REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 2
06/09/2014 02:14
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Group's total assets including all historic goodwill, also increased to 16.1% (2013 restated: 15.6%). Currency translation had minimal effect Halma reports its results in Sterling. The other key trading currencies are the US Dollar and Euro. Approximately 40% of Group revenue is denominated in US Dollars
and 15% in Euros. The Group has both translational and transactional currency exposure. Translational exposures arise on the consolidation of overseas company results into Sterling. Transactional exposures arise where the currency of sale or purchase transactions differs from the functional currency in which each company prepares its local accounts.
Weighted averagerates used inIncome Statement Year end exchangerates used to translateBalance Sheet
2014 2013 2014 2013
US Dollar 1.59 1.58 1.66 1.52
Euro 1.19 1.23 1.21 1.19
We take a neutral view of the future movements of currencies. After matching currency of revenue with currency costs wherever practical, forward exchange contracts are used to hedge a proportion (up to 75%) of the remaining forecast net transaction flows where there is a reasonable certainty of an exposure. We hedge up to 12 months and in certain specific circumstances 24 months, forward. At 29 March 2014 over 50% of our next 12 months' currency trading transactions were hedged. There is a good degree of
natural hedging within the Group in US Dollars but we typically buy fewer products in Euros than we sell and so have a net exposure of approximately E35m at any time.Favourable currency translation gains in the first half of 2014 were progressively eroded by the strengthening of Sterling relative to the US Dollar and Euro in particular. This strengthening has produced a tougher trading environment for our UK exporting businesses. Currency translation had a minimal effect on Group results for the year with
the net currency translation impact of 0.2% favourable on revenue and 0.4% favourable on profit. By the financial year end Sterling was 9% stronger relative to the US Dollar than at the start of the year. If currencies continue at current levels relative to Sterling (assuming a constant mix of currency results) then we might expect approximately 3% adverse impact on revenue and profit due to currency translation in 2014/15 compared with 2013/14. The adverse impact in these circumstances would be greater in
the first half of 2014/15 than in the second half. Based on the current mix of currency denominated revenue and profit, a 1% movement in the US Dollar relative to Sterling changes revenue by £2.7m and profit by £0.5m. Similarly, a 1% movement in the Euro changes revenue by £0.9m and profit by £0.2m.
Consistent financing costNet financing cost in the Income Statement at £4.7m was in line with the prior year (2013 restated: £4.9m). The average cost of bank financing remained in line with 2013 with higher levels of average debt for the year, following acquisitions made in the second half of 2012/13, but a slightly lower cost of funding (see the 'Average debt and interest rates' table below for more information). Interest cover (EBITDA as a multiple of net interest expense as defined by the revolving
credit facility) was 53 times (2013: 54 times) well in excess of the 4 times minimum required in our banking covenants. The net pension financing charge is included within the net financing cost, and this year increased to £1.9m (2013 restated: £1.5m). The restatement of the prior year results from a change in the accounting for Defined Benefit pension costs under IAS 19 (Revised). The main change is the new requirement to use the pension plans' discount rate to calculate the return on pension related
assets, rather than using a rate of return appropriate to the various asset classes. The total restatement for IAS 19 in the 2013 Income Statement is a reduction in profit of £2.1m being the £1.0m revision to net pension finance cost plus the charge against profit of pension administration costs not previously included. 2014 and future years' profits are expected to be impacted by similar amounts so that overall Group reported growth rates are largely unaffected.
Stable Group tax rateThe Group has major operating subsidiaries in 10 countries so the Group's effective tax rate is a blend of these different national rates applied to locally generated profits. Tax arrangements are driven by commercial transactions. We manage these tax arrangements in a responsible manner, keeping good relationships with tax authorities based on legal compliance, transparency and cooperation. Intercompany trading is set on a commercial arm's length basis. The effective tax rate on
adjusted1 profit reduced to 23.3% (2013: 24.2%). Approximately one-third of Group profit is generated and taxed in the UK and the UK Corporation tax rate fell from 24% to 23% this year, with it forecast to drop to 20% in 2016. Halma also benefited from the new UK 'Patent Box' rules, resulting in lower tax on profits generated from the use of patents. We anticipate that the effective tax rate in 2015 will be similar to that in 2014.
