Halma plc (HLMA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our Full Year Results Presentation. I'm pleased to be here to report a strong set of results my first as Chief Executive. As you'll hear, once again, they show the strength of our Sustainable Growth Model and the value of having exceptional talent and teams across our organization. I'd like to start by thanking everyone at Halma for their hard work and dedication and their contributions to our significant progress over the last 12 months. I'd also like to welcome Steve Gunning, who joined as Halma's fourth ever CFO in January. Steve was most recently CFO at IAG. And I'm delighted that he is here with me today and as a part of my leadership team going forward. In a few moments, Steve will give you more insight into our financial performance. But first, I wanted to share a few reflections on what's driving Halma's success in the substantial opportunities that I see ahead of us. And if I start by going back to 2016 when I was first introduced to Halma, right? I remember then being really impressed by so many things, the purpose-driven nature of the Group, the positive impact that we had on the world, the clarity and success of our Sustainable Growth Model, the culture and the diversity of the talented people that I met. And I knew then that this was a special company and something that I want to be a part of moving forward. And it's this feeling that's grown stronger over the past 7 years and has really deepened over the past 6 months as part of the CEO transition, I've had the opportunity to spend more time out in our individual companies. Every time I visit one of our companies, I'm always inspired by our fantastic people, the quality of our companies and the technologies, the scale of those problems that we're solving for our customers and the lives and environments that we protect and enhance. As you'll see, innovation and creativity remain core to the Group and every individual plays their part in the Group's success. I stand here immensely privileged to be leading an organization with such a strong purpose and inclusive culture, and I'm excited about the opportunities ahead of us. And as I think about the future, it's often the case that a new CEO has been appointed to make fundamental shifts in strategy or significant changes in portfolio. In fact, when we last changed our CEO 18 years ago, that was exactly Andrew's brief. And there are many significant changes happened in his first couple of years. Today, I believe we're in a very different position in terms of our portfolio, our capabilities, our people, the momentum we have in growth, investment and returns. In short, I believe we're in a position of strength with our Sustainable Growth Model at its foundation. And it's a dynamic system, and its strength lies in the way each of the elements are interlinked to reinforce each other, and its heart are unifying an ambitious purpose. This drives us to have a positive impact on people and the planet. Our purpose drives us to those niches within markets that are addressing long-term needs. And at Halma, we've always focused on those long-term growth drivers, and this underpins both our organic and inorganic growth. And all of this comes together to give us confidence in delivering our sustainable financial model. Our strong organic growth returns and high levels of cash generation allow us to constantly reinvest in growth opportunities, both organically and through acquisition and deliver those increasing dividends to our shareholders. Our ability to capture those opportunities over decades is underpinned by the agility of our business model. This puts talent close to those niche markets who can leverage our entrepreneurial and collaborative culture to innovate and solve high-value problems. I believe that this agility is especially critical now. Think about those challenges facing our customers, whether from climate change or ensuring our health and safety or indeed facing up to economic and social volatility. Therefore, as we've done consistently since our foundation 50 years ago, we must continue to evolve and enhance our model to capture the significant opportunities for growth and positive impact. And it's in this context that there are 4 areas that I see as key priorities for Halma as I start my first year. First up, organic growth. It's critical that we have clarity on the customer problems that we're solving, the value that we're creating and our ability to capture that value. Organic growth is the cornerstone of our financial model and is therefore our top priority. To do this, we'll keep our talent close to our customers, and we'll maintain high levels of continuous investment in our products and services and continue to seek a strong return on those investments. Secondly, inorganic growth, the other half of our growth model. Again, in a fast-changing world with many emerging trends, it's important that we remain disciplined in our approach to acquisitions with a relentless focus on purpose alignment and only those market niches that offer those long-term growth returns and cash flows. And it's this same lens through which we'll continue to review the existing portfolio and investments, and we'll need to act decisively when required. I don't believe that there's any fundamental outliers today. However, this must be a continuous process. My third area of focus is that of ensuring that we maintain the agility of our business model. This through our decentralized organization model, our entrepreneurial and collaborative culture and ensuring that we have the very best talent in our leadership teams across the Group. Allocating our capital in the right markets provides a solid foundation. However, in a world where we're seeing the increasing opportunity, the increasing pace of change and volatility, it's that agility and our talent that's going to ensure delivery of our ambitious growth targets. Put simply, talented teams close to their customers, making great decisions supported by being a part of a global Group will deliver sustainable growth and impact aligned to our purpose. I'll come back to this in the second part of my presentation. My final priority alongside growth is maintaining a disciplined approach to optimize the returns on the substantial investments that we make. Whilst I'm not signaling a change to our current KPIs, I do believe that it's critical that we maintain them as we continue to grow. And I know that this is an area that Steve will take the lead on. As I say, I'll cover strategy in a little bit more detail later. So before I hand over to Steve, let me just summarize our progress over the last 12 months. We've reported another set of record results with continued strong growth, high returns and substantial investment aligned to both our Sustainable Growth Model and the priorities that I've just described. We've delivered record revenue and our 20th consecutive year of record profit. And it's great to see our ambition reflected in the record levels of investment of over GBP 0.5 billion. This is also reflecting the scale of the opportunities that we see in our markets. This investment is strengthening our capabilities both organically and through our acquisition. Organically, we've continued to build the strength and diversity in our teams to foster our entrepreneurial spirit by building on the power of the Halma network. And for our acquisitions, we've had a record year for both spend and acquired revenue and profit. As always, this investment is supported by our strong financial position and high levels of cash generation. Really pleasing to see our cash conversion back to targeted levels in the second half. And our growth has been delivered with continued high returns. While return on sales was below last year's unusually high level, it was well within our target range as was ROTIC, which also remains substantially above our cost of capital. And all of this supporting a proposed 7% increase in the dividend. This representing our 44th year of annual dividend increases of 5% or more, another strong signal of our confidence in the future. So this performance, together with a good start to the new financial year means that we're well positioned for further progress in 2024 and beyond. So with that, let me hand over to Steve for more details on the financial performance in the year.

