Halma plc (HLMA) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to Halma's half year results presentation. It was back in July at our full year results announcement that we gave you an insight on how we are responding to the global pandemic. I'll give you -- we gave you a greater understanding of how we saw the financial year panning out, but also that shared confidence in our ability to create value in a sustainable way for all our stakeholders. And I'm pleased to say that the half year has gone to plan. In fact, we made progress very much in line with our expectations. If anything we're ahead of where we thought we'd be, demonstrating once again halma's resilience. So today, you're going to get a reminder of what drives that resilience. You're going to gain an insight into the impact COVID has had on our markets within each sector, but also through that, you'll see the benefit of the diversity of our markets. And finally, you'll understand how COVID has accelerated our decisions on organizational investment priorities for the second half, albeit reinforcing the value of our purpose and our growth strategy. So what do we mean by resilient by design? Because it doesn't happen by chance. Halma is resilient because it's systemic. It incorporates several key components, which are independent with one another. And it starts with that clear and positive purpose, which is both ambitious and inclusive, growing a safer, cleaner, healthier future for everyone every day. And I'll give you an example in my strategy review about how we are living our purpose, both in terms of our broader campaigns, our global campaigns as well as day-to-day within our business. Next, we've got a focused and sustainable growth strategy to grow and acquire businesses in global niche markets, aligned with our safety, health and environmental goals with long-term growth drivers and that growth is funded by the cash that we generate through our operating companies. But all of that needs to be supported by a robust and agile organization and a strong culture. We define it as Halma's DNA. And that gives us the agility, but also it gives agility through local autonomy, local accountability of the operating companies. It means we've got to have a strong investment in leadership at all levels, so when the crisis comes like a global pandemic, people know what they need to do and how they should do it without having to have every decision made at the center or indeed controlled by the center. And we've seen the value of all of these elements during the first half of the year. 2/3 of our operating company of our facilities had some sort of mandate to stay operational through the lockdown period due to the critical nature of their products and services. Just 3 out of our 53 operating facilities had any sort of extended lockdown period and all have been operational since July. I think it's worth at this point just recognizing the great work that our manufacturing teams have put in during this period because they've been working in our facilities throughout the period, while many of us have been working at home. And they have to adapt to new ways of working. They have to ensure that customer needs are met. I've been hugely impressed with the way they've responded to those challenges, proud of what they have achieved and would like to say that they've certainly led the way in living our purpose across the group and want to thank them for the efforts that they've made. Because it's through their efforts and indeed, these elements that make us resilient that's enabled us to perform well during the first half of the year and have confidence in the future. So already, you've heard the word resilient quite a lot during this presentation. And I think this slide will just summarize what we mean by that. So despite the huge variations and conditions across regions, across markets, revenue was only 5% lower than last year at GBP 618 million. Our rapid response to the emerging pandemic by reducing our costs significantly in the first quarter and then controlling our spend in the second quarter has protected our profitability such that profit is also only 5% lower than last year at GBP 122 million. And collectively, that has ensured we've maintained our return on sales at 19.7%, exactly in line with last year, and well within our 18% to 22% KPI target range. Exceptionally -- we've seen exceptionally strong cash generation by our operating companies. It was one of our priorities at the start of the half year to have strong cash generation and maintain strong liquidity. So we ended the period with net debt reduced from GBP 375 million to GBP 315 million at the end of September, which is around 1x EBITDA. And we had available liquidity at the end of September of just under GBP 500 million, which is an improvement from GBP 431 million at the end of the last financial year. As relative to this and our resilient trading and commerce in the future, we're increasing our interim dividend by 5%, which will position us well to continue our 40-plus year track record of increasing full year dividends by 5% or more. And finally, I was encouraged by the improved momentum and confidence across our business improving as the year -- the half year progressed. So we saw sequential revenue growth in the second quarter of 11% above the first quarter. And although you'll see quite large year-on-year variations in Mark's presentation, it's actually more to do with the variation we saw last year than this year. In fact, this year, the revenue trends after we went through the very challenging first quarter, since then the revenue trends have shown more of a gradual monthly improvement. So after that initial decline, it's felt like a well-managed period of progress with companies delivering on their short-term forecast and then gradually increasing their full year expectations. That confidence is also exemplified by the healthy rate of R&D investment we've seen during the period. So that has increased to 5.6% of revenue, albeit of that slightly lower revenue base. And lastly, it's been pleasing to see the level of M&A activity picking up strongly during the second quarter, and that's continued into the second half. So we've seen a good mix of new as well as old opportunities. There's opportunities that maybe were put on hold as lockdown came in. We've also seen a wide range of valuation expectations. But despite that, our criteria remain the same, we're looking for high-quality companies with valuable intellectual property, serving niches in global markets, which are aligned with our purpose. So before Marc's financial review, a brief summary, of how we are looking forward to the future and also how we perform during this first half. Our resilience has enabled us to continue to create value for all of our stakeholders, both internally and externally, and it's also ensured that we performed better than we expected during the first half of the year. We've seen improved trading, but also improved investment by operating companies, and that has continued into the second half of the year. As a result of all of this, we're increasing our expectations to the top of the guidance we gave at the full year, and we now believe profit for this year will be around 5% below last year. Now before I give you the strategy update, I hand over to Marc, who will take you through the financial results in more detail.