Increasing earnings per share and dividendsFor many years we have delivered value to shareholders through growth in earnings per share and dividend increases. Adjusted1 earnings per share increased by 10.4% to 28.47p, above the rate of increase in adjusted1 profit, due to the lower effective tax rate compared with the prior year. Statutory earnings per share increased by 13.5% due primarily to the factors noted earlier which are included in the calculation of statutory profit. An increase in the final
dividend of 7.1% to 6.82p per share (2013: 6.37p) is recommended which, together with the 7.1% increase in the interim dividend, gives a total dividend of 11.17p per share (2013: 10.43p). Halma has a very long record of growing its dividend and with this latest rise will have increased the dividend by 5% or more for every one of the last 35 years. We have paid out more than £300m to shareholders in the last decade. The final dividend for 2013/14 is subject to approval by shareholders at the AGM on 24 July
2014 and will be paid on 20 August 2014 to shareholders on the register at 18 July 2014. We have maintained a progressive dividend policy balancing dividend increases with organic growth rates achieved, taking into account potential acquisition spend and the maintenance of moderate debt levels. Dividend cover (the ratio of adjusted profit after tax to dividends paid and proposed) is slightly higher than last year at 2.55 times (2013 restated: 2.47 times). Our policy is to maintain dividend cover above two
times and we will continue to determine dividend payout each year based on the factors noted above. Good cash generationStrong cash generation is an important feature of the Halma model. Our cash performance in 2013/14 was good. Adjusted operating cash flow was £129.0m (2013: £113.7m) and represents 89% (2013 restated: 85%) of adjusted operating profit, ahead of our KPI target of 85% cash conversion.
Operating cash flow summary 2014£m 2013£m
Operating profit (restated) 143.6 117.3
Net acquisition costs and contingent consideration fair value adjustments (12.5) 2.2
Defined Benefit pension plan closure costs/curtailment gain (4.0) -
Amortisation of acquisition-related acquired intangibles 17.5 14.2
Adjusted operating profit 144.6 133.7
Depreciation and other amortisation 18.8 17.7
Working capital movements (10.9) (10.9)
Capital expenditure net of disposal proceeds (15.6) (14.6)
Additional payments to pension plans (restated) (5.9) (7.2)
Other adjustments (2.0) (5.0)
Adjusted operating cash flow 129.0 113.7
Cash conversion % 89% 85%
Non-operating cash flow and reconciliation to net debt 2014£m 2013£m
Adjusted operating cash flow 129.0 113.7
Tax paid (28.3) (25.5)
Acquisition of businesses and shares of associates including cash/debt acquired (16.9) (153.7)
Net finance costs and arrangement fees (2.5) (2.3)
Dividends paid (40.5) (37.8)
Issue of shares/treasury shares purchased (7.3) (5.1)
Disposal of businesses 1.9 19.6
Effects of foreign exchange 0.4 (0.5)
Movement in net debt 35.8 (91.6)
Opening net debt (110.3) (18.7)
Closing net debt (74.5) (110.3)
Net debt to EBITDA 2014 2013
£m £m
Operating profit (restated) 143.6 117.3
Depreciation and amortisation 36.3 31.9
EBITDA 179.9 149.2
Net debt to EBITDA (restated) 0.41 0.74
A summary of the year's cash flow is shown in the table above. The largest outflows in the year were in relation to dividends and taxation paid. Working capital movements, comprising changes in inventory, receivables and creditors, totalled £10.9m (2013: £10.9m). This year's increase reflects not just the growth in our business but also our wider geographic footprint and higher sales in the final quarter. Working capital management is the responsibility of each individual subsidiary board and therefore will
continue to receive close attention.Capital expenditure on property, plant and computer software this year was 12% above last year at £17.4m (2013: £15.5m), maintaining investment in our operating capability. This year's spend represents 117% of depreciation, falling within the 100% to 125% range we expect. Dividends totalling £40.5m (2013: £37.8m) were paid to shareholders in the year. Taxation paid increased to £28.3m (2013: £25.5m).
Strong financial position maintainedHalma operations are cash generative and the Group has substantial bank facilities. We have access to competitively priced finance at short notice and spread our risks to provide good liquidity for the Group. Group treasury policy is conservative and no speculative transactions are undertaken. We use debt to accelerate the Group's development, reviewing our funding needs and the structure of borrowing facilities regularly to ensure we have ample headroom. In November 2013
we increased and extended our syndicated revolving credit facility with the existing core group of banks. The facility was increased to £360m (from £260m) and the term extended to November 2018 (from October 2016). This increase in facilities provides Halma with the financial resources to operate within its existing business model for the medium term, continuing investment in our business and with capacity for further value-adding acquisitions. The Group continues to operate well within its banking
covenants with significant headroom under each financial ratio. At the year end net debt was £74.5m (2013: £110.3m), a combination of £109.0m of debt and £34.5m of cash held around the world to finance local operations. The ratio of net debt to EBITDA was 0.41 times (2013 restated: 0.74 times), well below the level of 1.25 times within which we feel comfortable operating. Net debt represents 3% (2013: 6%) of the Group's year end market capitalisation.
