Good morning everyone and welcome to Halma's half year results presentation. It was back in July, at our full year results announcement that we gave you an insight on how we were responding to the global pandemic.
We gave you a greater understanding of how we saw the financial year panning out, but also that shared confidence in our ability to create value in a sustainable way for all our stakeholders. I'm pleased to say that the half year has gone to plan. In fact, we made progress very much in line with our expectations. If anything, we're ahead of where we thought we'd be, demonstrating once again Halma's resilience, so today you're going to get a reminder of what drives that resilience. You're going to gain an insight into the impact COVID has had on our markets within each sector, but also through that you'll see the benefit of the diversity of our markets, and finally you'll understand how COVID has accelerated our decisions on organizational investment priorities for the second half, albeit reinforcing the value of our purpose and our growth strategy.
What do we mean by resilient by design because it doesn't happen by chance? Halma is resilient because it's systemic. It incorporates several key components which are independent of one another.
And it starts with that clear and positive purpose which is both ambitious and inclusive. Growing a safer, cleaner, healthier future for everyone every day. And I'll give you an example in my strategy review about how we are living our purpose, both in terms of our broader campaigns, our global campaigns, as well as day to day within our business.
Next, we've got a focused and sustainable growth strategy to grow and acquire businesses in global niche markets aligned with our safety, health and environmental goals, with long term growth drivers. And that growth is funded by the cash that we generate through our operating companies.
But all of that needs to be supported by a robust and agile organization and a strong culture. We define it as Halma's DNA and that gives us the agility, but also it gives agility through local autonomy, local accountability of the operating companies.
It means we've got to have a strong investment in leadership at all levels, so that when the crisis comes, like a global pandemic, people know what they need to do and how they should do it without having to have every decision made at the center, or indeed controlled by the center.
We've seen the value of all of these elements. During the first half of the year, two thirds of our operating company, of our facilities, had some sort of mandate to stay operational through the lockdown period due to the critical nature of their products and services. Just three out of our 53 operating facilities had any sort of extended lockdown period and all have been operational since July.
I think it's worth at this point just recognizing the great work that our manufacturing teams have put in during this period, because they've been working in our facilities throughout the period while many of us have been working at home. And they have to adapt to new ways of working. They have to ensure that customer needs are met. I've been hugely impressed with the way they've responded to those challenges, proud of what they achieved, and would like to say that they've certainly led the way in living our purpose across the group and want to thank them for the efforts that they've made because it's through their efforts and indeed these elements that make us resilient, that's enabled us to perform well during the first half of the year and have confidence in the future.
So already you've heard the word resilient quite a lot during this presentation and I think this slide will just summarize what we mean by that. Despite the huge variations in conditions across regions, across markets, revenue was only 5% lower than last year at GBP 618 million. Our rapid response to the emerging pandemic by reducing our costs significantly in the first quarter and then controlling our spend in the second quarter has protected our profitability such that profit is also only 5% lower than last year at GBP 122 million. And collectively that has ensured we've maintained our return on sales at 19.7%, exactly in line with last year and well within our 18-22% KPI target range.
Exceptionally, we've seen exceptionally strong cash generation by our operating companies. It was one of our priorities at the start of the half year to have strong cash generation and maintain strong liquidity, so we ended the period with net debt reduced from GBP 375 million to GBP 315 million at the end of September, which is around one times EBITDA. And we had available liquidity at the end of September just under GBP 500 million, which is an improvement from GBP 431 million at the end of the last financial year.
As a result of this and our resilient trading and confidence in the future, we're increasing our interim dividend by 5%, which will position us well to continue our 40 plus year track record of increasing full year dividends by 5% or more.
And finally, I was encouraged by the improved momentum and confidence across our business improving as the half year progressed.
We saw sequential revenue growth in the second quarter of 11% above the first quarter. Although you'll see quite large year-on-year variations in Mark's presentation, it's actually more to do with the variation we saw last year than this year. In fact, this year the revenue trends after we went through the very challenging first quarter, since then the revenue trends have shown more of a gradual monthly improvement. After that initial decline, it's felt like a well managed period of progress with companies delivering on their short term forecast and then gradually increasing their full year expectations. That confidence is also exemplified by the healthy rate of R& D investment we've seen during the period. That has increased to 5.6% of revenue, albeit off that slightly lower revenue base.
Lastly, it's been pleasing to see the level of M&A activity picking up strongly during the second quarter and that's continued into the second half. We've seen a good mix of new as well as old opportunities as opportunities maybe were put on hold as lockdown came in. We've also seen a wide range of valuation expectations, but despite that, our criteria remain the same. We're looking for high quality companies with valuable intellectual property serving niches in global markets which are aligned with our purpose.
So, before Mark's financial review, a brief summary of how we are looking forward to the future and also how we perform during this first half.
Our resilience has enabled us to continue to create value for all of our stakeholders, both internally and externally, and it's also ensured that we performed better than we expected during the first half of the year. We've seen improved trading but also improved investment by operating companies and that has continued into the second half of the year. As a result of all of this, we're increasing our expectations to the top of the guidance we gave at the full year and we now believe profit for this year will be around 5% below last year.
Now, before I give you the strategy update, I hand over to Marc who'll take you through the financial results in more detail.
Thank you Andrew and good morning everyone. As we've heard from Andrew, we've delivered a resilient performance in the first half of the year. Our response to COVID-19 enabled us to maintain high returns, deliver a strong cash performance and maintain a strong financial position to support continued investment for future growth. For me, this reinforces the benefits of our clear purpose and strong culture, our agile and responsive business model and the long-term growth drivers in our end markets. Let's take a more detailed look at the drivers behind this performance, starting with group revenue and working from left to right. As you can see, revenue decreased 11% on an organic constant currency basis.
And again, as Andrew's mentioned, there was a wide variation of performance among our individual companies reflecting significant changes in demand in individual end markets and geographies which impacted each of the sectors differently. I'll pick up on those key drivers as part of the individual sector reviews. That said, the overall resilience of the group result reflects the benefit of our structure as a portfolio of diverse companies.
