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Halma plc, Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE, UK. Registered in England number 40932. Tel: +44 (0)1494 721111 Fax: +44(0)1494 728032 Email: [email protected] Web: www.halma.com

Halma plc Half year results 2018/19

Summary of analysts’ presentation by: Andrew Williams, Group Chief Executive Marc Ronchetti, Chief Financial Officer 20 November 2018

Summary of analysts’ presentation 20 November 2018


Andrew Williams, Halma’s Group Chief Executive, summarised the half year results. Halma made excellent progress in the first half, delivering record revenue, profits and dividends, while continuing to invest in our strategic growth enablers for the longer term. There was strong organic growth in all four sectors together with an excellent performance from Medical following a weak H1 last year. As we look forward, there remains a lot of macro-economic uncertainty with Brexit, and the US-China trade relationship. However, we are on track to deliver more typical rates of constant currency organic growth in the second half, in line with the board’s expectations, resulting in a strong full year performance.

It was another record first half, with very impressive growth and high returns underpinned by exceptionally good organic growth. Revenue was up 16% to £585m and adjusted1 profit up 19% to £113m. Return on sales2 was strong across all sectors and increased to 19.3%. In terms of strategic investment, there was continued strong investment in R&D, with spend up by 14% to £31m, representing 5.3% of revenue. Our long-term investment in international expansion was reflected in Rest of World revenue rising by 10%, in line with our KPI, a good performance given the

tough comparative of 21% growth in the first half of last year. In the year to date, we have completed five acquisitions, including three in the first half year and two since the half year end, spending a total of £32m. This includes the purchase of Navtech, a provider of innovative radar surveillance and safety solutions, for an initial consideration of £21m, announced just last week. We had strong operating and cash performance. Cash flow was 86% of adjusted1 profit. We are recommending an interim dividend increase of 7%, maintaining our long-term progressive dividend policy. Our balance sheet remains strong with net debt of £195m, down from £220m at the year end. We have plenty of capacity for further investment in line with our organic and acquisitive growth strategy. Marc Ronchetti, Chief Financial Officer, reviewed the half year’s financial performance. Halma has delivered another strong set of results, with widespread growth and strong performances across all regions and all four sectors, high levels of cash generation, and further investment for the longer term.

Halma delivered a record Group revenue and adjusted1 profit performance, continuing our strong trend of year-on-year growth. Revenue was £585m, up 16%, and that generated £113m of profit, up 19%, the first

Record first half results and continued dividend growth



time our first half profit has exceeded £100m.

There was very strong organic constant currency revenue growth of 14%, well ahead of our 5% KPI. This benefited from strong performances across all four sectors, driven by the continuation of the underlying growth rates that we saw in the prior year, in addition to the phasing of the delivery of some large orders received in the second half of 17/18 and shipped in H1 this year. Order intake has continued at a good rate post September, ahead of both revenue and prior year, with our order book returning to more normal levels. Acquisitions made in last financial year, including Argus, Mini-Cam and Cardios, contributed 3.9%, while the Accudynamics disposal that we announced in our trading update, was a small negative of 0.6%. There was a 1.7% negative effect from currency translation, principally from the strengthening of Sterling against the US dollar. If exchange rates are in line with our current forecast rates, we expect the currency effect to reverse in the second half, giving a broadly neutral effect for the year as a whole.

There was good revenue growth in all the regions, both on a reported and an organic constant currency basis. The USA remains our largest sales destination at 37% of revenue. It was also our fastest growing region, with 23% organic constant currency growth, reflecting good performances across all four sectors, and the large orders mentioned previously. The UK also grew well at 13% organic constant currency, particularly in Environmental & Analysis and Infrastructure Safety. Mainland Europe growth rate was similar to last year, with Medical and Environmental & Analysis growing well, and slower growth in the two safety sectors. As regards Brexit, we remain confident that we will be resilient in the medium-term, given our business model and the agility it gives us. While there is clearly some risk of disruption in the immediate short term, we have lots of work under way to ensure that these short-term risks are mitigated as much as possible, especially given that March is typically a relatively strong trading month. In Asia Pacific, it was pleasing that China grew 8% on an organic constant currency basis. The region’s lower overall growth rate reflected a strong underlying performance, as last year included larger contract wins in China and South Korea. Other regions grew by 14% on an organic constant currency basis, with very good