Good morning. It's a pleasure to be presenting my first set of results as the Halma's CFO. And before I launch into the results, I thought it would be worth just making a few opening comments. Halma is a company I've followed and admired for a long time. Whilst working for Pricewaterhouse in the '90s, I used to visit Amersham and audit the Group at that point. And I got to -- I had the opportunity to meet David Barber and Mike Arthur, the founders of the Group and also to be exposed to the business model. And once you've been exposed to Halma, you don't forget it very easily. And when the opportunity came to work with Marc and the rest of the team to take Halma forward, I jumped at it. I'm now in my fifth month and I've received a great welcome. I visited 20 subsidiaries so far, and I look forward to visiting many more for the remainder of the year. Overall, I've been impressed with how the Sustainable Growth Model drives the culture, the decision-making and the governance of the Group, the focus being to create value in the long-term. At the same time, I've been impressed by how the Group companies and the Group as a whole look to deliver year in, year out. And that's what they've done this year as well. So let's take a look at their results. As Marc has already stated, there are a strong set of results with record revenue and record profit. Revenue of GBP 1.85 billion, up 21.5%. Adjusted profit of GBP 361 million, up 14.2%. All this with continued high returns. Return on sales was 19.5%, well within the 18% to 22% range. At the same time, we've made record investment. In terms of M&A, we've made 7 acquisitions, 4 stand-alone and 3 bolt-ons and invested nearly GBP 400 million. It is great to see the strong pipeline converting into quality acquisitions. R&D spend has exceeded GBP 100 million for the first time. And this investment is absolutely fundamental to maintaining and improving our market positions. Finally, we have continued to invest in our infrastructure. This includes capital expenditure and also the Group IT programs. All of this investment is only possible with a strong balance sheet and strong cash generation. So let's look at some of the metrics that support that. Net debt to EBITDA is at 1.38x. And that's very comfortable for us. It was also good to see cash conversion reach 90% in half 2. It was much lower in half 1 because some of our companies have made the strategic decision to invest in inventory because of supply chain issues. It's good to see those issues easing in the second half and going into FY '24. As a consequence, in FY '24, we would expect cash conversion to be ahead of the 90% target. And finally, we are proposing a dividend increase of 7% this year. This is the 44th consecutive year where we've increased the dividend by more than 5%. So now let's turn and talk about revenue. This slide provides a bridge of year-on-year revenue growth of over GBP 300 million or 21.5%. Organic revenue growth was 10.2%, which follows on from 17.5% the previous year. Price increases provided 4% of the growth, which was consistent across all 3 sectors and above our typical historic average of 1% to 2%. Volume increases at 6% were also at the high end of the historic range. All of this indicating the strong demand for our products. Next, we see acquisitions contribute 4.3%, and then we see an FX benefit of 8.1% as a consequence of the strong dollar compared to sterling. If we now look at the revenue through a different lens, we will now look at revenue growth in the regions, and these are destination regions. This slide on the left hand shows the reported revenue growth and on the right hand, the organic constant currency growth. For today's purposes, we'll focus on the organic constant currency growth. It was good to see strong growth in our 2 largest markets, the U.S., where the growth was across all 3 sectors, and in Europe, we saw strong growth in the safety and the health care sector. U.K. growth at 6% was in line with our long-term expectations and pleasing given the fact that it was 25% growth in the prior year. Asia Pacific saw strong growth in India and Australia, but this was partially offset by the decline in China due to the various lockdowns through the year. Now let's move to adjusted profit. As Marc outlined, we delivered record profit whilst making substantial investments to support our future growth. Profit was up 14.2%. And at the OCCY level, it was up at 3.1%. The organic level was held back by the half 2 ROS performance, and I'll touch a bit more on that in a minute. There was a good contribution from acquisitions of 2.8% and once again, an FX benefit due to the strong dollar compared to sterling in the year. I said I'd say a little bit more about the half 2 return on sales performance, and we'll turn to that now. This chart shows the half 1 and the full year return on sales performance for 3 periods. The first period is the 5-year average leading up to COVID. The second period is the 2-year average during the course of the COVID pandemic. And the last period is for FY '23, the year that we're actually reporting on today. The key observations we would make from looking at this graph. One, in all 3 periods, our return on sales was within our targeted range. Secondly, during the COVID years, our return on sales actually increased because we cut back on non-mandatory spend. Then if we look at FY '23, in half 1, you'll see the return on sales was at 19.6%. So that was above the historic average, albeit starting to normalize towards it. However, the full year result for FY '23 was below that historic average, and that was because the half 2 return on sales was at 19.4%. So why was the half 2 return on sales below the historic trend for half 2. There were 2 reasons. Firstly, the Safety Sector was impacted by supply chain disruptions. And secondly, the interest expense was up due to the record level of investment and the higher interest rates. So what was the issue in the Safety Sector. Some of the sector -- some of the semiconductor components used in our products have been deprioritized by the manufacturers. This has affected a number of our companies in 2 ways. The cost of the components has increased considerably due to their scarcity. And secondly, the effective companies have had to invest