Looking at sequential trends, it was positive to see an improvement in Q2 with revenue up 11% on Q1, acquisitions contributed a healthy 6% to revenue growth, reflecting the record 10 acquisitions made during the last financial year. We expect this contribution to reduce to circa 3% in H2 given the timing of the acquisition completions. There were small negative impacts from disposals and currency, and this completes our bridge to our reported revenue decline of 5.4%.
Looking at our revenue performance by destination, which more so than in previous periods, has been driven by the shape of the underlying sector performances. The chart on the left shows the reported revenue split by destination in addition to the reported growth by region, with the chart on the right showing the regional organic constant currency growth. Given the limited impact of currency in the period, acquisitions account for most of the difference between our reported and our organic constant currency revenue. Picking up on a few headlines and starting with revenue growth in the USA, which remains our largest sales destination, the growth driven by a strong organic performance in Environmental and Analysis and a positive contribution from acquisitions made last year. This growth was partially offset by organic constant currency declines in our Medical and two Safety sectors.
Moving to the U.K., which was our weakest region, with revenue declines driven by the two largest sectors in the region, Infrastructure Safety and Environmental and Analysis. While Process Safety demonstrated a more resilient performance.
The decline in Asia Pacific revenue reflected growth in China of 1% offset by falls in India, Malaysia and Singapore largely due to the timing of large projects. In addition to the impact of COVID-19 in these regions, the 1% headline growth of China included a strategic move away from low margin revenue in our infrastructure safety sector, without which growth would have been circa 4% sequentially. China revenues were 16% up in Q2 on Q1. Switching now to adjusted profit again working from left to right, organic constant-currency profit down 11% in line with revenue, a positive performance maintaining return on sales through a combination of continued strong gross margin and a reduction in overheads, including the discretionary cost reductions of over GBP 20 million in the first quarter compared to our Q4 run rate and our ongoing overhead controls.
However, importantly, we also continue strategic investment for future growth. We were pleased to be able to maintain return on sales despite the impact of our decision to self fund a small percentage of our workforce furloughed by their companies circa GBP 2,000,000. Additionally, we provided enhanced financial support to a small number of employees who were affected by unavoidable redundancies at a cost of GBP 2 million. In addition to the local operating company payments. There was a strong contribution from acquisitions reflecting good margins in businesses that we acquired last year. While disposals were a very small positive in line with revenue. We expect to see a reduced contribution from acquisitions in the second half to circa 3%. There was a small impact from currency translation for the period and we expect this to reverse in the second half leading to a minimal impact for the year as a whole.
This completes the bridge to the headline profit decline of 5.3%. To put some color on the group performance, I'll now take you through more detail at the sector level. As stated earlier, there's been a wide variation in performance across the portfolio and it's also worth remembering when looking at a six-month period we often get large percentage movements on what are relatively immaterial absolute movements.
Starting with infrastructure safety where we saw revenue down 13%, this included a 3% contribution from the acquisitions of Ampac and FireMate in the prior financial year, organic constant currency revenue declined 16%. From a subsector perspective, people and vehicle flow delivered a resilient performance with an agile shift in product mix away from sliding door sensors which are predominantly associated with construction work and retail refurbishment, towards the retrofit of sensors to automate swing doors. Other touchless entry activation devices.
Fire security and elevator safety were the most impacted by the challenge of customers gaining physical access to installation sites during lockdowns and the subsequent furloughing of installers, particularly in the first quarter. The second quarter saw a significant improvement after lockdown restrictions eased and installers returned to work and customers restocked. The trends in the subsector ultimately come through in the revenue by destination to highlight the two largest geographical movements. The U.K. down 20% was particularly impacted by the site access and furlough challenges. The decline in Asia was driven by the timing of large projects and the implementation of our plans to exit low margin business within elevator safety. In addition to the underlying impact of COVID-19.
Our prior year acquisitions, both based in Australia, made an excellent contribution in Asia, taking reported revenue in the region to a decline of only 1%.
Really positive to see return on sales improve to 22.88%, mitigating in part the revenue decline with profit down 12% to GBP 46 million, including 15% organic constant currency decline and 4% growth from acquisitions. The improved return on sales was driven by strong overhead control and higher gross margins due to effective management of product and geographic mix. R&D expenditure of GBP 12 million was maintained at a good level and represented 6.1% of revenue in line with last year. So, looking ahead, the sector is expected to make further progress in the second half and deliver a resilient full year performance with continued strategic investment in longer term growth opportunities. The timing of acquisitions will mean they'll have less of a positive impact on growth rates in the second half.
Moving now to process safety where revenue declined by 10% including organic constant currency decline of 17%, we saw significant declines in demand for safety products in U.S. onshore oil and gas related businesses, particularly within our pressure management subsector. In addition, industrial access controls also saw significant declines largely due to a strong prior year comparative which included a large logistics contract. These declines were offset in part on a reported level by the positive contribution of 7% from the U.S.-based acquisition of Sensit Technologies in the prior year. Again, this ultimately plays out in the revenue by destination with the declines in pressure management and industrial access control impacting the USA in addition to the positive contribution of the Sensit acquisition.
Great to see revenue growth in Europe which was driven by safe storage and transfer fulfilling larger projects, some of which have been in the order book. Prior to the start of the financial year, return on sales decreased to 18.2% resulting in profit declining by 33% to GBP 17 million. This includes a 37% organic constant currency decline and a 4% positive contribution from the Sensit acquisition. This significant drop in profit was driven by three areas, a reduction in gross margin following the decline in high margin U.S. onshore oil and gas revenue, the phasing impact of the large logistics contract and one-off restructuring costs in the period of GBP 1.7 million which when all combined exceeded the benefits from the action taken on overhead costs.
During the period, the sector continued to invest in key areas for the future such as connected monitoring solutions with R&D investment of GBP 4.5 million representing 4.9% of revenue.
