Halma PLC

LSE:HLMA

Earnings Call Transcript 2023-Q2

[Andrew Williams, executive]

Good morning, and welcome to our half year results presentation. I'm very pleased to report that Halma made good progress in the first half of the year, delivering strong growth and clearly demonstrating the enduring power of our Sustainable Growth Model. We delivered record revenue, profit and dividends, and not only delivered substantial growth against the strong first half last year, but also further sequential growth in both revenue and profit against the second half of last year. Our growth was broad-based. We had revenue growth in all regions and revenue and profit growth in all 3 of our sectors.We also delivered strong return on sales while increasing our strategic investment to enhance our future growth opportunities. This included 2 acquisitions and organically a substantial increase in investment in R&D, as well as operationally in increasing inventories to drive revenue growth, and also mitigate any supply chain risk. And we've got good momentum going into 2023. The strong demand for our products and services was reflected in order intake, which remained ahead of revenue, but also the strong order intake we saw in the same period last year.We had a record order book at the start of the year, and that's remained well above our pre-COVID levels of around 8 weeks of sales. And we also have a promising pipeline of M&A opportunities across all 3 of our sectors and broadly based across all regions. Therefore, although the operational environment remains challenging with a constant mix of challenges and opportunities, we look forward to future with confidence, and we remain on track to deliver further progress in the second half of the year and deliver a good full year performance.So this is the final time I'll be presenting Halma's results, and our strong performance in such a challenging environment once again underlines the value of the fundamental building blocks of our Sustainable Growth Model, our clear and authentic purpose, the diversity and global reach of our portfolio, and most importantly, the agility of our business model.However, none of that is possible without the great people. I'd like to thank everyone at Halma for their commitment and their contribution to another record first half. One of the foundations of our success is our culture, which is built around giving our companies autonomy and accountability, yet at the same time connecting them together to drive collaboration.And I believe that our ability to create and foster those connections has been one of the most valuable evolutions in Halma's growth model over the past 18 years. And here's a short film explaining why our company leaders believe it's so important for them too.[Audio Gap]

[Andrew Williams, executive]

I think coming out of the pandemic, that Halma network has never been more powerful, more valuable. And I think under Marc's leadership, it will continue to power our growth into the future. And I'll say more about this later on in the presentation, but for now, let's return to our first half performance.So as I mentioned earlier, it was a record first half with strong growth returns. Our revenue was up by 19% to GBP 875 million, which included an 8% benefit from currency translation, and our adjusted profit was up by 11% to GBP 172 million. We also saw a return on sales slightly ahead of our expectations at 19.6%, which was especially pleasing in the context of the inflationary pressures and, of course, that planned increase in discretionary overhead costs. There was an increased strategic investment in the business.We completed 2 acquisitions in the first half of the year and made a further acquisition at the beginning of the second half, 1 in each of our sectors. So we spent a maximum total consideration of GBP 188 million in the first half, with another GBP 50 million spent in -- since the period end. We've got a promising pipeline of potential opportunities looking ahead, each of them closely aligned with our purpose. And our R&D expenditure grew slightly ahead of revenue to GBP 50 million, which is 5.7% of sales. That just reflects our company's confidence in their long-term growth prospects.And we continue to invest in technology. We spent GBP 9 million in the half, which is on track as part of our projected spend of GBP 20 million for the full year. And that technology investment included our cyber security program, which should complete in the early part of 2023, investment in operational technology, both within our companies and at the center, and increasingly focusing investment on digital growth, supporting that digital growth.And then finally, we maintained a strong balance sheet to support investment and dividend growth. At the period end, our net debt-to-EBITDA was 1.2x, which is well within our typical operating range of up to 2x.And there was solid cash conversion of 63%, which included a larger than normal outflow in working capital, as our companies continue to make strategic investments to mitigate supply chain risk and support the strong increases in their order books. And that ability for our company to temporarily leverage their balance sheets to gain competitive advantage is just another benefit of being part of Halma. Although as Marc will explain later, we expect that cash conversion to be closer to our KPI by the end of the full year.So this continued combination of growth, a strong balance sheet and cash generation, support an interim dividend increase of 7%, which maintains our long-term progressive dividend policy, and reflects our confidence in the outlook. So all in all, a good first half for Halma.I am now going to hand over to Marc, who'll give you details on our financial performance.

