Halma plc (HLMA) Earnings Call Transcript & Summary

Good morning, and welcome to our full year '24 results presentation. It's great to be here to present another strong set of results. Before we turn to the detail of the numbers, I'd like to take this opportunity to thank everyone at Halma for their personal contributions to our record performance in the year. The commitment to delivering our purpose and the success that we've achieved in varied market conditions is something we should all be proud of. Thank you. Turning now to the highlights of the year. These record results have further strengthened our foundations and increased my confidence in our future growth. We've reported record revenue and our 21st consecutive year of record profit. We've delivered healthy revenue and profit growth, both on a reported and organic basis. Our EBIT margin and our return on sales were well within our target ranges. We've continued to deliver high returns substantially above our cost of capital. And this, alongside our strong cash generation, which was well ahead of our KPI has enabled us to make substantial investments to support our future growth. They serve financial performance that supports a further dividend increase, making this the 45th consecutive year of dividend growth of 5% or more. All in all, a great demonstration of our sustainable growth model in action. Steve will give you more detail and insight on our financial results in a moment. And after that, I'll come back to share my reflections on my first full year as CEO. And I'll look at the elements within our model that have both enabled this strong performance. And more importantly, give me confidence that we'll continue to deliver long-term sustainable growth. With that, over to Steve.