in recertifying their products with newer cheaper components. The good news is the impacted companies are making good progress through this challenge, and we are starting to see the Safety Sector's return on sales recover. So if we consider the main drivers for the fiscal year '24 return on sales for the Group. We have the operating leverage of the business coming out of FY '23 going into FY '24. We see the recovery in the Safety Sector's return on sales. And we see the highly profitable acquisitions we made during the course of the year. These 3 factors offsetting the increased interest expense. And so as a consequence of that, we're giving guidance today for FY '24 that our return on sales will be about 20% for the year, and it will have a more typical half 1, half 2 split, where the half 2 return on sales is higher than half 1. Now let's turn to cash flow performance. This chart effectively summarizes the cash flow statement for the Group. And I'll just pick out 4 items here. The 2 largest items, EBITDA and acquisitions. The strong EBITDA generation is typical for the Group and testimony to the growth model. The acquisition spend reflects the 7 acquisitions we made during the year, and these companies clearly will be a source of further EBITDA in future years. Working capital was higher than normal during the -- due to the strategic investment in inventory during the year. But we would expect that to ease in FY '24. And so the cash conversion improved to 90% in half 2, and we would expect it to be ahead of 90% in FY '24. Finally, it's worth mentioning pension contributions. We will expect pension contributions to reduce by GBP 11 million in FY '24 because agreements been made with the Halma pension plan trustees to defer contributions until the triennial valuation has been completed. The scheme is already very well funded, and we don't want to put further contributions in there, which aren't required. Now let's turn to sector performance. And before we get into the details of the Safety Sector, it's worth noting that because of the FX and the acquisitions creating a significant difference between reported revenue growth and OCCY revenue growth, we have provided detailed bridges in the back of the presentation deck. So what about the Safety Sector? The Safety Sector achieved a strong revenue growth and record investment in FY '23. The strong revenue growth of 11% was broadly spread across the regions and really reflected good underlying demand for our products. In terms of profitability, the ROS was lower at 20.5%. And this was primarily due to the supply chain issues I've already mentioned. The good news is we're starting to see that return on sales recover as we go into FY '24. Safety had a really good year in terms of M&A with 4 acquisitions. In Fire Safety, it purchased Thermocable and FirePro. In Power Safety, it purchased WEETECH and a bolt-on for Sentric Zonegreen. It was also great to see our companies investing in R&D to support their future top line growth. Let's turn to Environmental & Analysis sector. This sector saw good organic revenue and profit growth and healthy levels of investment during the course of the year. The revenue growth included strong performances in the U.S., Asia Pacific and other regions. In terms of profitability, the gross margin improved slightly due to good management of pricing and business mix. The return on sales declined 50 basis points to 24.3%. So this was reflecting variable overhead returning back to pre-COVID levels. It's fantastic, again, to see building momentum in M&A performance with 2 acquisitions during the year, Deep Trekker and a bolt-on for Ocean Insight. And then shortly after the year-end, the Sewertronics acquisition and a bolt-on for Minicam. Now let's turn to probably the star performer in the year, which is the health care sector. The health care sector performance in the year was really strong with double-digit revenue and profit growth at the organic constant currency level. Organic revenue grew 10%, and this included a recovery in patient case loads in the second year post-COVID. By geography, all regions except Asia Pacific reported double-digit revenue growth. Asia Pacific declined on an organic basis due to the lockdowns in China. In terms of profitability, the sector achieved a slightly higher gross margin and the ROS increased by 90 basis points to 23.4%, which does represent an element of recovery towards pre-COVID levels. It was good to see continued investment in the businesses. Organically, in terms of new product development, R&D spend was 5.9% of revenue and also to see a larger acquisition in IZI with a maximum consideration of GBP 151 million. If I turn now to the performance against financial KPIs. I think I've covered most of these, so I'll just pick out 3, which I think are worthy of note. A strong acquisition profit contribution of 5.5%, especially as this metric is on a post-interest basis. On a pre-interest basis, the figure would have been over 9%. This pre-interest basis has validity given the self-sustaining funding model that Halma has. EPS, great to see it up 17%, driven by the strong reported growth. And in terms of return on total invested capital at 14.8%, a strong level, just slightly up on the prior year and well above our weighted average cost of capital of 8.9%. This was delivered at a time of record investment, which is supported by a strong cash generation and strong balance sheet. It's fantastic to see the strong returns from our past investments. And now if I come on to my last slide. This slide shows the 10-year performance of the Group of the revenue and adjusted profit level. And it's excellent to see that the 10-year CAGR is over 10% for both of these metrics. It demonstrates the effectiveness of the Sustainable Growth Model, which is at the center of the business. The Group invests to achieve sustained long-term value creation, and you can see this in the slide. A key focus of my role will be working with Marc to see those returns continue to come through from the investments that the businesses have made and will continue to be making, that's both at the organic and at the inorganic level. I will now hand you back to Marc, who will give you an update on our priorities for the rest of the year. Over to you, Marc.