Average debt and interest rates 2014 2013
Average gross debt (£m) 150.9 133.7
Weighted average interest rate on gross debt 1.26% 1.34%
Average cash balances (£m) 47.1 45.2
Weighted average interest rate on cash 0.54% 0.43%
Average net debt (£m) 103.8 88.5
Weighted average interest rate on net debt 1.59% 1.80%
Acquisition and disposal activityAcquisitions and disposals are an important part of our operating model and strategy, ensuring the portfolio of companies in the Group can sustain growth and high returns. We buy businesses already successful in, or adjacent to, the niches in which we operate. Following a record acquisition spend in 2012/13 (£137m spent on acquiring six businesses (excluding net cash acquired of £5m)) we made only one acquisition in 2013/14. In April 2013 we acquired Talentum, a small
technology bolt-on for one of our Infrastructure Safety businesses, for £2.6m excluding cash acquired. In addition £14m was paid out in deferred contingent consideration for acquisitions made in prior years.Despite continued growth from MicroSurgical Technologies (MST), we have revised our estimate of deferred contingent consideration payable on the acquisition down from £16m to £4m due to slower than expected new product adoption. The change in deferred contingent consideration is accounted for as a credit
in the Income Statement but is not included in adjusted profit. Following the year end we made the following acquisitions:- Plasticspritzerei AG, a supplier to one of our businesses in the Medical sector, was acquired on 2 May 2014 for a net cash consideration of CHF4.8m (£3.2m). - Advanced Electronics Limited, a manufacturer of networked fire detection and control systems which will form part of our Infrastructure Safety sector, on 14 May 2014 for an initial cash consideration of £14.1m.
Contingent consideration of up to £10.1m is payable based on earnings growth for the period to March 2015. - Rohrback Cosasco Systems Inc. (RCS), a manufacturer of pipeline corrosion monitoring products and systems, acquired on 30 May 2014 for $108m (£64.7m) (excluding cash acquired) and which will be included in the Process Safety sector. Given the short period between these acquisitions and completion of these accounts we have included more limited disclosure (see Note 12 to the Preliminary
Statement) and full disclosure will be included in the 2014/15 Half Year Report. Also in May 2014 we sold Monitor Elevator Products Inc., a business within the Infrastructure Safety sector, for a consideration of $6m (£3.6m). We expect a gain of approximately £1m before tax to result from the transaction. The business acquired in 2013/14 and those acquired in 2014/15 to date, net of the disposal made, are expected to add a net amount of £29m to revenue and £6.4m (after financing costs) to profit in 2014/15,
based on their run rate at the time of acquisition/disposal.
Pension plans cease future accrualThe Defined Benefit (DB) sections of the Group's UK pension plans were closed to new entrants in 2003. Following consultation during the year, we announced in March 2014 that the DB pension plans will cease future accrual as at 1 December 2014. Members will earn future benefits within the Group's Defined Contribution (DC) pension plan under agreed transitional arrangements. This change reduces risk for the future and we will work with the plans' trustees to achieve a
balanced asset investment strategy and to ensure Halma meets all pension obligations. On an IAS 19 basis the deficit on the UK DB plans at March 2014 was £36.5m (2013: £47.2m) before the related deferred tax asset. Plan assets increased to £187.5m (2013: £176.3m) due to some further recovery in equity values and cash contributions by Halma and the plan members. In total, 54% of plan assets are invested in return seeking assets: 32% in equities and 22% in diversified growth funds providing a higher expected
level of return over the longer term. Plan liabilities were at a very similar level to the prior year at £224.0m (2013: £223.4m) having benefited from a curtailment gain of £4.2m (before costs) arising from the cessation of future DB accrual noted above. We continue to make extra cash contributions to the UK pension plans as agreed with the trustees and expect this to be at the rate of £7m per year for the immediate future with the objective of eliminating the pension deficit over the next five years.
R&D InvestmentR&D expenditure increased by 5% to £32.1m (2013 excluding disposal: £30.6m). In 2012/13 we increased R&D spend by 13% on a 7% revenue increase including some larger projects, and this year there were fewer such projects. Investment in new products remains an important strategic priority and in the medium term we expect R&D to increase broadly in line with revenue growth. We are required under IFRS to capitalise certain development expenditure and amortise it over an appropriate period, for us
three years. R&D by its nature carries risk and all R&D projects, particularly those requiring capitalisation, are subject to close scrutiny and a rigorous approval and review process. In 2013/14 we capitalised £5.2m (2013: £5.4m) and amortised £3.9m (2013: £3.5m). This results in an asset carried on the Consolidated Balance Sheet, after £0.3m of foreign exchange movements, of £13.0m (2013: £12.0m).