Thanks, Marc. Good morning. As you've already heard, we have delivered a strong financial performance, achieving record levels of revenue and profit. Given the varied market conditions we have seen in the year, and other headwinds such as FX and both higher interest rates and tax rates, the results demonstrate the benefit of our sustainable growth model. In particular, the benefits of diversity and breadth of our portfolio and the agility our operating companies have to act and react. Importantly, the results have enabled us to continue to make substantial investments to support future growth whilst maintaining a strong balance sheet. So let's take a look at the results. I'm pleased that we have delivered good growth and returns. Revenue is up over GBP 2 billion for the first time, up a healthy 10%. Adjusted EBIT is up 12% and EBIT margin at 20.8% around the middle of our target range of 19% to 23%. Given the increased interest costs from higher interest rates and higher average net debt in the year, the adjusted profit before tax is up 10%, resulting in a return on sales of 19.5%, flat compared to the prior year. This is the first full year of substantially higher interest rates, and it remains our objective to absorb these higher costs in the medium term. We continue to invest strongly to support future growth. R&D spend reached GBP 107 million, which represented 5.3% of group revenue. This investment is critical for our companies to continue growing over the medium term. It's also a good reflection of the opportunities our companies see before them. We made 8 acquisitions in the year, 4 standalone and 4 bolt-on and invested nearly GBP 300 million, hence, maintaining the momentum following the record investment last year. Marc will take you through the 8 acquisitions later in the presentation. As we look forward, the M&A pipeline remains healthy across all 3 sectors. It's also great to see that the acquisitions are contributing 5% or more to both revenue and profit growth. All of these investments are enabled by our strong cash generation and balance sheet. So let's take a look at some of the metrics behind these. Cash conversion at 103% is well above our target level of 90%. This was achieved through good underlying working capital control. Net debt-to-EBITDA at 1.35x has come down very slightly despite the substantial investment in the year. Finally, we are proposing to increase the dividend by 7% again. This will be the 45th consecutive year we have increased it 5% or more; once again, signaling our confidence in the future. So now let's look at revenue in more detail. This slide provides a bridge of the year-on-year revenue growth of 9.8%. Looking at the individual components. Organic constant currency, OCCY revenue growth was up 7.9%. If we look at price and volume in turn, price increases provided around 3% of the revenue growth. This is above the upper end of our typical range of 1% to 2%. The price/cost was higher in health care and also in safety where we saw annualized benefits of some of the higher price increases from the prior year. Volume increases at around 5% were within the historic range driven by continuing underlying demand and supported by our order intake, which remains ahead of last year. Acquisitions made a good contribution to revenue growth of 5%. As we look ahead, it's worth noting that based on latest currency rates, we'd expect an FX headwind of about 1% in FY '25. Now if we look at revenue through a different lens. Regional destination. This slide shows revenue growth by region. On the left-hand side, you have reported revenue growth. And on the right-hand side, you have OCCY growth. It's good to see revenue growing in all regions with the exception of Asia Pacific. If we now focus on the chart on the right, that analyzes the OCCY growth. We saw very strong growth in the U.S., our largest sales region. The key driver was the Environmental & Analysis sector, E&A with the exceptional growth in Photonics. The growth in the U.S. was also supported by the good performance of the Safety sector. Growth in Europe and the U.K. were solid, reflecting the mix of company performances. In Europe, the key driver was the health care sector, with very strong growth in our Health Therapeutics. This was also supported by a good performance in the E&A sector led by strong growth in the water analysis and treatment subsector. Growth in the U.K. was also driven by the water subsector. In addition, in FY '23, a larger public safety contract was successfully completed in the U.K. Underlying growth, excluding that contract was over 8%. Asia Pacific's revenue was 3% lower, reflecting weaker trends in China, partially offset by stronger growth in Australasia. For context, China represents about 5% of group revenue. If we now move from revenue to profit. This slide shows the year-on-year EBIT bridge. EBIT was above GBP 400 million for the first time, up a healthy 12.1% at the reported level and 7.2% on an OCCY basis. This was broadly in line with the OCCY revenue growth with good margin recovery in safety, which was offset by margin declines in the other 2 sectors. I will take you through the individual sector movements in a few moments. Moving on to acquisitions. We made a good contribution to EBIT of 7.6%. This reflects the quality of the businesses we have recently acquired. Disposals had a small positive impact of 0.2%. Since the year-end, we have made a further disposal, demonstrating we are continuously reviewing and refining our business portfolio. As with revenue, there was a currency drag of nearly 3% from the strength of sterling. Overall, it is pleasing that our performance resulted in an EBIT margin of 20.8%, which is in the middle of our target range. Let's now move on to the sector commentaries, and I'll start with safety. The safety sector was a star performer in the year. We had guided that it would recover from a challenging FY '23, and it more than met that expectation. Revenue growth was strong at 11% and positive across all regions. It also included a good contribution from acquisitions. Europe, Safety's largest region benefited in particular from the acquisition of Weetech, which was completed last year and the acquisition of Lazer Safe, which we completed this year. The good OCCY revenue growth of 6% was also broadly spread across the regions and subsectors and was supported by a healthy order book. The U.S. saw good growth with a strong contribution from worker safety. Europe and the U.K. saw modest growth, reflecting a mixed performance in public safety. There was a strong contribution from Asia Pacific, which reflected a steady recovery in China following the post-COVID slowdown and also strong growth in Australasia. And finally, there was a strong contribution from the smaller other regions due primarily to fire safety subsector. I was particularly pleased to see Safety's profit margin improved 280 basis points. This was ahead of our expectation with an exceptionally strong performance in the second half; hence, more than recovering the 230 basis points reduction experienced in FY '23 as a result of supply chain challenges. The sector benefited from good pricing, with relatively stable costs compared to previous years. It was further supported by portfolio improvements, including the completion of a significant ERP upgrade in one of the sector's largest companies. The companies within the sector remained well invested to support their future growth. Turning now to the Environmental & Analysis sector. E&A saw very strong reported and OCCY revenue growth of 19% and 21%, respectively. If we take a look at it by region, there was a very strong growth in the U.S. This was dominated by the exceptional growth in Photonics in the optical analysis subsector. This business is experiencing an acceleration