Halma plc (HLMA) Earnings Call Transcript & Summary

Hello. I'm Charles King, Head of Investor Relations at Halma, and I'd like to welcome you to this Halma webinar. Today's webinar is our first online investor event, looking at one aspect of Halma's sustainable growth model. And today, we're going to be focused on M&A and the contribution that acquisitions make to Halma's growth. We'll be tackling some of your most frequent questions on how we approach M&A. Questions like what sort of companies are we looking to buy, how do we find them and how do we bring them into the group. To help answer these and your other questions, let me introduce the team who will help us explore these themes, starting with -- to my left with Funmi Adegoke, our Sector Chief Executive for our Safety sector. And to her left, Bill Stoval, one of our divisional Chief Executives within our Healthcare sector. And finally, Todd Burt, who's our Chief Business Development Officer, effectively leading our M&A team in the Safety sector. Welcome, all 3 of you. So I'll start by asking them a few questions about their role in the acquisition process, and then we'll take questions from our audience online. So maybe I can start with you, Funmi. And ask you to give a bit of context on your role heading up the Safety sector.

Thank you, Charles. So Halma has 3 business units within the group, which we refer to as sectors. And each of those is led by a sector CEO. I'm the sector CEO for the Safety sector, which represents 40% of the group's revenues. My role is accountable for, firstly, driving our organic growth within the sector. Secondly, delivering on our M&A strategy; and finally, developing the long-term strategic direction for the sector and as a member of the group executive team for the group as well. So on a day-to-day basis, because I'm often asked what I do, and I don't take offense to that. A lot of my time is spent really supporting our amazing talent. Capital allocation is a big part of what I do. And as I said, then really taking a long-term view on the direction for the group and the sector.

Great. And just thinking of those aspirations at the group level in the context of our overall group targets for me, what sort of companies focusing in on that M&A topic for today, what sort of companies are you looking to buy?

So maybe just to take a step back, Charles, and sort of remind people about our growth strategy here at Halma. Fundamentally, we're trying to do 2 things. We're trying to buy companies and then we're trying to help them grow for the long term. So in terms of the first part of that, which is buying companies, what we're looking for are companies that are operating in really attractive niches that have differentiated products or solutions, typically quite small companies. They usually operate in a market driven by long-term sustainable growth drivers. We like to see them delivering a healthy track record of growth and returns. So we're not a turnaround. We look for companies that are already being successfully run and that can benefit from being part of the group. And importantly, for us, we'll ideally like to see them not being in a process. So we like to buy companies that aren't up for sale and really build the credibility and the relationship with the owners to tell them why we might be good home for them. In terms of the growth side of what we do because I talked about us sort of buying businesses and then growing them. I think what's really important to emphasize here is that we really drive a sustainable growth model. And so what we mean by that is we're looking to grow these companies to help them grow their top line and their returns over a long-term period. How do we do that? Fundamentally, in 2 ways. Firstly, we underpin that with a self-sustaining financial model. So these companies are the high-quality businesses that deliver strong organic growth and therefore, are highly cash generative. And what that means is that we can fund both our future growth and their future growth, but also our acquisition strategy. Secondly, we run a highly decentralized business model here. So we talk a lot about the autonomy that the companies have when they come into the group. And that's something that we really feel is really important to being able to deliver on that long-term growth strategy. So within the decentralized model, it's underpinned by autonomy, by agility, decisions being made quickly, operating at pace and with innovation at the heart of what we do. When we then think about sort of what we aspire to deliver through our growth strategy, our ambition is to double our earnings every 5 years. And that leads us to a growth KPI of 10%. Half of that comes through our organic strategy and the other half comes through M&A. So hopefully, that helps people understand where M&A sits at the center of our strategy.

And just then thinking about the resources behind that M&A strategy. How are you set up to do M&A? Well, how are we set up at Halma maybe, but also just obviously focusing on your sector?

Absolutely. So from a group perspective and equally from the sector perspective, I think the divisional CEOs of which Bill is one in the Healthcare sector are absolutely essential to being able to deliver on our M&A strategy. I mean you'll hear more from Bill directly, but our divisional CEOs spend typically half their time helping us source, find and acquire those businesses. What we've also done from a group perspective is put in a level of investment to put additional capabilities and expertise, to support the divisional CEOs as they go about delivering on our M&A strategy. And so we've invested in a team of M&A resources dedicated to each sector. And for the Safety sector, Todd is the Head of the M&A team. And so you'll hear more from him directly and he'll do a better job than I can of telling you what he does. And so -- and then in addition to sort of our divisional Chief Executives and the resources we've put at the center, what we've also seen over time is that our companies as they've scaled are being more interested in driving an inorganic growth strategy. So we've seen an increase over the years in the number of bolt-ons that we're doing as well. So you -- what also I think is worth mentioning actually, Charles, is sort of the process of how we do M&A. Really at the heart of what we do is, first of all, being able to get really valuable input within the organization and challenge on the quality of the decision-making. Secondly, a really heightened discipline on capital allocation, so really making sure that the right people are involved in the discussions around how we do that. But importantly, doing that in quite a collaborative way, a very Halma-esque way, where we're able to get the right level of conversations going quite early in the process. And all of that means that I'm quite confident that we have the expertise, the capability but also the capacity to keep doing deals.

Fantastic. Thank you for that. And it seems like a really good time to -- you talked about that pivotal role of the divisional Chief Executive. So maybe we can turn to Bill, and just talk about that role and Bill, maybe you could just put in your own words what you see that role as being and how that works for you and bring that to life for real -- for how that works for you.