Looking ahead, despite the ongoing challenges, especially in the oil and gas market, the sector is expected to continue the gradual improvement in trading we saw as the first half progressed. The continued investment in connected technologies and the growth potential of our products outside of oil and gas market is expected to improve performance in the longer term. So moving now onto environmental and analysis which I'm pleased to report continues to perform strongly with revenue increasing by 1% to GBP 154 million. The sector performance reflected strong growth in the photonics subsector driven by the phasing of a large contract in the USA which is one example of our photonics company seeing increasing demand for their technology in applications related to building digital and data capabilities for the digital world.
We also saw growth in our gas flow meter business, Alicat rapidly adapting its technology to make new components to meet their urgent new requirements from ventilator companies in response to COVID-19 and this is just one of many great examples of the benefits of the individual company agility within our operating model. This growth was in part offset by the disruption caused by COVID-19 in our water companies in addition to the delayed demand from the U.K. water utility due to the start of a new five-year regulatory investment cycle. Again, these subsector trends can be seen in the revenue by destination result with the impressive U.S. growth a result of the Photonics and gas flow meter growth and the decline in the U.K. reflecting the water company's performance.
Return on sales saw an impressive improvement from 20.5% to 24.9% primarily due to proactive cost management including in response to COVID-19, a fantastic example of our companies individually contributing to the overall challenges faced by the group's R&D. Expenditure of GBP 8.3 million was maintained at a good level, although this represents a reduction to 5.54% of sales, largely a result of the phasing of the investment. As a result, profit increased by 22% to GBP 38 million.
Looking forward, the sector is expected to perform well for the year as a whole, although a very strong prior year comparative will mean that growth rates will be reduced compared to the levels in the first half, with return on sales in the second half expected to return to recent historic levels. While water market should continue to recover, we expect lower demand for ventilator components and the timing of photonics projects to moderate full year growth. Turning now to medical where revenue increased by 3% to GBP 172 million with an organic constant currency decline of 11% and a large 15% positive contribution from acquisitions with six of the prior year acquisitions being in the medical sector.
There's a very strong trend of significant increases in demand for products and services related to the diagnosis or treatment of COVID-19 with dramatic decreases in products and services related to elective health care procedures. Consequently, our patient assessment companies along with Perma pure and Maxtec in the acute therapeutics subsector delivered a very strong performance. At the other end of the spectrum we saw declines in our ophthalmology, sensors and analytics and fluid diagnostics businesses due to sharp declines in elective procedures and a lack of physical access to hospitals. These headline trends were consistent across the sector's major markets with the USA in particular benefiting from the acquisition contribution. At a reported level, return on sales declined to 22.1% despite the overhead actions taken in the sector.
This decline in return on sales was driven by a reduction in gross margin due to mix with the growth in the period coming from the lower gross margin subsectors and the declines within the higher gross margin subsectors. R&D spending at GBP 9.4 million increased to 5.5% of revenue, demonstrating the confidence of our medical businesses in the long term growth prospects in their market niches. This led to a profit decline of 3% to GBP 38 million .
Looking forward, prior year acquisitions are expected to have a smaller impact on reported revenue growth in the second half due to the timing of the acquisition. On an underlying basis, as the financial year has progressed we've seen a gradual improvement in demand for products and services related to elective healthcare procedures and although the demand for COVID-19 related products is expected to moderate, the sector is expected to deliver a resilient performance in the second half, so looking now at net debt and overall a very pleasing performance on cash during the period and one which gives us a robust balance sheet and provides significant liquidity moving forward. Highlighting some of the key headlines, cash conversion was exceptionally high at 111%, significantly ahead of our KPI of 85%.
This reflected an underlying strong performance on working capital, wider cash conservation measures, tax payment phasing and the cash impacts of a decline in revenue during the period. We saw an inflow from working capital reflecting a combination of good debt collections across the group alongside an overall reduction in debtors and creditors due to the decrease in revenue. Working capital also included the phasing benefits associated with the U.K. and U.S. government COVID-19 initiatives, namely the deferral of GBP 4 million VAT payment in the U.K. into the second half and the deferral of U.S. employer payroll taxes of $4 million which will be paid over the period to December 2022. To date we've recorded very little bad debt and we've continued to pay our suppliers on a timely basis.
That said, we continue to see an enhanced bad debt risk going into the second half of the year and have maintained our bad debt provision at a similar level to that at the year end and continue to hold the additional GBP 5 million provision at the group level. Looking forward, we do not expect H2 cash conversion to remain at the exceptional levels seen in H1, but full year cash conversion should remain above our KPI of 85%.
With no new M&A in the period. Acquisition cash outflows were limited to payments of contingent consideration relating to acquisitions made in prior years. We paid GBP 38 million in dividends, continuing our policy of delivering progressive and sustainable returns to shareholders. Finally, in relation to other cash movements, we've included more detail including 2021 financial year guidance in the appendix slides. We therefore ended the period with net debt of GBP 315 million.
This represents a net debt to EBITDA ratio of approximately 1x, well within our typical operating range of up to 2 times gearing. We therefore continue to have a robust financial position, strong cash generation and substantial available liquidity of circa GBP 500 million and over GBP 300 million of capacity within an operating range of up to 2x gearing.
So to conclude, looking at our performance against our financial KPIs, while we delivered a resilient performance in the period, our revenue and profit growth rates were behind our financial targets given the challenges faced due to the COVID-19 pandemic. That said, it's really positive to see we maintained high returns and continued investment for future growth with all four of the KPIs at the bottom half of the slide exceeded. We continue to believe that our existing financial capital KPI targets remain appropriate for the group in the medium to long term. And to sum up, a resilient performance in the period reflecting our flexible and agile business model and the benefits of our diverse portfolio focused on markets with long term growth drivers and the essential nature of many of our products and services. I'll now hand you back to Andrew for a strategy update.