[Marc Ronchetti, executive]

Thank you, Andrew. Good morning, everyone. As you've heard from Andrew, we've delivered a strong performance in the first half of the year, again, underlying the value of our Sustainable Growth Model. One element of that model, which I've really continued to be impressed with, has been that agility and responsiveness that our companies have displayed in changing markets in that changing operating environment. And it's this underlying resilience that gives our companies that foundation to continue to invest, to continue to identify and take advantage of opportunities for continued growth.So looking now specifically at the last 6 months. Let's start our review of the financials with the headline performance. Excellent to be reporting record half year revenue and adjusted profit with revenue up 19% and profit up 11%. This performance against a very strong comparative in the first half of last year when we saw revenue up 19% and profit up 27%. If we look over the longer term, it's great to see the compound annual growth rate of both revenue and profit in excess of our KPI of 10%.So let's now dig a little bit deeper and look at the drivers behind this performance, starting with group revenue.As you can see on the right-hand side, revenue grew 18.8% compared to the first half of last year. This represents an improvement of GBP 138 million in the first half, and encouragingly sequential growth of nearly GBP 90 million from the second half of last year. This supported by good order intake and a strong order book and that order book has seen further growth in the first half from those high levels that we saw at the start of the year. Our order book reflects continued underlying demand, supported by those long-term growth drivers in our end markets. That in addition to some benefit from customers making their own strategic investments in inventory to protect themselves against ongoing disruption, an effect that I expect to start to unwind as we go through 2023.Just turning back to the slide and working from left to right. Great to see that organic constant currency revenue growth at 9.5%, with growth broadly based across all 3 sectors, and all regions. We estimate that price increases contributed around 4% of this growth. This is consistent across all 3 of the sectors, meaning the underlying volume growth was in line with historic averages at around 5% to 6%.Next, we see a good contribution of 3.4% from current and prior year acquisitions. This including Deep Trekker completed in April. And whilst not contributing to the half, it was great to see that momentum in M&A continue with the acquisitions of IZI Medical at the end of the half year, and WEETECH shortly after the period end. This partly offset by the effect of the disposal of Texecom in the first half of last year.And finally, completing the bridge. There was a substantial positive effect of 8.3% from currency translation. This reflecting the weakness of sterling and strength of our business in U.S. dollar and euro-denominated countries.So turning now to our revenue performance by destination. You can see, the chart on the left shows us reported revenue split by destination and reported growth in each region. And the table on the right compares organic constant currency growth this year with the first half of last year.So let's start with that chart on the left-hand side. Pleasing to see growth across all regions on a reported basis. This reflecting widespread organic growth, particularly in the U.S.A. and Mainland Europe, and a healthy contribution from acquisitions, offset in part by the disposal in the prior year. Within this reported growth, there was also a substantial positive effect from currency translation. This particularly in the U.S.A. were accounted for nearly half of the reported growth.Removing that impact of currency and acquisitions gives us the organic constant currency growth rates by region, shown on the right-hand table. As you can see, there was strong double-digit growth rates in the U.S.A., Europe and other regions and solid increases in the U.K. and Asia Pacific. The main drivers of the difference in these growth rates were the strength of the prior year comparatives, particularly in the U.K. and Asia Pacific, with ongoing lockdowns in China further impacting APAC growth in the period. I'll give a little bit more detail on these regional trends when I review each of the individual sector's performance.So switching now to adjusted profit. Excellent to have delivered record profit with profit year-on-year and sequentially compared to the second half of last year. Again, looking at that detail and working from left to right, organic constant currency profit was up 1.9%. This even including the increase as planned of discretionary variable overheads compared to the exceptionally low levels that we had in the first half of last year. There was a small contribution from acquisitions, which, as is typical, includes that early investment that we make in recently acquired companies, and then finally, a small dilution due to the disposal. As with revenue, there was a strong benefit from currency, and that completes our bridge to the headline profit growth of 10.9% and to profit of GBP 171.7 million.This profit represents a return on sales of 19.6%, a strong first half performance, which reflects return on sales marginally ahead of pre-COVID levels. This, as Andrew mentioned, is especially pleasing, giving the continued investments that we're making, the inflationary environment and the operational disruption that our companies are continuing to face.So let's turn now to cash flow and net debt. And starting with cash conversion and working capital.Cash conversion was 63%, mainly resulting from a higher than usual working capital outflow of GBP 70 million, on which I'll give a little bit more detail on the next slide. As referenced earlier, great to see that continued momentum in M&A with net acquisition cash spend at GBP 180 million. This reflecting the acquisitions of Deep Trekker and IZI in the half and earn-out payments for past acquisitions.With the other elements such as CapEx, tax and dividend payments in line with expectations, net debt was GBP 500 million, which included an increase of GBP 27 million due to substantial FX movements in the period.Net debt at GBP 500 million represents a net debt-to-EBITDA ratio of 1.2x, well within our typical operating range of up to 2x gearing, and importantly, giving us substantial liquidity and capacity for future growth investment, as mentioned, given that impact in the period.I just thought worth sharing a little bit more detail in relation to working capital. So firstly, quick reminder with regard to our organizational structure and the associated reporting model. This enables us to maintain a really granular view of working capital. We've got individual balance sheets at each of our companies, which is visible on a monthly basis.And these balance sheets are owned and managed to a local level of materiality by the individual company Boards, whose performance is then measured on a growth and returns metric, again, at that specific company level. So a really good example of that balance between autonomy and accountability.Turning to the data on the slide. The left-hand chart shows the split of the GBP 70 million increase between debtors, creditors and inventory. As you can see, approximately 40% represents movement in debtor and creditor