Risk management and the year aheadHalma has a well established business and financial model delivering success consistently over the long term. The model is based on considerable autonomy and accountability at operating company level, within a clear strategic framework with strong policies and procedures. Risk is managed closely and is spread across the well-resourced companies, each of which manages risk to its individual level of materiality. There are extensive review processes in place including peer
financial review and Internal Audit. The key Group risks have been referenced in the Strategic Review and Sector Reviews. We have an ethical approach to business and this is reflected in our Code of Conduct which is adopted internationally. This year we have increased our focus on cyber security with enhanced IT monitoring systems in place and security awareness programmes being rolled out across the Group. The Board considers all of the above factors in its review of 'Going Concern' as described in this
Preliminary Statement and has been able to conclude its review satisfactorily. The Annual Report and Accounts is prepared in line with the latest requirements for integrated reporting and the Board has taken care to ensure that it is 'fair, balanced and understandable'. The Audit Committee took a key role in assessing compliance with reporting requirements supported by robust management processes. The key performance indicators (KPIs) we choose reflect the importance of investment, growth and returns. These
externally reported KPIs are an important part of our day to day management of the business. In the year ahead we will focus on successful integration of the recent acquisitions, search for further opportunities and continue to emphasise strong cash generation to fund investment and increasing dividends. In this way we aim to continue to deliver significant long-term value to shareholders. Kevin Thompson, Finance Director 1 In addition to those figures reported under IFRS Halma uses adjusted figures as
key performance indicators. The Directors believe the adjusted figures give a more representative view of underlying performance. Adjusted profit figures exclude the amortisation of acquired intangible assets; acquisition items; the effects of closure to future benefit accrual of the Defined Benefit pension plans (net of associated costs) and profit or loss on disposal of operations. All of these are included in the statutory figures. More details are given in Note 11. 2 See Financial Highlights. 3
In this financial review, and where appropriate, the 2013 comparative figures have been restated to reflect the adoption of IAS 19 (Revised) in relation to the accounting for the Group's Defined Benefit pension plans. This has no impact on revenue but leads to restatement of profit figures. Results prior to 2012/13 have not been restated.
Process Safety Sector Review
Products which protect assets and people at work. Specialised interlocks which safely control critical processes. Instruments which detect flammable and hazardous gases. Explosion protection and corrosion monitoring products. Neil Quinn, Sector Chief Executive, Process SafetyAnother year of continued strong organic growth in our Process Safety businesses resulted from further extensions to our global reach through establishing additional regional sales operations and new routes to market. Momentum on new
product introductions was maintained and investment in our manufacturing operations ensured that our customers received the levels of product quality and on-time delivery to meet their needs. The acquisition of Rohrback Cosasco Systems in May 2014 expands our portfolio of critical safety products. Market trendsLong-term growth in Process Safety markets is supported by two key drivers:- rising expectations of workplace safety and more stringent safety and environmental legislation- rising demand
for life-critical resources, such as energyThe continuous introduction of new safety regulations and tougher enforcement of occupational safety and environmental protection laws drives growth in both developed and developing markets.The global process safety market is forecast to grow by over 11% annually for the next two years. A key factor is rising demand for safety systems in the oil and gas industry.Population growth and rising global incomes drive increasing demand for energy. By 2030 world population
is expected to reach 8.3 billion. Compared to today, this will add an extra 1.3 billion energy consumers. Global income levels in 2030 are forecast to be about double what they were in 2011. World primary energy consumption is forecast to grow 1.6% annually between 2011 and 2030. Because onshore oil reserves are maturing, the oil and gas industry's focus is shifting to deepwater offshore platforms. Sustained rising energy demand coupled with high oil prices is expected to increase offshore oil and gas
investment at over 10% per year until 2018. Throughout the world, governments continue to impose stricter safety regulations to protect industrial workers and our environment. Following the Deepwater Horizon incident in the Gulf of Mexico in 2010, the European Commission concluded that existing oil and gas industry safety practices did not provide adequate risk protection. In response, in 2013 a new EU Directive came into force which will implement higher offshore safety standards in Europe. Continuing
investment in new oil and gas exploration techniques, and delivery of conventional, unconventional and renewable energy resources, has supported our sales growth. Sustained investment in hydraulic fracturing (fracking) in the fast-growing shale oil and gas market, deep sea drilling and LNG production and storage ensures that we are operating in vibrant markets.The global market for gas detection equipment is forecast to grow at over 4% annually until 2018. This is driven by increasing regulations to protect
workers from harmful gases. The International Organization for Standardization (ISO) is working on a new global standard for occupational health and safety which may prompt new safety legislation in many countries. Geographic trendsWorldwide growth in demand for energy, chemicals, food and metals continues to increase with the USA, Middle East and Asia Pacific very buoyant. European process safety markets are returning to growth and emerging markets are performing well. Economic conditions have reduced
demand in India and Australia but we expect these areas to recover slowly. The main existing areas of offshore activity, such as the 'golden triangle' including Brazil, US Gulf of Mexico, and West Africa, are the key markets where offshore investment is focused. Asia Pacific is the key emerging market in terms of energy demand and offshore drilling activities.Awareness of process safety in China has increased following a pipeline explosion last year that cost 62 lives. A large number of government officials
were dismissed and a nationwide survey of 3,000 petrochemical sites revealed 20,000 disaster risk points. StrategyIn the Process Safety sector, our strategy for growth focuses on:- geographic market diversification via shared hubs - investment in new product development to meet local market needs- acquisitions in adjacent marketsOur commitment to new product development R&D investment has seen sales of products designed in the last three years make up over 30% of total sales in this
sector. New technology and shorter product lifecycles, together with industry-leading quality and customer service, ensures that we maintain competitive advantage with sales growth ahead of market growth. Our safety product companies now have 21 manufacturing sites across four continents. In addition to 22 existing regional sales and service centres, during 2013/14 we opened three new regional hubs in Brazil, the Middle East and Poland. R&D resources are increasingly localised to ensure that products meet
local market needs.To optimise customer service we continue to develop internal collaboration and strategic alliances between our businesses. More long-term customer partnerships to maintain market leadership in our process safety market niches remains a key strategic goal.