Thanks, Charles. The DCE role itself is really the non-exec chair for a group of companies. And so one level deeper, what does that mean? Like the 2 sort of key goals of the DCE. The first one is driving sustained organic growth because that sort of drives our whole model. And then the second one, as Funmi mentioned, is M&A and really finding new great companies to add to the portfolio to keep it going for the future. So drilling in a little on what each of those look like. From the organic side, most DCEs have between 4 and 8 companies in their division. I have 8 companies that I manage. They're all in health care because that's my expertise, with sort of a core group really around minimally invasive surgery and another in digital health. And then on the -- I guess one little deeper on that, like for organic, what do you do? Like how do you make an impact? And for me, the biggest areas of the DCE is talent and strategy. And given our model, we're in market niches with long-term growth drivers, differentiated products. And if that's your baseline and you add to that great talent and a clear strategy, good things happen. On M&A, the companies that I buy that we find come straight from my division. So I'm directly accountable and responsible for delivering on those -- on the growth of those acquisitions that we find. So it really ties it out and it sort of reinforces that disciplined approach we have to M&A and driving that accountability. Importantly, in M&A, we don't feel like we have to do any deal. There's not a pressure that you have to close a deal or meet a specific date or target. We really want to find the right companies, and we take the time to really find those best companies, and that's what we're after.

And how do you find those companies, Bill? What's the process that you go through?

I wish there was a single silver bullet that you could do and find these great companies, but it's hard, that's the challenge. And there's a number of different ways we go at it. One of my favorite is working closely with our existing operating companies because they're deep in their market, right? They have that market expertise. They know what's happening. They know the dynamics, and they can really spot what good looks like for future companies. We also ourselves get out in the market. We talk to people and immerse ourselves in the ecosystem, understanding what's happening and trying to connect the dots about what's happening in the future and where is this market going to go to find good companies. Internally, we do sort of market mapping. So we have a strategy or a strategic approach that we really would like to be in this area. We have a process where we really deep dive and really analyze the area and the drivers and what's happening and look for those companies, working really closely with Todd and his team to do that piece. And then the final 2 is bankers and brokers, especially where they have taken the time to really understand what good looks like at Halma and what we're after and understand the kinds of companies we look for. We found success with them. And lastly, increasingly, we have companies actually coming to us because they see some of our companies in the market that are successful in growing and they sort of want to be part of that club.

Sure. Sure. Absolutely. And I mean, that brings me on to those sort of broader reasons why companies want to be part of Halma. We'll hear from a couple of them on the video in a moment. But just what's your take on what's attractive to companies in joining Halma?

So let's take a typical scenario. And so if you step back, pretend like you're a founder, you're an entrepreneur, right? You had a great idea. You live in a small town, you've attracted people, you found these customers. And over 20, 30 years, you built an amazing business, right? And you're wanting to move on or step back or for whatever reason it's the right time for you to sell your company. And what would you care about? Well, this is like -- this has been your whole life, right? So you care deeply about your employees, your customers, your suppliers, your community where you're often a pillar of. And somebody who's going to take that legacy and build on it and take it to the future is really what you're looking for. And so if you think of the Halma autonomous model where people keep their brand, their employees, their building, their scope, their process. And then we add to it some of the things that a global group can bring and let them sort of maintain that and grow over time, with the proof points we have showing that we have great ability and strength in doing that, that's really a powerful attraction for that kind of a person.

So Todd, maybe turning to you now. And maybe just asking a simple question, same one as I asked Bill and Funmi. What's your role as Head of the Sector M&A team.

Yes. Thanks. I mean, ultimately, I'm responsible for managing really the whole M&A process for our sector. And that's driven by how we support the DCEs, as Bill talked about, who we view as the M&A champions in our group as well as the OpCos in our companies who see M&A as a critical part of their long-term growth strategy. We've got a small team of people that are really experts in all aspects of this that are helping our DCEs and the companies be successful. In terms of the M&A process, we think about it very simply as it starts with deciding where you want to play, right? So Bill talked about sort of this market mapping process that we do or market research that we do. It's really being clear about what are those niche markets that we think are super attractive, right? And then from that, spending time to understand who are the great companies in those markets, it's really the -- well, who is it that we want to play with, right? Who are the types of companies that really fit into our business model. With that, and once we build a pipeline of good targets up, we support the DCEs to sort of take the time to interact with those companies, start to learn about what makes them great, develop relationships with them and start to bring them into thinking about how Halma can really help them in whatever their longer-term plans are for their business, which is a really important part of the process. If we're lucky and we kind of like each other, and we feel like dating was a good start, but we need to do something more, then it gets to the point where we started doing maybe due diligence and really taking the next step of the deep dive of how would this look like in our company? What is it that we're looking to buy? And is this a good fit for us. So that, in very simple terms is how we go about M&A from very beginning to ultimately a good acquisition.

Great. And just for a bit of context for our audience and some who might not know Halma as well. What kind of size and type of transactions that we're doing? And maybe a word in that around multiples as well.

Well, we really like to buy small and medium-sized companies that are privately owned and in private transactions, right? I mean that's our clear focus and where we've been most successful. In today's world, there's a lot of variation to that, right? So we're open to and we'll consider larger transactions as well. But our sweet spot really is in those SME-type businesses. What that looks like in terms of size and multiple. Well, we'll spend anything from a couple of hundred thousand pounds on a small bolt-on that's very strategic for one of our operating businesses to -- historically, I think we've done about GBP 150 million on a transaction as a stand-alone business. In terms of multiples, again, it really depends, right? It varies quite a bit. Again, thinking about the different types of businesses and opportunities that we invest in, where it might be quite simple when may be talking about single-digit multiples of EBIT. When you look at larger, more complex, higher growth, maybe SaaS-type businesses, then we might be paying something in the low double-digit multiple range. So it really does vary depending on the type of business. But what's most important is, I think, identifying what's important to those businesses and then building with them a view on why joining Halma makes a lot of sense.