positions. Overall, these were well controlled with trade debtor and trade creditor days well within our normal range, therefore, much more a reflection of the growth of the group in the period.In fact, if inventory had grown in line with revenue, our cash conversion would have been in excess of 80%, a normal level for the first half of the year.So turning to that inventory movement. And the chart on the right-hand slide -- sorry, on the right-hand side, which shows the breakdown of the increase. You can see around 20% is accounted for by cost inflation. This consistent with a high single-digit annualized growth and the overall cost of inventory. Another 20% mainly includes inventories held to support increased new product development. And then finally, the largest chunk there at around 60% or around GBP 25 million relates to additional targeted strategic and supply chain purchases.It is important to note here that these purchases aren't due to a top-down directive, nor is it happening in every single company. Our model allows our companies that freedom to take commercial decisions to make selective purchases in line with their own specific circumstances. In fact, these purchases have enabled our companies to manage longer lead times, to mitigate cost increases and avoid shortages in addition to ensuring that continuity of supply and in many cases, securing a competitive advantage. And as Andrew mentioned, a good example of one of the many benefits our companies have of being a part of the group.Looking forward into the second half of the year, I don't expect further material increases in inventory in excess of our growth. And therefore, with that continued strong control over debtors and creditors, I therefore expect our cash conversion to improve closer to our KPI of 90%.Just turning now to a little bit more detail and looking through the sectors and starting with safety. While I'm pleased to report a strong performance across the largest regions and subsectors, if we start on the chart with the revenue growth, which was 11% and included positive contributions of 1% from acquisitions and 5% from currency with a negative effect from disposals of 5%.Therefore, underlying that, a strong organic revenue performance of 10%. This is driven by good growth in the 2 largest subsectors, Fire Detection and People & Vehicle Flow, a strong performance in Industrial Access Control driven by demand for its interlock products and growth in Pressure Management's chemical processing and general industrial markets.Switching then to the analysis by destination. It was really pleasing to see strong organic growth in the major Western regions, including good momentum in the U.K., which, as a reminder, had grown 69% on an organic constant currency basis in the first half of last year.Asia Pacific's growth was lower, primarily reflecting the impact of lockdowns in China. Turning to profitability, having increased return on sales by 140 basis points in the first half of last year, it decreased to 21.2% this half year. This reflecting the planned rise in variable over costs, and a lower gross margin as the percentage higher input costs, were covered in absolute cash terms by our own price increases.Finally, great to see that continued investment with R&D spend increasing to GBP 20 million, broadly in line with revenue and reflecting an increasing appetite for digital innovation.So moving now on to Environmental & Analysis, which delivered another excellent revenue and profit performance, reflecting that continued growth in demand for our solutions, which improve the availability and quality of life-critical resources and protect the environment. If we look at the numbers and start with reported revenue, this grew 26% and included a 7% contribution from acquisitions being International Light Technologies last year and Deep Trekker this year, plus a 10% positive effect from currency translation. Organic revenue growth of 9% included strong increases in the U.S.A. and Asia Pacific.And as can be seen in the central chart, the U.S.A. is half of the sector's revenues and the region saw broadly based growth, including a continuing large Photonics contract in Optical Analysis, emission detection products in Gas Detection and good growth in the gas analysis subsector.Also great to see growth in Asia Pacific with environmental monitoring benefiting from customer demand for fuel cell technology and flow, and pressure control products as well as good momentum in Optical Analysis. These positive trends were partly offset by a modest fall in U.K. revenue. This largely reflecting the phasing of customer project spending and the timing of some larger contracts in the prior year.Switching to profitability. The sector delivered a strong profit performance, with organic growth of 8% and a 5% contribution from acquisitions. There was also a 10% positive effect from currency translation. Return on sales was slightly lower at 24.8%. This reflecting the return of the variable overheads, offset in part by an improvement in gross margin, largely driven by business mix.Finally, pleasing to see that investment was maintained at a good level with R&D expenditure of GBP 13.6 million, representing an increase to 5.2% of sales.Then to complete our review of the sectors, turning to healthcare, where revenue growth in all subsectors and geographies was supported by improved customer buying patterns, driven by higher patient caseload levels as well as some customer advanced ordering to mitigate their own supply chain disruptions. Asia Pacific performance reflected lockdowns in China, although it is worth noting the performance improved during the course of the half year. And from a subsector perspective, great to see organic constant currency revenue growth in all subsectors.Health Assessment saw the strongest growth supported by demand in vital signs monitoring, software systems for healthcare facilities and clinical ophthalmology and communication. High patient caseload levels in eye surgery also drove good growth in Therapeutic Solutions, while the smaller Life Sciences subsectors also grew well.Profit growth closely matched revenue growth, resulting in return on sales very similar to last year at 22%. This included a modestly lower gross margin as a result of higher material cost and product mix, in addition to substantial new product development and investment by recently acquired companies driving that increase in R&D spend to a record 6.3% of revenue.So looking now at our performance against our financial KPIs. As I said at the outset, a really pleasing performance in the first half. There was widespread growth across our sectors and regions. Organic revenue growth was substantially ahead of our KPI, and we delivered a robust profit performance with return on sales above historic levels for the first half. We saw continued positive increases to both our organic and inorganic investments during the period. Our cash conversion reflected investment in inventory to support that growth.And with our underlying working capital control remaining strong, we expect this to land closer to our KPI at the full year-end. ROTIC remained well above our KPI and at a healthy premium to our weighted average cost of capital. And then finally, we maintained a strong balance sheet and liquidity position, and that gives us substantial headroom to support future investment.With that, I'll now hand you back to Andrew for a strategy update.