of demand for technologies that support the transformation of digital and data capabilities. It was also supported by international expansion in our water infrastructure companies within the Water Analysis and Treatment subsector. Strong Photonics performance was partly offset by substantial revenue declines in our high-margin spectroscopy businesses, as we talked about at the half year. U.K. growth was strong with continued growth in our water infrastructure companies and strong demand in gas detection. And Europe saw a good overall growth with again strong demand in gas detection. Asia Pacific was down 19% on an OCCY basis, reflecting weakness in spectroscopy and lower demand in the flow and pressure control market in India and China. In terms of profitability, the profit margin declined 180 basis points. This largely reflected the significant revenue decline in the higher-margin spectroscopy businesses, particularly in the first half. At the half year, we said we expected to see a significant improvement in the sector's profit margin, and that is exactly what we delivered in the second half. The profit margin improved from 20.9% in the first half to a more typical level of 23.7% in the second half. This improvement was due to continued momentum in Photonics and the water subsector. In addition, spectroscopy benefited from the actions taken on the cost base and the stabilization of the IT system implementation. The E&A sector continued to invest at a good level with lower R&D spend as a percentage of revenue resulting from a mix effect. We also saw good momentum in converting the M&A pipeline with 4 acquisitions in the year. So let's turn to the health care sector. Overall, the health care sector delivered a subdued performance with a modest decline in revenue. It was a good contribution from acquisitions. It's also great to see continued momentum with 3 acquisitions completed in the year. Reported revenue was down 1% and OCCY revenue down 3%. By geography, all regions declined except for Europe, which saw strong growth on a reported and OCCY basis. Overall, this reflected a diverse range of performances at the subsector level. Most of our companies in Healthcare Assessment and Analytics experienced soft demand, which reflected a combination of OEM destocking and budgetary headwinds. Within the subsector, however, Analytics and Sciences performed well due to high patient caseloads and demands from health care providers for systems to improve efficiency and patient outcomes. Our smaller life sciences subsector experienced a significant slowdown reflecting these headwinds; however, our therapeutic solutions subsector continue to benefit from strong growth in cataract and glaucoma procedures. This is a key driver for the strong revenue growth in Europe. In terms of profitability, profit margin decreased 70 basis points to 22.7%. This reflected the impact from the weakness in volumes, partially offset by good management of pricing and cost disciplines across the sector. R&D spend increased and reflected good investment in new product development. And I'm pleased to see continued high levels of investment in R&D to support our medium-term growth. If we now turn to the group's cash flow performance. This chart summarizes the group's cash flows for the year. I'll point out 4 key items: The strong EBITDA generation of GBP 483 million, up 12%, typical for the group and an important part of our sustainable growth model. The working capital outflow was much improved as expected. We are starting to see companies moderating inventories following the strategic buildup in prior years. In fact, stock turnover improved by nearly 1 whole turn in the year. This aided cash conversion, which was strong at 103% and well ahead of our 90% KPI target. The net acquisition spend reflects the 8 acquisitions and the 1 disposal we made in the period. These acquisitions will become a source of incremental EBITDA in future years. Interest costs increased GBP 10.7 million to GBP 27.6 million in the year. This was a result of both higher interest rates and higher average levels of net debt. Net debt only increased by GBP 56 million despite the strong year for M&A, continued investment in our businesses and the higher interest costs. As we look forward, we continue to have substantial available liquidity. We have very recently extended the maturity of the group RCF to May 2029. In addition, in April, we completed a GBP 336 million private placement debt issuance at competitive interest rates. This placement secures financing to meet the group's likely medium-term requirements. Finally, it is worth mentioning that you can find the usual slide in the appendix with our expectations for FY '25 in relation to CapEx, the effective tax rate and interest costs. Now let's turn to our financial KPIs and how we performed against them. In my opinion, these are a strong set of results, especially when I consider the varied market conditions and the other headwinds we have faced in the year. Those other headwinds include higher interest and tax rates and adverse FX movements. In terms of the specific KPIs, I'll limit myself to a few points, as I've already touched on a number of these. It's pleasing to see good performance on the 3 revenue and profit growth KPIs. Turning to EPS and ROTIC. Both were impacted by the higher interest and tax rates and adverse FX movements. EPS growth of 7.9% was respectable, but below our 10% KPI. If those 3 factors just mentioned have been flat, the EPS growth would have been 5 points higher at about 13% this year. ROTIC at 14.4% remained high and well above our weighted average cost of capital and within our KPI range, too. This level of return, coupled with the strong growth in the year means the group created significant value in FY '24. Compared to last year, our underlying ROTIC performance improved by about 40 basis points. However, this was more than offset by the adverse effects from currency, interest and tax movements. Moving on now to my penultimate slide. These graphs show the 10-year performance of the group at the reported revenue and adjusted EBIT level. For me, the consistency of performance demonstrates the effectiveness of our sustainable growth model. This includes benefits such as the intentional diversity and breadth of our portfolio and the agility our businesses enjoy to act and react to whatever is in front of them. That said, as a team, we're continually looking to evolve and progress the business. And two areas of focus this year have been, firstly, capital returns. We have sought to sharpen our focus throughout the group. This is partly due to the higher interest rate environment. This focus has included, amongst other things, ongoing review of the portfolio, looking at the working capital and cash management procedures, reviewing the relevant internal reporting and metrics and seeking to optimize interest costs. This work is ongoing. Secondly, metrics and KPIs. We've evolved our metrics and KPIs to better reflect our strategy, the new environment and also aid comparison with our peers. For example, at the half year, we began giving prominence to EBIT and EBIT margin and pre-interest growth measures. This has further progressed at the full year. Now to my last slide, which is on guidance. Building on our performance in FY '24 and in respect of FY '25, we are providing the following guidance. Firstly, we've made a positive start to the new financial year. Our order intake in the year-to-date is ahead of both revenue and the same period last year. For FY '25, we expect to deliver good OCCY revenue growth and with an adjusted EBIT margin of around 21% in the middle of our target range. Finally, we remain well positioned to make further progress this year and into the future. And with that, I'll hand you back to Marc.

