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Earnings Transcript for HLMA.L - Q3 Fiscal Year 2024

Marc Ronchetti: Good 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. 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 GBP1 billion, and EBIT is above GBP200 million for the first time. But 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. 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&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 rate of both revenue and profit at 12%, in excess of our KPI. 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're 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.
Steve Gunning: Thanks, Marc. Good morning. As you've already heard, we have 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, the results demonstrate once again the strength of the Halma model. So let's take a look at the first half results. We have delivered strong growth at high returns. Revenue was over GBP1 billion for the first time and was up 13%. Adjusted EBIT is over GBP200 million for the first time, up by 17%, with the EBIT margin improving 70 basis points to 20.7%. Return on total invested capital, ROTIC, was 14.3%, up 110 basis points, driven by the strong level of constant currency profit growth. This is slightly ahead of our 10-year average first half ROTIC and remains well above our weighted average cost of capital. In the first half, we've invested over GBP130 million to support future growth. R&D spend was up 8% to GBP54 million, 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 company see for the future, and it's pleasing to see our companies remaining well invested. We've made four acquisitions in half one, one stand-alone and three bolt-ons, and invested GBP84 million. As you'll hear from Marc, we have made two further bolt-on acquisitions since the end of September, and we've also just announced a stand-alone acquisition this week. So the total acquisition spend for the year-to-date is now at GBP158 million. Looking forward, the M&A pipeline remains healthy across all three sectors. It's also great to see the acquisitions we have recently made contributed 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. 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%. 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. 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 TeDan, MK Test and Lazer Safe, made a contribution to revenue growth of 3.5%. There was one disposal, Hydreka, 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. 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. 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 OCCY growth. We saw a very strong growth in the U.S., our largest sales region. The key driver was the Environmental & Analysis sector, E&A, with exceptional growth in the Optical Analysis subsector. In Europe, revenue declined 1%, where 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 two years. U.K. growth of 4% reflected a good performance in Safety and E&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. 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&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, 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%, 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%. 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 2024, delivered an excellent performance in the half
Marc Ronchetti: 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. First is a deep understanding our companies have of their markets. 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. 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. So three elements, all of which are important to our growth
Marc Ronchetti: 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 Excyna 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. 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. 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. We choose markets that have strong and long-term growth drivers based on solutions to issues that are fundamental and growing. The video showed two great examples
Marc Ronchetti: 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, how do we attract and retain the best talent, to name just a few. And as a Halma company MD or Board member, if you've got a question, you can be pretty sure that someone, in what Jason referred to as our support structure, is going to have the answer. Of course, that requires an open culture, one where, as Elmar 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. Over the last six 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 two great examples of this recently where founders have been succeeded by talented, well-prepared individuals. Both have participated in multiple Halma development programs, starting their careers years ago in our fantastic graduate scheme, the Catalyst Programme. 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 in 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 Carolin called an unfair advantage for our companies in their markets, what I think of as how companies are better off as a part of Halma than stand-alone. 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. Thank you. We'll now take your questions.
A - Marc Ronchetti: [Operator Instructions] So looking at the screen, our first question comes from Andre. So Andre, we'll start with you.
Andre Kukhnin: Good morning. Thank you very much for taking my questions. I'll have two. 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? 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 a midterm basis and taking a step back, what is the structural growth potential for that technology application from here?
Marc Ronchetti: Yes. Thanks, Andre. I'll pick that one up. As you say, a fantastic achievement from one of our companies, a business that was GBP4 million in revenue back in 2011. So a great example of a business scaling up in the group. 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. 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 first six months of next year, I see the growth in and around somewhere in line with the group's KPIs on revenue growth.
Andre Kukhnin: Great. Thank you. And my second question is on the acquisitions pipeline. As Stephen said, you've committed nearly GBP160 million of capital already to acquisitions. Is there anything you can tell us about how the second half pipeline looking? I appreciate it's always hard to predict acquisitions. And just generally right now, does it feel like the activity is heating up compared to six to 12 months ago, or more of a steady level or any signs of cooling down?