[Andrew Williams, executive]

Thanks, Marc. So now I want to give you an update on our strategic progress and also our priorities for the future. Over many years, as Halma's CEO, I think I've often talked about how our continuing success is driven by our purpose and our Sustainable Growth Model. Although our businesses continue to grow and our model continues to evolve, Halma is and always has been about sustainability. So we've got a growth strategy, which is based on choosing markets with resilient long-term growth drivers, such as safety regulation, demand for healthcare, protecting the environment.We've got a financial model which ensures that we can invest as we grow, we can acquire new companies, we can pay increasing dividends while maintaining a strong balance sheet. And we've got an organizational model that can scale as we grow without becoming highly complex and a model which continues to foster a strong collaborative and entrepreneurial culture.Our company's products, therefore, are already solving many of the sustainability challenges facing people in the planet. However, we're seeing a new dimension to some of our growth enablers as we grow, and particularly the crucial intersection between innovation and digital technologies in solving these sustainability challenges.So in safety, we're seeing digital technologies enabling our customers to remotely monitor systems to reduce energy costs, improve efficiency. In healthcare, we're helping to achieve better patient outcomes with the use of analytics and AI. And our environmental products are using data to help customers conserve scarce resources such as water. So although sustainability, digital innovation has been the basis of our purpose for many years, we see this as an increasingly strong growth opportunity for Halma.So I now want to look at that from 3 perspectives: Firstly, the innovative products that our companies are developing, both organically and through external partnerships; secondly, how it's increasingly a feature of some of the acquisitions that we make; and finally, as you saw in that opening film at the very start of this presentation, how the power of connections in the Halma model is driving collaboration and innovation to capture new growth opportunities.So first, let's look at innovation in our companies. So each of these new digital products further amplify each company's existing strong connection with our purpose and the positive sustainability impact that they have, by harnessing that power of digital technology.BEA's Thermotool is an online visualization tool that enables customers to see how they can improve energy efficiency of their industrial doors. So by using a simple few parameters, including the door size, the opening speed, the frequency and incorporating local environmental factors, it gives those customers a simple quantification of the energy savings they can make, by using BEA's products.And then Volk, one of our healthcare businesses, their VistaView product is a portable retinal camera that integrates Volk's high-quality optics with the benefits of smartphone technology. So now a health practitioner can take a high-quality image of the retina and instantly generate reports and patient images, which can then be assessed by ophthalmologists anywhere else in the world. And again, as you saw in our opening film, you can see that benefits of increasing accessibility to healthcare and enabling more patients to receive the care they require often in remote locations, while reducing those overall costs.And finally, a great example in Environmental & Analysis sector. And this one, a good example of an external partnership where Minicam has partnered with VAPAR, which is one of our Halma venture investments, to use AI-powered software to analyze CCTV footage from sewer networks, and through that, reduce blockages and reduce overspills. So it achieves that by reducing the need for manual assessments, which often can be more error prone, more costly and indeed more time-intensive. So those are the organic opportunities.What about acquisitions where sustainability and digital innovation is starting to become more prevalent? So as an example -- well, I'm going to show you a short film about one of our latest deals, Deep Trekker, which is a Canadian company, which joined our Environmental & Analysis sector in April earlier this year.[Audio Gap]

[Andrew Williams, executive]