Great stuff. Thanks, Steve. So to get us started on the second half of my presentation, let me just remind you of those 4 priority areas that I outlined at the beginning. First up, organic growth, our top priority, inorganic growth, remaining disciplined in our approach to purpose-aligned acquisitions in the right end markets, maintaining the agility of our business model, ensuring that we've got the very best talent close to our customers and empowered to capitalize on opportunities, optimizing the returns on the investments that we're making. I'd like to keep things simple. In the most basic level, we acquired great companies aligned to our purpose and culture, and we expand the growth and positive impact over decades, this at a rate over and above what they could achieve on their own. But let's just not take that from me. Let's hear from some of our companies, both ones that are new to the Group and others that are more established about how for them being a part of Halma has helped them achieve their strategic ambitions. [Presentation]

Fantastic examples there of our strategy in action, always great to hear how our companies are able to retain their existing culture, yet be aligned to Halma's overall purpose in DNA. You would have also have heard the words there of network and collaboration, always an area of significant value for our companies and always a key theme during my site visits. And it's always great to hear just how many examples there are of support or insights or knowledge sharing across our network and always covering a wide range of topics, whether that's solutions to complex R&D challenges, whether that's access to the latest technologies, recommendations for partners entering new geographies or assessing market knowledge, just to name a few. And finally, it was fantastic to hear those comments in relation to the ability to take a longer-term view without those time constraints that you may have with other owners. So thinking about those opportunities over the long-term and the current environment. While the long-term drivers that underpin our growth has not changed. It's clear that sustainability challenges are intensifying rapidly and are now front page news. And these challenges are driving billions of pounds of new investments, whether that's into renewable energy, electrification, clean technologies, health care systems or into automation and digitalization, all of this representing huge opportunities. So let's bring this to life by looking at some examples of how we're evolving our portfolio to capture these opportunities aligned to our key themes within our safer, cleaner, healthier purpose. First, a great example of a company that was historically focused on the oil and gas and chemical processing industries. They're now using their safety solutions to solve a new challenge, in this case, arising both from climate change and the energy transition. OsecoElfab has now customized its technology to support the rapid evolution of electricity distribution networks as part of the green energy transition. Specifically, its solution enables the elimination of SF6 as a insulating gas, which is used in electrical switchgear replacing it with clean air. Now this is critical in that SF6 is a really potent greenhouse gas with around 24,000x the warming potential of CO2. So [ CECO ] solution enables a much greener transition to those new forms of energy. Next up, a great example of our companies collaborating to respond to new opportunities. Sensit and Crowcon, 2 of our gas detection companies joined forces to respond to the rapid growth in demand for air quality monitoring products in Europe. This demand being driven by countries developing clean air strategies and introducing tighter regulations to protect people's health. And this collaboration ultimately resulted in a new series of air quality monitors sold into the European market and providing real-time insights into the air that we breathe. And finally, on this slide, an example of one of our health care companies, in this case, responding with agility to the increased incidence of disease in aging populations. This whilst ensuring that their customer can meet ever more stringent regulatory requirements. Longer Pump based in China was challenged by one of the long-standing Chinese medical equipment customers to develop a custom-built pump for its new dialysis machine. The team were able to adapt their existing technology to provide a high-quality solution at speed to the customer, this then help them meet this fast-growing health care need. So just a few of many great examples across the Group, which hopefully start to give a flavor of the fantastic work that we're seeing in the companies, ultimately, ensuring that we do more good and less harm. So turning now on to how we're evolving our portfolio through M&A, where you can see many of those same themes coming through nearly GBP 400 million worth of acquisitions we made in the year. For example, a number of companies are enablers of a green energy transition, WEETECH's high-voltage testing, Deep Trekker's ROVs inspecting offshore renewable energy infrastructure, and through FirePro's suppression products protecting lithium battery power storage facilities. In health care, our focus is on areas where we see increasing instance of disease, often correlated with age like diabetes in the Longer Pump example or IZI's products which support the diagnosis and treatment of cancers. All fantastic additions to the Group that I've got absolutely no doubt will form the basis of our organic growth for decades to come. Turning now to my final topic, talent. People are at the heart of the Group's and our individual companies' growth strategies. We're committed to supporting their development and ensuring that our culture is highly inclusive. And starting with the senior leadership team and changes to the Executive Board. As I stated earlier, Steve joined as CFO in January, and Andrew's retirement from the CEO role at the end of March marked the completion of the CEO succession process. And it feels like an appropriate time to thank Andrew for his leadership, the success that he's created and for his investment in me personally as part of the Group CEO transition. I wish him all the best after retiring from Halma. There's been 2 further changes to my leadership team since the year-end. Firstly, in relation to our innovation and digital