Knight-Swift Transportation H1 24/25 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2024

There are 20 speakers on the call.

Operator

Morning and welcome to our half year results presentation. It's great to be here to present a really strong set of results. But before we dive into the numbers, I want to start today by recognizing the incredible efforts of everyone at Halma for both their individual and collective contributions to another set of record results. I'm extremely proud of your dedication and your ongoing commitment to making a positive impact on people's lives. It's this that drives our continued success.

Operator

Thank you. Steve will provide more details on our financial performance shortly. However, in summary, really pleased to report record revenue and profit with a couple of milestones reached for this first half of the year. Revenue is above £1,000,000,000 and EBIT is above £200,000,000 for the first time. And it's great to see that our reported performance is underpinned by a strong foundation of organic growth with double digit increases for both revenue and profit.

Operator

Alongside this growth, we've continued to deliver strong margins, high returns and excellent cash generation. These enabling us to make substantial investments to support our future growth, both organically and through acquisitions with M and A momentum continuing in the second half. This strong performance supports a 7% increase in the interim dividend, reflecting our continued confidence in our future prospects. These results further extend our track record of delivering strong and compounding revenue and profit growth. It's great to see the 10 year compound annual growth rates of both revenue and profit at 12% in excess of our KPI.

Operator

And this through a volatile period for economic and geopolitical events, for example, the COVID pandemic, supply chain challenges and significant government and policy changes. Importantly, if we look over the longer term, our continued performance reflects the benefits we derive from our sustainable growth model and the importance of the long term growth drivers that underpin growth in our diverse portfolio. All in all, a very successful and pleasing half for Halma And our performance means that we are well positioned to make further progress this year and to deliver strong and sustainable growth and returns for decades to come. More on this in the second half of the presentation. But first, let me hand over to Steve for more details on our financial performance.

Speaker 1

Thanks, Mark. Good morning. As you've already heard, we've delivered strong half one results, achieving record levels of revenue and profit and continuing our track record of strong compounding growth. I'm pleased to say we are well placed to deliver for the full year. Given the varied market conditions in our company's end markets and other headwinds such as FX and higher tax rates, results demonstrate once again the strength of the Halmer model.

Speaker 1

So let's take a look at the first half results. We have delivered strong growth at high returns. Revenue was over £1,000,000,000 for the first time and was up 13%. Adjusted EBIT is over £200,000,000 for the first time, up by 17%, with the EBIT margin improving 70 basis points to 20.7%. Return on total invested capital, ROATIC, was 14.3%, up 110 basis points, driven by the strong level of constant currency profit growth.

Speaker 1

This is slightly ahead of our 10 year average first half ROATIC and remains well above our weighted average cost of capital. In the first half, we've invested over £130,000,000 to support future growth. R and D spend was up 8% to £54,000,000 which represented 5% of Group revenue. This investment is critical for our companies to continue growing over the medium term. It's also a good reflection of the opportunities our companies see for the future and it's pleasing to see our companies remaining well invested.

Speaker 1

We've made 4 acquisitions in Half 1, 1 standalone and 3 bolt ons and invested €84,000,000 As you'll hear from Mark, we've made 2 further bolt on acquisitions since the end of September, and we've also just announced a standalone acquisition this week. So the total acquisition spend for the year to date is now at £158,000,000 Looking forward, the M and A pipeline remains healthy across all three sectors. It's also great to see the acquisitions we have recently made contributing more than 4% to EBIT growth in the first half. All of these investments are enabled by our strong cash generation and healthy balance sheet. So let's look at some of the metrics behind these.

Speaker 1

Cash conversion at 108% is strong and well above our target KPI. Thanks to this high cash generation, net debt to EBITDA of 1.27 has come down slightly from the year end, and this is after the continued substantial investment. Finally, our continued growth, high cash generation and strong balance sheet support an interim dividend increase of 7%, once again, signaling our confidence in the future. So let's have a look at revenue in more detail. This slide provides a bridge of the year on year revenue growth of 13%.

Speaker 1

Organic revenue growth was up 11.5%. So let's look at price and volume. Volumes delivered the vast majority of the growth, driven by continued underlying demand and supported by our order intake, which remains ahead of revenue and last year. Price increases provided 1% to 2% of this growth and was within our typical historical range and consistent with our previous guidance. These increases enabled the gross margin to remain high and stable, reflecting the ongoing value that our products provide.

Speaker 1

We expect the benefit of price increases to be at the lower end of our historical range in the second half. This is because we are cycling against significant price increases put through by many of our companies in the prior period. Next, acquisitions, including the likes of Tadan, MK Test and Lasersafe made a contribution to revenue growth of 3.5%. There was one disposal, Hydrica, in May this year and this made a negative contribution to revenue of 0.4%. Finally, there was a currency drag of 1.6% due to the strengthening of sterling.

Speaker 1

Based on latest currency rates, we expect a similar headwind in the second half. So let's look at revenue through a different lens. This slide analyzes the revenue growth by region. On the left hand side, you have the reported revenue growth and on the right hand side, you have organic constant currency growth, OCCY. It is good to see revenue growing in all regions on a reported basis and all regions with the exception of Europe on an OCCY basis.

Speaker 1

It's worth remembering that for us, the rate of growth in each region is mainly driven by the strength of demand in a particular niche market as opposed to specific geographical factors. If we now focus on the chart on the right that analyzes OCC wide growth. We saw a very strong growth in the U. S, our largest sales region. The key driver was the environmental and analysis sector, E and A, with exceptional growth in the optical analysis subsector.

Speaker 1

In Europe, revenue declined 1% or a weak healthcare performance more than offset good growth in the other sectors. This was down to the weakness in eye health therapeutics following a very strong performance over the previous 2 years. UK growth of 4% reflected a good performance in Safety and E and A partially offset by a decline in Healthcare. Asia Pacific's revenue was up strongly, 11% higher than last year, reflecting strong growth in China compared to weaker trends in the prior year. For context, China represents about 5% of group revenue.