Marc Ronchetti: Yes. As you say, Andre, it's hard to predict the exact timing given our strategy and approach to M&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. We've invested well into the group in terms of our capabilities and continue to invest, and the team are 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. 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.
Andre Kukhnin: Great. Thank you very much.
Marc Ronchetti: Thank you, Andre. I see Jonathan. Jonathan Hurn, you've got your hand up.
Jonathan Hurn: Great. Can you hear me okay?
Marc Ronchetti: Yes, perfect, Jonathan. Yes.
Jonathan Hurn: Good one. Thanks. I actually have three questions, if I may. The first one was just staying on Optical Analysis, but this time on spectroscopy. Obviously, a high-margin area for you. You're seeing a recovery in China. But could 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 Healthcare and going forward. 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 Healthcare. Do you feel that Healthcare 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 third and final question is just on Safety. Obviously, really strong first half margin performance there around that. What kind of level is sustainable going forward? Those are the three.
Marc Ronchetti: Yes, great, Jonathan. Thanks. Well, let me -- I'll get Steve just to pick up on the first one around spectroscopy.
Steve Gunning: Yes. Thanks, Jonathan. Good question on spectroscopy. Actually, what I'm pleased to say is 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 were seeing in Asia Pacific. But spectro has been coming back. As you know, it's a high-margin business. So it's an important component of the E&A portfolio. So we would expect that to move forward. So when we look at the E&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.
Marc Ronchetti: 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 health care 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. 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 two 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 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. 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 just the margin?
Steve Gunning: Yes, 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, it's a high margin historically for the Safety sector. It's a long way from where we were in FY 2023 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. We're seeing good discipline on costs. And we've done a number of accretive acquisitions, the likes of Lazer Safe, MK Test and G.F.E. 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.
Jonathan Hurn: [indiscernible]
Marc Ronchetti: And then just looking at Max. I can see you've got your hand up, so over to you.
Max Yates: Yes. Thank you. Good morning. Just two questions I have. Just number one on the cash conversion. Obviously, a very, very strong start to the year or very strong first half. 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 sort of 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?
Marc Ronchetti: Okay, Steve, to you.
Steve Gunning: 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, 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 debtor days improving as well. So it's a good focus across the group. And we've been doing that in a Halma type way in terms of we've 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. 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%, because we're a business that invests for the long term. But clearly, the focus that we've got at the moment is meaning for this year that I think we'll be ahead of the 90%. So there won't be a sort of reversion back to 90% due to some underperformance in half two. I don't see that.
Max Yates: 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 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?
Marc Ronchetti: 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 is up, 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.
Max Yates: Thank you very much.
Marc Ronchetti: 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 Stephan. First one, Halma is, to some extent, U.K.-centric. How will higher NIC costs affect the company? I guess I can pick that one up. As you say, Stephan, we are listed in the U.K., but again, to give a little bit of context, around 14% of our revenue is in the U.K. 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. 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, Stephan, 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&A. Purchase multiples have come down this year versus the past three 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. You've seen it across our portfolio of using multiples as 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. Okay. Just back to raised hands. So I can see Rory, you've got your hand raised.
Rory Smith: Good morning. It's Rory at Oxcap. Can you hear me?
Marc Ronchetti: Yes.
Rory Smith: Perfect. Thank you so much for taking my question. Good morning, Steve. Good morning, Marc. Marc, I think it's for you, but my question is on M&A. And if we look at the bolt-ons, you're doing slightly more bolt-on deals, four companies at the company level. 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&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 out and find deals that you maybe wouldn't have seen landing on your desk in the past?
Marc Ronchetti: Yes. Thanks, Rory. 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&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. 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&A is exactly the same for any deal in 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. 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&A in the group. And then anything over GBP10 million actually goes to the main Board. 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 stand-alone deals, but equally is value creative for us.
Rory Smith: That’s really helpful. Thanks so much.