Thanks, Steve. So to start this section of the presentation, let me remind you of the 4 priorities that I set 12 months ago against which I'm pleased to report that we've made good progress. Organic growth was above our medium-term trend. In terms of inorganic growth, we had another successful year for acquisitions. And as you heard from Steve, returns remained strong and well above our cost of capital. And our continued agility was a key asset in delivering our strong performance, a point that I'll come back to shortly. These priorities will remain for FY '25 and their delivery will be underpinned by our sustainable growth model that ensure that we will remain focused on capturing the significant growth opportunities in our markets. Let me now take a step back and share the key elements, which I believe have driven our success in the last year. Starting with our relentless focus on providing value-added solutions to critical customer issues. [Presentation]

For me, these real-life examples of our purpose in action are at the heart of Halma. Makes me really proud to be able to show the difference that our companies are making for our customers and for people like us around the world every day in line with our purpose. And the video also highlighted a number of other consistent characteristics of our companies, how they build close relationships with their customers, enabling them to develop those innovative solutions? How their products have global applications and how at the portfolio level they operate across very diverse end markets, geographies and technologies. I'll pick up on a number of these points in a moment, but let's start with our purpose in action. Across all our companies, for all our people, everything we do at Halma starts and ends with our purpose. It means that everything we do is rooted in tackling some of the key challenges of our time, where there's a real premium in solving the problems. It unites us all in a common goal to grow safer, cleaner, healthier future for everyone every day. It powers every decision we make. It defines our choice of markets. It attracts ambitious and entrepreneurial people motivated to make a difference. And it gives us significant growth opportunities in helping our customers tackle some of the biggest challenges we face today, how to deliver health care for everyone, how to deal with the effects of climate change and increasing waste and pollution and how to keep us all safe in our cities, in public places and in the places we work. All of these being very long-term fundamental challenges, which are getting bigger and more urgent every day. And that, in turn, supporting our growth in returns for decades to come. So our purpose gives us the clarity on what we do and why we do it, in addition to shaping the significant opportunities ahead of us. It's then our sustainable growth model that determines how we deliver growth. Halma's growth over the last 50 years has been underpinned by the principles, which today form our sustainable growth model. The model has been tested and proven in a wide range of environments, good and challenging over many years. And this year was no exception. And our performance has further reinforced my confidence that the model is fundamentally fit for the future. As I've previously stated, it's important that we continue to challenge ourselves to ensure that the model remains relevant and to refine and optimize it as our circumstances change and we continue to scale. And over the last 12 months, I've tested it with our company leaders whether that be at our Annual Accelerate Leadership event, attending our talent development programs, our regular MD calls or during my company visits, visiting the majority of our companies across 8 countries to see our model in action firsthand. I've asked our leaders how can Halma best support your company's long-term growth. And with our leadership team, I've also reflected on what enables us to deliver resilient growth and returns through market cycles. And for me, there are 3 key takeaways: First, we must maintain a portfolio. It's not only aligned with our purpose and strategy, but also remains highly diverse. Second, as we grow, we need to retain agility, making sure that our organizational model gives our people the autonomy to respond quickly to opportunities and challenges. And third, talent and culture are critical. We want to recruit, retain and grow great people. It's crucial that in our decentralized model, we have the very best people empowered to make agile decisions close to our customers. So let me take each of these in turn outlining the actions we're taking to make sure that we're best positioned for the future. Turning first to our portfolio. We currently have nearly 50 companies and as well as being unified by a purpose, they share a number of common characteristics. For example, they operate in high-value market niches. Their markets have global potential and high exposure to long-term growth drivers. But as a portfolio, they're also highly diverse whether that be by sector or end market, by geography, by technology or by distribution channel. So paradoxically, while we're focused on a few significant challenges, we're also highly diverse organization. Let me bring this to life with some examples of how we focus on those specific long-term challenges, yet retain our diversity. First, climate change where we have great opportunities to apply a wide range of technologies in many different end markets. Let's just take one end market, wind farms, where we've invested in technologies that ensure safe access for workers through companies like Sentric and Fortress, and inspect the integrity of infrastructure, for example, through deep truckers remotely operated underwater vehicles inspecting offshore wind farms. Taking another example of how we help our customers tackle the challenge of water conservation. We've already seen in the video some of the work we do in freshwater through companies such as HWM. We're also seeing substantial growth opportunities helping our customers ensure the integrity of aging wastewater infrastructure, where we've been investing both organically through existing companies such as Minicam with their pipe crawlers pictured here, and also through M&A to further expand our technical capability and our distribution reach with 2 acquisitions made in FY '24. Sticking with water, we also have a long-standing capability in water testing through Palintest, which we acquired in 1983. Today, it enables more than 250 million tests a year for a wide range of customers. I'm particularly proud that this includes over 5 million tests for partners in international relief and development. So as a final example, let's take health care, where we're addressing the challenges from 2 angles: the first, focus on the patient and the second on health care providers. Our patient-focused technologies improve the quality of life, focused on the long-term issues associated with chronic illness. And we're in a wide range of end markets in areas such as eye health and respiratory and circulatory functions. As with other end markets, this through a range of companies with strong positions in specific niche markets. Examples would include Medicel, which we highlighted in the video. Volk in eye health diagnostics as we see here. Keeler, MST and SunTech. Our second area of focus is on health care providers, helping them to improve efficiency in health care facilities or the quality of care. PeriGen being a great example in this regard through its technology, which protects mothers and their unborn babies. It uses artificial intelligence to provide an automated early warning platform during labor, allowing health care professionals to spend more time on direct patient care while achieving better clinical outcomes. So just a few of many great examples I could give to try and bring our impact to life. So our growth and through the cycle resilience is supported by the long-term growth drivers in our company's markets. And then at a portfolio level, further underpinned by our diversity and breadth of our companies. And each year, we enter new markets and add new capabilities through acquisitions, which increases further our opportunities for growth and adds even more diversity. Let's take a look at what we've added in FY '24 through our M&A activity. And really pleasing to report another strong year for acquisitions, building on last year's excellent momentum. In fact, we've spent more on acquisitions in the last 2 years than in the previous 5. As you heard from Steve, we spent close to GBP 300 million in FY '24 on 4 standalone companies spread across all 3 of our sectors and 4 bolt-ons to accelerate our new product development and expand our distribution. And we've made a good start to FY '25 with one further acquisition completed, namely MK Test. And these acquisitions have further strengthened our positions in some exciting markets with growth underpinned by long-term growth drivers. For example, in electrical testing with MK Test and in women's health, a historically underserved market with Rovers. And we've maintained our geographic diversity, buying companies in the U.K., Europe, U.S.A. and Asia Pacific, all the time ensuring discipline in our decision-making that each company is delivering on our purpose is operating in a niche market supported by long-term growth drivers, is aligned with our culture and meets our financial criteria. And we apply this same discipline across our entire portfolio, and this has led to 2 small disposals of FireMate in FY '24 and Hydreka in FY '25. Overall, I'm really pleased with our M&A momentum. We've got a healthy pipeline of well over 600 companies, each aligned with our purpose. And this consisting mainly of SMEs operating in markets, which are the same or adjacent to our existing companies. This meaning that we can deliver continued strong M&A in line with our financial model by making a number of smaller acquisitions in each year. We've also invested in our teams in recent years, further reinforcing our M&A expertise in our sector teams, at the divisional level and in our companies. From a financial perspective, as you heard from Steve, we've got a strong balance sheet, substantial committed financing and very healthy levels of cash generation. And it's this combination of our healthy pipeline, capability and financial capacity that gives me confidence in our ability to continue to find and acquire excellent targets, which will support our future growth. So turning now to my second takeaway namely, ensuring that we maintain our agility as we continue to scale. Our organizational model allows our companies to be as agile and opportunistic as a start-up while leveraging the advantages as being part of a FTSE 100 global group, perfectly articulated by Kathy in the quote. When I visit our companies, I see leaders who don't wait for direction from us at the group level. Instead, they're entrepreneurial, knowing that they're empowered to seize the opportunities in their markets whilst at the same time being accountable for execution and delivery against clear financial targets over the medium term. We want them to be close to their customers, to their suppliers and to their markets, and, therefore, to be able to make the best decisions for their company as their markets evolve. At the same time, we give them access to the benefits of being a part of Halma from the scale that we bring as a group. From our collaborative culture, which means that they benefit from the experience, support and best practice of other companies, from the ability to attract even better talent than if they were stand-alone. From the support we give them through our menu of growth enablers, from the access to specialist skills and knowledge in areas such as digital technology, M&A, talent management and international expansion. And we can also support them with capital enabling them to invest with confidence in growth opportunities aligned to their individual growth strategies for the long term. And this combination of agility backed by support where required is really powerful for our companies in their niche markets. Again, let me bring this to life with some examples of the ways in which our companies have benefited from that agility during FY '24. For example, HWM doubling its production capacity to meet the demand from U.K. and U.S. water companies for its leak detection devices. This achieved at pace with limited investment by reorganizing its production lines and developing new testing software. Sentric, one of our interlock companies, launching a new global distributor platform created after studying best practice at another Halma company. Orama, moving quickly following a change of regulation for large timber frame buildings in San Francisco, further leveraging the temporary fire detection technology that you saw in the video being used in France. Thermocable, one of our fire detection companies accessing new markets in tunnel and industrial safety in India is through partnering with another Halma company. In NovaBone, rapidly increasing its production synthetic bone graft material following success in China with volume-based procurement. And in Crowcon, pivoting its gas detection technologies into the battery energy storage market. But none of this would be possible without the exceptional people and leaders in our companies. Turning now to how we identify, retain and grow the very best talent in Halma. Our decentralized model requires exceptional leaders inspired by purpose, who can grow each business as if it was their own, and show that type of agility and collaborative mindset that I've just outlined. And just like the types of companies we grow and acquire, there are some important common characteristics that we seek in the people that we hire. High intellect and good judgment, learning agility and potential, and a good cultural fit. In fact, talent is so important to our model and our success that we've set out the key principles in our own talent philosophy, as you can see on the slide. Recruiting people with high ambition and potential also creates an internal pipeline of leaders who can step up and run our businesses in the future. And again, just to give one example, this is from our leadership development program, which is aimed at people with high potential who are not yet on company boards. During FY '24, we saw 11 attendees received promotions to company boards, 2 of which to company MDs, just excellent to see. Now returning to where I began. Our success is driven by the combination of a number of factors. Our clear and positive purpose that drives our decisions and defines our choice of markets. Our diverse portfolio of businesses, each operating in niche markets underpinned by strong long-term growth drivers. The agility inherent in our model, the exceptional talent that we have in our companies and their leadership teams. And when I consider the scale of the opportunities ahead of us in both existing and new markets, I look forward with excitement. These opportunities lying the challenges that we're all aware of in our everyday lives, climate change, clean water and air, access to health care, keeping people and assets safe. And at Halma, we have the capabilities to help our customers address these challenges. The people, technologies and financial resources we need and the organizational capability and agility to deliver. And it's this that gives me the confidence that we will continue our track record of delivering sustainable growth for decades to come.