So I think Deep Trekker is just a great example of a business that's aligned with our purpose and sustainability. It's safer by allowing customers to employ ROVs rather than divers in dangerous underwater locations. It's cleaner in the -- it focuses on sustainable end markets such as improving aquaculture and offshore renewable energy installations. And as we look forward, we can see how there will be further opportunities to develop Deep Trekker's strong technology base through leveraging the digital expertise we have across our group.So turning now to the other 2 acquisitions that we've made in the half. First of all, in our healthcare sector, we acquired IZI, a manufacturer of markers and devices that support minimally invasive treatment, mainly for cancers, by radiologists and surgeons, and its products are already used in over 2,500 hospitals in the U.S.A. and 35 countries worldwide. And we can see, again, further opportunities for growth this time through IZI expanding its product portfolio, particularly as there are developments in screening and diagnostic technology, which enable earlier treatment of diseases.And then after the half year end, we have WEETECH, in addition to our safety sector, and WEETECH's safety-critical electrical testing technology supports the adoption of more efficient mode of transport, particularly those that use high-voltage systems such as mass transit systems and electric vehicles. And these have been developed in response to the challenges of the transition to greener forms of energy. So it's been a really pleasing first 7 months in M&A with 3 substantial acquisitions, all aligned with our purpose, 1 in each sector and a maximum total consideration of GBP 238 million.As we look ahead, we continue to see strong M&A opportunities. We've got a promising pipeline broadly based across geographies and all 3 of our sectors. So to finish this update, I want to go back to where I started and highlight the growing power of connections and collaboration within Halma in driving that innovation and growth. And in my mind, there's no better place to start than our Accelerate Halma event, which took place a couple of weeks ago.[Audio Gap]

[Andrew Williams, executive]

I believe that connections enable collaboration, innovation. And in Halma, that's really driven by our company's collective ambition, common ambition to solve major safety, health and environmental challenges. And we can look back over the last 2 or 3 years and see that these were really disrupted during the pandemic, particularly -- making it difficult -- particularly difficult for new joiners and new acquisitions, and I think those connections have now only grown in importance as we've emerged from the pandemic.Therefore, this year, we've invested heavily in reestablishing those connections, really making sure we fully reconnect our Halma network at all levels with more in-person meetings. Accelerate was just 1 example of that and here are a few more.The Halma [ Strength in Numbers ] purchasing group hosted a strategic supplier day with key suppliers and partners. We held the first in-person finance leaders conference for the first time in 4 years. We relaunched our Company MD leadership program, [ Compass ], which helps to deepen those networks and relationship between our MDs.And we also relaunched leadership programs for our top talent below board level with around 40 people attending so far. And our Halma Future Leaders program is now back to offering a full in-person global rotation program with 14 graduates joining the program this year, and it's been a really successful program for developing that next generation of leadership talent. We've now got 1 company MD and 11 company Board members having come through the Future Leaders program.So to conclude, as you've heard, Halma has made further good progress in the half and has a strong platform for sustainable growth. We delivered record revenue, profit and interim dividend with growth in all sectors and all regions. We maintained a strong balance sheet, and we also substantially increased our strategic investment to drive future growth, and this was organically in digital innovation technology and greater R&D expenditure. It was in acquisitions where we also have a promising pipeline of opportunities for the future and in our organization to rebuild the Halma network, increase collaboration and drive innovation.And as we look forward, we remain confident that our Sustainable Growth Model will continue to underpin our growth and resilience through our clear and authentic purpose, the diversity and global reach of our portfolio, and importantly, agility of our business model. We expect the operational environment to continue to present both challenges and opportunities, and we remain on track to make further progress in the second half and deliver another good full year performance. Thank you.So that's the end of the presentation, and now we've got some time for questions.

[Andrew Williams, executive]

[Operator Instructions] So can we start off with Scott, please? Scott Cagehin.]

[Scott Cagehin, analyst]

Firstly, congratulations on another great set of results. Also, I'd just like to take this opportunity, Andrew, to say, sadly, this is your last set of results. And I just wanted to say thank you from me and also on behalf of the analyst community for an amazing achievement as CEO. I've been lucky enough to have covered Halma for most of the time since you started and your tenure has definitely been impressive. I think you kept true to your word and delivered on the message from your first annual report in 2005.So looking back, it's amazing to think that group profits now are significantly higher than group revenue. [ Here's ] when you started, it's an amazing achievement. And just finally, I'd like to say thank you generally and good luck to Marc and Steve in their new roles, I believe, only the fourth CEO and CFO, respectively, in 50 years. So that's enough for me. I just wanted to state that.And now I have a couple of questions, if that's okay, on the results and looking forward. Could you give us a flavor of H2 pricing following the 4% achieved in the first half? And the second question is just regarding the visibility and composition of the order book. Clearly, it's strong. Just wondered if you could break down any pre-ordering, any catch-up and underlying demand? And just how many weeks of visibility compared to normal? That would be really helpful.

[Andrew Williams, executive]

Thanks for those comments. Really appreciate it. It's been good to work with a number of you, I think, almost throughout the whole 18 years I've been CEO. Two good questions and I think it's probably right of me to pass them over to our CEO [ designate ] -- to answer them.

