Morning, everyone, welcome to our full year results presentation. I'm pleased to be here to report a strong set of results, my first as Chief Executive. As you'll hear, once again, they show the strength of our sustainable growth model and the value of having exceptional talent and teams across our organization. I'd like to start by thanking everyone at Halma for their hard work and dedication, and their contributions to our significant progress over the last 12 months. I'd also like to welcome Steve Gunning, who joined as Halma's fourth-ever CFO in January. Steve was most recently CFO at IAG, and I'm delighted that he's here with me today and is a part of my leadership team going forward. In a few moments, Steve will give you more insight into our financial performance.
First, I wanted to share a few reflections on what's driving Halma's success and the substantial opportunities that I see ahead of us. If I start by going back to 2016, when I was first introduced to Halma, right? I remember then being really impressed by so many things: the purpose-driven nature of the group, the positive impact that we had on the world, the clarity and success of our sustainable growth model, the culture and the diversity of the talented people that I met. I knew then that this was a special company and something that I wanted to be a part of moving forward. It's this feeling that's grown stronger over the past seven years and has really deepened over the past six months.
As part of the CEO transition, I've had the opportunity to spend more time out in our individual companies. Every time I visit one of our companies, I'm always inspired by our fantastic people, the quality of our companies and the technologies, the scale of those problems that we're solving for our customers, and the lives and environments that we protect and enhance. As you'll see, innovation and creativity remain core to the Group, every individual plays their part in the Group's success. I stand here immensely privileged to be leading an organization with such a strong purpose and inclusive culture, I'm excited about the opportunities ahead of us. As I think about the future, it's often the case that a new CEO has been appointed to make fundamental shifts in strategy or significant changes in portfolio.
In fact, when we last changed our CEO 18 years ago, that was exactly Andrew's brief, and there are many significant changes happened in his first couple of years. Today, I believe we're in a very different position in terms of our portfolio, our capabilities, our people, the momentum we have in growth, investment, and returns. In short, I believe we're in a position of strength with our sustainable growth model at its foundation. It's a dynamic system, and its strength lies in the way each of the elements are interlinked and reinforce each other. At its heart, our unifying and ambitious purpose. This drives us to have a positive impact on people and the planet. Our purpose drives us to those niches within markets that are addressing long-term needs.
At Halma, we've always focused on those long-term growth drivers, and this underpins both our organic and inorganic growth. All of this comes together to give us confidence in delivering our sustainable financial model. Our strong organic growth returns and high levels of cash generation allow us to constantly reinvest in growth opportunities, both organically and through acquisition, and deliver those increasing dividends to our shareholders. Our ability to capture those opportunities over decades is underpinned by the agility of our business model. This puts talent close to those niche markets, who can leverage our entrepreneurial and collaborative culture to innovate and solve high-value problems. I believe that this agility is especially critical now. Think about those challenges facing our customers, whether from climate change or ensuring our health and safety, or indeed facing up to economic and social volatility.
As we've done consistently since our foundation 50 years ago, we must continue to evolve and enhance our model to capture the significant opportunities for growth and positive impact. It's in this context that there are four areas that I see as key priorities for Halma as I start my first year. First up, organic growth. It's critical that we have clarity on the customer problems that we're solving, the value that we're creating, and our ability to capture that value. Organic growth is the cornerstone of our financial model and is therefore our top priority. To do this, we'll keep our talent close to our customers, and we'll maintain high levels of continuous investment in our products and services, and continue to seek a strong return on those investments. Secondly, inorganic growth, the other half of our growth model.
In a fast-changing world with many emerging trends, it's important that we remain disciplined in our approach to acquisitions, with a relentless focus on purpose alignment and only those market niches that offer those long-term growth returns and cash flows. It's this same lens through which we'll continue to review the existing portfolio and investments, and we'll need to act decisively when required. I don't believe that there's any fundamental outliers today, however, this must be a continuous process. My third area of focus is that of ensuring that we maintain the agility of our business model. This, through our decentralized organization model, our entrepreneurial and collaborative culture, and ensuring that we have the very best talent in our leadership teams across the group. Allocating our capital in the right markets provides a solid foundation.
In a world where we're seeing the increasing opportunity, the increasing pace of change and volatility, it's that agility and our talent that's gonna ensure delivery of our ambitious growth targets. Put simply, talented teams close to their customers, making great decisions, supported by being a part of a global group, will deliver sustainable growth and impact aligned to our purpose. I'll come back to this in the second part of my presentation. My final priority, alongside growth, is maintaining a disciplined approach to optimize the returns on the substantial investments that we make. While I'm not signaling a change to our current KPIs, I do believe that it's critical that we maintain them as we continue to grow, and I know that this is an area that Steve will take the lead on. As I say, I'll cover strategy in a little bit more detail later.
Before I hand over to Steve, let me just summarize our progress over the last 12 months. We've reported another set of record results, with continued strong growth, high returns, and substantial investment, aligned to both our sustainable growth model and the priorities that I've just described. We've delivered record revenue and our 20th consecutive year of record profit. It's great to see our ambition reflected in the record levels of investment of over GBP 500 million . This also reflecting the scale of the opportunities that we see in our markets. This investment is strengthening our capabilities, both organically and through our acquisition. Organically, we've continued to build the strength and diversity in our teams to foster our entrepreneurial spirit by building on the power of the Halma Network. For our acquisitions, we've had a record year for both spend and acquired revenue and profit.