Thank you, Andrew, and good morning, everyone. As we've heard from Andrew, we've delivered a resilient performance in the first half of the year. Our response to COVID-19 enabled us to maintain high returns, deliver a strong cash performance and maintain a strong financial position to support continued investment for future growth. 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. Let's take a more detailed look at the drivers behind this performance, starting with group revenue. And working from left to right, as you can see, revenue decreased 11% on organic constant currency basis. And again, as Andrew mentioned, there was a wide variation of performance among our individual companies, reflecting significant changes in demand in individual end markets and geographies, which impacted each of the sectors differently. I'll pick up on those key drivers as part of the individual sector reviews. That said, the overall resilience of the group result reflects the benefit of our structure as a portfolio of diverse companies. Looking at sequential trends, it was positive to see an improvement in Q2 with revenue up 11% on Q1. Acquisitions contributed a healthy 6% to revenue growth, reflecting the record 10 acquisitions made during the last financial year. We expect this contribution to reduce to circa 3% in H2, given the timing of the acquisition completions. There were small negative impacts from disposals and currency, and this completes our bridge to our reported revenue decline of 5.4%. Looking at our revenue performance by destination, which more so than in previous periods has been driven by the shape of the underlying sector performances. 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. Given the limited impact of currency in the period, acquisitions account for most of the difference between our reported and our organic constant currency revenue. Picking up on a few headlines and starting with revenue growth in the U.S.A., which remains our largest sales destination. The growth driven by a strong organic performance in Environmental & Analysis and a positive contribution from acquisitions made last year. This growth was partially offset by organic constant currency declines in our medical and 2 safety sectors. Moving to the U.K., which was our weakest region, with revenue declines driven by the 2 largest sectors in the region, Infrastructure Safety and Environmental & Analysis. Process Safety demonstrated a more resilient performance. The decline in Asia Pacific revenue reflected growth in China of 1%, offset by falls in India, Malaysia and Singapore, largely due to the timing of large projects in addition to the impact of COVID-19 in these regions. The 1% headline growth in China included a strategic move away from low-margin revenue in our Infrastructure Safety sector, without which growth would have been circa 4%. Sequentially, China revenues were 16% up in Q2 -- on Q1. Switching now to adjusted profit, again working from left to right. Organic constant currency profit down 11%, in line with revenue, a positive performance, maintaining return on sales through a combination of continued strong gross margin and a reduction in overheads, including the discretionary cost reductions of over GBP 20 million in the first quarter compared to our Q4 run rate and our ongoing overhead controls. However, importantly, we also continued strategic investment for future growth. We were pleased to be able to maintain return on sales despite the impact of our decision to self-fund a small percentage of our workforce furloughed by their companies, circa GBP 2 million. Additionally, we provided enhanced financial support to a small number of employees who are affected by unavoidable redundancies at a cost of GBP 2 million in addition to the local operating company payments. There was a strong contribution from acquisitions, reflecting good margins in businesses that we acquired last year, while disposals were a very small positive. In line with revenue, we expect to see a reduced contribution from acquisitions in the second half to circa 3%. There's a small impact from currency translation for the period, and we expect this to reverse in the second half. Leading to a minimal impact for the year as a whole. This, completes the bridge to the headline profit decline of 5.3%. Just to put some color on the group performance, I'll now take you through more detail at the sector level. As I stated earlier, there's been a wide variation in performance across the portfolio, and it's also worth remembering when looking at a 6-month period. We often get large percentage movements on what a relatively immaterial absolute movements. So starting with Infrastructure Safety, where we saw revenue down 13%. This included a 3% contribution from the acquisitions of Ampac and FireMate in the prior financial year. Organic constant currency revenue declined 16%. From a subsector perspective, people and vehicle flow delivered a resilient performance with an agile shift in product mix away from sliding door sensors, which are predominantly associated with construction work and retail refurbishment towards the retrofit of sensors to automate swing doors and other touchless entry activation devices. Fire, security and elevator safety were the most impacted by the challenge of customers gaining physical access to installation sites during lockdowns and the subsequent furloughing of installers, particularly in the first quarter. The second quarter saw a significant improvement after