progress in the Middle East in Infrastructure Safety

Organic constant currency profit growth was very strong at 16.1%. This was driven by the flow through of strong top line growth, in addition to the improvement in Medical margin that we saw in the second half of last year. With the organic growth rate in the second half expected to be more in line with historical trends, we expect the balance of profit in the year to be less skewed to the second half than last year. Acquisitions contributed 5.1% to profit growth, reflecting healthy margins in the businesses acquired last year. The Accudynamics disposal also made a small contribution, while the currency effect was similar to that on revenue. These factors all contributed to reported headline profit growth of 19.4%.

In terms of cash flow, cash conversion was strong, at 86%, against our KPI target of 85%.

We saw a £11m working capital outflow, an improvement over last year. With strong growth in the business, this reflects the continuing focus of the Halma finance community on cash management in addition to our revenue and profit momentum. Capital expenditure at £14.9m was 47% higher than the same period last year, driven by facility and site expansion, investment in manufacturing capabilities, and investment in IT and operating system upgrades. We expect investment to continue in H2, and our full year forecast is for capex of £32m. The effective tax rate was 20.5% compared with 19.7% last full year and marginally up on the guidance at the year end of 20%, driven by the mix impact of strong growth in the USA. The deficit on our defined benefit pension plans is £20.7m on an IAS19 basis, down from £53.9m at year end, with about two-thirds of this change resulting from an increase in the discount rates and the remainder reflecting the benefit of incorporating the outcomes of the Halma scheme triennial valuation that we completed in August, and contributions during the period. We spent £5m on acquisitions in the half year, including earn-out payments from prior year acquisitions, and realised £3m from the Accudynamics disposal. Since half year end we’ve spent a further £29m on Limotec and Navtech. The FY 17/18 final dividend increased 7%, with £34m paid out, continuing our policy of delivering sustainable and affordable dividend growth. With currency and other movements, net debt at Half year end was £195m.



We have substantial financial capacity. In November 2016 we increased our Revolving Credit Facility to £550m; a year ago we extended its term to 2022 and now we have recently extended it further to 2023, on the same terms and with the same banking group. This gives us substantial medium term variable funding on top of the $250m USPP we put in place in 2016. Overall, there is no change in our approach to funding. We do not intend to become highly geared. At the half year end, gearing was 0.7x EBITDA, which is within our typical operating range of up to 2x gearing.

In terms of KPIs, shown above are our targets, and below we have highlighted a few key points in addition to the high rates of organic revenue and profit growth. Acquisition profit growth is the annualised profit, net of financing costs, for acquisitions made in the year expressed as a % of last year’s profit. With only small acquisitions announced in the period, there was no

significant contribution this half. However, the recent purchases of Limotec and Navtech will help improve this for the full year. Good progress on returns, with Return on Sales up from 18.7% to 19.3%, within our 18-22% range and ROTIC up from 13.4% to 14.9% for H1, ahead of our WACC and our 12% target reflecting the strong constant currency earnings growth in the half with the two recent acquisitions, and we expect progress in the second half. Cash conversion was 86%, a strong performance given the relatively high rate of revenue growth in the period. This continued focus on working capital in addition to our revenue and profit momentum enables us to continue to invest in our strategic growth enablers for the longer-term. Andrew Williams then looked at the performance of each of our sectors, followed by a brief update on strategy including M&A. By looking at the sector performances and strategy update, you will get an insight into how growth is being driven by our relentlessly increasing investment in Halma’s Growth Enablers. In addition, our performance demonstrates that the Executive Board changes made in December 2017, moving from four Sector CEOs to two, are working well.

