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Halma plc is a global group of life-saving technology companies, focused on growing a safer, cleaner, healthier future for everyone, every day. The company is listed on the LSE main market, is a constituent of the FTSE100 and has a market cap of £8.1bn. Full year results to 31st March 2022 were released on 16th June.
We were delighted to welcome Charles King, Head of Investor Relations, to a webinar for private investors to talk about these record full year results and how the company is performing in the current environment. A recording of the webinar is available here.
Halma has just reported record results and along with those record results the company announced a long-planned change of leadership and Charles started by talking about the forthcoming change in CEO. Andrew Williams, the CEO for the past 18 years will be retiring next year to be succeeded by Marc Ronchetti, the current CFO. This change has been many years in the planning and is testament to the strength in depth of the leadership team. Andrew will support Marc through the transition process until the time he succeeds on 1 April 2023. It’s a fantastic opportunity for a new CEO as the group could not be better placed to take advantage of the many opportunities arising in their markets.
Moving onto the results, 2022 was a year of significant achievement and Halma passed a number of new milestones. The company reported record revenue in excess of £1.5bn and this was the 19th consecutive year of record profits, as well as the 43rd year when dividends have been raised by 5% or more. This is all despite the global financial crisis, Brexit, Covid and more recently the war in Ukraine. There has been increased investment in technology, more spent on acquisitions with over £250m spent on 13 companies and R&D and management believe they are well positioned to deliver further progress this year and in the longer term. (Editor’s note – hard to bet against this given their track record).
In terms of the numbers: Revenues grew 16% to £1,525m, profits were up 14% to £316m and operating profit to cash conversion was 84%. Growth was achieved across all major regions and came both organically and through acquisitions. The balance sheet is in excellent shape and financial gearing at the end of the year came in below the half year and where it was at the end of the last year. Return on sales came in at 20.7%, well within 18-22% target range, return on total invested capital was 14.6% (more than double their cost of capital) and R&D spend as a % of sales was 5.6%. Across the board this is a very impressive set of financial figures.
Looking at the record revenues, 17.4% was generated from organic growth reflecting widespread demand across all sectors and all major regions. Acquisitions contributed 4.8% driven by the high level of activity through the year, there was a reduction of 3.2% from disposals and a further 3.3% reduction from the currency impact. The US is the largest market and contributes 39% of sales, followed by Europe at 20%, UK at 18% Asia Pacific at 16% and Other with 7%. All 4 main markets showed good growth with the UK particularly impressive with growth of 25%, US growth was 17% and Asia Pacific growth 16%. There was exceptional growth in the first half at 23%, with this slowing to the 12% growth reported in H2, but nonetheless there was still good sequential growth H2 on H1. The two-year CAGR is 7% through a challenging period and reflects the resilience of the model.
Record profits of £316.2m were also reported with profits also growing sequentially through the year. Organic growth contributed 15.4%, acquisitions contributed 3.6%, disposals reduced the number by 1.9% and there was a further reduction of 3.5% for the currency.
Looking at performance against the KPI’s this was a very pleasing performance with revenue and profit growth significantly above targets. Profits from acquisitions and cash conversion were both slightly below targets but RoS and RoTiC were comfortably in the target range and above the threshold level.
Moving on from the financial performance and metrics Charles spent the second half of the presentation talking about how this performance was achieved. Central to this is the Halma sustainable growth model which has six inter-dependent elements.
At the top of everything is the strong purpose of growing a safer, cleaner, healthier future. This purpose has always addressed significant, long term global issues like climate change, the need for better health care and improved safety.
The next 3 elements of the growth model were covered together: DNA, Growth strategy and business model. The DNA defines the organisational and cultural characteristics, the growth strategy helps define the strategic investment priorities and the business model gives the agility to respond rapidly to changes in markets and technologies. Leaders are empowered to make decisions, be innovative and create a winning culture. The fifth element is leadership and people and investing in the leaders of the future has been a key part of the growth model for many years. The final sixth element is sustainability and this has also always been central to Halma from the self-sustaining financial model through to the sectors they participate in.
Going into more detail of the growth strategy, record investment in R&D at £85m was highlighted as key to both short term and long-term performance. So too was the focus on digital which grew 15% last year and now makes up more than 40% of all revenues. M&A capabilities have been built to support continuous M&A in areas where there are good long term growth drivers. It was a record year for acquisitions, broadly spread geographically and across all 3 sectors. There is a healthy pipeline of future deals and the focus continues to be on private owner managed companies which are not for sale. Texecom was sold as management determined the market would not be able to meet sustainable growth and return targets.
The business model has been tested over the last 2 years and has passed with flying colours. The operating companies have the resources, agility and authority to respond to changes in the environment. There is a collaborative, problem solving culture and central growth enablers combined with small company agility have proven a very successful combination.
Halma’s decentralised organisation model puts a premium on the quality of leadership and there is a lot of focus on developing talented leaders. High potential leaders are identified and given relevant experience and training in multiple disciplines and operating companies. Capabilities they look for include passion for the Halma purpose, entrepreneurial spirit, collaborative approach, accountable and for a diverse background. A graduate program was established 10 years ago and a number of participants have progressed to company board level with one participant now an operating managing director. The outcome of this investment, is leaders committed to sustainable success. Progress in diversity, equity and inclusion has also paid dividends. The gender pay gap has been reduced, female representation on boards is getting strong and deeper with 50% of the Halma board now female. Efforts are ongoing to increase female representation at the operating board level. Halma meets the board requirement to have at least 1 racially diverse board member, 20% of senior leaders and 13% of the future leaders program are from ethnically diverse backgrounds. From 2023 diversity targets will be part of the remuneration targets.
Finally looking at sustainability the following factors were highlighted. There are 3 specific Key Sustainability Objectives: Diversity, Equity and Inclusion; Circular economy and Climate change. Focusing on climate change the company has made good progress towards the 2050 net zero target, there has been a 35% reduction in greenhouse gases since 2020 and renewable electricity has climbed from 8% of all electricity consumed to 42%.
In summary the charts showing 11% CAGR for revenue and profits over the last 10 years were displayed. This has been achieved alongside high returns and reinvestment for future growth and against a very difficult economic backdrop. The sustainable growth model has performed well and has prepared the company for good future growth too in what is a fast-changing world. Continued investment organically and through M&A will ensure the company is able to meet customer needs going forward.
Looking to current trading, Halma has made a positive start to the year, has a strong order book, order intake is ahead of revenues and inline with the very strong performance seen last year. Combined the company expects to grow organic constant currency revenues by single digits and to generate a return on sales similar to that achieved in the second half of the last financial year. Historically they have tended to beat their guidance.
All in all it was another confident performance and provided a lot of comfort for future growth in sales and profits.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com