lockdown restrictions ease and installers returned to work and customers restocked. The trends in the subsector ultimately come through in the revenue by destination. To highlight the 2 largest geographical movements, the U.K. down 20% was particularly impacted by the site access and furlough challenges. The decline in Asia was driven by the timing of large projects and the implementation of our plans to exit low-margin business within elevator safety in addition to the underlying impact of COVID-19. Our prior acquisitions, both based in Australia, made an excellent contribution in Asia, taking reported revenue in the region to a decline of only 1%. Really positive to see return on sales improved to 22.8%, mitigating in part the revenue decline, with profit down 12% to GBP 46 million, including 15% organic constant currency decline and 4% growth from acquisitions. The improved return on sales was driven by strong overhead control and higher gross margins due to effective management of product and geographic mix. R&D expenditure of GBP 12 million was maintained at a good level and represented 6.1% of revenue in line with last year. So looking ahead, the sector is expected to make further progress in the second half and deliver a resilient full year performance with continued strategic investment in longer-term growth opportunities. The timing of acquisitions will mean they'll have less of a positive impact on growth rates in the second half. Moving now to Process Safety, where revenue declined by 10%, including organic constant currency decline of 17%. We saw significant declines in demand for safety products in U.S. onshore oil and gas related businesses, particularly within our pressure management subsector. In addition, industrial access controls also saw significant declines, largely due to a strong prior year comparative, which included a large logistics contract. These declines were offset in part on a reported level by the positive contribution of 7% from the U.S.-based acquisition of Sensit Technologies in the prior year. Again, this ultimately plays out in the revenue by destination, with the declines in pressure management and industrial access control impacting the USA, in addition to the positive contribution of the Sensit acquisition. Great to see revenue growth in Europe, which was driven by safe storage and transfer fulfilling larger projects, some of which have been in the order book prior to the start of the financial year. Return on sales decreased 18.2%, resulting in profit declining by 33% to GBP 17 million. This includes a 37% organic constant currency decline and a 4% positive contribution from the Sensit acquisition. This significant drop in profit was driven by 3 areas: a reduction in gross margin following the decline in high-margin U.S. onshore oil and gas revenue; the phasing impact of the large logistics contract; and one-off restructuring costs in the period of GBP 1.7 million, which when all combined, exceeded the benefits from the action taken on overhead costs during the period. The sector continued to invest in key areas for the future, such as connected monitoring solutions, with R&D investment of GBP 4.5 million, representing 4.9% of revenue. Looking ahead, despite the ongoing challenges, especially in the oil and gas market, the sector is expected to continue the gradual improvement in trading, we saw as the first half progressed. The continued investment in connected technologies and the growth potential of our products outside of oil and gas market is expected to improve performance in the longer term. So moving now on to Environmental & Analysis, which I'm pleased to report continues to perform strongly, with revenue increasing by 1% to GBP 154 million. The sector performance reflected strong growth in the photonics subsector, driven by the phasing of a large contract in the USA, which is one example of our photonics company seeing increasing demand for their technology in applications related to building digital and data capabilities for the digital world. We also saw growth in our gas flowmeter business, Alicat, rapidly adapting its technology to make new components to meet urgent new requirements from ventilated companies in response to COVID-19. And this is just one of many great examples of the benefits of the individual company agility within our operating model. This growth was in part offset by the disruption caused by COVID-19 in our water companies in addition to the delayed demand from the U.K. water utilities due to the start of the new 5-year regulatory investment cycle. Again, these subsector trends can be seen in the revenue by destination result with the impressive U.S. growth, a result of the Photonics and gas flowmeter growth and the decline in the U.K., reflecting the water company's performance. Return on sales saw an impressive improvement from 20.5% to 24.9%, primarily due to proactive cost management, including in response to COVID-19. A fantastic example of our companies individually contributing to the overall challenges faced by the group. R&D expenditure of GBP 8.3 million was maintained at a good level, although this represents a reduction to 5.4% of sales, largely a result of the phasing of the investment. As a result, profit increased by 22% to GBP 38 million. Looking forward, the sector is expected to perform well for the year as a whole, although a very strong prior year comparative will mean that growth rates will be reduced compared to the levels in the first half, with