As always, this investment is supported by our strong financial position and high levels of cash generation. Really pleasing to see our cash conversion back to targeted levels in the second half. Our growth has been delivered with continued high returns. While return on sales was below last year's unusually high level, it was well within our target range, as was ROTIC, which also remained substantially above our cost of capital. All of this supporting a proposed 7% increase in the dividend. This representing our 44th year of annual dividend increases of 5% or more, another strong signal of our confidence in the future. This performance, together with a good start to the new financial year, means that we're well-positioned for further progress in 2024 and beyond.
With that, let me hand over to Steve for more details on the financial performance in the year.
Good morning. It's a pleasure to be presenting my first set of results as the Halma CFO. Before I launch into the results, I thought it'd be worth just making a few opening comments. Halma is a company I've followed and admired for a long time. Whilst working for Price Waterhouse in the 1990s, I used to visit Amersham and audit the group at that point. I had the opportunity to meet David Barber and Mike Arthur, the founders of the group, and also to be exposed to the business model. Once you've been exposed to Halma, you don't forget it very easily. When the opportunity came to work with Marc and the rest of the team to take Halma forward, I jumped at it. I'm now in my fifth month, and I've received a great welcome.
I've visited 20 subsidiaries so far, and I look forward to visiting many more for the remainder of the year. Overall, I've been impressed with how the sustainable growth model drives the culture, the decision-making, and the governance of the group. The focus being to create value in the long term. At the same time, I've been impressed by how the group companies and the group as a whole look to deliver year in, year out, and that's what they've done this year as well. Let's take a look at their results. As Marc has already stated, there are a strong set of results, with record revenue and record profit. Revenue of GBP 1.85 billion, up 21.5%. Adjusted profit of GBP 361 million, up 14.2%. All this with continued high returns.
The return on sales was 19.5%, well within the 18%-22% range. At the same time, we've made record investment. In terms of M&A, we've made seven acquisitions , four standalone and three bolt-ons , and invested nearly GBP 400 million. It is great to see the strong pipeline converting into quality acquisitions. R&D spend has exceeded GBP 100 million for the first time, and this investment is absolutely fundamental to maintaining and improving our market positions. Finally, we have continued to invest in our infrastructure. This includes capital expenditure and also the group IT programs. All of this investment is only possible with a strong balance sheet and strong cash generation. Let's look at some of the metrics that support that. Net debt to EBITDA is at 1.38 x, and that's very comfortable for us.
It was also good to see cash conversion reach 90% in half two. It was much lower in half one because some of our companies have made the strategic decision to invest in inventory because of supply chain issues. It's good to see those issues easing in the second half and going into FY 2024. In FY 2024, we would expect cash conversion to be ahead of the 90% target. Finally, we are proposing a dividend increase of 7% this year. This is the 44th consecutive year where we've increased the dividend by more than 5%. Now let's turn and talk about revenue. This slide provides a bridge of year-on-year revenue growth of over GBP 300 million or 21.5%.
Organic revenue growth was 10.2%, which follows on from 17.5% the previous year. Price increases provided 4% of the growth, which was consistent across all three sectors and above our typical historic average of 1%-2%. Volume increases at 6% were also at the high end of the historic range. All of this indicating the strong demand for our products. Next, we see acquisitions contribute 4.3%, and then we see an FX benefit of 8.1% as a consequence of the strong dollar compared to sterling. If we now look at the revenue through a different lens, we will now look at revenue growth in the regions, and these are destination regions. This slide, on the left hand, shows the reported revenue growth, and on the right hand, the organic constant currency growth.
For today's purposes, we'll focus on the organic constant currency growth. It was good to see strong growth in our two largest markets, the U.S., where the growth was across all three sectors, and in Europe, we saw strong growth in the safety and the Healthcare Sector . U.K. growth, at 6%, was in line with our long-term expectations, and pleasing given the fact that it was 25% growth in the prior year. Asia Pacific saw strong growth in India and Australia, this was partially offset by the decline in China due to the various lockdowns through the year. Let's move to adjusted profit. As Marc outlined, we delivered record profit whilst making substantial investments to support our future growth. Profit was up 14.2%, at the OCCY level, it was up at 3.1%.
The organic level was held back by the half two ROS performance. I'll touch a bit more on that in a minute. There was a good contribution from acquisitions of 2.8%. Once again, an FX benefit due to the strong dollar compared to sterling in the year. I said I'd say a little bit more about the half two return on sales performance. We'll turn to that now. This chart shows the half one and the full year return on sales performance for three periods. The first period is the five-year average leading up to COVID. The second period is the two-year average during the course of the COVID pandemic. The last period is for FY 2023, the year that we're actually reporting on today.
The key observations we would make from looking at this graph: One, in all three periods, our return on sales was within our targeted range. Secondly, during the COVID years, our return on sales actually increased because we cut back on non-mandatory spend. If we look at FY 2023, in half one, you'll see the return on sales was at 19.6%. That was above the historic average, albeit starting to normalize towards it. However, the full year result for FY 2023 was below that historic average, and that was because the half two return on sales was at 19.4%. Why was the half two return on sales below the historic trend for half two? There were two reasons.