Speaker 1

If we now move from revenue to profit, Adjusted EBIT was up 17.2% at the reported level and up 14.8% on an OCCY basis. This is an impressive level of growth, but it is cycling over a relatively soft prior year comparator. OCCY profit growth was ahead of revenue growth due to the good margin performance in both Safety and E and A, partly offset by a decline in Healthcare. I will take you through the individual sector commentaries in a few moments. Moving on to acquisitions.

Speaker 1

They made a good contribution to the half year profit of 4.1%. This was ahead of revenue contribution and reflects the quality of the businesses we have recently acquired. Disposals had a small positive impact of 0.2 percent demonstrating our continued discipline in capital allocation as we continuously review the portfolio. As with revenue, there was a currency drag of 1.9% from the strengthening of sterling. Overall, it is pleasing that our performance resulted in an EBIT margin increase of 70 basis points to 20.7%.

Speaker 1

This is towards the top end of what we have historically achieved in the first half of the year. This positions us well to deliver our margin guidance for the full year. Let's now move on to the sector commentaries. I'll start with the safety sector. The safety sector building off a strong FY 'twenty four delivered an excellent performance in the half, revenue up 11% and profit up 20%.

Speaker 1

This performance was broad based with positive revenue growth across all regions and subsectors. On an OCCY basis, revenue grew at 10%. This reflected double digit growth in the U. S. And Asia Pacific with growth broadly spread across the subsectors.

Speaker 1

It also reflected good growth in the U. K. And other regions, while Europe's growth of 4% was more modest. Growth in the UK, other regions and Europe primarily reflected a positive performance in the fire safety subsector. In Europe, this was partly offset by weaker trends in worker safety.

Speaker 1

Profit was up 20% on a reported basis and up 18% on an OCCY basis and it was up across all subsectors. I was particularly pleased to see Safety's profit margin expand by 190 basis points. This is a continued margin improvement well beyond the recovery from the supply chain challenges of 2 years ago. The margin benefited from stronger sales growth, more favorable product mix and good discipline on costs. It also included a good contribution from recent acquisitions, including LaserSafe, MK Test and AMPAK's recent bolt on global fire equipment.

Speaker 1

Finally, it was great to see the companies within the sector increased investment to support their future growth with R and D as a percentage of revenue increasing to 5.7%. Turning now to the Environmental and Analysis sector. The E and A sector saw very strong reported and OCCY revenue growth both at 27%. In addition, all regions grew revenue. If we take a look at the detail by the regions on an OCCY basis, The main takeaway is that there was very strong growth in the U.

Speaker 1

S. This was primarily driven by photonics in the optical analysis subsector, reflecting growth in demand for technologies that support the transformation of data and digital capabilities. In particular, the continued successful execution for a long standing customer. Revenue in Photonics in half 1 was, as expected, similar to the second half of last year. It is expected to remain at a similar level in half 2.

Speaker 1

Europe and the UK both grew well, driven by leak detection solutions within the water analysis and treatment subsector and in the UK, a good performance in gas detection within environmental monitoring. Asia Pac saw good growth. This mainly reflected an improved performance in spectroscopy in China, which has seen slightly firmer trends in selected end markets, including biopharma and solutions for OEM customers. In terms of profitability, profit increased by 36% on an OCCY basis and the profit margin saw some recovery versus last year, improving 190 basis points to 22.8%. The increase reflected the benefit of growth in all subsectors except water analysis and treatment.

Speaker 1

This also included some recovery in higher margin spectroscopy, which had a tough first half last year. The sector continued to invest at a good level with R and D increasing 9% to €14,000,000 The lower R and D spend as a percentage of revenue reflected a mix effect from the recent growth in Photonics, which has a lower R and D requirement. There was also a good contribution from recent acquisitions, including bolt ons for MINICAM and Alicat Scientific. Now let's turn to the Healthcare sector. The Healthcare sector delivered a subdued performance with the reported revenue growth of 1%, but a decline of 2.5% on an OCC wide basis.

Speaker 1

By geography, the U. S, Asia Pacific and other regions all grew, but Europe and the U. K. Declined. If we take a look at the detail by region on an OCC wide basis, there was a modest growth in the U.

Speaker 1

S, reflecting early signs of healthcare markets improving. In Europe, revenue declined with the key driver being weakness in the eye health therapeutics within the therapeutic solutions subsector. This compares to a very strong performance over the past 2 years in eye health and reflects delays to OEM customer product launches and destocking. In the UK, revenue was lower, reflecting budgetary caution by healthcare providers. Asia Pacific revenue grew modestly.

Speaker 1

This principally reflects a gradual return of demand in Life Sciences in China. In terms of profitability, the profit margin decreased 260 basis points to 20.8 percent against a strong comparator in the first half of last year. It was good to see the gross margin stronger as a sign of the value in use of our products to our customers. But this was more than offset by the effect of the revenue decline in higher margin eye health therapeutics. R and D spend remained at a good level and there was good contributions from acquisitions.

Speaker 1

It's great to see continued momentum with the acquisition of Lamadine Nouri announced this week. If we now turn to our cash flow performance. This chart summarizes the group's cash flows for the first half. I'll pick out just 3 items: working capital, acquisitions and pensions. I'm really pleased to see how our focus on working capital across the group is bearing fruit.

Speaker 1

This resulted in an actual working capital inflow despite the strong growth in the half. This is also the driver behind our strong cash conversion of 108%, well ahead of our 90% KPI target. The net acquisition spend mainly reflects the 4 acquisitions and 1 disposal made in the period. Just as we've seen in this half year, these acquisitions will become a source of incremental EBITDA in future periods. Finally, pensions.

