regions.
There was a resilient trading performance in developed markets. Revenue grew by 19% in the USA which offset the performances in Europe and the UK, where revenue was down by 3% and 6% respectively. Acquisitions, disposals and currency rate changes had a signiﬁcant impact on these ﬁgures. Taking these factors into account, we estimate that the underlying organic1 growth rates at constant currency were as follows: USA up 2%, Europe up 0.3% and UK down 2%.
Order intake in the ﬁrst half was slightly ahead of revenue – a trading pattern which has continued into the second half.
Health and Analysis grew revenue by 12% to £135.2m (2011/12: £121.1m) and proﬁt by 10% to £30.9m (2011/12: £28.0m).
Return on Sales remained strong at 22.9% (2011/12: 23.1%).
Our Water and Health Optics sub-sectors performed well, although we expect growth in Water to slow in the second half as UK water utilities move into the latter phases of their 5-year budget cycle. As forecast, Fluid Technology achieved a steady recovery as we progressed through 2012, although this was in contrast to Photonics where strong growth in Asia was insufﬁcient to fully mitigate the impact of lower demand from US government research customers.
Infrastructure Sensor revenue was 1% lower at £100.5m (2011/12: £101.1m) whilst proﬁt was down by 2% at £18.9m (2011/12: £19.4m). Return on Sales was slightly lower at 18.8% (2011/12: 19.2%). As forecast, there were one-off costs of £1m during the period, predominantly to complete the reorganisation of our European and Asian Elevator Safety businesses. This was completed on schedule in September 2012 so we expect to see the beneﬁt of these changes emerge more strongly during the second half. Fire Detection, Elevator Safety and Security Sensors all achieved modest revenue increases whilst our Automatic Door Sensors business saw lower revenue due to weakness in European markets.
Industrial Safety had another strong performance with revenue increasing by 8% to £62.5m (2011/12: £58.0m) and proﬁt up by 13% to £15.3m (2011/12: £13.6m). Return on Sales of 24.5% (2011/12: 23.4%) remained the highest of our three sectors. Gas Detection, Safety Interlocks and Bursting Disks all performed strongly and it was pleasing to see higher growth from regions outside the UK/Europe/USA. The disposal of our Asset Monitoring business in August 2012 (see details below) will further increase the proportion of this sector’s revenues from developing markets. In the longer term, this will be boosted further by the increased internal collaboration to serve Industrial customers in South America.
Acquisitions and disposals
During the period we spent £66m (plus up to £7m in earn-outs based on future growth) acquiring three companies for our Health and Analysis sector, details of which were given in Halma’s Annual Report 2012 and this Half Year Report. All three businesses are trading well, with Accutome and SunTech already progressing new opportunities through collaboration with our other Health Optics companies and Sensorex continuing to grow sales of its water quality sensors.
In August 2012, we sold our Asset Monitoring business, Tritech, to a UK subsidiary of Moog Inc. for a total consideration of £21.8m. We acquired Tritech in 2006 as our ﬁrst entry into the subsea asset market and, whilst it has performed well, we believe we can create greater shareholder value by reallocating resources to other sub-sectors. Moog’s presence in marine energy markets will enable Tritech to make strong progress under their ownership. A gain of £8.2m has been recognised in the Group Income Statement after accounting for the disposal of these assets, including the associated goodwill.
Although the ﬁrst half was a busy period for M&A, our search for acquisition opportunities continues. We are aiming to increase the number of prospects within our two safety-related sectors (Infrastructure Sensors and Industrial Safety) although currently the majority of opportunities in our pipeline are still within our Medical and Environmental related sector (Health and Analysis).
Cash generation and financial resources
There was good cash generation during the ﬁrst half year, when dividend payments tend to be greater than those made in the second half. We ended the period with net debt of £74.1m (March 2012: £18.7m) after funding acquisitions (net of disposals) of £62.5m (2011/12: £19.9m) and capital expenditure of £8.1m (2011/12: £8.4m). We have a £260m 5-year revolving credit facility in place until October 2016 so we are in a strong ﬁnancial position to support our future investment.
Investment for growth
Halma increased investment in each of the three strategic initiatives which underpin the sustainability of our growth and high returns:
- Investment in Innovation increased across all three sectors. R&D expenditure grew by 11% to £14.9m (2011/12: £13.4m).
- In October 2012, a group of graduates started the ﬁrst Halma Graduate Development Programme (HGDP) underpinning our commitment to People Development. This programme will provide them with a series of six-month placements in Halma companies across the world. The ﬁrst group of nine technical graduates includes a mix from leading universities in the UK and USA. Recruitment for the 2013 HGDP is already underway
- Halma companies are working together to accelerate the pace of International Expansion. In China, our Fluid Technology companies have created a combined manufacturing company, whilst in Brazil our Industrial Safety businesses are together establishing a trading company to serve key Oil, Gas and Process industry customers in that region.
Risks and uncertainties
To meet the challenge of sustaining growth and high returns, the need to create competitive advantage is more critical than ever. Halma’s business model is to operate with a diverse group of global businesses. Each has a management team empowered to adapt and allocate resources as the needs of their niche markets change leaving them well positioned to succeed.
Our focus on building strong positions in markets with sustainable, long-term growth drivers such as Health and Safety regulation, increasing demand for healthcare and the need for lifecritical resources (including energy and water) is providing both resilience and opportunities to grow. Order intake continues to be slightly ahead of revenue and Halma remains on track to make further progress in the second half of the year.
"Although the first half was a busy period for M&A, our search for acquisition opportunities continues."