Performance Process Safety grew revenue by 1% to £126.7m (2013: £125.7m) and profit1 by 8% to £34.9m (2013: £32.3m). Excluding the contribution of Tritech, which was sold in August 2012, revenue increased by 5% and profit by 11%. These were also the sector's organic growth rates.Return on Sales improved from 25.7% to 27.5% due to continued strong product margins and good operational management. New product introductions contributed to both this margin expansion and to revenue growth through diversification
into new application niches. Excluding the prior year disposal, there was growth in all major geographic regions except the UK, where revenue declined by 1%. There was double-digit growth from the USA (up 13%) and Asia Pacific (up 12%). Mainland Europe revenue increased by 1%. The sector hub set up in Brazil in 2013 is now firmly established and promises to boost Process Safety revenue from this territory in the future. OutlookGrowth prospects in the Process Safety sector remain positive supported by rising
investment forecasts in our targeted oil, gas and energy markets. We plan to extend further into the transport and logistics market where the latest forecasts also suggest a positive growth outlook.In May 2014 we acquired Rohrback Cosasco Systems Inc. (RCS) for a cash consideration of $108m (see Note 12 to the Preliminary Statement). As a world leader in the design, manufacture and sale of pipeline corrosion monitoring products and systems, RCS expands our portfolio of critical safety products which are
sold into the energy and utility markets to protect life and operational assets.We continue to search for further acquisitions in the Process Safety sector, particularly in complementary markets, to expand our technology portfolio and access new sales channels. 1 See Note 2 to the Preliminary Statement.
Infrastructure Safety Sector Review Products which detect hazards to protect assets and people in public spaces and commercial buildings. Fire and smoke detectors, fire detection systems, security sensors and audible/visual warning devices. Sensors used on automatic doors and elevators in buildings and transportation. Nigel Trodd, Sector Chief Executive, Infrastructure SafetyAll major businesses within the sector contributed to a strong year. Increasing investment in new products is driving growth above
market rates in both developed and developing regions. The acquisition of Talentum in April 2013 and Advanced Electronics in May 2014 demonstrates our strategy to acquire synergistic businesses which broaden our product range across our chosen markets. Market trendsIncreasing health and safety regulation remains the primary driver in our Infrastructure Safety sector. The global trend of increasing urbanisation also stimulates demand for our building safety and security products. In China, for example, the
government has recently announced plans to move 100 million people from rural areas to cities by 2020. Global construction output is forecast to grow by 70% between 2012 and 2025. More than half of that growth will probably take place in just three countries: China, India and the United States. Tougher fire regulations continue to be introduced in Asia and Europe; we now maintain over 3,000 international fire product approvals to give us access to world markets. New European fire safety legislation,
introduced last year, sets new standards for visual fire alarm devices that alert people who cannot hear warning sounders. We launched new visual fire warning products in 2013 compliant with the new regulations to protect people with hearing disabilities.The global market for our elevator safety and communications equipment is divided into two segments of almost equal size: new building installations, mainly in developing markets, and elevator modernisation and service in Europe and the USA. Ageing
populations, urbanisation, rising safety awareness and tighter building safety regulations continue to underpin global growth in the new-build elevator market. Elevator equipment demand is projected to grow worldwide by almost 6% annually until 2017, despite slowing demand in China. China still accounts for over half of the world's new elevator installations and high single-digit growth is set to continue, driven by China's extensive social housing programme. Elevator equipment sales are growing steadily in
Asia and Latin America, the US market is recovering well and Europe is starting to recover. Door sensor revenue and profits grew due to innovative new products and new European safety regulations that protect pedestrians from automatic door accidents. Door sensor demand grew in North and South America, and Asia, during 2013/14 but was weaker in Europe. Sales of sensors for use on train doors grew strongly in both China and Europe. New laser technology, developed for people detection, has opened new markets
in security and industrial automation.The electronic access control systems market, the target for our intruder alarm business, is forecast to grow by 7% per year until 2017. Growth drivers are rising security concerns in many countries plus increasing regulation. New wireless intruder detection sensors, plus greater UK market share, delivered significant revenue and profit growth this year. Sales of intruder detectors and emergency signalling devices grew due to new products that enable customers to comply
with the latest UK and European burglar alarm regulations. A new security product undergoing EU approvals will open additional markets in 2014/15.