Speaker 1

While not a substantial item for us, it is worth noting that in September, we purchased buy in policies for the group's 2 main defined benefit schemes. This has no P and L or cash flow impact and it has the benefit of reducing the principal risks associated with the 2 schemes. Now let's turn to our financial KPIs and how we've performed against them. Across the board, these are a strong set of results. This is especially true given the varied market conditions our companies are seeing in their end markets.

Speaker 1

We have met or exceeded all of our financial KPIs. In short, we've seen strong growth at high margins, a good profit contribution from recent acquisitions, our profit growth resulting in a strong EPS performance despite adverse FX and tax movements, cash conversion well over 100%. Our company is remaining well invested and return on total invested capital at 14.3%, significantly up from last year and well above our weighted average cost of capital. These high returns and strong growth coupled with a disciplined risk appetite mean the group continues to create significant value for shareholders. Moving on to my last slide, which is on guidance.

Speaker 1

The strength of our first half performance means we are well placed to deliver our existing guidance for FY 2025. While we continue to experience varied conditions in our individual companies' end markets, for the year as a whole, we expect to deliver good OCCY revenue growth and an adjusted EBIT margin of around 21%, in the middle of our target range. This is additionally supported by our group order intake, which remains ahead of both revenue in the year to date and the comparable period last year. Overall, we are well positioned to make further progress in the remainder of the year. And with this, I'll now hand you back to Mark.

Operator

Thanks, Steve. Fantastic to see the excellent performance against our KPIs in the first half. A strong set of results driven by the disciplined execution of our sustainable growth model. In this part of the presentation, I'll highlight three aspects of our model that were key to our success in the first half and which will support Halma's delivery of compounding growth and high returns over the long term. 1st is a deep understanding our companies have of their markets.

Operator

This allows them to identify our customers' biggest challenges and innovate to solve them. To bring that to life, I'll focus on the positive impact that these solutions have on people's lives. And it's this impact inspired by our purpose, which we're constantly looking to grow. It's both a significant motivator for our people and an underpinning for our financial performance. The second is the substantial benefits that come from our diverse portfolio of businesses, a portfolio that not only gives us fantastic growth opportunities, but also resilience to changes in individual markets.

Operator

And as you'll hear, the acquisitions we've made so far this year have reinforced those benefits. And third, talent and culture, which are crucial to our performance. Our devolved and autonomous model relies on having talented people close to their customers focused on delivering in their markets. So it's critical that we recruit, develop and retain the very best people. And we also know that there's huge benefits from collaboration and learning across our companies.

Operator

So three elements, all of which important to our growth, really understanding our markets, having a great diverse portfolio of companies and a fantastic team working together.

Speaker 2

That day, I went away almost 4 weeks pregnant.

Speaker 3

Exina is one of our fantastic nurses. We just got to chatting, seeing how she felt.

Speaker 2

Look at you said that you look so weak.

Speaker 3

Something was off. Our team felt that if she continued on, the likelihood of having a problem with the baby was high.

Speaker 2

You can imagine she was anxious, but we were able to calm her down and we put on fetal monitoring.

Speaker 3

In her case, she was doing fine until there were fetal heart rate changes.

Speaker 2

That was when we took her in and did a C section. We were able to act very rapidly, and this is a result of monitoring her. I do believe that her baby probably would not be here if it wasn't for Periwatch. They've created a tiny living thing in

Speaker 4

It was the 1st day of winter. My cousins had called me to turn their boiler back on.

Speaker 5

I go down to try and light the boiler and it wasn't burning properly. So it wasn't venting properly either.

Speaker 4

While we had the boiler on, I was very nauseous and I had a really bad headache.

Speaker 6

Carbon monoxide is a silent killer. You can't see it, you can't taste it, you can't smell it.

Speaker 5

I grabbed my tool bag and then I grabbed my Sensit, and as soon as I got close to the basement door, it's already at a 1000 parts per million of CO. And I'm like, we might have a problem.

Speaker 6

An elevated level of carbon monoxide would be typically around 35 parts per million. It can become very toxic very fast.

Speaker 4

We got everybody out. It was absolutely terrifying. I want to say thank you. They didn't just save my cousins, they saved us. They saved people every day.

Operator

What a fantastic video. Two really inspiring examples of our purpose in action. And the difference that our companies make on the lives of people such as Exina and Chelsea and Chris is something to be really proud of. And it's our company's ability to tackle some of the world's most fundamental challenges that underpin their growth and my confidence in our future delivery as a group. That underpin their growth and my confidence in our future delivery as a group.

Operator

Let me break that down to show how we think about this important link between purpose and performance. And starting at the top right, our purpose drives our companies to find those life critical solutions for our customers, solutions which are highly valued because of their positive impact and the complexity of the problems that they're solving. Moving clockwise, to do this, our companies must have a deep understanding of the markets in which they operate. And this is why our operating model is so important. In each of our companies, we have a dedicated leadership and commercial teams who are solely focused on their market niche.

Operator

This means they can be close to their customers, have deep insights into their markets to spot both opportunities and threats. And then the autonomy that our org model gives them allows them to be entrepreneurial and agile in spotting changing dynamics and responding with new innovative solutions. And at the same time, they can benefit from the collaboration and support that's available because they're part of our wider global group. And I'll come back to this point on collaboration and the power of our network later. The video also underlines 2 points on our choice of end markets, which is shown on the left hand side of the slide.

Operator

We choose markets that have strong and long term growth drivers based on solutions to issues that are fundamental and growing. The video showed 2 great examples, the need for better healthcare and clean air for everyone. These are global challenges that will increase over the longer term, giving us significant opportunities for future growth and solving for these challenges allows us to deliver strong margins and high returns. And finally, the markets we choose to operate in are fundamentally resilient. Many of our products are non discretionary or recurring, either because they are required by law or regulation or simply because the cost of not using them is too high.

