Halma p.l.c. Half year report 2007/08
Consistently good short-term performance whilst investing in growth for the future.
We have made good progress during the first half of the year, achieving record revenue and profits. Overall revenue growth of 12% and profit* growth of 10% was achieved despite a negative currency impact of 3% (mainly US Dollar). Organic revenue growth** was 8% (11% at constant currency) and organic profit growth** was 5% (8% at constant currency).
Double digit revenue growth was achieved in all major geographic regions with the exception of the US where adverse currency movements reduced growth from 16% at constant currency to 7%. Overall market conditions were steady, as were our product margins. The energy market niche, in particular, continued to offer strong opportunities for growth.
Cash generation in the first half of the year was satisfactory. We ended the period with net debt of £6.4 million.
Following the creation of our Halma China hubs last year, we are seeing promising results already with revenue to China up 38% to £4.3 million (2006/07: £3.1 million). To boost our efforts further, small investments to establish new local businesses in Infrastructure Sensors (Fire sub-sector) and Industrial Safety (Gas sub-sector) should start to bear fruit as we move into next year. Actions to establish additional manufacturing facilities in China for certain other Group companies during the second half are proceeding to plan.
Infrastructure Sensors increased revenue by 8% to £80.4 million and profit by 1% to £13.8 million - all organic growth. Our Fire detection business delivered an exceptional performance, driven by a strategic move towards becoming a total fire solutions business by successfully adding complementary products to our existing line of detectors. The growth of our Fire detection business reduced the cost impact of implementing the planned strategic actions in our Security business designed to position this sector for global expansion. Examples include gaining new national and international product approvals and improving the efficiency of the UK manufacturing base. The benefits of these changes should start to emerge during the second half of the year and should make a tangible positive impact on the sectoral performance in the next financial year.
Despite taking the brunt of the US Dollar currency effects, Health and Analysis grew revenue by 12% to £62.7 million and profits by 7% to £12.0 million. Product margins remained steady and investment in sales and R&D resources was increased. Balancing the tension between adding additional resources to secure sustainable growth and delivering consistent profit increases in the short term is a constant management focus in these higher growth markets. In this context, I am pleased with the progress made in the year to date.
Industrial Safety delivered another excellent performance in good market conditions - especially for those businesses selling into the oil, gas and petrochemical markets. Revenue grew by 23% to £45.0 million and profit by 27% to £9.0 million. Our Safety interlock sub-sector is performing particularly well having sought, in recent years, to develop new sales, product development and manufacturing strategies. Their continued success over a long period within the Group is pleasing to see.
Our commitment to building a culture which encourages innovation and prioritises people development is stronger than ever. R&D expenditure increased by 28% to £9.4 million, from 4.4% to 5.0% of revenue, thereby reducing the Group's overall return on sales margin slightly. However, this investment is necessary to ensure that organic growth is sustained.
The Halma Annual Innovation Award for 2007 was won by a team from Crowcon Detection Instruments who developed a new flue gas analyser, called Sprint V, which is already being used extensively by British Gas. The runners-up were Ocean Optics, who created a new market niche for their products in science education and Klaxon Signals, who developed the new Nexus sounder beacons for industrial and fire alarm applications.
We continue to reap the benefits of increasing our investment in developing talent within the Group. Our ability to identify and target resources to meet the fast-changing needs of our business has improved tremendously. Since the start of the year, two Executive Board positions have been filled through internal promotion. Most recently Allan Stamper, previously a Divisional Managing Director of our Gas detection business, replaced Andy Richardson, who left the Group in early October.
In October 2007, we added to our Industrial Safety sector by acquiring Sonar Research & Development Limited (SRD) for £2.6 million. SRD will add new technology to our existing subsea asset monitoring business, Tritech International, and benefit from their stronger market distribution.
At a Group level we have appointed two of our more experienced subsidiary executives to work alongside our Divisional Chief Executives to ensure we can generate greater momentum in our acquisition activities, whilst ensuring our efforts to sustain organic growth are also maintained.We have substantial resources available for further investment in innovation and growth.
Geographic expansion increases the exposure of the Group to different accounting bases and business cultures. Strong and well trained local managers utilising our common reporting procedures and policies, together with rigorous internal audit processes, help to mitigate this risk.
As experienced acquirers, we recognise that making acquisitions involves risk both at the time of acquisition and during integration thereafter. Increased resources are being directed at both these pre-acquisition and post-acquisition stages to ensure the businesses we acquire meet our demanding financial and growth criteria.
The Group does not use complex derivative financial instruments or undertake speculative treasury transactions but is exposed to foreign currency risk. Payments and receipts are hedged at the time of invoice, significant currency net assets are hedged, future currency profits are not. Our main currency risk is the US Dollar relative to Sterling where a 1% shift impacts revenue by approximately £1 million and profits by approximately £200,000 in a full year.
Halma's diverse and carefully selected market mix has enabled the Group to deliver consistently good short-term performances whilst also investing in growth for the future. We remain positive about our prospects for making further progress this year and in the medium term.
Andrew Williams Chief Executive
* Before amortisation of acquired intangible assets.
** See Financial highlights.
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