team, where we've seen a huge amount of success over the last 6 years, ultimately, the team achieving its aim of embedding significant capabilities in our companies. And as we look forward, our companies now need a different form of support. They need support that's focused on those technological requirements in relation to commercializing their digital solutions. And for example, giving them advice on the best technology platforms. And this support will be best led by the Halma technology team. And as a result, Inken Braunschmidt will leave Halma at the end of June. We also announced that after 5 years with Halma, Wendy McMillan, our Safety Sector Chief Executive, has decided to leave Halma to pursue leadership opportunities elsewhere. I'd like to thank Inken and Wendy for their significant contributions to Halma, and I wish them every success in the future. And as part of our ongoing succession planning, I'm really delighted to share that Wendy will be succeeded in early July by Funmi Adegoke, who is currently our Group General Counsel and Chief Sustainability Officer. Funmi brings strong strategic, commercial and business acumen across many, many multiple industries. And as I've personally worked closely with Funmi over the past 3 years, she's consistently displayed a deep understanding of our model and the core traits that we look for in a Halma leader. Fantastic to see our ongoing succession planning in action. And with that move, Constance Baroudel, our Environmental & Analysis Sector CEO will also take on the Group's Sustainability Officer role. As I've mentioned, the combination of our culture and our agile organizational model is one of our unique strategic assets. With our highly decentralized model, we need exceptional people who are empowered and accountable for making decisions close to their customers, all of this without the need for complex reporting lines. Our agile model enables our teams to respond quickly to their customers' needs to capture new growth opportunities. And it's, therefore, critical that we find the right talent and that we support and invest in their development. During the year, we've therefore increased investment in the development of our leaders to enable their success. We introduced 3 new leadership development programs with over 200 leaders participating in face-to-face learning events and 750 participating online. We also formalized our internal mentoring network, and we launched a new coaching program. Our Halma Future Leaders program, the aim of which is to see our graduates on one of our company Boards within 7 years continues to deliver with 12 alumni now promoted to that level. We also invested in the power of the Halma network. We run events to reconnect our people following the pandemic, and this included our global Senior Leadership Conference, Accelerate Halma that we held in October last year. This brought together over 300 of our senior leaders, a fantastic event, and it was really great to have everyone together again. We've also opened new offices in India and China, both of these designed for collaboration with more spaces for working together. And finally, our ongoing technology upgrades are greatly enhancing our ability to connect and collaborate across the Group. We also recognize that having an inclusive culture and supporting healthy lifestyles leads to a more energized and productive workforce. And we've supported this in a variety of ways, for example, through extending our employee assistance program, so that it now covers the U.K., U.S., Europe and China through enhanced health care and retirement saving plans in the U.S. and through a wide range of individual company initiatives appropriate for their local markets. I'm proud of the progress that we've made in our drive to build diverse and inclusive teams and businesses. However, at the same time, I recognize that there's still more for us to do. And this can be seen by looking at one measure of diversity, that of gender. And whilst we've made fantastic progress and have a really good gender balance across our senior roles and in our future leader programs despite great progress that we have more opportunity at the company Board level. Another notable achievement has been the success of our global neutral parental leave policy with now nearly 500 employees having benefited. And whilst I've used gender as an example, it remains important that we continue to challenge ourselves on every aspect of diversity, including race and ethnicity. Finally, it was great to see our seventh global employee engagement survey, reflecting the continued high levels of engagement among our people. Once again, we had a strong response rate of 85% and an overall engagement score as strong at 76%. So ahead of giving you the outlook, let me summarize. We're starting 2024 from a position of strength. We've got great momentum in the business. We've got a positive culture and strong teams. We're well invested and focused on those attractive niche markets aligned to some of the greatest challenges of our time. We have a proven strategy and growth model that we continue to evolve as required. And we've got clear priorities within that model to maximize our opportunities for organic and inorganic growth, to maintain the agility of our business model and to ensure that we're optimizing the returns from the substantial investments that we're making. Looking forward, 2023 was another successful year for Halma. This reflecting the benefits that we derive from our Sustainable Growth Model and the contributions of everyone in the Group. We've made a positive start to the new financial year. We have a strong order book and order intake in the year-to-date is broadly in line with revenue and ahead of the comparable period last year. And based on current market conditions, we expect to deliver good organic constant currency revenue growth in the year ahead. And as we heard from Steve, return on sales to increase to approximately 20%. We're well positioned to make further good progress this year and in the longer term. That's the end of the presentation. And now we've got time for some questions. As ever, there's 2 ways that 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 or you can type the question, which Steve and I will read out and then answer. So just looking at the list now, I can see Jonathan, Jonathan Hurn that you've got your hand up. So let's start with you.