Geographic trendsThe home automation and controls market is growing quickly, particularly in the USA where sales of our wireless carbon monoxide home safety detectors grew strongly in 2013/14.We relocated our existing elevator safety product manufacture within China to a new factory with more sophisticated manufacturing capability. The China elevator sales team was strengthened and a new local R&D unit will develop localised products to meet the needs of Chinese customers. The resulting elevator sales
performance in China was very strong. Last year China passed the new Special Equipment Safety Law to reduce accidents, including deaths and injuries caused by elevators. This stricter safety law is expected to create favourable growth conditions and stimulate demand from the growing Chinese elevator service and modernisation market. Our door sensor business grew in all territories, even in Europe where we increased market share in a flat market. In China the slowing pace of construction stabilised demand
but revenue growth was still strong throughout the Asia Pacific region.
StrategyOur primary growth strategy in the Infrastructure Safety sector is to penetrate new markets. We will develop our presence in high growth areas, such as Russia and Eastern Europe, ASEAN nations and Brazil. Other key target markets are those with commercial barriers-to-entry such as Japan, France and the USA.We have developed a dual channel strategy for fire detection products. In some markets we sell directly under our own brand. However, OEM sales now make up 50% of international fire detection
revenue. We will target fire detector sales growth in Russia during 2014 after gaining new technical product approvals. We aim to grow elevator equipment market share with a dual brand strategy. We now sell highly specified door sensors with global support to international elevator manufacturers in developed markets. Lower specification sensors made in China are sold to cost-focused customers in developing economies. Global branding was strengthened by reorganising our elevator equipment businesses into a
single organisation called Avire during 2013. Investment in our elevator emergency telephone business centres on products to penetrate new European markets. R&D activity at our elevator display business will add advanced viewing features for high-end building projects. China will continue to be a strategic focus for elevator product R&D, sales and manufacture.During 2013/14 we entered adjacent pedestrian automatic doors markets with new sensors to activate sliding and swinging doors. We aim to extend our
door sensor customer base beyond the pedestrian segment where we are market leader. Organic profit growth will centre on new products for industrial and transport sector customers. To precisely meet customer needs, door sensor R&D and manufacture is increasingly based in target markets. In 2013/14 we increased new product development spending in the USA and China.
Performance Infrastructure Safety performed strongly, growing both revenue and profit1 by 7% to £220.3m (2013: £205.3m) and £44.4m (2013 restated: £41.5m) respectively. At constant currency, organic revenue growth was 6% and profit growth was 5% demonstrating the resilience of demand for our products which is underpinned by increasing Health & Safety regulation.Return on Sales remained strong at 20.2% (2013 restated: 20.2%) due to successful new product launches and an effective balance between investment
and cost control to maintain strong product margins.Revenue increased in all major geographic regions, including 12% growth in Mainland Europe. Healthy mid-single digit growth in the UK, USA and Asia Pacific reflected the global reach of our products, whether selling into major multinational OEMs or through local distribution partners. Our strategy of increasing investment in locally based sales and technical resources continues to pay dividends.The Talentum flame detector business, acquired in 2013,
extended our fire detection technology offering and has been successfully integrated. OutlookWe expect continued Infrastructure Safety growth due to technology advances, regulatory pressure and products that are increasingly developed and manufactured locally within target markets. A significant amount of emerging market infrastructure cannot accommodate rising urbanisation and population growth trends. To combat this, a number of emerging countries' governments have committed to substantial urban
infrastructure stimulus plans.Demand for certified products in Europe will be a strong driver and we expect to benefit from adoption of integrated building monitoring systems and intruder alarms based on wireless communication over time.Mature market growth is expected to be modest, while developing economies should grow well. Russia, Eastern Europe, Middle East, Latin America, ASEAN nations and China all offer good growth potential. In the USA and Western Europe legislation-driven adjacent markets and the
rising use of home automation technology offers good growth prospects.In May 2014 we sold Monitor Elevator Products, Inc which manufactures customised control panels for elevators focused in north-eastern USA and no longer fits with our global market-leading door safety sensor and display product business.In May 2014 we acquired Advanced Electronics Limited (Advanced) for an initial cash consideration of £14.1m. Advanced manufactures networked fire detection and control systems adding complementary products
that will help capture the international growth opportunities in the increasingly regulated fire market. 1 See Note 2 to the Preliminary Statement.
