“Actions to reposition the Group for higher growth will continue both operationally and structurally.”

Andrew J Williams, Chief Executive

Record sales, profits and ROCE, but...

The Group delivered record sales, record profits and a ROCE* of 62% despite the headwind of currency and rising raw material prices – particularly stainless steel. It is always pleasing to report such achievements together with a record dividend payment for shareholders, but there is more to be done if we are to achieve the performance levels we really aspire to.

The Group did do well to compensate for some adverse factors, achieve excellent cash generation and make two high quality acquisitions. However, the underlying level of organic growth was inconsistent with parts of the business failing to make satisfactory progress, thereby eroding the growth delivered elsewhere.

We take encouragement from our achievements but do not shy away from the challenges. Setting high standards and expectations of our performance has been a key element of Halma’s continuing success in delivering outstanding returns.

The Group’s excellent cash generation and outstanding ROCE* record is not achieved easily but by the disciplined management of our assets at all levels. During the year this enabled us to make £9 million of capital investment in our existing operations, pay a record dividend to shareholders for the twenty-sixth consecutive year, make two significant acquisitions and still have £12 million of net cash available at the year end.

Sales from continuing operations, excluding acquisitions, increased to all territories except for the US where turnover fell by 10%. Clearly currency was a key factor, but again, is not the whole story. We must become more active in the way we build the distribution channels of our businesses, particularly in the US and other key markets. We have sometimes lacked clarity and speed of action in this area in the past and not allocated a significant proportion of our resources to make it happen.

During the year we acquired Ocean Optics, based in Florida, and Diba Industries, based in Connecticut, for a total of £22 million. They have significantly enhanced our capability in optical sensing and fluid technology and have performed well since joining the Group. We remain committed to making such high quality acquisitions as they become available in accordance with our strategy of focussing more closely on those markets offering the best growth opportunities.

Excluding these acquisitions and costs of holding companies, the Optics and Specialist sector achieved underlying profit growth of 12%. New product innovation, improved sales processes and increasing efficiencies in manufacturing contributed to an excellent result.

At constant currency, the sector reported marginal increases in both profits and sales. In the US, our voice communications equipment sales fell significantly. Since the year end we have merged this business with our US elevator safety products company to benefit from its well-developed sales channels.

BEA, the door safety business, performed slightly better in the second half than flagged at the Interim stage. After rapid growth since acquisition, this was encouraging and underpinned a reasonable sector performance overall.

We have taken actions to position the business for better growth in the future. There were significant changes to senior management and to the product range, which had short-term consequences for operating costs and margins. For example, it was necessary to rationalise our range of instruments which measure flow and pressure in water networks to meet more precisely the growing demand for these products worldwide. This resulted in additional costs associated with stock write downs, field service replacements, and adjustments to product design and selling resources. In addition, there was no repeat of a major US leak detection contract this year following last year’s success in Las Vegas. However, we continue with our investment in the US for leak detection, UV treatment and water quality. Our water business is now in better shape to meet the opportunities presented by this long-term growth market.

As indicated at the half year, the margins on our Resistor business came under intense pressure from stainless steel price increases. In the second half, we had some success in mitigating these increases although in certain cases long-term contract terms proved difficult to renegotiate. We have recognised for some time that our Resistors business has been struggling against rising raw material prices, currency and tough market conditions. Since the year end, more vigorous action is being taken and already we have consolidated two of our manufacturing operations based near Cincinnatti, Ohio.

We responded positively to the major M&A activity in the global Fire and Gas market. New product developments and industry-leading customer service levels helped us to compete with US based rivals who benefited from a weaker dollar when selling into export markets. Whilst the market is undergoing a period of significant consolidation we continue to find, and exploit, new opportunities.

A number of products were launched targeting new applications for our safety interlock products. The roll out was more gradual than expected in some cases, but the year ended with greater momentum than it started, particularly in the oil and petrochemical market. Overall, the sector continues to deliver a satisfactory return on sales and excellent ROCE.

During the year, I visited all of Halma’s principal subsidiaries and saw how hard our people are working towards our goal of higher growth. Halma has a talented workforce that creates, builds and sells excellent products covering a huge range of applications. Improving the timing of new product introductions is an area we need to improve continually and, although great strides have been made recently, a further improvement will have a significant impact on our organic growth prospects.

It is encouraging to see the increasing commitment of our businesses towards exceeding the expectation of customers. Our innovation often makes a big difference to our customers’ success and quicker new product introduction is another way in which we can exceed their expectation for our mutual benefit.

I would also like to record my thanks to Stephen O’Shea for his generous help during the recent handover period and for his contribution to the Group’s many successes since he joined us as MD of Apollo Fire Detectors 22 years ago. I am sure you will join me in wishing him a long and happy retirement.

Our ability to maintain strong returns reflects well on our strategy of creating unique, high value products which protect lives, or improve the quality of life, for individuals and businesses worldwide. We will continue to invest in, and develop, high return technology businesses which operate in niche, ‘demand driven’ global markets with strong barriers to entry.

Actions to reposition the Group for higher growth will continue both operationally and structurally. I am looking for greater consistency of performance across the Group to deliver the sustained organic growth which provides valuable returns for shareholders. Whilst there is still much work to be done, there are good opportunities available to us and I am very much looking forward to leading the Group in the year ahead.

*see Financial Highlights