Great. Thanks, Todd. I mean that seems like a great time to open up for Q&A. So I'll thank all 3 of you. What we'll do now is turn to open Q&A. And you can ask the questions in 2 ways. You can type them into the Q&A function on your screen and I'll read them out and ask the panel to respond to them. Or you can click to raise your hand and ask the question directly after we invite you on to the screen. Note that for that option, you'll need to turn on your camera and obviously your microphone as well. To give you a bit of time to prepare though, we've got a short video from 2 of our companies on why they joined Halma. So let's roll that video now, and we'll see you again in a minute. [Presentation]

So welcome back. And we're now going to move to some questions online. And as a reminder, you can ask those questions in 2 ways. You can type them into the Q&A function and I'll read them out, as I've mentioned before. Or you can click to raise your hand and ask the question directly after we invite you on to the screen and obviously, you'll need to turn on your camera and your microphone for that. So that -- so we'll now move to those live questions. And I think the first one, if I'm not mistaken, is from Andre Kukhnin at UBS. So Andre, please go ahead and ask your question.

Great. Yes. Good afternoon, everyone. Thank you very much for the...

Sorry, bear with us, Andre. We seem to have not have volume here in the room, so just bear with us one second. Okay. If you could go ahead now, Andre. Thanks.

Can you hear me now?

Yes, we can loud and clear.

Good afternoon, everyone, and thank you very much for the event and for [ few ] to ask questions. I've got 3. I'll just go one at a time. Maybe first, kind of classical one, we get a lot of incoming on this saying, okay, Halma obviously doubles every 5 years as you fulfill the promise and deliver on your target. Does that mean that you have to double the size of your acquisitions, companies? Or can you double the number?

And maybe, Funmi, would you like to take that one?

Yes. No, absolutely. Andre, thank you for the question. So the first thing to say is we remain really confident in our ability to deliver on our M&A strategy. And year-to-date, we've closed on 8 deals. And you heard Todd earlier talk about a really healthy pipeline that we have that includes over 600 companies. But then let's talk about sort of the size of the deal. So if you -- if we [ walk off the bases ] that we're a GBP 400 million EBIT business and you think about our KPI of hitting 5% of our growth through M&A, then we're really looking to deliver GBP 20 million of our profit through our acquisitions. If we went further and actually achieved our aspiration, that's GBP 30 million of profit. That only really requires us to do 5 to 6 deals a year to be able to deliver that, roughly, 1 to 2 deals per sector. If you think about doubling that in the next 5 years, and again, to the 10-year point, it's not a stretch to think that we could then also meet our aspiration of GBP 120 million of profitability through acquisitions because then we're doing sort of 12 to 15 deals a year. Looking back at our recent track record, we've hit up to 13 deals in a single period, in a single year. And so that feels to us to be very much within the realm of our track record of what we've delivered in the past. So when I think about sort of the capabilities that we've put into the group and the expertise that we've built and we certainly have the capacity to keep doing more deals. We look at all deals that come our way, including the larger ones, but we certainly don't feel that we need to do them unless it actually makes sense for us and the particular business is a good fit for what which our -- for the level of growth and returns that we're looking to deliver there.

And one more question is, I guess you've touched on what your attraction is to the acquirees. But could you maybe talk about that in a bit more detail? And kind of what is the secret sauce that makes Halma so successful at converting these opportunities of making companies actually want to join you?

Okay. Well, maybe on that one, Bill, I think perhaps to fill that.

Sure, happy to. A little bit like we discussed before, I really think it's the attraction is the ability to stay somewhat autonomous and you can keep that entrepreneurial spirit and keep all those things that made you successful to this point. Contrasting that with sort of what happens from an acquisition for a strategic, it's just a very different experience. And so a lot of people like that ability to sort of keep that culture, the spirit, the people, the energy and that decision-making that they have and the speed that they have in their current business. And I think that goes a long way.

And the final one. You mentioned the multiples, which is very helpful. How have they evolved over time? And what is the recent trend.

Todd, do you want to pick up on that since you were talking about multiples earlier?

Sure. I'm glad to try that. Obviously, with 3 different sectors in 3 different, vastly different markets, we find slightly different challenges when it comes to multiples in the different sectors. Also given the fact that we've got -- the types of investments you make are everything from small asset purchases of a few hundred thousand pounds to, of course, larger ones in the GBP 100-plus million range. In different types of businesses, the multiples will be very different from project to project. I think generally, what we've experienced in the last few years, at least across all the sectors is a slight increase in multiples for premium high-quality businesses. But that will, again, very different -- vary from one sector to the next, the size of the deal, the complexity of the business itself. We don't think there's been a significant difference in multiples in recent years from what we've experienced in the past.

Thanks, Andre. We'll move along then. Our next question comes from Scott Cagehin at Investec. Scott, if you'd like to put your camera on and then ask your question, that would be great.

Thank you, Charles, and thank you, everyone. Really informative. The main question I have really is, do you have a blueprint of how you integrate the companies? Like is there a set practice? Or does it differ between companies? And any examples of -- good examples or any bad examples. And just give us a feel for how you do it and what you find different between different sectors.

Todd, I think that's probably another one for you, if you'd like to pick up on that.

Sure. Yes, I'm glad to. Integrate is an interesting word because it's not something we necessarily use here at Halma. We don't think about when we buy a business, how we're going to integrate them in. Again, it goes back to our business model and we want to do as little as possible to mess these businesses up any more than possible, being part of a large group. I mean the fact is that when they get here, day 1 and day 360 is not a whole lot different than it was the month before or the year before we bought them. They still run the business. They still set their own strategy. They're still responsible for their own decisions they make in the business. And all we're here and hoping to do is provide them support, guidance and maybe some capabilities that they are looking for and would need that will allow them to continue to grow and maybe even accelerate that. So integration is probably very light touch in terms of what changes from day 1. There are some obvious things that when you join a group like ours that will change around maybe IT and financial controls and compliance things. But in general terms of how people think about integration, it's not really what occurs with us.