There was double-digit revenue growth reported in all sectors. This reflected a strong organic performance, with the additional benefit of prior year acquisitions,



including Argus and Setco in Infrastructure Safety, Cardios and CASMED in Medical and Mini-Cam in Environmental & Analysis. Overall, the shape of the Group’s profit and loss account was stable, with strong volume growth, gross margin very marginally lower, mainly because of the impact of M&A and larger contracts, and overheads well controlled with increased strategic investment. This resulted in the slightly higher rate of profit growth when compared to revenue growth.

The trends were similar in organic constant currency terms, which excludes acquisitions, the Accudynamics disposal and the effects of foreign exchange movements. There was double-digit organic constant currency revenue and profit growth across all four sectors. Medical contined the trend of substantially improved profitability from the second half of last year, while there was continued strong performance in Environmental & Analysis. We saw good performances in Infrastructure Safety, and also in Process Safety, even with some modest re-organisation costs taken in H1.

Infrastructure Safety made strong progress, with revenue increasing by 18% to £198m, and by 13% on an organic constant currency basis. Profit improved by 17% to £42m including 12% organic constant currency growth. The prior year acquisitions of Argus and Setco added 6% to revenue and profit growth, and there was a small adverse foreign exchange effect. There was revenue and profit growth in all of the major end market segments, with the Fire and Security businesses performing strongly, and solid progress in People/Vehicle Flow and Elevator Safety. At the end of the year, we acquired LAN Controls Limited, a small tech bolt-on for the Fire businesses within Infrastructure Safety. Return on sales of 21.1% was in line with last year. Gross margin remained healthy. R&D investment increased by 31% at constant currency and by 19% excluding the effect of acquisitions. Good cost control meant that we maintained a strong return on sales.

The Infrastructure Safety sector, which is diverse geographically, reported growth in all major regions, with the strongest organic constant currency growth in the USA and Other regions, including the Middle East. All business segments grew, with the Fire businesses performing particularly well. In addition, Security and Fire Detection performed well in the UK, while underlying progress in Asia Pacific was reasonably good, with China growing 10%, against a tough comparative with the first half of 2017



which included a major People/Vehicle Flow project in South Korea. In summary, the sector had a very good first half with widespread organic growth and a contribution from last year’s acquisitions. We expect continued progress in the second half, in line with historical trends, with solid organic growth further boosted by the recent acquisitions of Limotec and Navtech early in the second half.

Process Safety delivered another good performance, with Revenue up by 10% at £98m, which included 12% organic constant currency growth. Profit was up 9% to £22m, including 11% organic constant currency growth. There was a small adverse effect from foreign exchange, and there was no acquisition or disposal effect. We saw revenue growth in all business segments, with the strongest in Gas Sensors and Safety Interlocks, which were also the businesses that achieved the strongest growth. Profit was lower in Pipeline Management and Pressure Relief, with some reorganisation costs in the first half, and lower growth in US onshore energy. Return on sales was very close to that in H1 last year, at 22.6%. Gross margin was slightly lower mainly due to a larger Safety Interlocks contract. However, good overhead control kept return on sales at a healthy level. We increased investment in the sector, with R&D spend up 12% on a constant currency basis, in line with revenue. We have taken

some modest reorganisation costs in the first half, and will also do so in the second half, in relation to merging businesses and management changes in Pipeline Management and Safety Interlocks to better position these businesses for growth over the longer-term. In total, we expect to spend between £1.5m and £2m over the year, with £0.7m charged in the first half.

As in Infrastructure Safety, we can see good geographic diversity and balance and this sector. All major regions grew, with the highest growth in USA (Safety Interlocks shipped a large order for logistics safety with a major retailer). We saw solid or modest progress elsewhere, with a mixture of performance across the sector’s four business segments. For the second half, I expect the sector to have solid organic revenue growth with a lower rate of profit growth, due to the expected reorganisation costs.