Yes. Can you hear me okay?

All good, Jonathan. Yes.

Great. I just have 3 questions, if I may. Firstly, just on margin, and if you give a bit more detail, just firstly on how you see that safety margin touch again in FY '24 to get back to sort of a 23% level or is it so just sort of edge up between [Technical Difficulty]? And also on margin, safety in terms of Environmental Analysis, obviously, 24.3% margin for this year. Obviously, it's down. Does it start -- does it come down further from here or is it kind of sort of level out or between how sort of the trajectory of that margin progress going forward as well, please?

Yes. Thanks, Jonathan. I'll just sort of make an overview comment in terms of margins. So I do think it's important that we recognize that the prior year was particularly strong given that we didn't have that fast recovery or spend coming back in from the discretionary overhead. So a little bit of context there. And as Steve talked to actually going back to those pre-COVID levels. But I'll let Steve just dig into a bit more detail on safety and E&A.

Sure. Jonathan, in terms of safety, as you heard from the presentation, clearly, they've had challenges to work through with FY '23. I think one of the things I'd highlight in the midst of that was actually the Safety Sector had the strongest organic revenue growth of all of our sectors. So there was no issue with underlying demand. It was just a case we had a challenge to work through with componentry. In terms of our confidence as to why we think the safety ROS will recover during the course of FY '24. When we look at the 2 months year-to-date, we're already ahead of the same time last year, and we're also ahead of the level that we had in half 2. So we're already seeing improvements. So that's data or input to us when we were giving the guidance of the 20%. So will it get all the way back in the first half, second half, difficult to say. Do we think there's good reason and confidence and evidence to it recover, absolutely, because we're seeing that already at the moment. In terms of health care, I do think health care is more a case of it's been normalizing. So I think that will be more leveling out -- sorry, in terms of E&A, I think it's more a case of it will be leveling out. In terms of health care, I still think there's an element of normalizing back to the pre-COVID level. So I think there's some potential upside there. So when we look at it overall, clearly, there's sort of movements in all 3 of our sectors, but that's one of the beauties of having a portfolio, some have good days, some have bad days. But when we look at it overall, we think the 20% guidance looks sound. It's getting us back to pretty much where we were pre-COVID. And as we said in the presentation as well, we think that the profile will be much similar to what we've seen pre-COVID, half 1 considerably lower than half 2, but low-19s for half 1 and then sort of mid-20s for half 2.

Good. Thanks, Steve. And I guess let's just pick up on a question there from George Featherstone, similar in terms of the second part of his question, which was on margins. The first part of the question was in relation, let me read it out. On growth outlook, you guided for good organic growth last year and delivered 10%. How should we think about good growth for FY '24, given your comments suggest orders ahead year-on-year and backlogs remain elevated?

Yes. So the KPI with ourselves internally is 5% growth. And the aspirational target we set ourselves is 7.5%. Our view at the moment is we're going to make good progress, which probably means something in the region of the 5% to 6% range. What underpins this is primarily the state of the order position. The order book is strong. It's at about 16 weeks. Typically, it would be at about 8 weeks to 10 weeks. The order intake is ahead of last year, and the book-to-bill is just under 1. So when we look at the situation and the underlying sort of fresh demand for our business, we are comfortable with the 5% to 6% range in terms of organic growth.

Thanks, Steve. And Jonathan realized we just sort of built on your first question. So I'm expecting that you said that you had a couple of questions, back to you, [ good to tell ].

Just -- yes. Just going back to that growth of sort of 5% and 6% that you are talking about, how much of that is going to be price within that mix? Is it going to go back to sort of 1% to 2% price or maybe a little bit more in [ '24 ]?

Yes. That's a good question, Jonathan. And absolutely, to your point, historically, we've been around 1% to 2%. We've seen 4% this year. The prior year, we're at 3% to 4%. So we're absolutely trying to find that balance in terms of the value that we're giving to our customers, maintaining the relationships with them. And the general view across the Group is that we should be back around that 1% to 2% moving forward, which will find a nice balance in terms of value creation and maintaining the relationship.

Great. And then maybe just the final one. Just in terms of [indiscernible], it's up GBP 5 million in this fiscal year. I mean, are we going to see that kind of increment going forward every year? And just in terms of the payback on that business, do you feel like you're really getting the payback on investment now or is that still [Technical Difficulty]?

Apologies, Jonathan, you're breaking up. I didn't catch that question. Can you just try again?

Certainly. Yes. So just in terms of that sort of central cost function. Obviously, it starts probably around about GBP 5 million this fiscal year versus last. Are we going to see those kind of increments going forward? Is that going to be sort of the annual sort of ride we see every year in terms of central cost function? Just aligned with that, are you starting to see a payback on that investment or is that really still to come through?

Yes, it's a great question. 2 thoughts on that. In terms of explaining the sort of GBP 5 million movement, frankly, it's somewhat distorted by what we've been doing in technology. We did rephase a couple of the IT programs that we were doing. We took stock and looked at where we were with the programs. That resulted in about GBP 2 million of spend coming out of FY '23 and going into FY '24. So if you recall at the half year, we guided a much higher central cost figure for FY '23. So if you strip out that GBP 2 million sort of movement from FY '23 to FY '24, we're broadly flat on central costs. And that's roughly what we'll be aspiring to achieve going forward. And in terms of returns on central costs, I think it's a really good question. And I think what we -- what's happened with I&D is a really good example of that. We've built and we've invested in a growth enabler. We think we've taken that. It's been hugely successful to its conclusion. And now we've dismantled that and rephased and reshaped the way we're doing that activity going forward. So we're constantly looking at the growth enablers and the central functions to ensure that they are giving us a return for our investment. And as Marc said in the presentation, we're continuing to look right across the business, whether it's investment in growth enablers or investment in the companies or the sectors to make sure that we are getting a return for that investment.