Thank you, Mark. To finish, although there's been an inevitable focus on short-term issues, I think the last six months has also really given us a strong reinforcement of both our purpose and also of the value of our growth strategy, and I'm going to like to take a few moments just to give you three examples and they're three examples which are also very well aligned with three key elements of Halma's DNA.
So we're going to look at an organizational change that we're making which ensures that we continue to be structured for growth. We also then want to share with you how we're going to be accelerating our investment for the future, particularly focused on technology, and then finish off with talking a little bit around how we are living our purpose, both within the operating companies and across the group, and really looking at the social aspects within the whole ESG agenda.
So over the last couple of years, I've always known that at some point we'd eventually align our operating structure with our purpose and with our three key market focus areas of safety, environment and healthcare. And our experience during the pandemic has, particularly when we think about its impacts on the world, has meant that we brought those plans forward. We're bringing those plans forward so that from the 1st of April of 2021, we're both going to report and operate as three sectors. So as a combined safety sector, combining process safety and infrastructure safety, a separate environmental analysis sector, and then finally a medical sector.
We need new Sector Chief Executives. And these positions will be filled by internal promotions of two of our existing divisional CEOs. And I'm very pleased to see the work that we're doing to develop leadership talent, really paying dividends in situations like this. So our safety sector will be led by Wendy McMillan, replacing Adam Meyers, who as you know, is retiring in 2021. Our environmental analysis sector will be led by Constance Baroudel. And then finally Laura Stoltenberg will continue the excellent work she's doing as Sector Chief Executive of our medical sector. There's only one change in our portfolios across the three sectors, with our two gas detection businesses, Crowcon and Sensit, transferring across from process safety into the environmental analysis sector, which really reflects where we see their long term growth opportunities.
We'll give you a full analysis and the historical numbers under the new three-sector heading and how, with the translation from four sectors to three, as certainly before the year begins, most likely with our March trading update.
I think it's important to recognize that this change is important, that it really rebalances our resources according to where we see our growth opportunities. In particular recognizing that the acquisition growth opportunities in environmental analysis are very different to the opportunities you see in medical. By having a dedicated team in each of those two sectors, I believe it's going to enable us to sustain growth in the longer term.
We think about where we are investing for the future and particularly technology. I talked earlier in the year about our intention to invest more in our operational and strategic technology. Again, I think the past six months have only amplified that decision when we think about how technology is transforming our working lives, but also the ways in which businesses need to provide their services and products to their customers.
So we're accelerating those plans by investing in some carefully selected areas. We're going to be investing around GBP 10 million of CapEx over the next three years and then adding around GBP 2 million of OpEx to support that investment.
What do we mean by the investment? Well, there's two main areas, the operational and the strategic. So the operational technology initiatives are going to be about modernizing the ways of working across the group so that we can all do business in a more technology-enabled way. And the strategic initiatives will enable Halma companies to move to new digital business models in line with the Halma 4.0 growth strategy, by building a common approach to IoT, the Internet of Things. And it will also help them to more easily commercialize the ideas, including those ones that are created by working with Inken Braunschmidt's innovation and digital team. So turning first to those operational technology investments, there are three areas. The first one is we're going to build an enhanced core IT services.
So we're going to be upgrading our communication, collaboration, security technology to ensure we've got the right foundations to support how we work and how we want to grow in the future. And that's an important initiative because it underpins all the other investments we'll be making.
Then we've got the HQ Digital Transformation program. So that's delivering critical changes to our systems at the group level to improve our consolidation and operational efficiency across our core group functions such as finance, HR, sustainability, and legal functions. And then finally we've got the architecture Center of Expertise initiatives. And that's about creating and sharing best practice across the group companies, providing them with that guidance they need. And really it's important that we recognize it's about what's right for each business. So it's about helping each other, each business choose the right kind of business application or technology architecture across their key business operations. Whether it's ERP, CRM, e-commerce, finance, HR, business intelligence, they all need help and we can give them that expertise from the center.
Then strategically, there are two core initiatives and it's worth remembering that we're not starting from scratch here. We've been working with external IoT partners for a couple of years and we've also been researching what the leading benchmark companies do.
So the IoT Center of Excellence, Center of Expertise, in that we're going to actually build a platform solution to help Halma companies get to market sooner with their connected solutions. And then on the Software Center of Excellence, we're going to complement the IoT Center of Excellence by providing those companies with critical software development capabilities. Because many of our businesses, particularly those that perhaps make mechanically based products or electromechanically based products, do not have that software expertise and they struggle to gain access to it. So by having that at the center, we can give them the capabilities that they so badly need. And when you look at that in the round, you can see that not only we accelerating the pace of investment, but we're doing it in a way which is going to be fast and agile, consistent with our overall approach.
We're going to be addressing the actual needs of each business rather than doing what we just think they do need. And we're going to make sure it's properly resourced. So that's going to be a combination of internal resource, but also finding the right external partners. And all of this is just going to help us be more connected with each other, but most importantly, connected with our customers, both in terms of our product solutions and our operations.
So finally, I want to look at Living our purpose and what that means. I mean, when you think about the ESG agenda, clearly we are continuing to push ahead with our environmental initiatives and we'll no doubt talk about that in more detail later in the year. But for this presentation I want to focus on the social aspects of ESG in two different ways because that is very much aligned with one of our key elements of Halma's DNA, which is Living our purpose. And first, I'm delighted to share with you details of Halma's new global charitable campaign, Water for Life, which is a two year campaign with our partner WaterAid.
It follows the success of Gift of Sight. You remember that over the last couple of years we've had a project which ultimately ended up restoring the sight of hundreds of people in Ghana, as well as giving free eye tests to Halma employees using Halma technology.
What are we going to do? First of all, it is a program which is aligned with our purpose and with our sustainable development goals. In this case, good health and well-being and also clean water and sanitation. Our goal is to build and provide clean water for over 8,000 people in northern India. We're going to do that by supporting the WaterAid team on the ground. With funding we're going to raise at least GBP 200,000, but also by donating our water testing technologies from one of Halma companies, Palintest, which can help prevent contaminated water supply.