return on sales in the second half expected to return to recent historic levels. While water market should continue to recover, we expect lower demand for ventilator components and the timing of photonics projects to moderate full year growth. Turning now to Medical, where revenue increased by 3% to GBP 172 million, with an organic constant currency decline of 11% and a large 15% positive contribution from acquisitions, with 6 of the prior year acquisitions being in the medical sector. There's a very strong trend of significant increases in demand for products and services related to the diagnosis or treatment of COVID-19, with dramatic decreases in products and services related to elective health care procedures. Consequently, our patient assessment companies, along with Perma Pure and Maxtec in the acute therapeutics subsector, delivered a very strong performance. At the other end of the spectrum, we saw declines in our ophthalmology, sensors and analytics and fluid diagnostics businesses due to sharp declines in elective procedures and a lack of physical access to hospitals. These headline trends were consistent across the sector's major markets, with the USA, in particular, benefiting from the acquisition contribution at a reported level. Return on sales declined to 22.1% despite the overhead actions taken in the sector. This decline in return on sales was driven by a reduction in gross margin due to mix, with the growth in the period coming from the lower gross margin subsectors and the declines within the higher gross margin subsectors. R&D spending at GBP 9.4 million increased to 5.5% of revenue, demonstrating the confidence of our medical businesses in the long-term growth prospects in their market niches. This led to a profit decline of 3% to GBP 38 million. Looking forward, prior year acquisitions are expected to have a smaller impact on reported revenue growth in the second half due to the timing of the acquisition. On an underlying basis, as the financial year has progressed, we've seen a gradual improvement in demand for products and services related to elective health care procedures. And although the demand for COVID-19 related products is expected to moderate, the sector is expected to deliver a resilient performance in the second half. So looking now at net debt. An overall a very pleasing performance on cash during the period and one which gives us a robust balance sheet and provides significant liquidity moving forward. Highlighting some of the key headlines. Cash conversion was exceptionally high at 111%, significantly ahead of our KPI of 85%. This reflected an underlying strong performance on working capital, wider cash conservation measures, tax payment phasing and the cash impacts of a decline in revenue during the period. We saw an inflow from working capital, reflecting a combination of good debt collections across the group, alongside an overall reduction in debtors and creditors due to the decrease in revenue. Working capital also included the phasing benefits associated with the U.K. and U.S. government COVID-19 initiatives, namely the deferral of GBP 4 million VAT payment in the U.K. into the second half and the deferral of U.S. employer payroll taxes of GBP 4 million, which will be paid over the period to December 2022. To date, we've recorded very little bad debt, and we've continued to pay our suppliers on a timely basis. That said, we continue to see an enhanced bad debt risk going into the second half of the year and have maintained our bad debt provision at a similar level to that at the year-end and continue to hold the additional GBP 5 million provision at the group level. Looking forward, we do not expect H2 cash conversion to remain at the exceptional levels seen in H1, but full year cash conversion should remain above our KPI of 85%. With no new M&A in the period, acquisition cash outflows were limited to payments of contingent consideration relating to acquisitions made in prior years. We paid GBP 38 million in dividends continuing our policy of delivering progressive and sustainable returns to shareholders. Finally, in relation to other cash movements, we've included more detail, including 2021 financial year guidance in the appendix slides. We, therefore, ended the period with net debt of GBP 315 million. This represents a net debt-to-EBITDA ratio of approximately 1x, well within our typical operating range of up to 2x gearing. We, therefore, continue to have a robust financial position, strong cash generation and substantial available liquidity of circa GBP 500 million and over GBP 300 million of capacity within an operating range of up to 2x gearing. So to conclude, looking at our performance against our financial KPIs, whilst we delivered a resilient performance in the period, our revenue and profit growth rates were behind our financial targets given the challenges faced due to the COVID-19 pandemic. That said, it's really positive to see we maintained high returns and continued investment for future growth with all 4 of the KPIs at the bottom half of the slide exceeded. We continue to believe that our existing financial KPI targets remain appropriate for the group in the medium-to long- term. And to sum up, a resilient performance in the period, reflecting our flexible and agile business model and the benefits of our diverse portfolio focused on markets with long-term growth drivers and the essential nature of many of our products and services. I'll now hand you back to Andrew for a strategy update.