Operator

This supports our resilience, which is further reinforced by our diverse portfolio, diverse by end market, by geography, by technology as examples. This enables us to continue to invest through individual market short term cycles and also underpins the consistency of our delivery over the medium term. So it should be no surprise that our first priority and top priority when allocating capital remains organic growth. So if that's the type of companies we want in the portfolio, let's now look at how we've grown our portfolio in the year to date through disciplined and purpose aligned M and A. And I'm pleased to report that our positive momentum in M and A has continued so far this year.

Operator

As I mentioned, one of the benefits of our model is that we're able to continue to invest across all of our sectors through varied end market conditions. As you heard from Steve, we've made 7 acquisitions in the year to date for a total spend of GBP 158,000,000 Let me highlight 3 acquisitions, 1 in each of our sectors. Each of these are focused on the long term growth trends and a good example of how we use M and A to enter new and adjacent markets, but also to further expand existing market positions. MK Test supporting the energy transition and growing our presence in high voltage electrical testing following the recent acquisition of Vtech. Haythorn expanding Minicam's capabilities, helping to ensure clean water and prevent pollution.

Operator

And as Steve said, only this week, Lamadine Nuri in minimally invasive surgery adjacent to our existing presence in diagnosis, a great acquisition helping to deliver improved outcomes for patients and driving excellence in healthcare. It's also great to see as shown at the bottom of the slide, more of our companies using bolt on acquisitions to deliver their long term growth strategies with 5 of the 7 acquisitions in the year being bolt ons. Looking forward, we have a healthy pipeline and our leadership teams, company M and Ds and dedicated M and A resource are actively pursuing opportunities in their markets to grow and further diversify our portfolio. So turning now to my 3rd and final area of focus for today, our talent and culture. This time last year, I focused on the value of agility, a crucial asset in driving success given the rapidly changing world.

Operator

Today, I'm going to focus on the value of our collaborative culture, a major competitive advantage for our portfolio of companies. Let's utilize video again. This one was from our recent Global Accelerate event, where we brought together all of our company leaders to build relationships, share best practice and collaborate. Welcome, everyone. It's fantastic to see you all together.

Speaker 7

It's an eye opener to find out what we are now part of because we've spent a long time as an SME or small business trying to fight our own fight and now realizing we're part of a larger support structure with people in a similar position to us is helpful and, certainly something that we're gonna take back to the rest of the team and really bring to light what we are now part of.

Speaker 2

I've never been to 1 a hink quite like this before, and I've been in business for a few years. I think the beauty of it is you almost submerge yourself in the Alma ecosystem.

Speaker 8

As I look across Alma, there are so many touch points and so many areas of collaboration that are possible. As a business leader, we share challenges with other business leaders. We operate in regions that are the same as other businesses here. Being able to work with other leaders and talk through those challenges and share and compare notes and identify ways that we can all work together better is is really the benefit for me of this event.

Speaker 9

I think the relationship that we build here is so important because there's the opportunity to just then pick up the phone, and now there is a personal connection. And I think, you know, we talk about the unfair advantage that home has with all the OpCos, and and it's so true, but it's up to us to tap into that, right? It's not to look to the group to set it up for us, but it's really for us to actually build that bridge to each other.

Speaker 10

I like the way that people connect to each other. It's very easy to talk to anyone. There's very low layer, so it's not hierarchical. It's very nice to have connections to people.

Speaker 5

Every time I walk out of an Accelerate, I know what Halma is looking for in the next couple of years. They do it in a very nice way, but it allows us to go, these are the things that we need to make sure we're covering. These are going to be the new areas that we want to develop into, not on the business side, but in how we grow and where we play.

Speaker 11

The most value for me is to connect with a different leader. I'm really impressed by the people that I meet, and I'm super, also impressed by the innovations that we have. I was just discussing with someone saying, that's incredible how much of small companies are doing such a positive impact on the world.

Operator

Another great video, fantastic to feel the energy from our leaders and so many themes that I could pick up on in just that short video. Melissa's comment that there are so many areas of collaboration that are possible. And this might surprise some of you, after all, our companies operate in different market niches and sectors and different countries. But despite their diversity, their needs as leaders of entrepreneurial companies are often very similar. How do we internationalize, digitalize, deliver in the short term and invest for the long term?

Operator

How do we attract and retain the best talent to name just a few? And as a Halmer company MD or Board member, if you've got a question, you can be pretty sure that someone than what Jason referred to as our support structure is going to have the answer. Of course, that requires an open culture, one where as Alma said, it's very easy to talk to anyone with very low layers and not hierarchical. And these are all things that as we've grown, we've had to work hard to retain. Examples include events like Accelerate, but also developing our people by giving them new challenges and experiences in different companies, different sectors and in a variety of geographies to ensure they are ready for their next role.

Operator

Over the last 6 months, over 100 of our leaders have been through our leadership development programs. This gives us a strong pipeline of leaders who can be promoted internally. In fact, one of those value propositions that we have to founders and owners is often that they need a successor, someone who can take their company through the next phase of growth. And by developing talent internally that can take on these opportunities, we can be confident in a smooth transition when that time comes. In fact, we've had 2 great examples of this recently where founders have been succeeded by talented, well prepared individuals.

Operator

Both who participated in multiple Halma development programs, starting their careers years ago in our fantastic graduate scheme, the Catalyst program. And this talent mindset is evident across the entire group, from the PLC board to our individual companies. We spend significant time understanding the specific needs of our companies and ensuring that we build a culture and environment in which everyone can be their very best. And I think that came through in Rob's comment on how we grow and where we play, the value we can add and how we as a group can address broader themes and invest in specific growth areas to support our companies in delivering their individual growth strategies. And all of this adds up to support what Carolyn called an unfair advantage for our companies in their markets.

Operator

What I think of as how companies are better off as a part of Halma than standalone. So to summarize, this has been a very successful half year and the foundations of that success lie in our sustainable growth model and this includes the disciplined choices we make on where to invest, both organically and inorganically, in niche markets with long term growth drivers supporting compounding growth and high returns. The benefits we derive from our diverse portfolio of businesses. The agility inherent in our org model putting great people close to their customers with the autonomy to make the best decision for their company at that moment in time and the investments we make in our people and in our culture to deliver against our ambitions. And it's for these reasons that I believe we're well positioned to make further progress this year and for decades to come.