Firstly, the Safety Sector was impacted by supply chain disruptions, and secondly, the interest expense was up due to the record level of investment and the higher interest rates. What was the issue in the Safety Sector? Some of the semiconductor components used in our products have been deprioritized by the manufacturers. This has affected a number of our companies in two ways: The cost of the components has increased considerably due to their scarcity, and secondly, the affected companies have had to invest in recertifying their products with newer, cheaper components. The good news is the impacted companies are making good progress through this challenge, and we are starting to see the Safety Sector's return on sales recover.
If we consider the main drivers for the fiscal year 2024 return on sales for the group, we have the operating leverage of the business coming out of FY 2023, going into FY 2024. We see the recovery in the Safety Sector's return on sales, and we see the highly profitable acquisitions we made during the course of the year. These three factors offsetting the increased interest expense. As a consequence of that, we're giving guidance today for FY 2024, that our return on sales will be about 20% for the year, and it will have a more typical half one, half two split, where the half two return on sales is higher than half one. Let's turn to cash flow performance. This chart effectively summarizes the cash flow statement for the group, and I'll just pick out four items here.
The two largest items, EBITDA and acquisitions. The strong EBITDA generation is typical for the group and testimony to the growth model. The acquisition spend reflects the seven acquisitions we made during the year, and these companies clearly will be a source of further EBITDA in future years. Working capital was higher than normal due to the strategic investment in inventory during the year, but we would expect that to ease in FY 2024. The cash conversion improved to 90% in half two, and we would expect it to be ahead of 90% in FY 2024. Finally, it's worth mentioning pension contributions. We will expect pension contributions to reduce by GBP 11 million in FY 2024 because agreement's been made with the Halma Group Pension Plan trustees to defer contributions until the triennial valuation has been completed.
The scheme is already very well funded, we don't want to put further contributions in there which aren't required. Now, let's turn to sector performance. Before we get into the details of the Safety Sector, it's worth noting that because of the FX and the acquisitions creating a significant difference between reported revenue growth and OCCY revenue growth, we have provided detailed bridges in the back of the presentation deck. What about the Safety Sector? The Safety Sector achieved a strong revenue growth and record investment in FY 2023. The strong revenue growth of 11% was broadly spread across the regions and really reflected good underlying demand for our products. In terms of profitability, the ROS was lower at 20.5%, and this was primarily due to the supply chain issues I've already mentioned.
The good news is we're starting to see that return on sales recover as we go into FY 2024. Safety had a really good year in terms of M&A, with four acquisitions. In fire safety, it purchased Thermocable and FirePro. In power safety, it purchased WEETECH and a bolt-on for Sentric, Zonegreen . It was also great to see our companies investing in R&D to support their future top-line growth. Let's turn to Environmental & Analysis Sector . The sector saw good organic revenue and profit growth and healthy levels of investment during the course of the year. The revenue growth included strong performances in the U.S., Asia Pacific, and other regions. In terms of profitability, the gross margin improved slightly due to good management of pricing and business mix.
The return on sales declined 50 basis points to 24.3%. This was reflecting variable overhead, returning back to pre-COVID levels. It's fantastic, again, to see building momentum in M&A performance with two acquisitions during the year, Deep Trekker and a bolt-on for our Ocean Insight. Shortly after the year end, the Sewertronics acquisition and a bolt-on for Minicam. Let's turn to probably the star performer in the year, which is the Healthcare Sector . The Healthcare Sector performance in the year was really strong, with double-digit revenue and profit growth at the organic constant currency level. Organic revenue grew 10%. This included a recovery in patient caseloads in the second year post-COVID. By geography, all regions, except Asia Pacific, reported double-digit revenue growth. Asia Pacific declined on an organic basis due to the lockdowns in China.
In terms of profitability, the sector achieved a slightly higher gross margin, and the ROS increased by 90 basis points to 23.4%, which does represent an element of recovery towards pre-COVID levels. It was good to see continued investment in the businesses. Organically, in terms of new product development, R&D spend was 5.9% of revenue, and also to see a larger acquisition in IZI with a maximum consideration of GBP 151 million. I turn now to the performance against financial KPIs, I think I've covered most of these, so I'll just pick out three, which I think are worthy of note. A strong acquisition profit contribution of 5.5%, especially as this metric is on a post-interest basis. On a pre-interest basis, the figure would have been over 9%.
This pre-interest basis has validity given the self-sustaining funding model that Halma has. EPS, great to see it up 17%, driven by the strong reported growth. In terms of return on total invested capital at 14.8%, a strong level, just slightly up on the prior year, and well above our weighted average cost of capital of 8.9%. This was delivered at a time of record investment, which is supported by a strong cash generation and strong balance sheet. It's fantastic to see the strong returns from our past investments. Now, if I come on to my last slide. This slide shows the 10-year performance of the group at the revenue and adjusted profit level, and it's excellent to see that the 10-year CAGR is over 10% for both of these metrics.
It demonstrates the effectiveness of the sustainable growth model, which is at the center of the business. The group invests to achieve sustained long-term value creation, and you can see this in the slide. A key focus of my role will be working with Marc to see those returns continue to come through from the investments that the businesses have made and will continue to be making. That's both at the organic and at the inorganic level. I will now hand you back to Marc, who will give you an update on our priorities for the rest of the year. Over to you, Marc.