Thank you, Marc. Well, to finish, although there's been an inevitable focus on short-term issues, I think the last 6 months has also really acted as -- given us a strong reinforcement of both our purpose and also of the value of our growth strategy. And now I'd like to take a few moments just to give you 3 examples, and the 3 examples, which are also very well aligned with 3 key elements of Halma's DNA. So we're going to look at an organizational change that we are making, which ensures that we continue to be structured for growth. We also then want to share with you how we're going to be accelerating our investment for the future, particularly focused on technology, and then finish off with talking a little bit around how we are living our purpose, both within the operating companies and across the group and really looking at the social aspects within the whole ESG agenda. Taking over the last couple of years, I've always known that at some point we'd eventually align our operating structure with our purpose and with our 3 key market focus areas of safety, environment and health care. And our experience during the pandemic has, particularly when we think about its impacts on the world, has meant that we brought those plans forward. We're bringing those plans forward so that from the 1st of April of 2021 we're both going to report and operate as 3 sectors. So as a combined safety sector, combining Process Safety and Infrastructure Safety, a separate Environmental & Analysis sector, and then finally, a Medical sector. We need new sector chief executives. And these positions will be filled by internal promotions of 2 of our existing divisional CEOs. I'm very pleased to see the work that we're doing to develop leadership talent really paying dividends in situations like this. So our safety sector will be led by Wendy McMillan, replacing Adam Meyers, who as you know, is retiring in 2021. Our Environmental & Analysis sector will be led by Constance Baroudel. And then finally, Laura Stoltenberg will continue the excellent work she's doing as sector Chief Executive of our Medical sector. There's only 1 change in our portfolios across the 3 sectors, with our 2 gas detection businesses, Crowcon and Sensit, transferring across from Process Safety into the Environmental & Analysis sector, which really reflects where we see their long-term growth opportunities. We'll give you a full analysis and the historical numbers under the new 3 sector heading and how we -- the translation from 4 sectors to 3, as certainly before the year begins, most likely with our March trading update. I think it's important to recognize that this change is important, that it really rebalances our resources according to where we see our growth opportunities. And in particular, recognizing the acquisition growth opportunities in Environmental & Analysis are very different to the opportunities we see in Medical. And by having a dedicated team in each of those 2 sectors, I believe it's going to enable us to sustain growth in the longer term. So then we think about where are we investing for the future and particularly technology. I talked earlier in the year about our intention to invest more in our operational and strategic technology. And again, I think the past 6 months have only amplified that decision, when we think about how technology is transforming our working lives, but also the ways in which business need to provide their services and products to their customers. So we're accelerating those plans, and we're accelerating those plans by investing in some carefully selected areas. We're going to be investing around GBP 10 million of CapEx over the next 3 years, and then adding around GBP 2 million of OpEx to support that investment. What do we mean by the investment? Well, there's 2 main areas: the operational and the strategic. So the operational technology initiatives are going to be about modernizing the ways of working across the group, so that we can all do business in a more technology-enabled way. And the strategic initiatives will enable Halma companies to move to new digital business models in line with the Halma 4.0 growth strategy by building a common approach to IoT, the Internet of Things. And it will also help them to more easily commercialize the ideas, including those ones that are created by working with Inken Braunschmidt, Innovation and Digital team. So turning first to those operational technology investments. There are 3 areas. The first one is we're going to build an enhanced core IT services. So we're going to be upgrading our communication, collaboration, security technology to ensure we've got the right foundations to support how we work and how we want to grow in the future. And that's an important initiative because it underpins all the other investments we'll be making. Then we've got the HQ digital transformation program. So that's delivering critical changes to our systems at the group level, to improve our consolidation and operational efficiency across our core group functions, such as finance, HR, sustainability and legal functions. And then finally, we've got the Architecture Center of Expertise initiatives. And that's about creating and sharing best practice across the group companies, providing them with that guidance they need. And really, it's important that we recognize is about what's right for each business. So it's about helping each business choose the right kind of business application or technology architecture across their key business operations, whether it's ERP, CRM, e-commerce, finance, HR, business intelligence, they all need help, and we can give them that expertise from the center. And then strategically, there are 2 core initiatives. And it's worth remembering that we're not starting from scratch here. We've been working with external IoT partners for a couple of years. And we've also been researching what the leading benchmark companies do. So the IoT Center of Excellence -- Center of Expertise, in that, we're going to actually build a platform solution to help Halma companies get to market sooner with their connected solutions. And then on the Software Center of Excellence, we're going to complement the IoT Center of Excellence by providing those companies with critical software development capabilities because many of our businesses, particularly those that perhaps mechanically based products or electromechanically based products, do not have that software expertise, and they struggle to gain access to it. So by having that at the center, we can give them the capabilities that they so badly need. And when you look at that in the range, you can see that not only we're accelerating the pace of investment, but we're doing it in a way which is going to be fast and agile, consistent with our overall approach. We're going to be addressing the actual needs of each business rather than doing what we just think they do need. And we're going to make sure it's properly resourced. So that's going to be a combination