Operator

Thank you. We'll now take your questions. Two ways you can ask questions. You can either raise your hand using the tool at the bottom of your screen and I'll invite you to ask your question verbally or you can type your question, which Steve and I will read out and then answer. So looking at the screen, our first question comes from Andre.

Operator

So Andre, we'll start with you.

Speaker 12

Good morning. Thank you very much for taking my questions. I'll have 2. I'll just go one at a time. Firstly, could you just take us through the dynamics of the Photonics business that surprised significantly in the second half of last year?

Speaker 12

I understand the delivery in the first half of this year has been in line with that second half. What should we think about for the second half of this year? And I guess looking at this more on midterm basis and taking a step back, what is the structural growth potential for that technology application from here?

Operator

Yes. Thanks, Andre. I'll pick that one up. As you say, fantastic achievement from one of our companies, a business that was €4,000,000 in revenue back in 2011. So a great example of a business scaling up in the group.

Operator

And we did see that exceptional growth in the second half of last year. As a reminder, this is a relationship that we've had with a customer now for over 10 years. It was really pleasing to see that ramp up in terms of them delivering their strategy and the role that we play in it. So really pleased to have seen the ramp up. As pleasing is to see that continue at that high level through the first half of the year.

Operator

And as we look forward, I guess, again, just worth reminding everyone in terms of this is a very dynamic market. We don't have a huge amount of direct visibility forward. However, we do have that strong relationship built up over many years with the customer. So as I sit here today, we've already given the guidance in terms of the continuation of those high levels into the second half of this year. And as I look forward into the 1st 6 months of next year, I see the growth in and around somewhere in line with the group's KPIs on revenue growth.

Speaker 12

Great. Thank you. And my second question is on the acquisitions pipeline. As Stephen said, you've committed nearly 160,000,000 pounds of capital already to acquisitions. So is there anything you can tell us about how the second half pipeline looking?

Speaker 12

I appreciate it's always hard to predict acquisitions. And just generally right now, does it feel like activity is heating up compared to 6 to 12 months ago or more of a steady level or any signs of cooling down?

Operator

Yes. As you said, Andre, it's hard to predict the exact timing given our strategy and approach to M and A and that we're looking for those fantastic businesses in those niches solving real world problems underpinned by long term growth drivers, often privately owned. And I guess putting it really simply, we're trying to buy businesses that aren't for sale. So predicting the point in time that we're going to convert the sale is very difficult. That said, we do have a strong pipeline, as I say, underpinned by those long term growth drivers.

Operator

We've invested well into the group in terms of our capabilities and continue to invest and the team is certainly busy at the moment. We've got the financial firepower in place. And in terms of what we're seeing moving forward, we've got to make sure that we maintain our disciplined approach around purpose market, future growth and returns. But all of that said, it's great to see the momentum, the pipeline looks strong. The wider activity in the market, mainly our biggest competitor is actually the owner's decision as to whether to sell in those areas that we do come up against private equity, come up against other funds.

Operator

We're trying to avoid auction processes. But where we are seeing that, maybe there's been a little bit of an uptick in activity. But as I say, our strategy remains, we're trying to find fantastic businesses privately owned and give them a home for their business within the Halma Group.

Speaker 12

Great. Thank you very much.

Operator

Thank you, Andre. I see Jonathan. Jonathan Hurn, you've got your hand up.

Speaker 13

Greg Hunt, can you hear me okay?

Operator

Yes, perfect, Jonathan. Yes.

Speaker 13

Yes. So yes, good morning. Thanks. I actually have three questions, if I may. The first one was just staying on optical analysis, but this time on spectroscopy.

Speaker 13

Obviously, a high margin error for you. You're seeing a recovery in China. But can you just talk about what you're seeing in other regions globally within that space? That was the first question. The second question was just in terms of health care and going forward.

Speaker 13

How should we think about that just in terms of the shape of recovery? Obviously, if we look at H2 last year, it's quite a weak comp for you in health care. Do you feel that health care can return to growth in the second half of this year? And what kind of magnitude do you think that could be? And then the 3rd and final question is just on safety.

Speaker 13

Obviously, really strong first half margin performance there, roundabout. Is that level sustainable going forward? Those are the 3 things.

Operator

Yes, great, Jonathan. Thanks. Well, let me I'll get Steve just to pick up on the first one around spectroscopy. Yes.

Speaker 1

Thanks, Jonathan. Good question on spectroscopy. Actually, what I'm pleased to say is, you know, we're seeing improving and sort of what I'd call slow to modest recovery in spectroscopy across the board, not just in China. We pointed out China just because it was one of the key dynamics in terms of the growth we've seen in Asia Pacific. But Spectro has been coming back.

Speaker 1

As you know, it's a high margin business, so it's an important component of the E and A portfolio. So we would expect that to move forward. So when we look at the E and A portfolio in its entirety, we would expect the margin to improve a little bit in the second half based on where we're going. But in terms of spectroscopy, I think it's moving in the right direction.

Operator

And then, Jonathan, on the second question around healthcare, and in particular, the go forward. As you say, I think the first half of the year and a little bit of the continuation from the back end of last year, there's well documented softer demand in terms of the wider healthcare markets. It was pleasing in the first half of the year to see that modest recovery in a number of the end markets across the portfolio. You can certainly see that playing out in the businesses that are based out in the U. S.

Operator

So you can see a bit of recovery there. However, as Steve pointed out in the presentation, that was offset by a decline in our ophthalmology therapeutics subsector. And to be clear, that was following 2 years of really strong growth in that business. So for us to see that decline, a combination of destocking, but actually also driven by the delay in OEM product launches and was kind of a position that really reflects the portfolio. So we've seen those ups and downs, we've seen some recovery and then we've seen some phasing of downturn.