Got it. So in terms of the KPIs. Can you give us examples of how other companies work well within the group? Is there like sort of good sort of constructive competitiveness as it were? Do you help fund them to moving outside of the U.S., for example? I mean, I can't believe you just don't touch them as soon as you buy them, right? It's same as day 1 to [indiscernible].

You've got 8 companies. Do you want to pick up on that in terms of just those developmental pieces that Scott is talking about?

Sure. Happy to. It's a great question. And the way we run the model is we want to provide what we call sort of growth enablers and help them grow, like in your example, internationalization. And a number of the companies would like some help with that and support and that -- but it's really driven by the company. So if the company says, "Hey, I would like your help to go internationalize and go to the U.S. from Europe." Great. We have ways we can do that and places we can help, but it's really driven by them. So we're supporting them accelerating versus integration tends to be more of a top-down piece. So it's really just trying to -- how do we accelerate the strategy and help them do things that they were struggling to do potentially by themselves as part of a smaller team.

And a very last question. So when a company joins, do the employees know that they're a Halma company? I mean is it -- does Halma get through the company? Or are they still very, very autonomous?

Bill, do you want to take that one again, I think.

Sure. I would say the first week, they know they're a Halma company and they're sort of nervous like what's going to happen? [ They're going to be, ] "Halma just came in." And after about 30 days, they're like, oh, I'm still the same company. It's the same brand, the same whatever. So there's still -- know it's there, but it's definitely in the background, it's not in the foreground, and that's by design.

Okay. We'll take our next question or set of questions perhaps from Max Yates at Morgan Stanley. Max, if you'd like to come online there and ask your question.

Excellent I just wanted to understand a little bit around how the process has evolved. So maybe if you look at kind of how you go about your process, what would you say are the real kind of improvements in and how you do things today versus maybe sort of 3, 5 years ago? And as an extension of that, when you think about sort of the change of leadership you've had as CEO, what would you say kind of Marc has really kind of impressed on the process, if it's changed at all under him specifically or maybe over the last 3 to 5 years?

Well, maybe, Todd, if you take the first part and Funmi the second. So over to you, Todd.

Yes. So taking more of a sector view on that. I think the biggest change that's occurred really in the last 5 to 7 years is investment that we've made in kind of shifting from what was a DCE-led and DCE-driven by themselves in a lot of ways, process historically to one where there's a lot more support and capability around them to help them, both on the sort of mapping side and origination side as well as the execution side. So we've really beefed up our M&A capability and not just in the M&A teams, but also in the expertise at group level that can step in and help as we look for these acquisitions. The second part of that is, I think in the same period of time, we've put, I'd say, more focus and discipline on what we think is important for us. So the focus part is really around, as we talked about before, this understanding of where we want to play and being very clear about those markets and those niches that are super attractive and we believe we'd have success in running businesses in. And the discipline of them being clear about what a great company looks like and not only what they look like, but what they would benefit from being part of our group as much as what we benefit from. That discipline and focus, I think, has improved quite a bit in recent years and allowed us to really accelerate the number of deals we're doing and the types of businesses, and even be more comfortable stepping into adjacent areas that are a little bit different than where we've been historically.

And Funmi the second part.

So it's really a continuation of -- from Marc's perspective, it's a continuation of what we've been doing well. So he emphasizes the points around -- being really clear to Todd's point about what markets the businesses that we're buying operate in, what drives their growth, what do we believe about their future cash flows, all of the things that you'd expect us to understand well. But I think what's really also notable, which is a continuation, but something he continues to emphasize is the collaboration that you see in the process. So he's very keen that we have the benefits of the expertise that we have within certain teams to be part of that decision-making process. And that really happens at quite a lot of pace. So it's not as if you defined a deal and then you go through this very structured process and then at the end, somebody approves it. It's an ongoing dialogue through the entire process. So what typically will happen is if Bill comes up with a deal really quite early on, working with Steve Brown, who's my equivalent in Healthcare and Marc and Steve Gunning, they're already in a sort of 3-, 4-way conversation. What's also obviously important -- and Marc continues to emphasize is the discipline in terms of how we allocate capital. So we're open for business. We want to do deals. We're looking for those amazing companies to join the group, but they really have to be high-quality companies, and we're not going to do deals at any cost. And so I guess my summary really is a continuation of the best that we do and an amplification of the need to do more of that.

Maybe just a very quick follow-up. And I know you don't buy sort of highly cyclical businesses. But I guess I'm curious sort of how do you see your conversations with the pipeline evolving in sort of, I guess, good economic times and bad economic times? I mean, should we view this as sort of somewhat countercyclical where actually when maybe some of that pipeline is struggling a bit more, there's more opportunities and we maybe see less in kind of good economic times? Or is it actually vice versa? People are kind of more keen to sell when things are going well? I'm just curious whether you think there's any kind of cyclicality of how we should think about sort of deals over the long run.

Well, Todd, maybe we'll turn to you first on that one, but Bill might have some thoughts as well in specific to health care. So Todd?

Yes. It's a great question. I think that there's different touch points in those different situations, right? And so while we're looking at a very large pool of potential targets, within that, you have some that are affected more by economic conditions in certain cycles and others that aren't. And so what may happen is all of a sudden, the interest level from the sell side changes for some of those folks that weren't interested before that now gives us an opportunity to engage with them and vice versa. And when times are really great, yes, maybe there's more competition and they feel like they've got more choices of where they go, where, again, we just need to emphasize the importance of how we differentiate ourselves from others and how we take a really long-term view that works through these cycles that all companies have to go through at some point.