So our operating companies are not only going to help us with the fundraising, but also be encouraged to find ways to sustainably reduce their water usage both at work and also at home. And again, it's another great initiative, just like Gift of Sight, which brings our purpose to life. It engages employees, it helps communities in need and it uses Halma technology to solve real world problems. So, I'm really looking forward to giving you updates on this program, this campaign as we go through the next couple of years.
Let's move across then from a big campaign to what we're doing to live our purpose for everyone every day, which again, a key element of our purpose because it's not just about the large campaigns. I think one thing that struck me again over the last six months is that we've seen more examples of this in action across the group and I'd like to share a few examples of that with you.
Firstly, we see many examples of how our companies are helping external stakeholders through the pandemic. Many of our companies have been engaging with their local healthcare facilities and repurposing resources to make PPE to help in their response to the COVID pandemic. We've also seen companies, while focusing strongly on cash generation to make sure they continue to support their supply chain by ensuring they pay suppliers in a timely fashion.
We've been ensuring the health, well-being, and development of our employees. Our operating companies have been collaborating to make their workplaces safe, sharing best practice, expanding their manufacturing footprints to maintain safe social distancing. So in many cases, with colleagues in the offices working from home, the manufacturing teams have taken over some of that office space for manufacturing. Or if that's not been enough, they've actually been working with sister companies to share spare capacity.
At the group level, we set up online and telephone support helplines through our external partners to offer mental health and other legal and financial support for all employees, and we significantly expanded our online virtual training development program for our employees too.
Finally, we've maintained our investment in our Halma Future Leaders program this year, which brings the best young graduate talent from across the world into the group. I think it's particularly important at this time that we continue to invest in younger talent in our business.
And finally, we see some great examples of the progress we're making in building an inclusive culture. We recently have launched a new global parental leave policy which provides 14 weeks pay for all parents in all situations. That's covering all 7,000 plus employees across the world in over 20 countries. And in many cases, significantly exceeds the support that people can get within the country where they live.
We continue to build the inclusive culture through our Accelerate Inclusion Online initiative. It's a tool which both educates and gives practical tips and encouragement to all of our employees to ensure that we all work together to make Halma a place where everyone is included and able to contribute their best.
And finally, our progress in terms of increased diversity in our leadership team is reflected in the fact that we've exceeded all the Hampton- Alexander targets at all three levels of our leadership group. So that's at the PLC level, the Executive Board level and the Executive Board minus one level. If you look at that list, it's hugely encouraging to be able to share so many examples of what the S in ESG means in Halma. And I believe it's becoming an increasingly important component of our sustainable success in the future.
So let's finish and summarize what we've heard this morning. Halma's success and confidence in the future comes from tangible qualities, tangible characteristics that we have. We are resilient by design. It's in our purpose, our growth strategy, our chosen markets with long-term growth drivers and our relentless focus on developing an agile organization with a strong culture and developing talent as we grow.
This has enabled us to continue to deliver sustainable value creation for all our stakeholders. Not just financially for employees and shareholders, but also in practical support we're giving to our local communities and also in the solution we provide for our customers.
From a trading point of view, we've delivered a better than expected first half and our trading momentum has improved as the year has progressed, and we're improving the momentum in our investment as well. We continue to invest as we grow. Our operating companies are increasing their R&D investment, we're continuing to invest in our Future Leaders program. We talked about the investment in technology and we will increase our investment in M&A in the year ahead after a quiet first half period. As a result of all of the above, we're increasing our expectations for the full year towards the higher end of previous guidance and we now expect adjusted profits for the year to be around 5% below last year. We look forward to the year ahead and the longer term with confidence.
That's the end of today's presentation. Now I'd like to hand over to the analysts as we have time for questions.
Okay, everyone, there's two ways you can ask questions. You can either raise your hand using the tool at the bottom of your screen, and I'll invite you to ask your question verbally. In which case, if you can obviously introduce yourself as well as your company.
Or you can type the question up.
Marc and I will be able to see that and read it out.
Answer it for you.
Okay, so our first question is from Andre at Credit Suisse.
Good morning.
Thanks so much for taking my questions. I've got two kind of short term quick ones on infrastructure safety and then the broader one on infrastructure safety. Could you give us some idea of the Q2 run rate versus kind of the H1 that you printed? It looks like there was quite a marked difference there with.
The drivers that you cited, such as furloughing of installers in the U.K. and also in that business, the elevator safety disposal business that you mentioned. Could you give us idea of the size and kind of the background to that?
Perhaps if I take your second point first and then Mark can talk to the sequential performance of infrastructure. So what we're talking about on elevator safety is actually more of a decision around where we put our resources. So in Asia pac, for example, as you well know, the elevator safety market is very much shifting in terms of from new construction to the aftermarket.
Accordingly, the aftermarket and certainly new.
Construction over there is not strong for us in terms of the margins we can get from our elevator door safety products, and so it's more around refocusing our efforts on selling other technologies for elevator safety and moving away from those door sensors.
In those markets. So it's about a GBP 1 million impact. But it's within a business.
It wasn't a disposal, it was just.
Shifting resource to where we see the growth.
Right, got it.
Let me just pick up on the first point around sequential growth.
As you know, certainly the fire security and elevator businesses were impacted certainly in.
The UK heavily by the site access issues. We did see that lift in the second quarter and then, to your point, on a relative basis, so sequentially the group was 11% up in Q2 on Q1, and in infrastructure safety, that number was closer to 15 or 16% up on Q1, so there was definitely a faster sequential recovery in infrastructure safety after that down point in Q1.
Very clear, thank you.
The broader question I wanted to ask really is on the strategy update, Andrew, when you talk about investing in future and creating IoT and software centers of excellence and expertise. Could you talk about the balance that you expected to strike on internal development versus externally procured solutions and kind of what choices of partners maybe you've made already? Also somewhat connected to this, we've seen a whole array of software acquisitions by hardware companies across industrial sector.