Great stuff. Thanks, Steve. To get us started on the second half of my presentation, let me just remind you of those four priority areas that I outlined at the beginning. First up, organic growth, our top priority. Inorganic growth, remaining disciplined in our approach to purpose-aligned acquisitions in the right end markets. Maintaining the agility of our business model, ensuring that we've got the very best talent close to our customers and empowered to capitalize on opportunities. Optimizing the returns on the investments that we're making. I like to keep things simple. In the most basic level, we acquire great companies aligned to our purpose and culture, and we expand their growth and positive impact over decades. This at a rate over and above what they could achieve on their own. Let's just not take that from me.
Let's hear from some of our companies, both ones that are new to the group and others that are more established, about how, for them, being a part of Halma has helped them achieve their strategic ambitions.
What attracted to me to Halma initially was a very defined focus on making the world a better place. It's very consistent with our mission-driven sensibility here at PeriGen.
In doing our research on Halma, I really enjoyed that the company had a very clear purpose. I also love that the company has a network of a variety of different companies who have been there and done it. I can always reach out to one of the Halma presidents and managing directors with any problem that I might have had and find someone who has been there and done it before.
The advantage with getting into a group like Halma is that they have a lot of companies under their umbrella, so somebody have been on your problem before you actually get there, so you can reach out and get a lot of answers.
We wanted to get part of Halma because of keeping the autonomy to run our business and have a long-term home.
I thought Halma was a great fit for PeriGen because they had a bit of a longer term view than our current investors.
When I was in the process of selling, where I had some help on the sideline, was actually that the people that I was going to sell to had a strategy behind it.
When I heard about Halma, on their website, I read quite a lot about the culture and also the purpose: safer, cleaner, healthier future for everyone, every day. When I met the people of Halma, I had the feeling it's not only ink on the paper, but they live that culture. With the hubs in, China, in India, and in the U.S., we have the possibility to grow international.
Deep Trekker has now been part of the Halma family for about a year, and we've really found that having Halma working with us has allowed us to refine our strategy and really bring focus to our business to allow for continued growth.
Fantastic examples there of our strategy in action. Always, great to hear how our companies are able to retain their existing culture, yet be aligned to Halma's overall purpose and DNA. You will have also heard the words there of Network and collaboration. Always, an area of significant value for our companies, and always a key theme during my site visits. It's always great to hear just how many examples there are of support or insights or knowledge sharing across our Network, and always covering a wide range of topics. Whether that's solutions to complex R&D challenges, whether that's access to the latest technologies, recommendations for partners, entering new geographies, or assessing market knowledge, just to name a few.
Finally, it was fantastic to hear those comments in relation to the ability to take a longer-term view, without those time constraints that you may have with other owners. Thinking about those opportunities over the long term and the current environment. Well, the long-term drivers that underpin our growth have not changed. It's clear that sustainability challenges are intensifying rapidly and are now front-page news. These challenges are driving billions of pounds of new investments, whether that's into renewable energy, electrification, clean technologies, healthcare systems, or into automation and digitalization. All of this representing huge opportunities. Let's bring this to life by looking at some examples of how we're evolving our portfolio to capture these opportunities aligned to our key themes within our Safer, Cleaner, Healthier Purpose.
First, a great example of a company that was historically focused on the oil and gas and chemical processing industries. They're now using their safety solutions to solve a new challenge, in this case, arising both from climate change and the energy transition. OsecoElfab has now customized its technology to support the rapid evolution of electricity distribution networks as part of the green energy transition. Specifically, its solution enables the elimination of SF6 as a insulating gas, which is used in electrical switchgear, replacing it with clean air. Now, this is critical in that SF6 is a really potent greenhouse gas, with around 24,000 times the warming potential of CO2. Oseco's solution enables a much greener transition to those new forms of energy. Next up, a great example of our companies collaborating to respond to new opportunities.
Sensit and Crowcon, two of our gas detection companies, joined forces to respond to the rapid growth in demand for air quality monitoring products in Europe. This demand being driven by countries developing clean air strategies and introducing tighter regulations to protect people's health. This collaboration ultimately resulted in a new series of air quality monitors sold into the European market and providing real-time insights into the air that we breathe. Finally, on this slide, an example of one of our healthcare companies, in this case, responding with agility to the increased incidence of disease in aging populations. This whilst ensuring that their customer can meet ever more stringent regulatory requirements. Longer Pump, based in China, was challenged by one of their long-standing Chinese medical equipment customers to develop a custom-built pump for its new dialysis machine.
The team were able to adapt their existing technology to provide a high-quality solution at speed to the customer. This then helped them meet this fast-growing healthcare need. Just a few of many great examples across the group, which hopefully start to give a flavor of the fantastic work that we're seeing in the companies, ultimately ensuring that we do more good and less harm. Turning now on to how we're evolving our portfolio through M&A, where you can see many of those same themes coming through in nearly GBP 400 million worth of acquisitions we made in the year. For example, a number of companies are enablers of the green energy transition. WEETECH's high voltage testing, Deep Trekker's ROVs inspecting offshore renewable energy infrastructure, and through FirePro's suppression products, protecting lithium battery power storage facilities.