Bill, anything to add?

Sure. It's a great question. I guess my thought would be that it's not necessarily cyclical, but where there are short-term challenges in a way, our pitch is stronger, our proposal is stronger because we take a long-term view where some other [ P-type ] buyers might only take a short-term view. So we're okay more if there's something going wrong in the next 12 months as long as this is a great company for the long term. So we got to see that bigger picture, I think, which is a strength in finding those great companies in hard times, potentially.

Okay. I've got a couple of written questions that have come through on the chat actually from David Farrell at Jefferies. So maybe we will just go one at a time on those. First one, interesting in terms of the difference between bolt-ons and stand-alone acquisitions. So David asks, I'd be interested to know if the economic hurdles for bolt-ons are any different than they are for stand-alone companies. So Todd, maybe you want to cover that?

Sure. I don't think the economic hurdles are different for bolt-ons and stand-alone. I think what's different and what's most important to us is bolt-on acquisitions are really an opportunity for our operating businesses to accelerate their organic plans and their normal growth plans. And so it's -- those decisions are much more strategic about is this the right thing for those businesses and how this will help them accelerate. And the economic aspects of that become a little less relevant probably than they would be for just a stand-alone business on its own. So I don't know if that fully answers what he's trying to get at, but...

Limiting to any thoughts on that, stand-alone versus bolt-ons and the kind of considerations that you've got as you're looking at the 2 contrasting kinds of acquisition.

I think for the most part, Todd hit it. The other big difference, obviously, in a bolt-on is you tend to have a lot of revenue synergies because there's a reason you're bolting it on, right? So the economics actually become easier in a bolt-on and good -- it's really more about is it the right strategy, is this the right adjacency at the right time. So it's -- in a way, it's less of a financial discussion because the finances are better and make sure you're actually driving the right direction for the future.

And then David had another one. When M&A is used to move into adjacent markets, e.g., the recent focus on electrical testing with MK Test and WEETECH, how do you get comfortable with the growth drivers and the market dynamics? And Todd, maybe since you worked on both of those deals, I mean, obviously, it's more of a general question, but maybe pick up on that.

Yes. So I think I'll reflect back to kind of what we talked about earlier in terms of what our process is. It starts at deciding where we want to play. And that's exactly what happened with these 2 acquisitions. We did some market mapping and market research and identified what we look like -- what to us look like some interesting niches within the broader sort of electrical safety space that we didn't really play in completely today. And from that, identified maybe some really great companies that could be interesting. And voila, both of those companies came out of that. So it took a lot of -- we took time upfront to make sure we really understood those markets and what was driving them. And to the question earlier around, are there cycles in there that are uncomfortable -- that we're uncomfortable with or that we can live with. And then once we got comfortable with that and decided this is a space, then it was finding those right companies that are in that, that we think will continue to grow at or above market growth in those markets.

Yes. I think I'd just add that even when we make those moves into what feels like a slightly different market, it's still an adjacent market for us. So if you take the WEETECH and the MK test example, even though they were moving into sort of the electrical safety testing, a lot of the markets that they sell to were markets that we were familiar with, whether that be transportation or the aerospace industry or even some of the industrial end markets as well. So to Todd's point, what that gives us the ability to do is to both do the sort of deep market research, but to triangulate what we're hearing because we have a level of expertise in those markets anyway.

Yes, through our [ Intralox ] companies, for example, yes, absolutely. Okay, David. We hope that answers your questions there. We'll now take some more online. So live, as you might say. And our next questioner is Fergus McCorkell from Troy Asset Management. So Fergus, if you'd like to come off mute and ask your question, that would be great.

Just one from me. I'm interested to understand in a bit of detail your incentive structures, both for kind of Halma managers and for kind of OpCo managers once they're acquired. And sort of as part of that, I'm specifically interested in the M&A teams for Halma. Basically, how do you balance incentivizing them to find inorganic growth with the discipline kind of for the M&A team specifically?

Well, maybe if we start with Funme, just on the sort of broad remuneration. And Todd, you can add in if you want to, specifically on the M&A side. I don't think it's really any different, but...

Yes. No, absolutely. So I mean, in broad terms, we incentivize on our EVA growth and that's consistent, right, all the way through from Marc through to the company Board. So there's a consistency there in how we incentivize for our delivery. Do you want to talk -- I mean, it's pretty much the same answer, but you could confirm that from an M&A perspective.

Yes. I mean we're incentivized to acquire profit, right, through these acquisitions that we make. And the reality is that there's more benefit when we're buying stand-alone companies than bolt-ons, but we look at it as it's really critical because whatever -- when we're making great acquisitions as bolt-ons, it's accelerating the profit growth capabilities of the operating businesses, which we benefit through the EVA process as well as just finding new great stand-alone companies. And I think it's the right and appropriate way to incentivize us as teams to do a good job.

So Fergus very consistent and very consistent throughout the senior population, in other words. So I hope that answers the question.

Could I just ask one extra one, which is just about reputation, which obviously, I think, often plays an important role in people looking to Halma or choosing Halma. I mean in the occasions where you are in a process for a deal or there are other parties sniffing around, I'm just interested in the role of reputation and how often that can then lead to, say, Halma winning even if not being the highest bidder.

Bill, do you want to take that one?

Sure. I think it's a great question. And one of the areas where I see it come up is that we tend to do a little more work pre-LOI to make sure we're really comfortable with the company, the space, et cetera. So by the time we get to LOI, we tend to put a number out there that we're really -- we really feel good about. And sometimes when you're comparing it in a process, there are other people that just sort of throw out a number and then they'll deal with taking it down post-LOI. And I think when the targets ask around and they realize that our LOIs are serious, we put thought into it, and it's a number that we -- unless we find out something in due diligence that we really feel good about and we'll stand behind, that provides a lot of certainty and confidence in the potential target we're acquiring, which goes a long way.