The Medical sector delivered an excellent performance, especially compared to the 6% decline in organic constant currency profit in the first half of last year. Revenue



grew 10% to £147m, and 14% on an organic constant currency basis, and profit was up 22% to £35m in both reported and organic constant currency terms. There was a modest contribution from last year’s Cardios and CASMED acquisitions, as well as small effect from the Accudynamics disposal. Foreign exchange effects had a 3% adverse impact on revenue and profit. Return on sales rose to 23.8%, an improvement over 21.6% in the first half of last year. Gross margin was up, with higher gross margin companies growing well, and overheads were much better controlled than in the first half of last year. After a period of strong increases, R&D investment was down 2% in constant currency, although excluding Accudynamics, R&D spend would be broadly flat.

We see much less geographic diversity compared with other sectors, with the USA accounting for over half the sector due to its large healthcare market. There was organic constant currency revenue growth in all major regions, with strong momentum in the USA, especially in Ophthalmic, Sensors Technologies and Patient Assessment. There were good rates of organic growth elsewhere except in the UK, which was only marginally up, but given that the UK comprises only 4% of the sector, this didn’t have a material impact. Following the strong recovery from a weak first half last year, we expect more normal rates of organic growth in H2 against a tougher comparator, and overall the sector is back on track to deliver a new record performance for the year.

The Environmental & Analysis sector delivered a tremendous performance. Revenue was up by 23% to £143m, including 19% organic constant currency growth. Profit improved by 33% to £29m, including 21% organic constant currency growth. There was a good contribution from Mini-Cam, which we acquired in October 2017, and a 2% adverse effect on revenue and 3% on profit from foreign exchange. There was organic growth in all business segments, which was strongest in Environmental Monitoring (which now includes Mini-Cam) and was also good in Water Analysis and Spectroscopy / Photonics. Return on sales continues to improve each year, and improved to 20.3% from 18.7% in the first half of last year. Gross margins were lower, mainly due to a large Photonics contract in the USA. This was more than compensated for by good overhead control, despite increased investment with R&D spend on a constant currency basis up by 11%, to 6.8% of revenue.



In this sector, we see reasonable geographic diversity, although the USA is the largest segment with 46% of revenue. Revenue growth was reported in all major regions. There was strong growth in the USA, especially in Photonics (including the benefit of the large contract I have already mentioned) and Environmental Monitoring. The UK and Europe also grew strongly, notably in Environmental Monitoring, with UK water companies still spending Flow, Pressure and Leak detection technologies. Asia Pacific growth was lower after a very strong first half last year and is expected to pick-up in the second half. In summary, this was an excellent first half for Environmental & Analysis, with stellar rates of organic growth boosted further by Mini-Cam. In the second half, we expect more typical rates of organic growth, with the sector delivering a strong result for the full year. Andrew Williams then gave a brief update on strategy.

Here we show Halma’s 7 Growth Enablers, which define how we bring value to our companies Increasingly we are seeing how these are inter-linked and supportive of each other rather than independent activities and would like to expand on this further.

First, I’ll give you an insight through a couple of brief examples in a short film showing how we are starting to drive new ways to boost core growth within companies, or potentially create new business models, through our focus on talent, innovation and digital growth.

• Bio-Chem Fluidics is bringing condition monitoring to their miniature valves and pumps to improve the reliability and performance of analytical instruments, potentially providing this as a service to customers.

• WAVE, a potential spin-out from our

Environmental & Analysis business Ocean Optics, is improving both well-being and commercial outcomes through the dynamic, real-time control of lighting in public places.

http://www.halma.com/news-and-media/media-gallery/videos Although it is still early days commercially, these kinds of activities are good examples showing the benefits to Halma companies of being part of a culture which looks to share technologies and expertise across our Innovation Network, how we use the new talent in our Digital Growth team to help companies overcome technical and business model challenges, and how we use emerging talent from our Future Leaders ‘graduate’ programme to accelerate the speed of innovation and business development.



In the months and years ahead I’m sure we will see these kinds of investments play an increasingly important role in the growth and progress of the group. Now I’ll move from relatively new ways of growing our business to a core staple of Halma’s growth story over more than 4 decades – M&A.