Operator

As we look forward, I think it's fair to say that we expect to see a level of recovery in the second half, but we're certainly not sitting here expecting a heroic bounce back in healthcare, which I think is aligned to what you will have heard from others too. And then safety, Steve, do you want to pick up on the margin?

Speaker 1

Just one other thought on healthcare is, with eye health therapeutics, we have more than one business in that sphere. And the business that's dealing directly with surgeons is still seeing very strong demand. So we're not concerned about there's a lack of or there's a structural change in our demand dynamic. We think we're very well positioned over the medium term. In terms of safety, you're right.

Speaker 1

It's a high margin historically for the safety sector. It's a long way from where we were in FY 'twenty three when we were having supply chain issues. We've recovered from that and now we're at a high level and we think that's sustainable. When we look at the gross margin levels, they look strong. And what's driving that, it's stronger sales growth, it's a more favorable product mix.

Speaker 1

We're seeing good discipline on costs and we've done a number of accretive acquisitions, the likes of Laser Safe, MK Test and GFE. So when we look at all of those factors, we think this is a sustainable margin. One thing I would say, but it's further down the road because of the growth that Safety has managed to achieve. I think at some point we'll probably need to reinvest to some degree in additional capacity, but I think that is further down the road. So good margin and yes, I do think that's sustainable.

Speaker 1

Thanks.

Speaker 13

That's very nice. Thank you very much, Rick.

Operator

And then just looking at Max, I can see you've got your hand up, so over to you.

Speaker 14

Yeah. Thank you. Good morning. Just two questions I'd have. Just number 1 on the cash conversion, obviously, a very, very strong start to the year, a very strong first half.

Speaker 14

Could you just give us sort of some sort of thoughts on how you would expect that to play out in the second half? Would you expect a

Speaker 3

sort of

Speaker 14

normalization to kind of below your targeted cash conversion level? Or should we be thinking you can stay above that 90% level and have a better overall outcome for the full year?

Speaker 1

Do you want to? Yes. Max, I'll take that quite happily. We're really pleased with the half one performance. And I think this reflects our overall focus on returns and working capital levels.

Speaker 1

And that's what you're seeing come through with that. I think you will see us be ahead of the 90% KPI target in the second half as well. So that's encouraging. What we're seeing drive some of the cash conversion is we're seeing inventory days improving, we're seeing better days improving as well. So it's a good focus across the group and we've been doing that in a helmet type way in terms of we've, you know, talked to the businesses about what's important and what are the key drivers and then they take it away and they run with it.

Speaker 1

So I do expect us to be ahead of the 90% in the second half. I wouldn't want you to translate that into should we be changing the medium term KPI of 90 percent because we're a business that invests for the long term. But clearly the focus that we've got at the moment is meaningful this year that I think will be ahead of the 90%. So there won't be a sort of reversion back to 90% due to some underperformance in half 2. I don't see that.

Speaker 14

And maybe just a quick follow-up on the Safety business. I mean, obviously, the division has accelerated organically this year and there's not that many kind of businesses that are seeing acceleration. So obviously, there's a lot of different businesses in here, but they're all kind of geared into safety. I mean, could you talk about whether you think this there is a reason that the actual end market is accelerating? Or would you put this more down to kind of the individual performances of the sub businesses that sit within that unit?

Operator

Yes, I think it's more the latter, but I'll come back to the fundamentals of the markets that we choose to be in. We're deliberately choosing to be in those niche markets in solving those high value problems often regulated underpinned by the long term growth drivers. So over the medium term across the entire portfolio, we expect every one of our businesses to be able to deliver that compounding continuous growth and high return. So there's always phasing in terms of a portfolio. You're going to get periods where everything's up.

Operator

You're going to get periods where things are challenged. But certainly over the medium term, these are great markets to be in and they underpin our confidence moving forward across the group and within the sector itself.

Speaker 14

Okay. Thank you very much.

Operator

That's great. Thank you, Max. So I've got I'll just pick up. I've got a couple of questions in the text. First from in fact, they're all from Stefan.

Operator

First one, Halma is to some extent UK centric. How will higher NIC costs affect the company? I guess I can pick that one up. As you say, Stefan, we are listed in the UK, but again, give a little bit of context around 14% of our revenue is in the UK, around 30% of the workforce is the head office is here too. I guess the headline there is that from a materiality perspective, it's not material to the group less than 1% of our profits.

Operator

All of that said, the individual companies and I'll come back to the agility will work through the appropriate actions for their business. They are operating clearly in high margin niches as we've just talked through. The budget won't be material in its own right, but we'll rely on those working it through moving forward. I think, Stefan, and correct me if I'm wrong, but we've covered your question in terms of the healthcare sector in terms of trading and a view going forward. And then your third question is on M and A.

Operator

Purchase multiples have come down this year versus the past 3 years. Does that reflect acquisition multiples are generally coming down? I guess picking that up, the simple answer is no, we don't see a reduction in multiples. We're acquiring high quality businesses in high quality margins and they attract a certain level of multiple. What I would say is it's a little bit dangerous coming off the back of some of the end markets that we've all been operating.

Operator

You've seen it across our portfolio of using multiples is a single indicator. You may well be coming off a 12 month period where you've seen a trough or in fact, a recovery year. So overall, we're certainly not seeing a reflection that multiples are generally coming down. But on the flip side, we're not seeing a material uptick. But I come back to that point of we are buying good quality businesses where we have a high degree of confidence in their long term compounding growth.

Operator

Okay, just back to raised hands. So I can see Rory, you've got your hand raised.

Speaker 15

Good morning. It's Rory at Boxcap. Can you hear me? Yeah. All right.