of internal resource, but also finding the right external partners. And all of this is just going to help us be more connected with each other, but most importantly connected with our customers, both in terms of our product solutions and our operations. So want to look at living our purpose and what that means. I mean, we -- when you think about the ESG agenda, clearly, we are continuing to push ahead with our environmental initiatives. And we'll talk -- no doubt, talk about that in more detail later in the year. But for this presentation, I want to focus on the social aspects of ESG in 2 different ways because that is very much aligned with one of our key elements of Halma's DNA, which is leading our purpose. And firstly, I'm delighted to share with you details of Halma's new global charitable campaign, Water for Life, which is a 2-year campaign with our partner, WaterAid. It follows the success of Gift of Sight. You remember that over the last couple of years, we've had a project which ultimately ended up restoring the sight of hundreds of people at Ghana as well as giving free eye tests to Halma employees using Halma technology. So what are we going to do? Well, first of all, it is a program which is aligned with our purpose and with our sustainable development goals. In this case, good health and well-being and also clean water and sanitation. And our goal is to build and provide clean water for 8,000 people in Northern India. And we're going to do that by supporting the WaterAid team on the ground. With funding, we're going to raise at least GBP 200,000, but also by donating our water testing technologies from one of Halma Company's paling test, which can help prevent contaminated water supply. So our operating companies are not only going to help us with the fundraising, but also be encouraged to find ways to sustainably reduce their water usage, both at work and also at home. And again, it's another great initiative just like Gift of Sight, which brings our purpose to life. It engages employees. It helps communities in needs, and it uses Halma's technology to solve real-world problems. So I'm really looking forward to giving you updates on this program -- this campaign as we go through the next couple of years. So let's move across then from a big campaign to what we're doing to live our purpose for everyone, every day, which is again a key element of our purpose because it's not just about the large campaigns. I think one thing that struck me, again, over the last 6 months is that we've seen more examples of this in action across the group. And I'd like to share a few examples of that with you. Firstly, we see many examples of how our companies are helping external stakeholders through the pandemic. Many of our companies have been engaging with their local health care facilities and repurposing resources to make PPE to help in their response to the COVID pandemic. We've also seen companies, while focusing strongly on cash generation, to make sure they continue to supply -- support their supply chain by ensuring they pay suppliers in a timely fashion. We've been ensuring that health, well-being and development of our employees. Our operating companies have been collaborating to make their workplaces safe, sharing best practice, expanding their manufacturing footprints to maintain safe social distancing. So in many cases, with colleagues in the offices, working from home, the manufacturing teams have taken over some of that office space and manufacturing. Or if that's not been enough, they've actually been working with sister companies to share spare capacity. At the group level, we set up online, telephone support help lines through our external partners to offer mental health and other legal and financial support for all employees. And we significantly expanded our online virtual training development program for our employees, too. And finally, we've maintained our investment in our Halma Future Leaders program this year, which brings the best young graduate talent from across the world into the group. And I think it's particularly important at this time that we continue to invest in younger talent in our business. And finally, we've seen some great examples of the progress we're making in building an inclusive culture. We recently have launched a new global parental leave policy, which provides 14 weeks pay for all parents in all situations. That's covering all 7,000 plus employees across the world in over 20 countries, and in many cases, significantly exceeds the support that people can get within the country where they live. We continue to build the inclusive culture through our Accelerate Inclusion online initiative. It's a tool which both educates and gives practical tips and encouragement to all of our employees to ensure that we all work together to make Halma a place where everyone is included and able to contribute their best. And finally, our progress in terms of increased diversity in our leadership team is reflected in the fact that we've exceeded all Hampton-Alexander to target at all 3 levels of our leadership group, so that's at the PLC level, the Executive Board level and the Executive Board minus 1 level. And you look at that list, it's hugely encouraging to be able to share so many examples of what the S in ESG means in Halma, and I believe it's becoming an increasingly important component of our sustainable success in the future. So let's finish and summarize what we've heard this morning. Halma's success and confidence in the future comes from tangible qualities, tangible characteristics that we have. We are resilient by design. It's in our purpose, our growth strategy, our chosen markets with long-term growth drivers and our relentless focus on developing an agile organization with a strong culture and developing talent as we grow. This has enabled us to continue to deliver sustainable value creation for all our stakeholders, not just financially for employees and shareholders, but also in practical support we're giving to our local communities and also in the solution we provide for our customers. From a trading point of view, we've delivered a better-than-expected first half and our trading momentum has improved as the year has progressed. And we're improving the momentum in our investment as well. So we continue to invest as we grow. Our operating companies were increasing their R&D investment. We're investing -- continuing to invest in our future leaders program. We talked about the investment in technology, and we will increase our investment in M&A in the year ahead after a quiet first half period. So as a result of all of the above, we're increasing our expectations for the full year towards the higher end of previous guidance, and we now expect adjusted profits for the year to be around 5% below last year, and we look forward to the year ahead and the longer-term with confidence. That's the end of today's presentation. Now I'd like to hand over to the analysts as we have time for questions.