That's the end of the presentation. And now we have some time for questions. There's two 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, or you can type the question, which Steve and I will read out and then answer. So our first question, let's go to Jonathan. Jonathan Hurn. I think you need to unmute Jonathan. There we go.

Yes, just 2 questions, please. Firstly was just on environmental analysis. I wonder if you could just talk a little bit more about sort of photonics; obviously, strong growth last year. How long can that cycle run? Do you feel that, that strength in photonics, particularly in the U.S. can run through all of next year? And just aligned to that is just on spectroscopy. I mean just in terms of your thoughts there, when do you think you can start to see or expect to see a recovery in that market be?

Yes, I'll take that up, Jonathan. Just on the wider photonics piece, it's just worth putting it in the context, of course, of a strong group performance with our revenue and profit up 8% organic constant currency, and that's come across, as I talked about in the presentation, across the entire portfolio and really coming back to the diversity that we've got in the portfolio. And again, for context, just to take a quote from Steve there in the presentation, Safety was the star delivering year-on-year profit growth of over GBP 39 million. And again, to put that into context, that compares to GBP 19 million in optical analysis within the E&A sector. That said, still a fantastic contribution, a real effort and, again, come back to the agility of the teams this year in terms of being able to scale up. So a really good opportunity there. I'm really pleased with the growth that's been delivered. And across the wider portfolio, we have seen a number of companies successfully scaling up this year. So I talked around HWM in the presentation, Medicel also in the video. So it comes back again to that point on portfolio. That said, really pleased with the photonics growth in the year. As we look forward, we've got a high degree of confidence that we can expect a continued strong contribution in FY '25. And I guess then beyond that, it's really thinking about the opportunities for the wider group in the use of photonics, which again is something that we'll look into as we move forward. So really pleased with its contribution and great effort by the teams in terms of scaling up. On the point then in terms of spectroscopy. We did see some benefits come through in the second half from the self-help measures and the actions that they took in the first half of the year. So again, coming back to that agility in the portfolio. You've got one part of E&A really scaling up, another part taking appropriate actions. So we saw the benefits there. From a demand perspective and looking forward, we have seen order take start to come back, certainly got pockets of good momentum on order take. But I think it would be too soon to call that a recovery. So in our mindsets on spectroscopy, we're seeing that certainly is a second half come through in terms of recovery.