Thanks, Jonathan. So I can see, Andre, you've got your hand up, so we'll switch to you.

Yes. Can you hear me?

Yes. Yes, all very clear.

Great. I'll just carry on with one on margin. And I wanted to pick up on the operational gearing that you mentioned as one of the drivers of margin expansion or recovery back to [ 20% ] in fiscal 2024. That is expected to happen despite the central function moving as you've just explained why with IT, but nevertheless, we are seeing a GBP 6 million increase. So I just wanted to see if ask about this kind of higher reliance of operational gearing, we haven't really talked about that in the past, there's a factor of margin improvement. And with that central now being at least 100 basis points above historic levels and interest costs being also, I think around 50 bps higher. Is there a bit more pressure on the companies to generate higher kind of operating ROS to get to the 20% PBT?

So let me pick up on that one, Andre. I think the first thing to say is there isn't any increased focus on operational gearing. All of our individual companies have Halma like metrics. They're in those markets with long-term growth drivers. They are selling highly valued products and services. So the reference to operational gearing was one of continued top line momentum in addition to that high gross margin that we've always had on our products. So nothing changes there in terms of a focus or in terms of the flow-through. And your point in terms of central costs, Steve picked up there in terms of how we're still operating and focusing on having a lean central function, finding that balance between ever-increasing need for governance reporting and regulation, but also in addition to making appropriate investments to support and enable growth in our companies. Historically, those costs have been around 2% of revenue. Often, when I've looked at that, it's been split 1% on the regulatory governance reporting, 1% on the enablers. The only real increment here is that bit of technology spend to get us to where we need to be on the back office system. So I think it's much more business as usual, continued good growth with a return on sales at around 20%. So no incremental pressure on anybody. It's about continued momentum in the great businesses that we have.

Great. That's very good to check of. And then just a quick follow-up on that IT spend. So in fiscal 2025, you don't expect that GBP 2 million to repeat, right? These were all -- these one-off items.

The GBP 2 million was purely a rephasing. So it's not a case that it's a recurring item. It was a rephasing from [ '23 to '24 ], just basically because where we got to with the programs and we wanted to put our foot on the ball and see whether the plan still made sense and the time scales made sense.

And, Andre, to that point in terms of is that continuing, absolutely. Investment and continuation in technology at the center and in the Group has to continue. A large proportion of our R&D spend that was great to see up over GBP 100 million this year is focused on technology. In the center, we have had, as you're aware, what we're calling our DTP projects, which are upgrades of our systems. We've also made investments in cybersecurity. And all of those investments will continue as we move forward, albeit we had a little bit of a peak last year, and that will flow through into this year. But as I sit here, I absolutely see that as an area that we'll need to continue to invest in as we move forward.

Okay. That's very clear. I was asking because I think in the past you discussed there was a SaaS item that you were expensing while originally the plan was to amortize. But I think that's now we'll work through. So we expect that GBP 2 million to continue.

Excellent. Thank you, Andre.

If I may, just a final one on the M&A pipeline, clearly, very healthy and it sounds like you're kind of operating in a target-rich environment at the moment. Is there any color you could give us on where maybe there is particularly strong opportunities in terms of across the 3 sectors or regionally?

As you say, Andre, I mean, really good momentum. It's pleasing to see that record level of spend last year. And then we've made 2 further acquisitions in this year. So great momentum. The pipeline does look healthy. In terms of timing, as you know, due to our approach, we're, I guess, in its simplest form trying to buy businesses that aren't for sale. And therefore, the timing of when these deals lands can change, and that's why we see those peaks and troughs. All of that said, it's really pleasing as we look at the pipeline to see that good mix across our sectors, good mix in terms of size and good mix in terms of geography. And then finally, we're seeing a nice mix between stand-alone and bolt-on. So those investments that we made in the teams a couple of years ago are certainly coming to fruition and the scale of the opportunities in our end markets are certainly there. So I don't sit here today concerned about the pipeline, but I'm also not able to sit here today and predict exactly how much we'll execute in the 12 months ahead.

Great.

Thanks, Andre. So we've got Bruno with your hand up, so if we open the mic to Bruno, please?

Awesome. My question is revolved around pricing. So coming back to it, so 4% does not sound like a great deal in the context of the inflationary environment, we find [indiscernible]. And it sounds as if this was a conscious effort by yourselves to hold up a little on pricing to gain market share or build on some of those relationships with customers. I just wanted to check, one, if this is fair? And I was also just interested in how far you could have taken pricing up by, if you so wish to do so, [ missed a square ]?