Speaker 15

Thank you so much for taking my question. Good morning, Steve. Good morning, Mark. Mark, I think it's for you, but my question is on M and A. And if we look at the bolt ons, you're doing slightly more bolt on deals for companies at the company level.

Speaker 15

I just wanted to ask, how do you ensure that those deals are sort of sourced and executed in line with sort of group priorities and group sort of criteria for M and A, do you put in place quite strong guardrails around the operating companies or is there slightly more sort of leeway for them to go and find deals that you maybe wouldn't have seen landing on your desk in the past?

Operator

Yes. Thanks, Rory. And as you say, I mean, it's fantastic to see the momentum in bolt ons as our individual companies become bigger, have that capacity to utilize M and A to deliver their growth strategy. So it's a good thing to see that momentum coming through and something that one would expect to continue going forward. In terms of, I guess, governance on the deals, firstly, in our decentralized autonomous model, we do have great people close to their markets with really good insight into the growth drivers in those markets.

Operator

So to some degree, it's derisked by having that in-depth knowledge and the insights of our leaders who operate in those markets day in, day out. All of that said, if you like, the governance and control around M and A is exactly the same for any deal. And that fundamentally, any deal. And that fundamentally, it's our divisional Chief Exec that will take the lead in terms of acquiring the company. They will be the chair on that individual company in this instance.

Operator

It will then be that same DCE that will chair the company with the bolt on post acquisition and be responsible for delivering that future growth. So that's in place from an approval and authorization. Again, we'll come up through the group. The sector chief execs will review and approve and Steve and I approve all M and A in the group. And then anything over £10,000,000 actually goes to the main board.

Operator

But to be clear, that isn't some form of investment committee. We're all heavily involved in the early stages, really talking through the dynamics of the market and getting ourselves comfortable in the future cash flow. So ultimately, I would say it's lower risk than standalone deals, but equally is value creative for us.

Speaker 15

That's really helpful. Thanks so much.

Operator

And then I can see thanks, Roy. I can see Bruno with your hand up.

Speaker 16

Thank you for taking my questions. Just firstly, two small questions on the contribution from acquisitions in the half. The contribution margin from acquisitions appears a little lower in H1 given the financial profile of the assets you recently acquired, I think, 23% at the group level. And for health care, 17%, where I think, for instance, the margin for Robins was incredibly rich. So I guess the two questions being why was the contribution margin slightly lower?

Speaker 16

Were there certain investments that you had to make? Or did any of the markets for the acquired assets moderate downwards? And secondly, are you able to provide any guidance in regards to contribution from acquisitions for

Speaker 10

the full year?

Speaker 1

Okay. I'll pick those up Bruno. In terms of acquisitions, when we first bring a company into the group, we often do need to put additional investment in. So that's why you'll see some of the reduction that comes through. So you won't see exactly what you're expecting.

Speaker 1

It's more that than some of the markets come off once it's come into the Group. So I think that's the key driver. In terms of our expectations, in terms of M and A and the contribution it's going to make, when I look at it from a revenue perspective, I think it'll be for the full year somewhere in the region of just over 3%. If I then think about the disposals we've made, I think it comes into about 3% overall, 2.5% to 3%. So those are the numbers that we've got in our modeling and I think they're pretty spot on.

Speaker 14

Okay, got it.

Speaker 16

And just lastly, apologies if partly covered, but just a question in regards to the softer market development in ophthalmology and implications for margin, particularly as we think about H2.

Speaker 14

So I

Speaker 16

guess, how long do you think the destocking lasts? Are we over that pretty much today? Or does this linger into H2? And as we think about that margin for health care in H2, are you taking any measures to counteract for those softer that softer top line development? So are you able to share any color, I guess, in regards to how that margin trends in H2 and what you expect?

Speaker 1

Yes, it's a good question. It's interesting when you look at the portfolio affecting Healthcare, you know, the revenue is down for about 2%, 2.5% in the first half, but the margin is down more than that. And that's partly due to, as you've rightly picked out, the mix effect of the high margin eye health therapeutics part. It's also due to some lack of leverage as well as the revenues come down a bit. In the second half, we're not assuming anything heroic in terms of recovery.

Speaker 1

I think the challenges in healthcare are well documented. So we think there'll be some improvements and so we'll get some leverage come back. So there'll be some margin improvement. But in terms of eye health therapeutics, in terms of what we're seeing, maybe some small improvement in the second half, but we're not assuming anything significant in the second half. So I think it's more an FY 'twenty six where I would expect that to come back, particularly when we're talking about the European based business.

Speaker 1

As I say, our other eye health businesses are going strongly because there is good underlying demand. So we just need to work through the delay in product launches of some of our OEM customers and some of the overstocking. But I think it's an FY 'twenty five phenomenon.

Speaker 14

That's very clear. Thank you.

Operator

Thanks, Bruno. Just looking at the screen, so Margaret, I can see that you have your hand up also.

Speaker 17

Yes, good morning. Hopefully, you can hear me. Thank you for taking my questions. I have just 2, if I may. Just go back to the first question on the pipeline.

Speaker 17

Can you just give us an indication? You've said in the past, it's 600 plus companies, but over the past 6, 7, 8 months, how many of those are new companies coming into the pipeline? What is the traction on refreshing that pipeline? If you could just give us some commentary on that? And then the second question is very pleasing to see the ROTIC trend to go up.

Speaker 17

But structurally, as you are bringing in higher margin businesses, would you expect to be holding a higher level of normalized working capital than you have historically? And so in terms of recovery of that trend, what should we be thinking about those moving parts there?

Operator

Yes. Thanks, Warren. I'll pick up the first one in terms of the pipeline. As you say, it's running it anywhere between sort of 600 or 700. In terms of how many of those are new, how many flush through, I mean it's hard to put an exact number on it, but we're certainly seeing new companies always coming into the top of the pipeline, whether that be from insights from our company MDs, whether that be from insights from us going to trade shows or in fact from our central teams doing the market mapping.