Very clear. And just a second question was just obviously on your margin guidance, that sort of 21% EBIT margin for this year versus 20.8% last year. Obviously, you are seeing strong earnings growth in terms of your outlook. Why is the gearing not better in terms of that margin for this year? Is it down to mix? Is there anything sort of working against you in terms of basically getting a stronger margin improvement?

Yes, I'll take that one, Jonathan. It is exactly a mixed dynamic. So we will see some improvement in the margin performance, particularly E&A because it had a difficult performance in half 1, but it is a mix play coming through. You saw safety recover their margin hugely in FY '24. I wouldn't expect significant margin expansion from safety in FY '25. You'll see some improvement from E&A, and then you've got, what we call a sort of challenging performance for health care in FY '24. And I think it's going to take some time for health care to recover probably sometime in the second half, but we'll have to wait and see.

So I can see Rory, you've got your hand up. So over to you, Rory.

Congratulations on good set of results, strong outlook. I think -- I mean, no doubt that the 9% share price appreciation this morning is as a result of that broad strength across the group and that profitable growth in safety; however, I do want to come back to the point on photonics, if I may. And just really ask what do you think your ability is to grow share across that space? I'm aware that, I guess, customer concentration has been quite high there in the past. Do you think that, that could be something that, that business might look at? And that's the question.

Yes. Obviously, we've had businesses Rory in the group in photonics since -- or certainly 2010 and before, always looking for a number of opportunities. A core part of that business is still operating across many different end markets. So certainly look forward with excitement in terms of other areas that we can apply that technology to meet some of those challenges that I talk to around our purpose. So we've got good capability. It's then looking for those applications. So confident in terms of the opportunity going forward. I do think the performance that we've seen in the last couple of years is a fantastic example of how we can bring in really good capability, fantastic teams locally and then with the backing of the group, give them the ability to play in these markets and with these types of customers. So a really good example of what we're trying to do here in the group in terms of delivering future value.

Great. And if I could just have a quick follow-up, staying within E&A. It looks like there's also been strong growth in the U.S. there in water and, obviously, the video alluded to that. Just trying to think about how structural that growth is in water in the U.S.?

Yes, there's no doubt the video quoted in terms of the scale of the water infrastructure in the network and, of course, the aging network of pipes in the U.S. So we see it as a good market for us. We think we've got the technologies. We've got the proven capability. We've got a good footprint in the U.S. already in terms of water, and it's certainly an area that we're excited about as we look forward.

Yes. I'd just add to that. When we look at the water subsectors, U.K. is about 36% of the business and U.S. is about 25% of the subsector. So I think there's lots of opportunity in the U.S. for us to grow.

So let me just pick up a couple of the typed questions. So first one from Stephan. Could you -- sorry, I've just gone a little bit blank on screen. Could you please explain the rationale to divesting Hydreka? And his second question is around a little bit of color on photonics going into H1 '25. H1 was good, but the demand trickled significant through in H2 plus does your assumptions include an improvement? So I think we've covered off most of that. But Stephan, please shout if we haven't covered off the photonics question. Then just picking up on Hydreka again, just to give a little bit of context in the presentation, we said that we're always looking to refine the portfolio. These are small refinements to the portfolio. So taking Hydreka to give you scale, it's around EUR 9 million of revenue. That said, the real driver was the financial profile of Hydreka below that of a typical Halma company in terms of both revenue growth and return on sales, but the fundamentals of what were driving that was the growth strategy and the strength that it's got going forward is very much a rental model. It's specific to France and a significant portion of their business now and where the growth can come in the future is by selling third-party products. So it just didn't fit within our criteria moving forward and good luck to the team with their new owner. So I can see David Farrell, got your hand up, so we'll go to David.

All right. Just a quick question on E&A, but not necessarily around photonics. Just kind of looking at the R&D there as a percentage of sales. Steve, you said something about revenue mix affecting that. Can you just give a bit more detail in terms of what's driven that low? I think from recollection, E&A is probably one of the more unregulated sectors you have and, therefore, typically has higher R&D to drive that kind of continued profit revenue growth opportunities.

David, it's Steve. You're spot on when you mentioned mix. It was because we saw such an acceleration of revenue during the year, particularly with regards to photonics and water infrastructure that the R&D spend didn't quite keep up with that. So it's a mix effect rather than there's any signal that there's less confidence or less opportunity in E&A going forward. Quite the reverse, we see it as a really promising set of subsectors and long-term end markets. So it is a mix effect, nothing more than that.

Okay. And my second question, just around kind of M&A and the pipeline of opportunities that you've alluded to. I think that in '24, it was kind of a bit of a continuation in '23, where you were picking up companies, which had return on sales substantially above the group level, which looks kind of as if there's been a bit of a change relative to history. When you look at the pipeline going forward, do you expect that mix to carry on going in the direction it has done? Or are we still looking at quite a broad range of opportunities?

Very much a broad range, David. I think the start point, of course, is aligned to our purpose. Looking for those businesses in those niche markets that are solving high-value problems with the long-term underlying growth drivers. So we are always looking at high-quality businesses. They tend to have very strong growth and metrics. Really pleased with those that we've been able to identify. It's not that we're specifically sitting here going, we need to find businesses with that higher return on sales, but it's a very good start point. In fact, more of my focus when I'm looking at M&A deals is around that gross margin. So what is the value that we're creating for our customers and the problems that we're solving and we've been really pleased with what we've seen come through and confident in the pipeline moving forward in that respect.