Medical Sector Review
Products used to improve personal and public health. Devices used to assess eye health, assist with eye surgery and primary care applications. Fluidic components such as pumps, probes, valves and connectors used by medical diagnostic OEMs. Adam Meyers, Sector Chief Executive, MedicalThe Medical sector continued its record of producing both revenue and profit growth due to a combination of prior year acquisitions and organic growth.Returns remain high and continue well above Group targets. Although Return
on Sales was down slightly on the prior year, ROCE improved, leading to good cash generation.We continue to invest in new products and process innovation and in expanding our resources in developing economies. Revenue from these markets is increasing as a proportion of the sector. Market trendsThe Medical sector growth driver of increasing demand for healthcare is underpinned by:- worldwide population ageing and increasing life expectancy- increasing prevalence of obesity and hypertension-
increasing healthcare access in developing economies- new medical diagnostic technologies - new or improved surgical and pharmaceutical therapiesThe proportion of people aged over 60 continues to rise and drives demand for healthcare both in developed and developing geographies. Population ageing is a key driver for our ophthalmology and hypertension management businesses because eyesight problems and rising blood pressure are both age-related. The global market for ophthalmic diagnostic and eye
surgery products is forecast to grow at 4% per year through 2017 as new technologies, population ageing and rising healthcare expectations and affordability in developing economies continue to drive demand.Eye surgeons are increasingly switching to the type of single-use surgical instruments that we make. Cataract surgery is a key market niche and demand for cataract instruments is forecast to grow annually by over 5% through 2019.We expect continued growth in spending on hypertension management tools
throughout the developed world. In the USA for example, one in three adults has high blood pressure, but over 50% do not realise they have this condition which causes, or leads to, over 2.4 million American deaths annually. In addition, rising obesity can lead to both an increase in hypertension-related conditions and an increase in diabetic-related eye disorders.In South East Asia medical product demand should remain strong as governments continue to improve healthcare provision and extend it to rural
areas. Last year China announced a three-year, £75 billion healthcare investment project to build 2,000 new regional hospitals and 29,000 township hospitals. Molecular diagnostics (tests on patients' genetic codes), is expected to be our fastest growing market for fluidic components with forecast global growth of 11% annually through 2019. North America and Europe comprise the largest global markets, while growth in Asia is expected to outpace all other geographies, with an expected annual growth rate of
over 14%.We continue to invest in resources to increase sales in the fast-growing Asian and South American healthcare markets. In the past year we increased staff in China, India, Brazil and the Middle East. Additional medical device R&D engineers recruited in China should deliver new products with specifications to meet the needs of Asian customers during 2014/15.
Geographic trendsApart from Japan, our sales in Asia continue to grow strongly as governments invest in health and medical infrastructure and extend healthcare to a wider section of their populations. China now has more than 330 million people with high blood pressure (one out of every three adults) with prevalence increasing particularly among the young and rural populations. Increased awareness and programmes to combat hypertension will increase demand for our diagnostic devices.In China, most of our
medical products have now completed lengthy and costly official testing and registration. This should ensure that China continues to offer substantial growth opportunities. However, Chinese growth may be affected by government control of the medical device market, including the possibility of price controls. US healthcare spending is forecast to continue to rise rapidly at almost 6% annually through 2022. However, short-term medical market growth in the USA is less certain as the impact of the recently
enacted Patient Protection and Affordable Care Act (PPACA) is being digested. The US market for single-use surgical devices and consumables should continue to grow with medical procedure growth, but capital equipment sales could be slower until the increased patient flow from the PPACA is realised. Growth in the US medical diagnostic market, our largest fluidics niche, was also affected by uncertainty in the new US healthcare model. Its new 2.3% tax on medical devices in the USA increased sales costs by
over £0.6m in 2014 and was reported by some of our customers to cause reductions in their spending. We expect flat short-term sales in Europe as economic conditions slowly improve.With the acquisition of a Chinese peristaltic pump maker in 2013, we began selling their products through our US distribution channels and our US-made products through the acquired business' Chinese channels.
StrategyFollowing strong growth in 2012/13 Medical sector strategy is to increase organic growth through:- broadening our product lines and commercialising innovative new products- further penetration of geographical markets- increasing our customer diversity- expansion into adjacent market nichesWe aim to increase R&D investment in ophthalmology and hypertension management products where we have a competitive advantage due to our strong sales channels in these niche markets. Product
line growth will come from both internally and externally developed products. Medical sector R&D focus is on high quality components and instrumentation that will be readily accepted by our existing conservative customer base. However, local development and manufacture in emerging markets, to better satisfy local customer needs, is a key Medical sector strategic priority. Focusing on Asia, South America, USA and Russia extended market penetration will be achieved through additional sales resources, market
intelligence sharing, cooperative marketing between sector companies and new sales channel partnerships. Compliance with national product regulation continues to get more complex and costly, in both developing and developed markets. Product registration and renewal overheads continue to rise but provide market access and bar entry by weaker competitors. Further acquisitions of value-enhancing healthcare businesses should also add significant growth.
Performance Following strong growth in 2012/13 our Medical sector grew revenue by 20% to £163.2m (2013: £136.1m) and profit1 by 16% to £41.8m (2013: £35.9m), including a sizeable contribution from acquisitions completed in the prior financial year. Organic revenue growth at constant currency was 7% and organic profit growth was 1%. Return on Sales remained strong at 25.6%, albeit slightly below last year's record 26.4% due to a combination of minor factors, including the full-year effect of the new medical
device tax in the USA. Increased investment internationally to support good rates of underlying revenue growth also impacted profitability this year.While currency translation impact was minimal in the year, if exchange rates remain at current levels we expect an adverse impact on results in 2014/15 due to the relative strength of Sterling versus the US dollar and Euro.There was strong revenue growth in all geographic regions. Asia Pacific growth of 52% benefited from a good first year's performance from
Longer Pump in China and strong organic growth of 22% (constant currency). Elsewhere, organic revenue growth (constant currency) from the UK was up 8%, Mainland Europe grew by 6% and the USA increased 3%.