Yes. I mean, I'll, again, just give a couple of headlines and then Steve can build. But I think the key thing is that, look, there's no doubt that there's pricing resilience given that non-discretionary and regulatory nature of our products and services. And they're clearly highly valued given where we are from a gross margin perspective. The key thing that we've got is that agility down in our operating companies. So we've got individual Board of Directors with deep market knowledge, deep relationships with their customers, and they have the autonomy to make the appropriate pricing decisions not only for the short term but over the medium term. So I wouldn't like to predict how far we could have pushed it. I think I trust our teams and trust their relationships with their customers that we found the right balance between ensuring that we can cover incremental costs and build on that long-term relationship.

Yes. Not a lot to add to that other than the fact that, Bruno, I was very encouraged that the gross margin was flat year-on-year. So there was significant inflationary pressure come through. So the companies did a great job adjusting their prices to recover that position. They didn't go beyond that, but they did recover and maintain the gross margin, which I was encouraged by.

Understood. And just coming back to order trends in terms of what you've seen in trading year-to-date. Could you provide some color and flesh out some of the drivers of this growth? Is it broad-based across all sectors? Is it driven by pricing and volume growth or would it be fair to characterize it strong? Any color along these lines would be greatly appreciated.

Yes. I think the start with our portfolio, and as I say, the markets that we're in and the types of products and services is that we have got good underlying demand in our end markets. All of that said, you will have heard from others and other companies that you're speaking to, there are certainly pockets in the short term, whether that be let's [ sink ] some examples, some OEM stock build unwinding over the next couple of months, whether that be in health care, some MDR buildup in order books. But actually, we're a portfolio of companies, and we've got that agility. So at the headline level, we start in a position of strength with the underlying demand. We're certainly not immune to the challenges that others are seeing in the markets, but we've got great resilience across the portfolio.

Understood. That's very clear. And just finally, just on the backlog then, I think you commented that it stood around 16 weeks of revenue coverage pre-COVID, that was 8 weeks to 10 weeks. Do you expect it to converge towards 8 weeks to 10 weeks by the end of this fiscal year or is that perhaps an FY '25 story?

I think they will converge. I don't think it will converge within 12 months. I think it will be a longer run off than that. But over the long-term, we would expect to see those to converge back to the 8 weeks to 10 weeks typical. But I wouldn't expect us to close that during the course of FY '24, but clearly, it will come down.

Thank you, Bruno. So we've got a couple of further questions come up on the chat. Firstly, from Aurelio. R&D, Halma has been spending above 5% of sales for some years and ahead of the 4% KPI, while organic growth has also been ahead of the KPI, how should we think about R&D going forward in relation to organic growth?

Well, I think that's a great question, Aurelio. We're very encouraged and pleased to see our companies invest in R&D. The central engine of this business is the organic growth and to maintain our positions and to maintain our return on sales, et cetera, to invest in new products and processes is absolutely key. Everything we see at the moment suggests we'll continue to be in that 5% to 6% range in terms of R&D spend. I think for Marc and I, when we talk about returns, what we're looking to see is can we see the output of that coming through in the return on sales and the growth and demand in our products, and that's what we are seeing. So I think we should continue to think about it in that sort of 5.5% range going forward.

Thanks, Steve. We have one other question from [ Rory ] from UBS in the chat. So I'll just read that out. First question, which businesses within safety are most affected by supply chain issues and when did they become aware of the issues? Second question, can you remind us of the coupon rate on the private placement debt? And the third question across your pipeline of opportunities, what is the tone of discussions around valuation? So Steve, do you want to put a little bit of color on the first 2, and I'll pick up number 3?

Yes. On when did we become aware of these issues, I think the Safety Sector has been addressing and dealing with the challenges throughout FY '23. We did see a buildup in inventories in the first half of the year, but that was more about scarce supply and building up the stocks. In the second half, it became clearer that, that situation was ongoing and becoming more severe. And so we then went into the situation where we were having to recertify our products with new components. So it's been something that's been building throughout the year, and were certainly more the case in half 2, and that's as we saw the figures come through. In terms of the private placement debt, the coupon rate, it's at 2.9%.

Thanks, Steve. And then picking up in terms of tone of discussions around valuation. I think the headline there is that pricing is held up. I mean ultimately, we're looking to acquire quality assets. We're looking to acquire them in those markets with strong long-term growth drivers. So you often don't see downward pressure on pricing, but they look to be maintained. The other important piece here is that price isn't often the key driver of the seller's decision when we're talking to owners. Clearly, they're looking for a home for business. It's absolutely appropriate to get a fair value for their business. So all in all, pricing is held up. Looking from the outside in, one may argue that given rate rises, does that mean that we've got less competition where we've seen it previously with private equity, I think that's fair to say in the short term. However, the flip side of that is, clearly, there's a lot of capital out there waiting to be deployed. So that's a dynamic that we'll keep an eye on over the next 12 months to 18 months.

And Rory, if I just come back to your second question, just try a bit more color. Our average cost of debt at the moment is about 3.8%., where 50% fixed and 50% floating with our debt in terms of interest rate exposure, if that gives you a little bit more color around interest expense.

Thanks, Steve. I don't see any other hands up and there's nothing in the Q&A text box. So just one last request, if there is anyone, could you either raise your hand or open your mic? Okay. Excellent. Well, with that, a big thank you to all for your questions, and have a great day.