Marc Ronchetti: And then I can see -- thanks, Rory. I can see Bruno with your hand up.
Bruno Gjani: Thank you for taking mu questions. Just firstly, two small questions on the contribution from acquisitions in the half. The contribution margin from acquisitions appears a little lower than H1 given the financial profile of the assets you recently acquired, I think, 23% at the group level; and for Healthcare, 17%, where I think, for instance, the margin for [indiscernible] was incredibly rich. So I guess the two questions being, why was the contribution margin slightly lower? 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 the full year?
Steve Gunning: 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. It's more of 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&A and the contribution it's going to make, when I look at it from a revenue perspective, I think it will 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.
Bruno Gjani: Okay. Got it. And just lastly, apologies if it's 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. So I 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 Healthcare 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?
Steve Gunning: Yes, it's a good question. It's interesting when you look at the portfolio effect in Healthcare, 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. I think the challenges in health care are well documented. So we think there will be some improvements, and so we'll get some leverage come back. So there will 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 on FY 2026 where I would expect that to come back, particularly when we're talking about the European-based business. 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 2025 phenomenon.
Bruno Gjani: That’s very clear. Thank you.
Marc Ronchetti: Thanks, Bruno. Just looking at the screen. So Margaret, I can see that you have your hand up also.
Margaret Schooley: Yes. Good morning. Hopefully, you can hear me. Thank you for taking my questions. I have just two, if I may. Just go back to the first question on the pipeline, can you just give us an indication? You've said in the past, it's 600-plus companies. But over the past six, seven, eight 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, it's very pleasing to see the ROTIC trend to go up. 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?
Marc Ronchetti: Yes. Thanks, Margaret. I'll pick up the first one in terms of the pipeline. As you say, it's running at 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. So I would estimate that we were bringing in 50 or 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 [Technical Difficulty]
Steve Gunning: [Technical Difficulty] this time last year. ROTIC is up 110 basis points compared to this time last year. And if I look at it from a CFROI 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 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 Halma type business. 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 first three or four years, I'm not expecting it to have a massive impact on the working capital. What was interesting to us this last six months is overall, our working capital is down despite the M&A. And that's due to the focus our businesses have put on debtors and inventory and creditors, et cetera. 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.
Margaret Schooley: Yes. Very helpful. I appreciate it.
Marc Ronchetti: Thank you, Margaret. And then just looking at the screen. So Mark, Mark Davies Jones, I can see you have your hand up.
Mark Jones: Yes. Thank you, Marc. Broad and probably slightly impossible question. But obviously, the U.S. is, by some distance, now your largest market and also driving growth. We've seen some interesting political changes there. Just thinking forward, are there any areas where tariffs, particularly on flowing 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&A business on regulatory drivers, where any sort of retraction of state support is a threat?
Marc Ronchetti: Always love a broad and impossible question. Thanks, Mark. No, 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. 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. 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. 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 deliver our 22nd year of consecutive record profit growth. 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
Mark Jones: That’s great. Thank you.
Marc Ronchetti: Okay. And Stephan, I can see that you have your hand up. So over to you.
Stephan Klepp: Yes. Hi. Stephan from HSBC. I can not only type questions, I can speak as 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 two things. 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 buildup are we're talking? Is the capital investment side lacking a little bit at the moment and that's why the ROCE, yes, the return on invested capital looks so good at the moment?
Steve Gunning: I think you're over-indexing on that, Stephan. 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 will 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.
Stephan Klepp: But how much reinvestment do you have to put in?
Marc Ronchetti: I guess to put it in context, Stephan, our forecast last year, this year for capital expenditure is GBP35 million and GBP38 million. So we're a capital-light business. Steve was talking about facility expansion, investment in R&D to make the point that what we don't want is people thinking that this is a story of ever-increasing P&L returns. Our strategy is one of maintaining high returns and delivering long-term compounding growth.
Stephan Klepp: Yes. Thank you so much.
Marc Ronchetti: Great. Thank you, Stephan. And I can see that there's no other typed 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. 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.