So far this financial year, we have had a total spend of £32m on acquisitions. In the Medical sector, we bought AWP and Elpas, which are small bolt-ons for CenTrak, bringing new intellectual property and customers. In Infrastructure Safety, we have made three acquisitions in the past three months: LAN Controls, which provides cloud-based solutions to connect devices in Fire and Security applications; Limotec, a Belgian Fire systems manufacturer and distributor; and Navtech, which makes radar based sensors and surveillance systems for road safety and perimeter security. These include good examples of typical Halma acquisitions. We look for privately-owned companies which are not for sale, so often we have built up a relationship with them over many years. For example, Limotec is system integration partner for our Fire Detection business. They all have valuable Intellectual Property focussed on market niches. For example, Navtech’s radar technology is complementary to BEA’s for people/vehicle flow but provides market diversification. Finally, the end-markets served are driven by regulation which gives us the confidence to invest for

long-term growth rather than focus on cost efficiencies for short-term benefit. These recent deals continue to demonstrate that we can continue to acquire good quality businesses with the additional resources in our sector M&A team starting to have a positive impact. Our acquisition pipeline remains healthy as we enter 2019.

In summary, this was a very strong first half, delivering record revenue, profit and dividends for shareholders and we are on track to deliver a strong full year performance, in line with the board’s expectations. We saw widespread growth in all sectors and all regions, and order intake since period end is above revenue and order intake in the comparable period last year. Our continuing investment is supported by our Growth Enablers, as you saw in the films, and we have made good recent progress on acquisitions and have a good pipeline of potential acquisitions. Finally, before I open the meeting to questions, I’d like to give you advance warning of an investor event we will be holding in London in February 2019, to take a deeper dive into our Medical sector businesses. Invitations will be going out soon. Now time for questions. _________________________________ Definitions:

Adjusted items are adjusted to remove the amortisation and impairment of acquired intangible



assets, acquisition items, significant restructuring costs and profit or loss on disposal of operations.

Return on Sales is defined as Adjusted profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations. Organic growth measures the change in the revenue and profit from continuing operations. The effect of acquisitions and disposals during the current or prior financial year has been equalised. Acquisitions are removed to calculate organic results for the first full year of ownership.

Return on Total Invested Capital (ROTIC) is defined as profit for the year from continuing operations before amortisation of acquired intangible assets, acquisition items, restructuring costs and profit or loss on disposal of operations but after taxation; expressed as a percentage of average shareholders’ funds, adding back net retirement benefit obligations, cumulative amortisation of acquired intangible assets and historic goodwill. See the Half Year report published on 20 November 2018 for more details. A webcast of the half year results presentation will be available on Halma’s website www.halma.com from 20 November 2018. CAUTIONARY NOTE. This document contains statements about Halma plc that are or may be forward-looking statements. Forward-looking statements include statements relating to (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; (ii) business and management strategies and the expansion and growth of Halma plc’s operations and potential synergies; and (iii) the effects of government regulation on business. These forward-looking statements are not guarantees of future performance. They have not been reviewed by the auditors of Halma plc. They involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by such statements. They are based on numerous assumptions regarding present and future business strategies and the future operating environment. All subsequent oral or written forward-looking statements attributable to Halma plc or any of its shareholders or any persons acting on its behalf are expressly qualified in their entirety by this cautionary statement. All forward-looking statements included in this document speak only as of the date they were made and are based on information then available to Halma plc. Investors should not place undue reliance on such forward-looking statements, and Halma plc does not undertake any obligation to update publicly or revise any forward-looking statements.

No representation or warranty, express or implied, is given regarding the accuracy of the information or opinions contained in this document and no liability is accepted by Halma plc or any of its directors, members, officers, employees, agents or advisers for any such information or opinions. This information is being supplied to you for information purposes only and not for any other purpose. This document and the information contained in it does not constitute or form any part of an offer of, or invitation or inducement to apply for, securities. The distribution of this document in jurisdictions other than the United Kingdom may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of laws of any such other jurisdiction.

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