And if I can add to that, maybe just, I think, another aspect that benefits our reputation is it's -- very commonly, when we're involved in some sort of a process or in looking at acquiring a business, we will connect them with business owners that sold their businesses to us as a way to sort of get a real picture of what is life like when I sell my company to Halma. And I think that really enhances and helps our reputation, because it shows them that what we say we deliver on and we stand behind and it has really helped us quite a bit with a lot of those deals.

Great point. Okay. Fergus, is that...

Yes. That's great.

Perfect. So we'll take another one online now from Martin Wilkie at Citigroup.

A couple of questions just on regional preferences. How are you thinking about different parts of the world? Certainly from our perspective looking at public companies, obviously big differences in multiples in the U.S. versus either Europe or the U.K.? So interested to hear how you think about regional preferences there. But also in terms of the -- this sort of M&A backdrop. There have been changes just this month in the U.K. on the Competition and Markets Authority. Does that make the U.K. more or less appealing for you? And obviously, a lot of talk in the U.S. about regulatory cuts there or deregulation effectively. Does that make the U.S. more appealing? So yes, very interested to hear how you think about it regionally.

Funmi, do you want to just give the big picture and then maybe Todd and Bill can give their particular perspectives.

Absolutely. So from our perspective, we're interested in opportunities, really, across all regions. As you would expect us to do, we obviously will then sort of dive deeper into the particular market context, look at the risks and opportunities of doing business in that region. But fundamentally, from a sector, there isn't any preference for us from a sector perspective or from a strategic perspective, and we really look to explore where there are good businesses, where they might be globally. In terms of the questions around sort of some of those short-term changes that we see on the macroeconomic scale, I think it's really vital to remember sort of that we take a really long-term view. And that's really critical when we look at things like regulation or deregulation and those sort of things. And the things -- and I think it's also vital to remember what the long-term growth drivers are for the businesses that we acquire. So we talk about this often, we talk about sort of health care, for instance, and the increase in demand for health care. That's really something that is consistent across a number of regions that we operate in. If you take Safety as an example, and we talk about the increasing need to keep critical assets safe, but also people safe, as you think about the trend of urbanization, those are things that outlast short-term cyclicality from a macroeconomic perspective, very similar in terms of the environment. So I think that -- that's what drives our confidence when we're going out and seeing -- actually, from a regional perspective, there are lots of opportunities for us to make an impact and to find attractive opportunities and really great companies to buy. Todd, Bill, is there anything that you'd want to add to that?

No, just that I -- just as, I guess, support your point around the fact that we'll do business anywhere those great companies exist, just about anywhere -- not anywhere, but most countries and places around the world. And it's not uncommon that we'll find businesses like the one we bought in Cyprus recently that sells in 120 countries around the world. So it doesn't matter where they're at. It's really where the customers in the market is. And as Funmi said, especially in Safety, I know regulatory -- increase in regulatory requirements and compliance is a big, big driver for Safety. And so we go where that tends to be the strongest.

We'll go to our next questioner, who is Jonathan Hurn at Barclays. Jonathan, if you'd like to come online. Go ahead and ask your question, Jonathan.

I just have 2 questions, please. Firstly, just obviously, in terms of the performance of the acquisitions. Do you make, obviously, a lot of [ acquisitions ] every year. Just in terms of how they trend, do they always come out in line with expectation? Or is there a number or sort of a rough field [ with acquisitions if they perform. ] And then secondly if they don't perform, what kind of actions do you take to rectify them in the short term, please?

Well, Bill, I mean, we've made a number of acquisitions and some are newer than others. So maybe you'd like to pick up on that one and others might want to chip in after you, but...

I really wish I lived in the world where every company performed just like my Excel spreadsheet does, but that doesn't happen. Clearly, there are some that are going to perform higher and some lower. And there's -- you win a customer, you lose a customer, different things happen, you get a delay on a regulatory approval. So the normal business things happen. I think from us, once again, with that long-term view that Funmi talked about, the question is, are the long-term drivers still there, is it still a differentiated product, is it still in each market, do we have them the right team and the right strategy? And you'll roll with some of the ups and downs as long as the overall trend and direction of travel is what you want to see over the midterm, so.

We'll move on to our next questioner then, Rory Smith at Oxcap Analytics. Rory, if you'd like to go ahead and ask your question?

Right. I just wanted to touch on disposals, if I may. You've talked about taking that long -- medium- to long-term view of outlooks. Over what time frame would an operating company have to be flashing amber or red on their signals for it to be considered for disposal. What are those signals? And how often are you checking in on them? That's my question.

Funmi, maybe I'll ask you to pick up on that one.

Sure. So Rory, from a portfolio perspective, we're constantly reviewing our portfolio. It's a regular cadence at the divisional level. So Bill would be doing that within his division. It's a cadence at the sector level and then as a group exec team, we're constantly having those conversations, so sort of answering the second part of your question first. And then answering the first part of your question, fundamentally, again, as we've said a number of times over the course of today, we really importantly take a long-term view of a business. So exactly as Bill said, business cyclicality isn't necessarily a reason for us to divest of a business. What matters is whether we still believe that the long-term growth drivers for those -- this business are positive. Whether we believe that the market is -- they still have a position in the market where they can win and fundamentally also, that it's still aligned with our purpose. So if I just give you an example of the divestment that we made a few years ago, which was Texecom, which is a securities business in our sector in Safety, in Todd's and I sector. That was actually a really good business. It was performing well. We sought it primarily because strategically, it made sense for them to move more into the residential space, where, primarily for us as the sector, we see our advantage in the commercial space. So that was really a misalignment of strategy. We knew that actually then it would be better for them to be home somewhere else and they could grow even faster under somebody else's ownership. Equally, FiberGuide was another business that sold a few years ago, and that really was around a misalignment with our purpose as it became clear that their long-term growth opportunities were in areas like defense, which isn't something that Halma typically operates in. So I think it's really fundamentally around whether in the long term, we believe that the growth drivers are still there and that the business is still positioned in a way that it can win in line with our purpose.