Operator

So I would estimate that we were bringing in 50, 100 new companies and flushing them through in terms of the rate that we're reviewing. But again, I come back to that point, it's really difficult to oversimplify our approach when we're building relationships with these companies, sometimes over 10, 15, 20 years as opposed to necessarily working through pipelines as you may see in more traditional M and A companies. And Steve, did you want to pick up the one?

Speaker 1

Yes. So thank you for the question on returns, capital employed and sort of the impact of M and A. Overall, we're really pleased with how we're making progress on capital returns. We look at it from a number of different angles and a number of different metrics. So return on capital employed for the first half is up nearly 7 percentage points versus this time last year.

Speaker 1

ROTIC is up 110 basis points compared to this time last year. And if I look at it from a CF ROI perspective, we're up considerably as well. So it's encouraging to look at that. In terms of acquisitions, clearly when we bring in a new business that's going to add to our working capital undoubtedly. But when we look at those businesses, you know, and we're assessing a target, we're looking at its returns performance, we're looking at its margins performance as well to see if we think this is a helmet type business.

Speaker 1

So when we come in, when the business comes into the business, although it may have some drag on the return on capital for the 1st 3 or 4 years, I'm not expecting it to have a massive impact on the working capital. What was interesting to us this last 6 months is overall our working capital is down despite the M and A and that's due to the focus our businesses have put on debtors and inventory and creditors, etcetera. So it will increase over time the working capital, but what we're looking for is our businesses to be efficient from a balance sheet perspective and they get that and they're incentivized on that as well. So they have a remuneration scheme that has a capital charge built into it. So people are being remunerated on an EVA basis.

Speaker 17

Yeah, very helpful. I appreciate it.

Operator

Thank you, Margaret. And then just looking at the screens, so Mark, Mark Davis Jones, I can see you have your hand up.

Speaker 18

Yes. Thank you, Mark. Broad and probably slightly impossible question, but obviously the U. S. Is by some distance now your largest market and also driving growth.

Speaker 18

We've seen some interesting political changes there. Just thinking forward, are there any areas where tariffs, particularly on flow from Europe into the U. S. Might affect you? Or are there any areas we should be particularly concerned about given your focus on the E and A business on regulatory drivers where any sort of retraction of state support is a threat?

Operator

You always love a broad and impossible question. Thanks, Mark. Now let me pick that up. I think fundamentally, we have to come back to those core elements of our model and sitting at the heart of that is that we have a strategy that puts our companies close to their customers. So it's very much local to local across the portfolio.

Operator

And I guess to try and put a little bit of color on that over 70% of our revenue is if you like local to local in region. And specifically in the U. S, that number is around 90% to give some context. So from the revenue perspective. So I think that start point of having businesses that are close to their customers puts us in a relatively strong position.

Operator

Then of course, you think about the fact that we're operating in those niche high value markets, which are underpinned by the long term growth drivers. That gives us a strong margin because of the value that we're creating and a certain level of pricing power that we use appropriately. And then I guess we further benefit from the agility in the model. So again, decentralized autonomous model, each individual business has that autonomy and that ability to make the appropriate decisions for their business, for their customers, for their supply chain. So you bring all of those things together and I think we're relatively well placed.

Operator

I guess then just a couple of other points that are worth making. We've clearly got the learnings and experience from the more recent U. S. China tariffs in terms of how we work those through, so we can share best practice across the group there. And then I think fundamentally you come back to we are on track to deliver our 22nd year of consecutive record profit growth.

Operator

And there's been a lot of changes in many areas over that period. And that really reflects those points that I've just talked to. What are we looking for from governments? We are looking for that focus on addressing those long term challenges, clean air, clean water, health infrastructure. We're looking for frameworks that promote investment.

Operator

And of course, a stable and growing economy is a good place for us to operate. So not a direct, I guess, answer to your specific complicated question, but hopefully gives you the context of how we work it through.

Speaker 18

No, that's great. Thank you.

Operator

Okay. And Stefan, I can see that you have your hand up. So over to you.

Speaker 19

Yeah. Hi, Stefan from HSBC. I cannot only type questions, I can speak it well. Back to the returns, I mean, we have been discussing that last year quite a bit or the beginning of this year and you made really good progress. I'm just wanting to pick up 2 things.

Speaker 19

You I wonder how sustainable it is because you said probably in safety, you're a little bit over earning now in terms of returns because you have to recapitalize the business and put more capacities in. So I'm rather wondering how much more capacity build up are we talking? Is the capital investments by blacking a little bit at the moment? And that's why the ROCE, yes, the churn on invested capital looks so good at the moment.

Speaker 1

I think you're over indexing on that Stefan. So I don't think that's going to have a material drag on our capital returns going forward. So I was just trying to give you a bit of a sense that high margins, at some point there'll be some investment, but I would expect safety to stay at the high margins for all the reasons I've outlined. So if I've over indexed on that for you or misled you, let me correct that. I don't see that as being a drag on our capital returns performance.

Speaker 19

But how much reinvestment do you have to put in?

Operator

I guess to put it in context, Stefan, our forecast last year, this year for capital expenditure is €35,000,000 €38,000,000 So we're a capital light business. Steve was talking about facility expansion investment in our R and D to make the point that what we don't want is people thinking that this is a story of ever increasing P and L returns. Our strategy is one of maintaining high returns and delivering long term compounding growth.

Speaker 19

No, that's understood. Thank you, Simon.

Operator

Great. Thank you, Stefan. And I can see that there's no other type questions. So I'll just close and come back to the intro that I made at the beginning of the presentation. We're really pleased with our first half performance, record results of both across both growth and returns, continued investment and a result, a consequence of the fantastic contributions of everyone at Halma.

Operator

And we're sitting here with confidence both in the short and the medium and the long term future for the group. So thank you for your time and have a great day.

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Earnings Conference Call
Knight-Swift Transportation H1 24/25
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