Year to date and kind of really.
Accelerating a sort of two or three-year trend.
Do you envisage making software acquisitions over the next three years?
Again, I think, you know, for us software is.
The way in which we deliver hardware solutions to market. So what I mean by that is, for example, we made a small software acquisition last year, an Australian business called FireMate which provides maintenance software solutions for our fire customers. So if you like, it's a way in which we can extend our offering of fire detection into the maintenance arena. So for us, I think to the extent that we do buy software companies, it's going to be more just extending our core focus areas based on the sensor technologies and what have you we already have out there, rather than seeking to shift the whole focus of the group, if you like, from being a sensor business across to being purely a software business.
I think that in terms of the answer to the question around what does IoT look like and what does the software look like? I think the reality is we haven't yet fully scoped out what that's going to look like. There are advantages and disadvantages of having internal and external resources. I think my overall view is that we will have a core of internal expertise, but because of the variability, if you like, in terms of demand that we're going to get from our companies, we will need external partners too in order to deal with those peaks. So ideally it's going to be a combination. Now, just to put that into context, we already, as I mentioned in the presentation already, particularly on IoT, have been working with external partners who helped us develop some of those solutions.
We kind of know how it needs to be done, but it's likely to be a combination of the two. I don't think it's a healthy thing to have that completely in house. Equally, I think you do need some control over what you're doing and obviously joining the dots to make sure that, for example, as we're developing our IoT solutions, at some point in the future, we could combine IoT capabilities between different businesses within the group because we've got that common approach to how the platform was being created.
Thank you, very helpful.
Thanks Andrew. Can we now move over to Michael Tindall?
Can't hear you yet. Mike,
can you hear me now?
We can.
Michael Tyndall from HSBC. A couple for.
Me if I can.
One just on numbers. Do you have a sense of temporary savings the first half because operating leverage seemed to be quite low, so profit performance very good. I presume that you've got savings on travel, potentially on salaries. Any sense of the numbers there around temporary savings that we may see coming back? And then the second one just around water in the U.K. It feels like the trend is reversed. Where previously you saw kind of a pause in investment at the end of the five-year capital investment period and this time around you saw a continuation of investment but now after that new period has begun, it looks like we've actually seen a pause in investment. Any clues as to how long that will continue on in terms of water in the U.K.?
Yeah, let me just pick up on the overhead. So I think the important point here is as we announced we were able to move GBP 20 million or save GBP 20 million of overhead costs in the first quarter compared to our quarter four run rate. This was very much driven by cash conservation at that point. Whilst we're pleased with how it's protected profit, so it's a lot about temporary salary reductions, etc. We then at the end of the first quarter from a liquidity perspective, lifted those restrictions and therefore not only have some of those costs come back, but we've also continued to invest in the business. That said, to your point, there are some areas of the business where you'll continue to see savings around travel, around entertainment, not hugely material numbers going into the second half.
And it's also worth pointing out that we are experiencing a low level of increased costs in our operations in terms of creating COVID-safe environment. So the way that I would be thinking about it is overhead at a more normalized run rate following that short hit in the first quarter and then on the U.K. water. I think historically you're partly right there Mike, that the fifth year of the investment cycle has typically been a weaker year and we did see a much stronger fifth year this time around, which is encouraging also. However, in the past we've also seen a quieter first year while the water companies kind of get their house in order and get their budgets underway and start making those decisions in terms of timing of investment. So to some extent we were expecting a slightly quieter year this year.
However, there's no doubt that again during COVID that has caused some disruption in the procurement processes within some of the water utilities in the U.K.
The projects are still there, but they have been delayed somewhat. So you would expect in 2021 to see many of those starting to come back. So you know, it's one of those things where we look forward to next year with some confidence.
Thank you.
Okay, and then can I invite Andrew Wilson now to ask his questions, please?
Hi, hopefully you can hear me. Okay. It's Andrew, J.P. Morgan. I have a couple I'll start with. Actually just a quick follow up on what Mike said just on the discretionary costs and, sorry, deliberate. But just so I kind of understand, thinking more about the first half of next year, Marc, it feels as if you've got the kind of competing aspects of the discretionary cost savings, the additional costs associated with COVID and kind of making safe and then I think it's about four million or so of cost, sort of redundancy related costs. You know, how should I sort of think about those? I guess almost one-offs kind of in the first half of next year if I'm thinking of kind of the bridge effect.
Yeah, I think the best way to build up is from the revenue line in terms of recovery period. So that would be my start. When I'd start with revenue, what do I think is going to happen to the demand in my markets? And then from a cost perspective, as I say, largely those discretionary variable savings, I would assume that we won't be taking such extreme measures. But on the flip side to your point, we have had some one-off costs, if you like, in the first half of this year. So the way I would be looking at it is very much one of what's a normalized rate of overhead cost, assuming that the top line is back to normalized level.
Of course we do still have that lever available to us and all of our operating companies are managing their overheads appropriately in line with their revenue while also making the appropriate decisions to ensure medium- to long-term growth.
It's just worth saying at this point as well, we had a question from Andrew Douglas at Jefferies along the same line. So I think that's answered Andrew's question as well.
Yes, I just had a couple of others and second one, just in terms of the investment that you've outlined. It's obviously a fairly broad program, I guess. Interested if we're going to see that in terms of a higher level of investment going forward than whether that's in. I guess it would be in R&D to some degree or elsewhere. Is that something we need to be thinking about in terms of our models or is that sort of captured in the run rate and just the sort of reallocating of previous spend?
Yeah, I think more of the latter.
With the exception of the technology investment because obviously that's reflecting the direction of the travel of the world in general in terms of everything having to become more digital and data driven, but also us as a business recognizing the opportunities there. So we call that out as if you like an additional investment. But other than that, I think the R&D investment is a bottom up investment. It comes from the decisions that the operating companies make. Historically, in my experience that tends to shift more due to the M&A activity. In other words, buying a higher or lower R&D content businesses and also any disposals we make. So overall somewhere between 5% and 6% of revenue for R&D feels appropriate for our business for the next and foreseeable future.