In healthcare, our focus is on areas where we see increasing instances of disease, often correlated with age, like diabetes in the Longer Pump example, or IZI's products, which support the diagnosis and treatment of cancers. All fantastic additions to the group that I've got absolutely no doubt will form the basis of our organic growth for decades to come. Turning now to my final topic: talent. People are at the heart of the group's and our individual companies' growth strategies. We're committed to supporting their development and ensuring that our culture is highly inclusive. Starting with the senior leadership team and changes to the executive board. As I stated earlier, Steve joined as CFO in January, and Andrew's retirement from the CEO role at the end of March marked the completion of the CEO succession process.
It feels like an appropriate time to thank Andrew for his leadership, the success that he's created, and for his investment in me personally, as part of the group CEO transition. I wish him all the best after retiring from Halma. There's been two further changes to my leadership team since year-end. Firstly, in relation to our Innovation & Digital team, where we've seen a huge amount of success over the last six years. Ultimately, the team achieving its aim of embedding significant capabilities in our companies. As we look forward, our companies now need a different form of support. They need support that's focused on those technological requirements in relation to commercializing their digital solutions, and, for example, giving them advice on the best technology platforms.
This support will be best led by the Halma technology team, and as a result, Inken Braunschmidt will leave Halma at the end of June. We also announced that after five years with Halma, Wendy McMillan, our Safety Sector Chief Executive, has decided to leave Halma to pursue leadership opportunities elsewhere. I'd like to thank Inken and Wendy for their significant contributions to Halma, and I wish them every success in the future. As part of our ongoing succession planning, I'm really delighted to share that Wendy will be succeeded in early July by Funmi Adegoke, who is currently our Group General Counsel and Chief Sustainability Officer. Funmi brings strong strategic, commercial, and business acumen across many multiple industries.
As I've personally worked closely with Funmi over the past 3 years, she's consistently displayed a deep understanding of our model and the core traits that we look for in a Halma leader. Fantastic to see our ongoing succession planning in action. With that move, Constance Baroudel, our Environmental & Analysis Sector CEO, will also take on the Group Sustainability Officer role. As I've mentioned, the combination of our culture and our agile organizational model is one of our unique strategic assets. With our highly decentralized model, we need exceptional people who are empowered and accountable for making decisions close to their customers. All of this without the need for complex reporting lines.
Our agile model enables our teams to respond quickly to their customers' needs to capture new growth opportunities, and it's therefore critical that we find the right talent, and then we support and invest in their development. During the year, we've therefore increased investment in the development of our leaders to enable their success. We introduced three new leadership development programs, with over 200 leaders participating in face-to-face learning events and 750 participating online. We also formalized our internal mentoring network, and we launched a new coaching program. Our Halma Future Leaders program, the aim of which is to see our graduates on one of our company boards within seven years, continues to deliver, with 12 alumni now promoted to that level. We also invested in the power of the Halma Network.
We ran events to reconnect our people following the pandemic. This included our global senior leadership conference, Accelerate Halma, that we held in October last year. This brought together over 300 of our senior leaders. A fantastic event, and it was really great to have everyone together again. We've also opened new offices in India and China, both of these designed for collaboration with more spaces for working together. Finally, our ongoing technology upgrades are greatly enhancing our ability to connect and collaborate across the group. We also recognize that having an inclusive culture and supporting healthy lifestyles leads to a more energized and productive workforce. We've supported this in a variety of ways. For example, through extending our employee assistance program, so that it now covers the U.K., U.S., Europe, and China.
Through enhanced healthcare and retirement saving plans in the U.S., and through a wide range of individual company initiatives appropriate for their local markets. I'm proud of the progress that we've made in our drive to build diverse and inclusive teams and businesses. However, at the same time, I recognize that there's still more for us to do, and this can be seen by looking at one measure of diversity, that of gender. Whilst we've made fantastic progress and have a really good gender balance across our senior roles and in our future leader programs, despite great progress, that we have more opportunity at the company board level. Another notable achievement has been the success of our global neutral parental leave policy, with now nearly 500 employees having benefited.
Whilst I've used gender as an example, it remains important that we continue to challenge ourselves on every aspect of diversity, including race and ethnicity. Finally, it was great to see our seventh global employee engagement survey reflecting the continued high levels of engagement among our people. Once again, we had a strong response rate of 85% and an overall engagement score, strong at 76%. Ahead of giving you the outlook, let me summarize. We're starting 2024 from a position of strength. We've got great momentum in the business. We've got a positive culture and strong teams. We're well invested and focused on those attractive niche markets aligned to some of the greatest challenges of our time.
We've a proven strategy and growth model that we continue to evolve as required. We've got clear priorities within that model to maximize our opportunities for organic and inorganic growth, to maintain the agility of our business model, and to ensure that we're optimizing the returns from the substantial investments that we're making. Looking forward, 2023 was another successful year for Halma. This reflecting the benefits that we derive from our sustainable growth model and the contributions of everyone in the group. We've made a positive start to the new financial year. We have a strong order book. Order intake in the year to date is broadly in line with revenue and ahead of the comparable period last year.
Based on current market conditions, we expect to deliver good organic constant currency revenue growth in the year ahead, and as we heard from Steve Gunning, return on sales to increase to approximately 20%. We're well positioned to make further good progress this year and in the longer term. That's the end of the presentation, and now we've got time for some questions. As ever, there's two ways that you can ask questions. You can either raise your hand using the tool at the bottom of your screen, and I'll invite you to ask your question verbally, or you can type the question, which Steve Gunning and I will read out and then answer. Just looking at the list now, I can see Jonathan Hurn, that you've got your hand up, so let's start with you.