Great. And just as a follow-up to that, obviously, one of the key attractions of power and the investment case is this sort of broad defensiveness of the portfolio. Would you ever think about disposing of a company that was growing too quickly, without naming any particular companies?

Well, I guess we'd never say never. But I guess there's always a price for everything, isn't there. But for me, any thoughts on that?

I mean, that would be -- I mean that's -- I mean I know you've described that as a problem, but that's what we hope for. That sounds great to us, Rory. Fundamentally, that's what we wanted to do. We want to grow these businesses. We want to grow them consistently, but also as quickly as they can. And that's what we bring to the table, fundamentally. Look, and we're really proud of the fact that we have a number of businesses that we acquired that were quite small at the point of acquisition and today are significant players in our portfolio. That's exactly what gives us the reputation in the market that says actually joining Halma would be a good idea. As I said earlier, we're constantly reviewing our portfolio in all directions and we'll keep doing that for sure.

Maybe if it's okay, I'll add that, that maybe it really depends on what's driving or what's required to maintain that high growth of pace for that business. So as an example, if it's -- in order to maintain that or take advantage of that is going to require huge capital investment, it may no longer fit in sort of our general business model, right? So we do see that. We haven't invested heavily in pure SaaS businesses kind of for that reason. They're super fast-growing markets that require a tremendous amount of investment upfront, right, to continue that burn to grow that revenue. And so those have been a bit more of a challenge for us to see how they fit in our business. So I think it would really come down to what's required for that business and whether it matches up with the things that we tend to feel like we bring to a business.

We've got a fair few questions coming in on the chat, actually, so we'll turn to those now. And we'll try to get through as many as possible in the time that we've got available, but I'm aware that we were up on the hour already, and I've got quite a list here. So if we don't manage to cover all of those questions, we will come back to you as an Investor Relations team and answer them to you separately. But maybe we can start with a pretty simple one actually from [ Francesco Biondo ] at Capital. Can you talk about the funding mix, cash versus debt for your M&A strategy? And will this change as you go forward? I think it's pretty clear our model is a self-financing one. But, Funmi, I don't know whether you want to add anything to that?

I think that was a pretty good answer, Charles, I think.

It's basically 100% for cash right? I mean that is our model. So I think we can tick that one off pretty quickly. [ Gareth Hayward ] at Charles Stanley has a few questions. First one is our experience -- what experience do we have of getting an acquisition wrong? And if so, what lessons did we learn? And maybe Todd, Bill -- Bill, do you want to pick up on that one? I mean maybe it's not so much about what's wrong, but what we might need to get right in particular circumstances, yes.

One of the things that I would say is that we've built over time, which is really valuable is over -- I should know, I don't know how many acquisitions we've done over 40 years, 100 or something. It's a big number. 170 -- thank you, Todd. There's typically a lot of little things you'll get wrong or you'll miss on a given deal. And hopefully, sometimes it doesn't matter, but you're like, "Man, I should have thought of that before." Over those decades, we've compiled a list of the key things that we've missed in every deal. And so we've built sort of this knowledge base. And so as we go forward, we get smarter and smarter on every one, learning from what we might not have picked up prior, and I think, it really helps because when I'm reviewing a deal, just thinking through things that over the decades people have missed help me make sure that I don't make that same mistake again. So it's sort of a learning organization from our due diligence process. Todd, anything you would add?

Yes, I'd say the other thing that maybe the biggest risk around that is maybe misreading the markets that we're in. So -- and not so much at the time we made that investment, but more about where those markets are going and whether the businesses we have can evolve with that. So ultimately, I think in the end, what that does mean is it leads to disposal of investments that we do because those marketing conditions have changed or the needs of the customers in that market or what drives that have changed to a level that no longer fits our growth model. That's probably more where that comes into play, I think.

Which is a risk that we minimize because we then move into adjacent markets. Staying close to what we know, staying close to what we're familiar with -- and yes, absolutely. I agree with that.

Well, you're actually anticipating the next question that [ Gareth ] had in fact, which is how do we de-risk acquisitions? What steps and processes do we take? And maybe related to that, his third question is about, okay, how many acquisition possibilities do we embark upon but don't actually carry forward to conclusion as well? So there are a couple of related questions there. But maybe we'll just talk about the derisking first, maybe, Bill, if you want to talk about the derisking of the acquisition process.

I think we've hit on a lot of the pieces. Markets that we know or at least know a fair amount about, where they are either in where we understand or adjacencies typically. The process we talked about, what we've done, the experts we bring to those deep dives and that due diligence because they're in adjacent markets and understand. And just all that sort of adds up, I think, just to de-risk overall the things we're looking at.

Sure. And Todd, just in thinking about the work that you do around the pipeline and the management and tracking of that pipeline, what is the attrition rate on sort of the large number of possibilities? And then down to the -- I mean we're very selective, right?

Yes. So you think about it as a funnel, right? So at the front end of that, there's huge attrition, and we'll do a certain amount of work upfront and then things will fall off and die on their own at a very high rate. In the beginning, you want that. And as we move closer through developing those relationships, finding alignment between us and another company and seeing that there might be a path towards this marriage someday, that happens a lot less and very rarely, I would say. As Bill mentioned earlier, we are the type of buyers that have a reputation in the market of -- by the time we make an offer, we have a very strong intent to complete that deal unless there's something that just absolutely was unexpected that comes out of it. So we have a high close rate when it comes to -- we've got a handshake, an agreement and let's go through that process and complete it than maybe others do.