Okay, everyone. There's 2 ways you can ask questions. You can either raise your hand using the tool at the bottom of your screen, and I'll invite you to ask your question verbally, in which case if you can obviously introduce yourself as well as your company or you can type the question up. And Marc and I will be able to see that and read it out, and then I'll answer it for you. Okay. So our first question is from Andre at Crédit Suisse.

I've got 2 kind of short term, quick ones on Infrastructure Safety and then a broader one. On Infrastructure Safety, could you give us some idea of the Q2 run rate versus kind of the H1 that you printed, it looks like there was quite a market difference there with the drivers that you cited such as furloughing of installers in the U.K. and also in that business, the Elevator Safety disposal -- business disposal that you mentioned, could you give us a idea of the size and kind of the background to that?

Perhaps if I take your second point first, and then Marc can talk to the sequential performance of infrastructure. So what we're talking about on Elevator Safety is actually more of a decision around where we put our resources. So in Asia Pac, for example, as you well know, the Elevator Safety market is very much shifting in terms of from new construction to the aftermarket. And accordingly, the aftermarket and certainly new construction over there is not strong for us in terms of the margins we can get from our elevator door safety products. And so it's more around refocusing our efforts on selling other technologies for Elevator Safety and moving away from those door sensors in those markets. So it's GBP 1 million impact. But it's within a business. It wasn't a disposal. It was just shifting resource to where we see the growth.