Yes, good morning, guys. Can you hear me okay?
All good, Jonathan.
Yep.
Great. I just have three questions, if I may. First is just on margins, and get into a little bit more detail. Is firstly on how we see that safety margin progressing in FY 2024, get back to sort of the 23% level, or is it just edge up on the 20.5% that we saw in FY 2023? Also on margin, just in terms of environmental analysis, obviously 24.3% margin for this year, obviously, it's down. Does it come down first from here, or does it kind of level out between how the trajectory of that margin progress is going forward as well, please?
Yeah. Thanks, Jonathan. I'll just make an overview comment in terms of margins. I do think it's important that we recognize that the prior year was particularly strong, given that we didn't have that fast recovery or spend coming back in from the discretionary overhead. A little bit of context there. As Steve talked to actually going back to those pre-COVID levels, but I'll let Steve just dig into a bit more detail on safety and E&A.
Sure. Good morning, Jonathan. In terms of safety, as you heard from the presentation, clearly they've had challenges to work through with FY 2023. I think one of the things I'd highlight in the midst of that was actually the Safety Sector had the strongest organic revenue growth of all of our sectors. There was no issue with underlying demand, it was just a case we had a challenge to work through with componentry. In terms of our confidence as to why we think the safety ROS will recover during the course of FY 2024, you know, when we look at the two months year to date, we're already ahead of the same time last year, and we're also ahead of the level that we had in half two. We're already seeing improvement.
You know, that's data input to us when we were giving the guidance of the 20%. You know, will it get all the way back in the, in the first half, second half? Difficult to say. Do we think there's good reason and confidence and evidence to it recover? Absolutely, 'cause we're seeing that already at the moment. In terms of healthcare, I do think healthcare is more a case of it's been normalizing. I think that will be more leveling out... Sorry, in terms of E&A, I think it's more a case of it will be leveling out. In terms of healthcare, I still think there's a, an element of normalizing back to the pre-COVID level, I think there's some potential upside there.
When we look at it overall, clearly there's sort of movements in all three of our sectors, but that's one of the beauties of having a portfolio. Some have good days, some have bad days. When we look at it overall, we think the 20% guidance looks sound. It's getting us back to pretty much where we were pre-COVID. As we said in the presentation as well, we think that the profile will be much similar to what we've seen pre-COVID, i.e., half one considerably lower than half two, but, you know, low 19s for half one and then sort of mid-20s for half two.
Good. Thanks, Steve. I guess let's just pick up on a question there from George Featherstone. Similar in terms of the second part of his question, which was on margins, the first part of the question was in relation, let me read it out. "On growth outlook, you guided for good organic growth last year and delivered 10%. How should we think about good growth for FY 2024, given your comments suggest orders ahead year-on-year and backlogs remain elevated?
Yeah. So I the KPI we set ourselves internally is 5% growth, and the aspirational target we set ourselves is 7.5%. Our view at the moment is we're going to make good progress, which probably means something in the region of the 5%-6% range. What underpins this is primarily the state of the order position. The order book's strong. It's at about 16 weeks. Typically, it would be at about eight to 10 weeks. The order intake is ahead of last year, and the book-to-bill is just under one. When we look at the situation and the underlying sort of fresh demand for our business, we are comfortable with the 5%-6% range in terms of organic growth.
Thanks, Steve, and Jonathan, realize we just sort of built on your first question. Accepting that you said that you had a couple of questions back to your good self.
Just. Thank you. Just coming back to that growth, the sort of 5%-6% that you're talking about, how much of that is gonna be price, within that mix? Is it gonna go back to sort of 1%-2% price, or we can get a little bit more in 2024?
That's a good question, Jonathan, and absolutely to your point. Historically, we've been around 1%-2%. We've seen 4% this year. The prior year, we were at 3%-4%. We're absolutely trying to find that balance in terms of the value that we're giving to our customers, maintaining the relationships with them, and the general view across the group is that we should be back around that 1%-2% moving forward, which will find a nice balance in terms of value creation and maintaining the relationship.
Okay. Maybe just the final one, just in terms of obviously that sort of pick-up in cost, it's up GBP 5 million into this fiscal year. I mean, are we going to see that kind of increment going forward every year? Just in terms of the payback on that investment, do you feel that you're already getting the payback on that investment, and how is that still...?
Apologies, Jonathan. You're breaking up. I didn't catch that question. Can you just try again?
Sorry, yeah, it's just in terms of that sort of central cost function, obviously, it's up probably around about GBP 5 million this fiscal year versus last. Are we gonna see those kind of increments going forward? Is that gonna be sort of the annual sort of rise we see every year in terms of central cost function? Just in line with that, are you starting to see a payback on that investment, or is that really to still to come through?
Yeah, that's a great question. Two thoughts on that. In terms of explaining the sort of GBP 5 million movement, frankly, it's somewhat distorted by what we've been doing in technology. We did rephase a couple of the IT programs that we were doing. We took stock and looked at where we were with the programs. That resulted in about GBP 2 million of spend coming out of FY 2023 and going into FY 2024. If you recall at the half year, we guided a much higher central cost figure for FY 2023. If you strip out that GBP 2 million sort of movement from FY 2023 to FY 2024, we're broadly flat on central costs, and that's roughly what we'll be aspiring to achieve going forward.