[Marc Ronchetti, executive]

In terms of just picking up on those 2 points of order book and pricing -- price/volume mix going forward. If I just start with the order book, what we historically have seen from an order book perspective is generally around 8 to 10 weeks. And as we said in the presentation, we've seen that continue to grow in the first half. And the current levels are around 16 weeks in terms of order book. If I dig into that a little bit more in terms of what are we seeing, what's driving that order book, it is different by individual company as one would expect in terms of the types of customers, the types of businesses.But from a group level, around 60% to 70% of that is, if you like, underlying fundamental demand that we're seeing continue. So if you work that through on a weekly basis, actually, that's pretty much in line with what we would normally see it sort of 8 to 10 weeks of order book for fundamental demand. And a further then 25% is order backlog where we're awaiting on components or waiting for final fix to fulfill those orders. And then a smaller proportion, around 5% or 6% is around pre-ordering. So not a huge amount of pre-ordering in there. But as I say, overall, looking at 16 weeks compared to 8 to 10 weeks historically.I guess in some ways, a little bit linked to that, if we think about pricing going forward, what we can see is in that order book, a similar price/volume mix to that, that we've seen in the first half of the year in terms of 3% to 4% of pricing. As we look beyond that, and for the balance of the second half -- and I think one would like to think that we'll start seeing the unwinding of the supply chain. We start to lap a little bit of comparator of when price increases started to come through last year.So I expect a level below that, that we've seen in the first half of the year, but it is worth just, I guess, taking a step back a little bit on the pricing side of things and all of our products and services. We're selling very much on value and not on cost. They're not discretionary purchases. And therefore, each of our companies are carefully looking at their cost base carefully looking at what's going on in components and supply cost, and then where it makes sense, having those conversations with customers, but it's very much about balancing that long-term customer relationship with appropriate pricing in the short-term. So apologies for the long answer, but hopefully that's covered off both of those points.

[Andrew Williams, executive]

Now, I'd like to invite Andre Kukhnin to ask his question. Andre, over to you.

[Andre Kukhnin, analyst]

And yes, many thanks from my side as well, Andrew, it's a sad day, but one amazing achievement, and I haven't covered you for as long as others maybe have done. But from my side, your clarity of thought and purpose have always been very impressive to me. And obviously, best of luck to Marc and Steve and I really look forward to working with both of you going forward.In terms of questions, I have a couple. One, just a broader question on M&A and the pipeline. You closed out a couple of deals towards the end of the period and actually as you went into second half. Could you comment on the kind of overall level of activity? And is that evidence of kind of rate of conversions of process into closed deals picking up as we went through a bit of a [ hay ], just, I guess, post still the geopolitical events early in the year? And is there any movement on valuations on that front?

[Andrew Williams, executive]

That's a great question, Andre. And as you say, I think it's quite a dynamic situation on M&A. First of all, it's fair to say, yes, the level of activity is high in terms of opportunities and our teams are very busy looking at the various opportunities that are out there. And I think when you do get times of uncertainty, particularly as you look over the next 2 to 3 years, then private business owners quite often will think about whether now is the right time to sell, or indeed get that greater sense they need some help with their business in terms of taking it up to the next level, the next phase of growth.And so, I think the big challenge actually for us at the moment is being selective around the kind of deals that we do. Obviously, the first filter is always, does it really fit with our purpose of, say, for cleaner, healthier? And beyond that, does it fit with the financial model, will it thrive in our organizational model, and is it in a market which has got those long-term growth drivers, or should I say, the market niches? So it is -- we refer to it as a promising pipeline, which implies that there's opportunity out there.I think, obviously, you've got some short-term challenges for some acquirers out there in terms of interest rates and the cost of debt and what have you, particularly those acquirers who may be looking at over a slightly shorter time period than we are. If we take that 15 to 20-year view of opportunity, then to some extent, we can see through those short-term economic challenges. As far as multiples are concerned, I'd say for really good businesses, the multiples are still quite healthy. What I would say is that there's probably a little less competition for some of those better deals.And so again, it's making sure that we're not spending a lot of time on those opportunities that we're very unlikely to be the acquirer for, and finding quite often those situations where it's a more exclusive conversation with a business owner so that we can obviously get through that process more quickly and bring them into the group. So yes, I think it's a time of opportunity, I would say, but also a time to really exercise discipline in terms of what we do complete.

[Andre Kukhnin, analyst]

And second question, I just wanted to ask, and that's probably going to [ indiscernible] with Marc. It's just on that central cost increase for the guidance for full year of GBP 3 million and the step-up also in the finance net expected for the year, that GBP 3 million increase in central. Can we treat that as more or less kind of nonrecurring one-off because of the management changes? Or should we think about some of that being recurring? And then similar for finance net, how much of that was due to kind of one-off cost of changing the profile of the debt versus just underlying cost of debt rising, please?

[Marc Ronchetti, executive]

Yes. See, this is unclear, Andre. You're referring to the full year central cost guidance moving up by the GBP 3 million and then the same on the interest for the second half?

[Andre Kukhnin, analyst]

Exactly. Yes.