A couple more then from Osmond Wang at FM Global. Pretty simple one. How many years of relationship do you have on average with a company before a transaction happens? And that's kind of how long is a piece of string, I think, but...

I inherited the business a few years ago that we bought that we had spent 12 years developing. I don't encourage that for every deal we do, but it really, really varies. I mean, to be honest, they'll -- it can be as short as 6 months from the moment we meet somebody and maybe complete a deal on the short end to many years. On average, a lot of the best deals that we had just take time because we're buying them off market. They're not necessarily looking to sell their company when we first talk to them and start developing that relationship. And we don't get involved in a lot of sale processes or auction processes at least, which are much more time bound. We have the time, and we want to make sure that we're getting it right and they're getting it right and that just takes time. So we're patient, as much as where we like things to move quickly when the time is right.

Right. And then maybe one for Bill on the financials. How do you project future financials? How many years of growth do you usually project? And do the acquisitions usually end up hitting those targets? So you kind of already covered maybe a bit of that. It's the real world, but also how far forward are we looking in terms of financial performance?

Yes. I think strategically, we would like to think 20 years. Financial modeling, we really model out the next 10 and then have an assumed lower tail, but really try to really think through what do we think is going to happen in the next decade. And that's sort of how we manage that. And what was the second piece of your question?

Well, just -- are they hitting those targets in terms of the 10 years? And I guess there's always going to be a mix.

Well, we just went back and did an analysis of the last 10 years and I was really happily -- I felt great about the performance that we had. Because you think -- I mean, M&A is hard, right? It's [ grunty ]. There's stuff you don't know, there's moving parts. But I think overall, it's pretty amazing that -- what we've been able to accomplish over the last 10 years and the companies we bought, where we've gotten almost -- most all of them right. There's -- some would -- obviously we would have liked to go better, but it's a huge percentage that we really do well at.

Yes. Yes, no, that's great. And that's because of the care and the time that we've taken upfront, right, and really understanding those market dynamics.

Exactly.

And actually, we've got almost that same question from John Gilmore at Martin Currie. Can you expand some more on the success of acquisitions over time? Have you done any cohort analysis? Well, we just heard that you have, of time periods and groups of acquisitions that have worked well or where there's lessons to be learned. I mean it might be worth just thinking about what, if anything, have we learned in terms of the lessons, some of the chops and changes that we've had to make over time and whether there's any particular things that spring to mind as we've gone through those process.

Well, just maybe a point on what Bill was just talking about, I think that what we have seen is that, of course, right after acquisition, there's probably more volatility. And then as time goes on, 5 years in, there's more alignment with what we forecast and projected as these businesses sort of work through that and [ relearn ] through those cycles. And then when you get to 10 years out, it's pretty well aligned. So again, that long-term view is super critical and patience around recognizing that things don't always go perfectly day 1, year 1 afterwards. But as long as the fundamentals are there, then -- and we've done our homework and you get that support on both sides, it's going to be successful in the longer run. In terms of what we've learned, I mean, while we've always done bolt-ons across the group over the last 40 to 50 years, it's only been in the last sort of 10 years or so that we've really emphasized more the benefit and the value that our operating businesses can get from accelerating their growth through M&A. And so we put a lot of effort into learning from that, from historically when we did in the past, why they didn't work as well and how can we improve upon that. And a lot of it is on training and development. And so we put a lot of effort into really preparing our -- especially our stronger operating businesses and bigger ones that are more capable of this, of using this as a strategic growth initiative for them and building that capability in their organizations. So it's another way we've sort of been able to expand our reach through M&A through the bolt-on process.

Yes. And then maybe just the last sort of group of questions I've got here. Just to conclude, and I think it's a good note to end on. So one of our audience, Jake Hennessey at Barclays Private Bank asks, how do you ensure that the M&A investment that you're making achieves returns that are accretive to shareholders? So sort of a kind of big picture. Rather a more specific one from Harald Nissen at ODIN, what's a typical rate that you look for in year 5? And again, I think it comes to that long-term view, doesn't it, Todd? But maybe Todd, Bill, between you, you want to think about just the returns topic overall?

I guess just one point that every deal is different, the numbers change. But fundamentally, we're buying businesses that are accretive from a -- returns to where we are today, right? So we're really looking for the high-quality businesses. We're buying them and that has a positive effect for us. So some are really accretive, some are a little bit accretive, but that's really what we're looking for in terms of what we buy. So I think we're trending in the right direction to answer the -- sort of, I think, the question behind the question.

Yes, and -- sorry, Funmi.

Yes. No, I was going to say, fundamentally, what we're trying to do is to deliver sort of strong revenue and profit growth and sort of similarly strong returns from a group perspective and sort of we talk about sort of post tax, sort of high mid-teens from a group perspective. And so when we're looking at those companies, as we've emphasized a number of times today, it's really around sort of their future cash flows and what we believe about that. So we look at the company and say, "Do we believe that you can continue to grow sustainably over an extended period of time?" And we have a level of confidence with what the likes of Bill and Todd do, and that if the answer to that is yes, then you will underpin our ability to continue to deliver sort of really strong growth and returns for the group?

Well, I think that's a great note to wrap up on. I'm aware the time has ticked by. So we're 10 past the hour. I'm going to thank on the audience's behalf Funmi, Bill and Todd, thank you for spending the time. I hope, for everyone online watching, it's been useful. We'll be asking for your feedback, so please do fill that in. Tell us what's been good and maybe not so good. And we'll see you next time. But thank you very much for joining, and we hope it's been an enjoyable use of an hour or so. Thanks so much.