In terms of returns on central costs, I think it's a really good question, and I think what's happened with I&D is a really good example of that. You know, we've built and we've invested in a growth enabler. We think we've taken that, and it's been hugely successful to its conclusion, and now we've dismantled that and rephased and reshaped the way we're doing that activity going forward. We're constantly looking at the growth enablers and the central functions to ensure that they are giving us a return for our investment. As Marc said in the presentation, you know, we're continuing to look right across the business, whether it's investment in growth enablers or investment in the companies or the sectors, to make sure that we are getting a return for that investment.
That's very helpful, guys. Thank you very much.
Thanks, Jonathan. I can see, Andre, you've got your hand up, so we'll switch to you.
Yes. Hi, can you hear me?
Yes. Yeah, all very clear.
Great. Good morning, everyone. Thank you for taking my questions. I'll just carry on with one on margin. I wanted to pick up on the operational gearing that you mentioned as one of the drivers of margin expansion or recovery back to 20% in fiscal year 2024. That is expected to happen despite the central function moving, as you've just explained, why with IT, but nevertheless, we are seeing a GBP 6 million increase. I just wanted to see if ask about this kind of higher reliance of operational gearing. We haven't really talked about that in the past as a factor of margin improvement.
With that central now being at least 100 basis points above historic levels and interest costs being also, I think, around 50 basis points higher, is there a bit more pressure on the companies to generate higher kind of operating ROS to get to the 20% PBT?
Let me pick up on that one, Andre. I think the first thing to say is there isn't any increased focus on operational gearing. All of our individual companies have Halma-like metrics. They're in those markets with long-term growth drivers. They are selling highly valued products and services. The reference to operational gearing was one of continued top-line momentum, in addition to that high gross margin that we've always had on our products. Nothing changes there in terms of a focus or in terms of the flow-through. Your point in terms of central cost, Steve picked up there in terms of how we're still operating and focusing on having a lean central function, finding that balance between ever-increasing need for governance, reporting, and regulation, but also in addition to making appropriate investments to support and enable growth in our companies.
Historically, those costs have been around 2% of revenue. Often, when I've looked at that, it's been split 1% on the regulatory governance reporting, 1% on the enablers. The only real increment here is that bit of technology spend to get us to where we need to be on the back office system. I think it's much more business as usual, continued good growth with a return on sales at around 20%. No incremental pressure on anybody. It's about continued momentum in the great businesses that we have.
Great. Thank you. That's very good to check off. Just a quick follow-up on that IT spend. In fiscal year 2025, you don't expect that GBP 2 million to repeat, right? That these were all. It is a one-off items.
The GBP 2 million was purely a rephasing. It's not a case that it's a recurring item. It was a rephasing from 2023 to 2024, just basically because where we'd got to with the programs, and we wanted to put our foot on the ball and see whether the plan still made sense and the timescales made sense.
Andre, to that point, in terms of is that continuing? Absolutely. Investment and continuation in technology at the center and in the group has to continue. A large proportion of our R&D spend, that was great to see up over GBP 100 million this year, is focused on technology. In the center, we have had, as you're aware, what we're calling our DTP projects, which are upgrades of our systems. We've also made investments in cybersecurity, and all of those investments will continue as we move forward, albeit we had a little bit of a peak last year, and that'll flow through into this year. As I sit here, I absolutely see that as an area that we'll need to continue to invest in as we move forward.
That's very clear. I was asking because I think in the past, we discussed there was a SaaS item that you were expensing, while originally the plan was to amortize. I think that's now well worked through, so we expect that GBP 2 million to continue.
Excellent. Thank you, Andre.
If I may, just a final one on the M&A pipeline. Clearly very healthy and sounds like you're kind of operating in a target-rich environment at the moment. Is there any color you could give us on where maybe there's particularly strong opportunities in terms of across the three sectors or regionally?
I, as you say, Andre, I mean, really good momentum. It's pleasing to see that record level of spend last year. We've made two further acquisitions in this year, so great momentum. The pipeline does look healthy. In terms of timing, as you know, due to our approach, we're, I guess, in its simplest form, trying to buy businesses that aren't for sale, and therefore, the timing of when these deals lands can change, and that's why we see those peaks and troughs. All of that said, it's really pleasing as we look at the pipeline, to see that good mix across our sectors, good mix in terms of size, and good mix in terms of geography. Finally, we're seeing a nice mix between standalone and bolt-on.
Those investments that we made in the teams a couple of years ago are certainly coming to fruition, and the scale of the opportunities in our end markets are certainly there. I don't sit here today concerned about the pipeline, but I'm also not able to sit here today and predict exactly how much we'll execute in the 12 months ahead.
Great. Thank you very much for your time.
Thanks, Andre. We've got Bruno with your hand up. If we open the mic to Bruno, please.
Awesome. Thank you for taking the question. My questions revolve around pricing. Coming back to it, so 4% does not sound like a great deal in the context of the inflationary environment we find ourselves in, and it sounds as if this was a conscious effort by yourselves to hold up a little on pricing, to gain market share or build on some of those relationships with customers. I just wanted to check, one, if this was fair, and was also just interested in how far you could have taken pricing up by, if you so wished to do so, this fiscal year.