And David, just to pick up on that. I think it's worth noting that particularly in that first few years that we bring those businesses into the group, we do end up investing in those businesses, whether that's strengthening the Board of Directors, the financial governance or whether it's investing in capital in the operations. So they come in very ROCE accretive. They will be ROCE positive, but we do invest in those first few years as well.

And over to Max. Max Yates.

Thank you. Can you hear me?

Yes, we can, Max.

Just the first question because I've sort of heard from a couple of people this morning, could you just sort of the best that you can, just kind of really lay out exactly what is happening in the photonics business. So maybe sort of referencing exactly what sort of customer groups are driving this? Is this data centers is a question I've been asked a few times. So maybe kind of as much as we can talk about sort of the end customers, it would be really great to get some color, just in really simple English exactly what's happening there.

I'll certainly try Max. I think the first thing to say is, look, we all know in and around these markets that it's highly competitive. And there's also a lot of confidentiality in terms of when you're operating at that end of the technology. So we are restricted in the detail that we can give. That said, we have talked in the past in terms of giving the clarity, where are we playing? It's around using photonics around those technologies that are supporting the building of digital and data capabilities. So we see that as an area of growth. But as I say, as you'll appreciate, it's a highly competitive and lots of confidentiality. So I can't really dig any deeper than that.

No, that's helpful. And just maybe one for Steve. Obviously, a very, very good year of cash conversion, above your targets. And I guess when we look at your working capital across the group, I know it will kind of vary on a sort of business level. Do you see opportunities to kind of reduce inventories, improve working capital when you look at the group in aggregate? And I guess, could we see a continuation of that sort of cash conversion above your 90% target continue into 2025?

Yes. Thanks, Max. So as I said in the presentation, capital returns has been an area of focus for us. And I'm pleased with the progress we've made during the course of the year. I'm pleased you pointed out that it's 50 businesses driving their working capital and dictating what they need to do with their capital employed. That said, it's been really good to see the inventory levels in absolute terms come down a little bit year-on-year despite the growth of the group. And it was really good to see stock turns improve by nearly a whole turn this year, which was good to see. Do I see inventories continue to go down? I think that's difficult to call because it will be dependent on what the businesses see in front of them. What I do expect to see is a continued focus on return on capital employed and for that to make steps forward. That said, it's a work in progress. We've had a lot of conversations around the group in a very Halma way. There's no central diktat. It's just raising awareness and raising education of what's needed and what's required. So I think it will move forward in FY '25. In terms of cash conversion, I do see us being ahead of the 90% target. I wouldn't want to commit to how far ahead of it, but I think that's our expectation.

And then to Bruno.

So it is on Photonics because just going back to E&A, so the 32% organic sales growth in H2, and there were some headwinds at other businesses, though I would have assumed photonics probably grew at 50% or more in the second half. I guess, can you just clarify how much growth in H2 was driven by the photonics business? And in regards to that strength, was it 2 or 3 non-repeat orders? Or is it broad-based and rather a flurry of orders that you executed on? Just really trying to get a sense of how useful is H2 as an underlying indicator of demand, is this sustainable? Should we be annualizing this number as we think about 2025? Any color here would be useful.

Yes. Yes. Thanks, Bruno. I mean, clearly, a lot of questions today on photonics. So I do just want to go back to the point in terms of the wider portfolio. That's what's delivered our result this year. That growth that we've seen in safety, the performances that we've seen in a number of our companies. And that's not unusual. If we go back over the last 20 half years, over the last 10 years, there's only been 4 half years where all sectors have grown their profit at the same time. So we are still and always have been very much a portfolio of 50 fantastic companies, all contributing to our long-term growth. That said, coming back to the specifics on photonics. We did see good growth in the second half of the year. Again, for context, the optical analysis sector, subsector as a whole delivered us over the year, GBP 19 million worth of profit growth. And to put that into context, our fire safety businesses delivered GBP 24 million worth of profit growth over the year. To your point then in terms of how does that roll forward, and to Steve's point earlier, we're confident in terms of a continuation of that demand. So very much think of that as an acceleration in phenomenal growth in the first half. It's led to a good level of performance in the second half that we see continuing through FY '25.

Got it. So it sounds if something shouldn't reverse as we look towards 2025. Okay. And then just, I guess, shifting gear because I think you mentioned health care you expect it to recover in H2. Spectroscopy is expected to somewhat recover in H2 of fiscal 2025. I guess just any color around seasonality as we think about 2025? Do you expect a normal shape? Or is it expected to be more H2 weighted given those points?

I think actually, the numbers will be more half 1 weighted this year, Bruno. If you pick up on what Marc just said, on half 1, with regards to E&A and photonics, we've got this high level of contribution we've achieved in half 2 of this year, and we'd expect that to sustain into half 1 and half 2 next year. So on that basis, given half 1 last year was lower, you're going to -- you can see significant growth in half 1, but less so in half 2, more plateaued. So I think that's part of the shape that's going to drive the shape of next year. In terms of health care, Yes, I'd like to think we'll see some improvement in the half 2. So that will help the half 2 performance. But overall, I think the shape of the growth for half 1 and half 2 will probably be about sort of 48-52 overall in terms of profitability.