As I say, the exception to that would be technology.
And maybe if I can ask just one broader question, I guess thinking about the portfolio and just anything that I guess you've seen during this period and sort of obviously the impact of COVID and how businesses have traded through, which made you think about the sort of composition of the portfolio. And I'm not trying to read into, you know, merging the safety businesses particularly, but obviously, you know, that's interesting in itself. But yeah, just a broader question in terms of the sort of.
I guess how you think about the portfolio on the other side of the last six months?
Yeah, I think as we said in.
The presentation. There's no doubt that the last six months have reinforced the value of our growth model, but also our purpose, in other words, our focus on safety, healthcare and the environment, and the organizational change that we announce, I think, is reflecting where the opportunities are. So rather than it being us who decides where we think what the group should look like, it's more being open to where those growth opportunities are. And one of the things that we've seen, running a combined medical, environmental sector for quite a period of time, is that the nature of the M&A activity, the way in which you grow businesses in each of those markets, is quite different.
And there's going to be, I think, over the longer term huge benefit to us of having a dedicated sector team, including dedicated M& A support driving growth in each of those two areas separately as opposed to being combined in the past. And you're right to some extent on the safety side. It's more a reflection of where we see the growth opportunities, that there is still strong growth in safety, but we all know there's less growth for us and the world in general in the oil and gas markets and it's only now, I think, less than 5% of group revenue. It's a much smaller activity. So it equally makes sense to combine those sectors together to drive strong growth in perhaps some other safety related segments.
Yeah, perfect. That makes a lot of sense. Thanks Andrew. Thanks Marc.
Thank you. Can I ask Mark at?
Yeah, Mark Davies Jones at Stifel to ask his question please?
You might still be on mute. Mark.
Sorry, I've now hit the magic button. Thank you. I just wanted to follow up on that last one actually. On the safety side, obviously I can see the benefits of separating the environmental and the medical businesses and that makes perfect sense. Particularly what you say about M& A. But the two sides of your safety business are quite distinct in terms of their end markets. You know, one fairly heavy industrial, much more commercial building related. So is there anything you risk losing in that? And to sort of push a little bit harder on Andrew's question, does it imply that parts of process safety are now effectively on the way out or non-core?
I think the first thing in terms of the market focus point again the way we are just remind you how we're structured. You know, we're structured safety as a sector is let's say approximately 20 independent businesses and the market focus and the market knowledge and the application focus and the investment decision in R&D is through those individual businesses. So to some extent how we structure it from an organic growth point of view is to a degree slightly irrelevant because the decisions are made by the local management teams based on the knowledge of their market. So I don't see a change like this having an impact on the organic growth of a sector.
I suppose then related to my previous.
And, really, when you look at the M&A landscape, you can see that there's a broader safety play in a whole range of markets.
Quite often there's a lot of overlap.
In the technologies that we use. I think there's going to be benefit in terms of looking at the interaction, I don't know between fire safety, door safety. We've even got some technologies over in the environmental and medical sectors that could be valid within that market. I don't see it diluting the M and A effort. I certainly don't see it diluting the organic effort.
As I said earlier on, it.
Does reflect the fact that something like process safety, which let's face it, whatever five, six years ago was perhaps 40%, 50% oil and gas, it's now a much smaller part of that business. So we need to find new niches to move into and there's likely to be a lot of overlap between our safety sectors to help us get there.
Thank you very much. That's very clear. One follow up, more general one, if I may. Obviously improving momentum through the first half and you've suggested that's continued so far in the second. But are you seeing any impact in terms of the further lockdowns we're seeing in Europe and the rise again in infection rates in the U.S.? Are you seeing any moderation in that recovering trend as you look through the numbers at the moment?
I think too early to tell what that impact is.
We certainly to date haven't seen an impact in terms of our ability to continue to operate. We obviously have more confidence this time around in the sense that our businesses already have got six, eight months of experience of operating under these circumstances. So far we haven't seen any impact in terms of on our operations or indeed in terms of the trading performance. That's not to say we're complacent about it. That challenge may come, but you know, we've got to gain confidence from the fact that 50 out of our 53 operations were able to continue operating right the way through the last lockdown and that 2/3 of our businesses have some sort of mandate last time around to keep on operating.
So I think we just got to take some confidence from that. And then finally just the agility and the adaptability of the organization that if there are some challenges there. For example, in the last six months we've seen Halma companies sharing spare capacity with each other. That may be a solution to a problem that some of them may have in these next six months. So I think we're reasonably confident. I think the final point on that sort of thinking it through is I think equally our customers are more able to continue working during some of these more challenging lockdown periods in a way that didn't happen certainly during April, June time. So there is some grounds, I think, for believing that even if we do have another lockdown, we're pretty well placed to navigate our way through it again.
Perfect. Thanks very much.
Next we'll invite Robert Davies to ask his question, please. Morgan Stanley. Morning.
Can you hear me okay?
We can hear you loud and clear. Great.
Yeah, I had three questions really somewhat connected. The first one was just really around M and A. I noticed you made a comment saying that the activity had sort of picked up in the second quarter. Just be interested to see in terms of sort of getting transactions over the line, you know, given the restrictions around travel, site access, you know, just even kind of visiting some of those sites to assess the businesses, meet with the people and kind of complete transactions. Just wondered how much of an impact that's having and how much you can kind of, you know, keep the ball rolling, do things remote, over zoom, et cetera. That was the first one.
The second one was just around I guess this, you know, we get a lot of questions around the sustainability of the M and A model and just I guess the way that that process is being managed from a sort of top down driven by yourself and Mark versus sort of coming from the businesses or the, or the sector heads or how that's going to be sort of, you know, kind of operated right now, particularly in light of the sort of divisional changes. And then the third one was just around the combination of the safety. I'd just be interested from a sort of cost standpoint, how does that affect any sort of shared or will there be any shared sort of R& D or service kind of engineer sort of savings that you can make from combining those operations.