[Marc Ronchetti, executive]

Perfect. Yes, I think certainly on the central cost side of things, there's 3 main buckets in there in terms of the change in the forecast. A piece of that is around -- we saw the videos there on the reconnection, on Accelerate Halma on a number of the other conferences plus the travel. So largely, if you like, one-off albeit we see reconnection and connecting across the network is part of our ongoing central cost, but it was something that we've invested in, in the second half of this year.The other 2 elements then absolutely, one of them is one-off, which is very much around CEO transition. So recruitment costs having Steve in for the first quarter, and then all of the travel associated with myself and Steve getting around to as many companies as we can. So very much one-off there. And then the final piece is just around FX translation. So again, build that into your forecast. That's a smaller piece, but that comes out in terms of the translation of the P&L.From a financing cost perspective, very much, I guess, driven by 2 things: the underlying rate increase. So what we've actually seen is our RCF, which is on a floating rate is now very similar cost as to that of our fixed rate. So we've switched into a lot of PP for the recent M&A. What that's actually doing is giving us that same rate, albeit an increase, but it takes the volatility of the rate rises away. So that's what you're seeing in the second half of the year. Clearly, we've got the USPP in place that gives us that opportunity to fix in the appropriate currencies, and then we'll keep an eye on the floating rates in terms of use of the RCF as appropriate.

[Andrew Williams, executive]

So we've got a few questions on the screen here, which I can read out. 2 questions from George Featherstone from Bank of America. I think we answered your first question, George. It's all around the order book and how that split between volume, pricing and forward ordering. So I think we've covered that. The second question you had was -- which I think was related to one of the questions Andre just asked, on margins. Are we back to a normalized level of overhead expense now?

[Marc Ronchetti, executive]

Yes. I think, George -- and please shout if we haven't answered the first question, but I believe we have. On the second question there in terms of normalization of overhead expense, I think the best way to think about that is very much on the return on sales where we're managing between margins and overheads. And we talked a lot in the last sort of 2 or 3 earnings updates around return on sales normalizing. We went through that period certainly in the first half of '21, '22, where we saw an excessive return on sales due to the slow recovery or going back in of those discretionary costs, and we pointed towards moving forward a more normalized shape on return on sales.That's what we've seen come through in the first half of the year. In fact, at 19.6%, that's marginally ahead of what we have historically seen in the first half. So we were very pleased with that. And then as we move into the second half, historically, we've been around 21%. So getting the full year to around that average in the early 20%. And again, that's very much where we see things moving forward. So I think the fair way to answer that question is we see a much more normalized shape to our return on sales and therefore, overheads moving forward.

[Andrew Williams, executive]

And then the final question we've currently got is from Aurelio Calderon at Morgan Stanley. I think, again, it was related to the M&A pipeline. So the question was, I wanted to ask on M&A for some time, you've been below your 5% contribution target. You've talked about an encouraging pipeline. Do you see better M&A opportunities, multiples coming down in the current environment?Again, I think we covered that off. Clearly, we've had a good start to the year-to-date in terms of our performance against that 5% contribution target, but obviously looking to do further deal as we go through 2023, I should say, provided we can find the deals that fit the bill both from a strategic and a financial point of view.

[Andrew Williams, executive]

We've got 1 more question here. So Mark Davies Jones, can I invite you to ask your question, please?

[Mark Jones, analyst]

Yes. Just a quick one. Clearly, you've always been very resilient and you are expecting to continue to be resilient, but could you just comment on any of the end markets either geographically or vertically where you're seeing any impact so far from sort of cyclical weakness? And particularly in the old days, when you used to provide splits by end market, buildings was always the biggest one. If we are seeing a significant construction slowdown, does that really impact Halma? Or are you more RMI-related than new construction related?

[Andrew Williams, executive]

Yes. I mean I always refer back a little bit to -- I don't know, every downturn as it were -- has its own unique characteristics. But if we think back to the global financial crisis in '08, '09, '10, we -- at that point, we sort of had 3 broad sectors. We had the -- what we now would regard our safety sector, but Infrastructure Safety, which is more construction exposed, industrial safety, which is more obviously industry exposed and then we had the sort of environmental and medical business together. And over a sort of 18-month period, we certainly saw an impact from the slowdown in areas like construction, but it was relatively short-lived, and we were able to get back stability and growing again quite quickly.So it makes life tougher. I think the reason why we don't get the complete, if you like, translation, if there were to be a slowdown in construction, the reason that doesn't translate right the way through to Halma figures is that, first of all, in our larger safety businesses, probably around 30%, 40% of what they sell is exposed to new construction, but the rest is actually aftermarket, which is much more resilient during those downturns. And obviously, the final point is that we're selling highly regulated safety-related products. So there's that -- there's obviously a lack of discretion, if you like, in terms of their ability not to buy those kinds of products.So I think the protection we get from having a diverse portfolio across our 3 sectors and the timing of challenges they've seen together with that, as you alluded to, that decoupling from sort of the broad macro to actually what goes on in our market niches, does give us the ability to outperform our markets and our peers when times get tough. So early days yet, I think in terms of seeing any impacts on our businesses yet. But I'm confident that we've got that resilience from our diversity and, as I say, the non-discretionary nature of our products.