Yeah, I mean, I'll again just give a couple of headlines, and then Steve can build. I think the key thing is that, look, there's no doubt that there's pricing resilience, given that non-discretionary and regulatory nature of our products and services. They're clearly highly valued, given where we are from a growth margin perspective. The key thing that we've got is that agility down in our operating companies. We've got individual boards of directors with deep market knowledge, deep relationships with their customers, and they have the autonomy to make the appropriate pricing decisions, not only for the short term but over the medium term. I wouldn't like to predict how far we could have pushed it.
I think I trust our teams and trust their relationships with their customers, that we found the right balance between ensuring that we can cover up incremental costs and build on that long-term relationship.
Yeah, not a lot to add to that, other than the fact that, Bruno, I was very encouraged that the gross margin was flat year-on-year. There was, you know, significant inflationary pressure coming through. The companies did a great job adjusting their prices to recover that position. They didn't go beyond that, but they did recover and maintain the gross margin, which I was encouraged by.
Understood. Just coming back to order trends in terms of what you've seen in trading year-to-date, could you provide some color and flesh out some of the drivers of this growth? Is it broad-based across all sectors? Is it driven by pricing and volume growth, or would it be fair to characterize it as strong? Any color along these lines would be greatly appreciated.
I think the start point with our portfolio, as I say, the markets that we're in and the types of products and services, is that we have got good underlying demand in our end markets. All of that said, you will have heard from others and other companies that you're speaking to, there's certainly pockets in the short term, whether that be Let's think some examples, some OEM stock build unwinding over the next two months, whether that be in healthcare, some MDR build-up in order books. Actually, we're a portfolio of companies, and we've got that agility. At the headline level, we start in a position of strength with the underlying demand. We're certainly not immune to the challenges that others are seeing in the markets, but we've got great resilience across the portfolio.
Understood. That's very clear. Just finally, just on the backlog length, I think you commented that it stood around 16 weeks of revenue coverage. Pre-COVID, that was 8 to 10 weeks. Do you expect it to converge towards eight to 10 weeks by the end of this fiscal year, or is that perhaps an FY 2025 story?
I think they will converge. I don't think it will converge within 12 months. I think it'll be a longer run off than that. Over the long term, we would expect to see those two converge back to the 8-10 weeks typical. I wouldn't expect us to close that during the course of FY 2024, but clearly, it will come down.
Understood. Thank you.
Thank you, Bruno. We've got a couple of further questions come up on the chat. Firstly, from Aurelio, R&D. Halma has been spending above 5% of sales for some years and ahead of the 4% KPI, while organic growth has also been ahead of the KPI. How should we think about R&D going forward in relation to organic growth?
Well, I think that's a great question, Aurelio. We're very encouraging and pleased to see our companies invest in R&D. you know, the central engine of this business is the organic growth, and to maintain our positions and to maintain our return on sales, et cetera, to invest in new products and processes is absolutely key. Everything we see at the moment suggests we'll continue to be in that 5%-6% range in terms of R&D spend. I think for Marc and I, when we talk about returns, what we're looking to see is, can we see the output of that coming through in the return on sales and the growth and demand in our products? That's what we are seeing.
I think we should continue to think about it in that sort of 5.5% range going forward.
Thanks, Steve. We have one other question from Rory from UBS in the chat, let me just read that out. First question: Which businesses within Safety are most affected by supply chain issues, and when did they become aware of the issues? Second question: Can you remind us of the coupon rate on the private placement debt? Third question: Across your pipeline of opportunities, what is the tone of discussions around valuation? Steve, do you want to put a little bit of color on the first two, and I'll pick up number three?
Yeah. When did we become aware of these issues? I think the Safety Sector has been addressing and dealing with the challenges throughout FY 2023. You know, we did see a build-up in inventories in the first half of the year, but that was more about scarce supply and building up the stocks. In the second half, it became clearer that that situation was ongoing and becoming more severe, and so we then went into the situation where we were having to recertify our products with new components. It's been something that's been building throughout the year and was certainly more the case in half two, and that's as we saw the figures come through. In terms of the private placement debt, the coupon rate, it's at 2.9%.
Thanks, Steve. Picking up in terms of tone of discussions around valuation, I think the headline there is that pricing is held up. I mean, ultimately, we're looking to acquire quality assets. We're looking to acquire them in those markets with strong long-term growth drivers. You often don't see downward pressure on pricing, but they look to be maintained. The other important piece here is that price isn't often the key driver of the seller's decision when we're talking to owners. Clearly, they're looking for a home for their business. It's absolutely appropriate to get a fair value for their business. All in all, pricing is held up. Looking from the outside in, one may argue that given rate rises, does that mean that we've got less competition where we've seen it previously with private equity?
I think that's fair to say in the short term. However, the flip side of that is clearly there's a lot of capital out there awaiting to be deployed. That's a dynamic that we'll keep an eye on over the next 12 - 18 months.
Rory, if I just come back to your second question, just to add a bit more color. Our average cost of debt at the moment is about 3.8%, where 50% fixed and 50% floating with our debt in terms of interest rate exposure, if that gives you a little bit more color around interest expense.
Thanks, Steve. I don't see any other hands up. There's nothing in the Q&A text box. Just one last request, if there is anyone, could you either raise your hand or open your mic? Okay, excellent. With that, a big thank you to all for your questions, and have a great day.
Thank you.