Just wonder from a sort of on the ground perspective what's actually going to change there?
Thank you.
Thanks. So Mark, if you do the last point, I'll do the first two just on M and A. I think one of the beauties of our model is that we've got, we're a global group and our sector teams, our M and A teams are global in terms of where they are located. And so one of the really great things we've seen over in recent months with M and A is the ability first of all for that global sector team to be able to step up and physically visit and have conversations with business owners which maybe would not be possible if you were for example a U.S. based executive trying to buy a company in Europe. And also we've seen that across sectors. So we've had our divisional CEOs, our divisional CEOs to remind you are the portfolio managers operating within each sector.
They have been very actively working with each other and visiting each other's prospects if you like, where it's been necessary, where it's been appropriate to sell the Halma story also just to physically see what it is that we're considering acquiring and whether there is that good match between the business and what we're looking for. So I think it's just been a good reflection of again the ability of us to operate differently depending on what the circumstances are. I think looking forward, M&A is going to be continues to be driven, therefore in much the same way that it's been driven for the last five, 10, 15 years.
So the people who are finding the opportunities, creating the ideas, and the ideas themselves are coming from the operating companies, but also the very small M and A teams we have in each of our sectors who are both doing research, desk research, as well as obviously going out and visiting opportunities within their region. And I just see that continuing to evolve. And that's a model that can work very well for us. That's not to say that we still don't have the same discipline around what we're looking for, nor the same discipline around who's ultimately making the decision about what we buy and what we sell.
So although we've got all of this huge amount of activity going on down at the divisional level and the sector level, we still got exactly the same process in place in terms of ideas and opportunities coming up to the executive board and ultimately to Marc and me and the PLC board to make those decisions about what we buy and what we sell. So no change, just more flexibility about how we use our resources to assess, visit and who knows, negotiate some of the deals that we need to get across the line over for the next year or so.
Just picking up, I think the question is just relating to that merger savings around R&D investment. I think the first thing and important thing to say is that, as we talked about combining the sectors. What we're actually talking about here is combining the senior management team, so the Sector Chief Executive, Sector CFO. And actually they're set up that way today. The way that the operating companies sit within those sectors are still separate individual operating companies with their own operating board making their decisions that are appropriate for their markets, for their customers and their products, around R&D and around cost. Clearly, if there are opportunities, they will work together and they collaborate. Occasionally we have joint R&D products where it's appropriate.
And of course, if you look at the group over the last five, 10 years, on average, we're buying three to four businesses a year. We're disposing of a business a year and we're merging two together on average per year. But that will only be where it's approved. That certainly isn't a part of what we are talking about on this consolidation and structure. So just so we absolutely nail this point around the reorganization. We have been, although we have been reporting as four sectors over the last four, five, six years, in the last two or three years we've been operating as two sectors. In other words, the two safety sectors have been operating within the group as a single sector, they've had one sector board and the same goes for medical and environmental.
So actually what we're doing with this change is just aligning the way we're reporting externally and the way we're operating internally. The net effect is we're actually adding a third sector board, albeit we're going to share out a lot of the resource we currently have in our two sector boards across the three sectors. So it's not a 50% increase in our sector costs. There will be some increase, but it's just getting that real alignment between what happens outside and how we report outside our purpose and obviously the internal structure.
Great, thank you.
Thank you. Just read some questions now from Jonathan Hearn. Jonathan's got three questions. The first one and Jonathan from Barclays. First one is can you quantify the benefit you saw in the first half in environmental analysis from ventilator demand and at medical from COVID in general? The second question is on M and A, obviously China was the geography seeing the strongest performance in the first half. Has that increased your focus on undertaking M and A there? And the third one was Internet of Things. I know this may be difficult, but can you quantify the current percentage of sales for Halma that are delivered from what you class as IoT and based on your ongoing actions, what percentage do you think you can grow to?
Mark, do you want to touch on the first one about the proportion or the benefit we got in the first half in ENA from ventilator demand and the medical from COVID?
Yeah, I think the first thing to say is it's very difficult to be specific and quantify the exact amount. That said, clearly it's a question that we've been asking ourselves to understand. Having worked through, I would estimate at the group level in the first half in total from upside benefits, if you like, from ventilator demand and COVID-related demand, no more than GBP 10 or 15 million worth of incremental revenue, GBP 2-3 million of that being in ENA, the balance being in medical.
But clearly that's been more than offset by the decline seen elsewhere that you can see in the overall medical organic constant currency decline of 11% in the first half.
And then on M&A in China. You're right, China saw strongest performance in the first half. The reality is our M&A strategy, however, is not determined by growth rates in a particular half year. It's our long term view of where we see safety, health and environmental markets growing in a region over the longer term. I think we've got to say that Asia Pacific and China within that still remains a good long term opportunity for us in terms of growth in those regions. So it hasn't changed our approach to M and A there.
We have over the last two or three years recruited senior people in region to help both with managing our existing businesses there and also support M and A in the region. And that's just going to continue. And I'm sure at some point of time in the future we'll be acquiring more businesses in that region. And then finally on the Internet of Things, in terms of the proportion of current sales, it's not something we measure every month. However, I do know the last time we looked at this was probably about 12 months ago. It was round about 10%-15% of our revenue was related to Internet of Things. That is obviously a percentage that will increase over time as more and more of our hardware begins, becomes connected and obviously to support that growth with those strategic technology investments.
Okay, and then we've got a question from Richard Page. Richard, over to you.
Can't hear you, Richard, so maybe you're on mute or maybe there's a problem with the connection.
I'll pick up one. So maybe Richard, we can pick you up at a later time. So please drop us an email or give us a call and we can answer that question.
Okay, well, it looks like we don't have any more questions. Thank you for joining us this morning and look forward to catching up with you again sometime over the next few months. Thanks very much.