Andre, let me just pick up on the first point around the sequential growth. As you know, certainly, the Fire, Security and Elevator businesses were impacted certainly in the U.K. heavily by the site access issues. We did see that lift in the second quarter. And then to your point, on a relative basis. So sequentially, the group was 11% up in Q2 on Q1. And in Infrastructure Safety, that number was closer to 15% or 16% up on Q1. So there was definitely a faster sequential recovery and Infrastructure Safety after that down point in Q1.

Very clear. And the broader question I wanted to ask really is on the strategy update, Andre. When you talk about the investing in future and creating IoT and Software Centers of Excellence and Expertise, could you talk about the balance that you expected to strike on internal development versus externally procured solutions and kind of what choices of partners maybe you've made already? And also somewhat connected to this, we've seen a whole array of software acquisitions by hardware companies across industrial sector year-to-date and kind of really accelerating now what is a sort of a 2- or 3-year trend. Do you envisage making software acquisitions over the next 3 years?

Again, I think the -- for us, software is the way in which we deliver hardware solution to the market. So what I mean by that is, for example, we made a small software acquisition last year, an Australian business called FireMate, which provides maintenance software solutions for our fire -- customers. So if you like, it's a way in which we can extend our offering of fire detection into the maintenance arena. So for us, I think to the extent that we do buy software companies, it's going to be more just extending our core focus areas based on the sensor technologies and what have you, we already have out there, rather than seeking to shift the whole focus of the group, if you like, from being a sensor business across to being purely a software business. I think that in terms of the answer to the question around what does IoT look like and what does the software look like, I think I think the reality is we haven't yet fully scoped out what that's going to look like. There are advantages and disadvantages of having internal external resources. I think my overall view is that we will have a core of internal expertise. But because of the variability, if you like, in terms of demand that we're going to get from our companies, we will need external partners to in order to deal with those peaks. So ideally, it's going to be a combination. Now just to put that into context, we already -- as also I mentioned in the presentation already, particularly on IoT, have been working with external partners who helped us develop some of those solutions. So we kind of know how it needs to be done, but it's likely to be a combination of the 2. I don't think it's a healthy thing to have that completely in-house. Equally, I think you do need some control over what you're doing and obviously, joining the docs to make sure that, for example, as we're developing our IoT solutions, at some point in the future, we could combine IoT capabilities between different businesses within the group because we've got that common approach to how the platform was being created. Can we now move over to Michael Tyndall. Can't hear you yet, Mike.

Can you hear me now?

We can.

Mike Tyndall from HSBC. A couple for me, if I can. One, just on numbers. Do you have a sense of temporary savings in the first half because the operating leverage seemed to be quite low. So profit performance is very good. I presume that you've got savings on travel potentially on salaries. Any sense of the numbers there around temporary savings that we may see coming back? And then the second one, just around water in the U.K. It feels like the trend has reversed, where previously you saw kind of a pause in investment at the end of the 5-year capital investment period. And this time around, you saw a continuation of investment but now after that new period has begun. It looks like we've actually seen the pause in investment. Any clues as to how long that will continue on in terms of water in the U.K.?

Yes. So Mike, let me just pick up on the overhead. So I think the important point here is, as we announced, we were able to move GBP 20 million or say, GBP 20 million of overhead costs in the first quarter compared to our quarter 4 run rate. This was very much driven by cash conservation at that point, whilst we're pleased with how it's protected profit. So it's a lot about temporary salary reductions, et cetera. We then, at the end of the first quarter from a liquidity perspective, lifted those restrictions, and therefore, not only have some of those costs come back, but we've also continued to invest in the business. That said, to your point, there are some areas of the business where you'll continue to see savings around travel, around entertainment, not hugely material numbers going into the second half. And it's also worth pointing out that we are experiencing a low level of increased costs in our operations in terms of creating COVID-safe environment. So the way that I would be thinking about it is overheads at a more normalized run rate following that short hit in the first quarter. And then on the U.K. Water, I think historically, you're partly right there, Mike, that the fifth year of the investment cycle has typically been a weaker year, and we did see a much stronger fifth year this time around, which is encouraging. Also, however, in the past, you've also seen a quarter first year, while the water companies kind of get their house in order and get their budgets underway and start making those decisions in terms of timing of investment. So to some extent, we were expecting a slightly quieter year this year. However, there's no doubt that, again, during COVID, that has caused some disruption in the procurement processes within the -- some of the water utilities in the U.K. The projects are still there, but they have been delayed somewhat. So you would expect in 2021 to see many of those starting to come back. So it's one of those things where we look forward to next year with some confidence.

Okay. And then can I invite Andrew Wilson next to ask his questions, please.

Hopefully, you hear me okay. It's Andy from JPMorgan. I have a couple. I'll start with actually just a quick follow-up on to Mike's just on the discretionary cost, and -- sorry, delevered, but just so I kind of understand. Thinking more about the first half of next year, Marc, it feels as if you've got the kind of competing aspects of the discretionary cost savings, the additional costs associated with COVID and kind of making safe. And then I think it's about GBP 4 million or so of sort of redundancy-related costs. How should I sort of think about those, I guess, almost one-offs kind of in the first half of next year, if I'm thinking of kind of the bridge effect?

Yes. I think the best way to spill it up is from the revenue line in terms of recovery period. So that would be my start. I'd start with revenue. What do I think is going to happen to the demand in my markets? And then from a cost perspective, as I say, largely those discretionary variable savings, I would assume that we won't be taking such extreme measures. But on the flip side, to your point, we have had some one-off costs, if you like, in the first half of this year. So the way I would be looking at is very much one of what's a normalized rate of overhead cost, assuming that the top line is back to a normalized level. And of course, we do still have that lever available to us. And all of our operating companies are managing their overheads appropriately in line with their revenue, whilst also making the appropriate decisions to ensure medium to long-term growth.

And it's just worth saying at this point as well, we had a question from Andrew Douglas at Jefferies along the same line. So I think that's answered Andrew's question as well. Andrew, any questions?