Just on the orders. So a good start to the year, but I was wondering if there's a seasonality to the order intake. Is it typical that orders in book-to-bill are typically stronger in the first quarter? Or is that not the case? And actually, is it just a stronger fiscal Q1 for you guys?

No, it's not seasonality. You do get some seasonality, like E&A is a more half 2 seasonal business. But overall, as a group, not seasonally driven. So the order book is good as we go into FY '25. And as we've talked about, the order intakes book-to-bills ahead of 1, and we're ahead of order intake for last year. All of that underpinning the guidance that we've given you that we'll have good OCCY revenue growth in FY '25 and at a good margin at 21% around that level.

Got it. And just on the order book, I think you previously commented at least in H1 that it was 30% to 40% above historical levels. Where do we sit today?

Yes, we -- our typical -- if I talk about it in terms of weeks, may historically have been 8 to 10 weeks, we're just a little bit above that at the moment. But what we saw coming into FY '24 was a very high order book position. People were doing a lot of forward booking because they were concerned about supply chain issues, et cetera. What we've seen happen and we talked about this at the half year, is that normalizing during the course of the year. So we're still a little bit more than we would normally be overall, but we do see the market as far more normalized and far more normal overall. So we think the markets broadly come into equilibrium and we're just about over 1 in terms of book-to-bill and the order intakes are supporting the underlying revenue guidance.

Thanks, Bruno. I don't see any other hands up. So please do get your hand up now. No. Okay. And there's no open questions. Bruno, just to be clear, your hand is back up. Is that as you got a follow-up question? Or is that just a hangover?

No, I've got a follow-up question. I just want to ask. I got back in the queue expecting there might be other questions. But could we just talk about pricing a little bit? Because I guess when we started this fiscal year, you were discussing price increases or you're talking around 1% to 2%, you delivered 2% in H1. The contribution in H2 seems to have been 4% or close to. So it seems as if you put some sequential increases through the year, was this in any specific sectors, business areas? And could you also talk about your expectation for 2025 in terms of pricing?

Yes. No, you're right. We did guide to 1% to 2%, and we have come out slightly better than that. We've seen good pricing performance through safety, and we've also seen some good pricing performance through health care as well. So that's what's come through. When we look out across the 50 businesses and always remember that it's those 50 businesses deciding what their pricing should be because they're closest to their markets and closest to their customers. We think it's typical Halma levels, 1% to 2%. We think we're going to be in the sort of 1%, 1.5% range for FY '25. That's where our thinking is, and that's what's underpinning our guidance.

Got it. And just finally, on life sciences. Are you guys -- did you comment earlier on that you're seeing tentative signs of recovery? And I guess in terms of your Chinese life sciences business or China, in general, could you talk a little bit about what you're seeing in that end market? And if expectations of stimulus or at least chance for a stimulus is, I guess, [ infusing ] any of your end customers or how you expect that to pan out in the next fiscal year?

Yes. I think it's fair to say that certainly looking at spectroscopy, we're seeing spots of order intake coming back. But as I said, Bruno, I think it's too early to call that a recovery. We're certainly looking at our forecast something closer to the second half. Looking then more wider at China, again, just to give you a little bit of context around 5% of the group. Revenue was down 6% across the different sectors. But as ever, with Halma, that was very mixed. We had some strong performances and in particular, again, within our safety sector, they've had a good performance in China. The challenge was within spectroscopy. And certainly, some of those other end markets that we're exposed to, beyond life sciences to consumer electronics, testing, et cetera. So again, too early to say in terms of that recovery. It certainly feels like we've hit the bottom, but I wouldn't want to be saying that it's recovering back quicker and certainly very much looking towards the second half. Thanks, Bruno. Stephan, I see you have your hand up.

Stephan from HSBC. Just on the portfolio management side. I appreciate that you're looking into, obviously, refining the portfolio to get more the Halma characteristics through and pronounced and in most of the portfolio you have that. And that's for Steve. If you look into the portfolio, is there a percentage -- I mean, how should we think about it? Is there a percentage that is close to not making the Halma criteria where you have a closer look? In other words, should we expect more divestments going forward? Should we expect more portfolio measures to get as well the returns back to -- I mean, you have good returns, but back to a more pronounced level.

No. We've looked at the portfolio and we're always looking at the portfolio. So I wouldn't want to give the impression, for example, the new CFO has come in or the new CEO has come in and now we're looking at the portfolio in a way that we haven't before. We're always reviewing the portfolio and seeing what's there. When we're looking at businesses, we're looking at them over the long term. So there will always be some businesses in the portfolio that are going backwards and they might go backwards for a year or 2. And then whenever we're seeing that, we're trying to understand what's sitting behind that. Is it a market issue? Have we lost market position? Has there been niche erosion? Or is this a transitory point? And they'll work through that, is there an issue with management and maybe it's a management issue. So we're not looking at the portfolio at the moment. And so saying there's a big slug that needs to be changed or there's a big churn that needs to take place. But we are constantly reviewing it. So I wouldn't be sort of divulging it, here is a percentage of businesses. What we're really doing is sort of saying, can we see the long-term prospects for that business? Will it meet Halma characteristics over the long term? If it is, that's a business we want in the portfolio even if we had to work through a short period of challenge.

So you're saying you're very happy with the portfolio as it is at the moment?

Yes. And judging by the results we've just posted, I think it supports that.

So no other written questions and no hands up, just giving one last chance for anybody. Okay. Well, it just leaves for me to say a big thank you to everyone. Appreciate the questions, and have a great day.