[Andrew Williams, executive]

We've now got a question from David Farrell. David, if you can introduce yourself?

[David Richard Farrell, analyst]

Andrew, yes, congratulations on such a strong tenure and best of luck in retirement.Just a quick question on the environmental and the analysis margin. But presentation just [ tell ] me, but I think it was kind of not far off where it was last year. And clearly, the trend over time has been up significantly. Can you just kind of explain what's going on in that end market, why the margins are going up? Is it revenue mix? Or is it the impact of acquisitions? Or what exactly is going on there? And really how far can it go?

[Andrew Williams, executive]

Yes. First of all, I don't think there's a -- I don't think any of our sectors are setting out as it were to constantly increase their returns. I think they're all looking to operate within a sort of a plus or minus 2% range. So it tends to be a function of growth as much as pricing and underlying cost base. Having said that, I always thought that our Environmental & Analysis sector, because it's, in many cases, slightly less regulated, so the product life cycles are slightly shorter -- is a sector where innovation, new product introduction, if you like, entrepreneurialism, plays a stronger theme in the way in which you can generate that growth.Whereas if you think about in safety, for example, these are long-term steadily growing markets, which are highly regulated. There's product approvals to go through and all the rest of it and the [ safe ] on the healthcare side. So I do think that increasing spend in R&D that's built up over the years has played an important part in our building that competitive advantage and ensuring that margins are strong, but also more importantly, generating that top line growth. So yes, I think it's got a slightly different character to the other 2 sectors, which gives us that opportunity to sustain those high margins. But just to be clear, the long-term success of that sector, as indeed the other 2, is going to come through that revenue growth rather than margin expansion.I've got a couple of questions now from Jonathan Hurn. And Jonathan, first of all, asks, can we talk about the rate of growth in digital solutions that we saw in the first half of '23? And let's take that one first, Marc, if we got a --

[Marc Ronchetti, executive]

Yes. I can pick that up [ for now ]. I guess, Jonathan, as you know -- but just worth reiterating clearly, when I talk about the makeup of digital revenue, it's at the group level. Down at the individual company level, we've got a number of businesses that may well be 100% digital-only and others then that are at that hardware and service offerings. But at the group level, so the consolidated group level, our digital growth was slightly ahead of the total revenue in the period. So digital revenues, as we define them, grew at 12% against the group's revenue growth of 11%. So largely in line, but slightly ahead and therefore, working that through digital revenue makes up just under 45% of our Halma revenue. As I said, a little bit up on the 44% that we saw in the first half of last year.

[Andrew Williams, executive]

And then a follow-on question from Jonathan was how much of group revenue do you think is derived from energy efficiency solutions?I think the simple answer to that, Jonathan, we don't -- today, we don't capture that information. In fact, I would say one of the things that came out of the recent Accelerate conference was just getting some of the companies who traditionally don't see themselves as playing a part in sustainability solutions starting to see actually directly or indirectly, they do have a role to play. I mean we gave a great example in the presentation there of the BEA door sensor, which just by improving the efficiency utilization of industrial doors, you can improve the energy efficiency of that particular operation. So I think that's something that will emerge as a theme as we go through the next 2 or 3 years. But as I say, today, we don't have a specific answer to that.

[Andrew Williams, executive]

And then there's a third question from Jonathan, which was we recently appointed a new President for APAC. Are we closer to seeing an increasing M&A in China or Asia Pac?I think the first point to say there, Jonathan, is -- which I think you know is we've had a President in Asia Pac since 2007, 2008. So this in itself wasn't signaling a change of gear. We've always had that leadership position over in that part of the world. However, I think at the time about a year ago, we talked about recognizing as we look over the next 5 and 10 years, that Asia Pac and within that China, is our opportunities for growth, particularly as we look at the themes, again, that we're focused on safety, healthcare and the environment. We have got some China opportunities in our acquisition pipeline, as has been the case over many years.We've made 1, let's say, standalone acquisition in China over the last 5 or 10 years, Longer Pump , which is doing extremely well. And so I think if we can find good quality businesses in China -- for China, I think we recognize that an investment in an acquisition in China, it's very much got to be focused on serving that local market. Then we're still looking for those opportunities and believe there will be good additions to the group. But at the moment, it's taking a longer-term view rather than feeling there's some sort of short-term opportunity or short-term need to do something.And I think that's it. So thank you, everyone, for those questions and also your comments to Marc and me in terms of the transition. Very much appreciated. I look forward to catching up with many of you between now and the end of March. And with that, we'll finish the call. Thank you.

[Marc Ronchetti, executive]

Thank you.