OutlookAgeing populations in developed economies and rising populations with increasing access to affordable healthcare in the developing world should, subject to budgetary constraints, continue to create a favourable environment for growth. We expect our Medical businesses to outperform the market in the medium term with sales into the healthcare and medical diagnostics markets rising consistently, driven by enhanced distribution in export markets, new products and acquisitions. We expect the strongest
growth in the short term in developing markets, especially Asia and the Middle East. Growth in South East Asia, particularly China, should remain strong as government healthcare spending continues to rise. While our fluidics businesses will remain US-centric, we expect to reduce reliance on large customers by diversifying our customer base in emerging markets and Europe. 1 See Note 2 to the Preliminary Statement.
Environmental & Analysis Sector Review
Products and technologies for analysis in safety, life sciences and environmental markets. Market-leading opto-electronic technology and gas conditioning products. Products to monitor water networks, UV technology for disinfecting water, and water quality testing products. Chuck Dubois, Sector Chief Executive, Environmental & Analysis The sector has delivered increasing revenue and profit growth as the year progressed and made good progress on its reorganisation. Action within the businesses to improve
performance will continue and we expect to see the benefits of this in the coming year, including more collaborative inter-company projects. Market trendsOur Environmental & Analysis sector businesses operate in diverse markets where sustained growth is delivered by three key drivers:- rising demand for basic resources such as energy and water- increasing environmental monitoring and regulation- growing demand for healthcareIn many countries water demand outstrips supply and water quality
often fails to meet minimum standards. The quality and scarcity of water, and the need to reduce water treatment energy costs, are the key factors behind increasingly strict regulation and enforcement which drives demand for our water analysis and water and wastewater treatment systems.Increasing water scarcity is due to finite resources, population growth, increasing urbanisation in developing economies and climate change impact. In about 15 years' time almost half of the world's population is forecast to
live in regions of high water stress or water scarcity. Within the next 20 years water demand will exceed supply by 40%. New carbon reduction regulations, such as the CRC Energy Efficiency Scheme in the UK, is increasing demand for cost effective monitoring and remote transmission of data related to water usage and energy consumption.Sales to the scientific analysis market grew faster in 2013/14 than in previous years. The global market for laboratory analytical instruments and environmental sensors and
monitoring is forecast to grow at about 6% per year until 2016. Photonics technology is no longer just a science and research tool, but is increasingly used in manufacturing processes; industrial photonics is the fastest growing photonics sector worldwide.Environmental regulations in China are being strengthened and the government has made a series of multi-billion dollar funding commitments to increase controls on air and water pollution, and decrease greenhouse gas emissions.China's most heavily-polluting
industries, including thermal power, iron and steel, and petrochemicals will, in the future, have to comply with international pollution standards. New environmental regulations and stronger enforcement in China will create increased opportunities for our businesses which make analytical and monitoring equipment for controlling environmental pollution. US environmental protection regulations are also undergoing significant change, with many more stringent requirements being issued by the EPA. US government
spending on environmental monitoring is increasing. As a result, we expect rising demand in America for our analytical technologies that monitor pollutants in trace amounts.
Geographic trendsIn April 2014 we created a new subsidiary in China by transforming the Shanghai R&D, sales and manufacturing operations of our US-based Ocean Optics business into a stand-alone company to deliver an optimal service to Asian customers. This company not only distributes spectroscopy products made by Ocean Optics in the USA, but is designing and developing products fit for purpose in China and Southeast Asia.In the USA, we reorganised our multispectral sensing and imaging business by investing
in a consolidated manufacturing centre.Plans for deregulation of the UK commercial water market from 2017 are prompting UK water companies to increase investment in treatment and distribution to retain existing customers. Continued economic difficulties in Europe significantly reduced spending by some of our key OEM customers in the water market.China is now the world's fastest growing water and wastewater treatment market. It recently announced plans to invest almost £200 billion in water treatment
technology to control water resources pollution.
StrategyOur organic profit growth strategy for the Environmental & Analysis sector centres on geographic expansion, with a strong focus on emerging markets, increased R&D investment in new product development and continued diversification of the customer base.R&D will focus on products to meet emerging market customer needs. Investments to develop emerging markets include a new business unit in India and local manufacture in China. Sales development in the US alternative energy market was cut back because
progress on alternative energy projects depends on government funding, which has proven to be very variable. While we will aim to maintain world leadership in products to reduce treated water loss in distribution networks, we succeeded in reducing dependence on water conservation technology sales to UK water companies within their 5-year cyclical investment programmes. We diversified our customer base and achieved strong sales growth in non-water markets such as energy monitoring, building management
systems and commercial remote data logging.Our strategy for opto-electronic analytical products is to grow organic profit by extending our offering in the life sciences and environmental monitoring sectors. Performance Environmental & Analysis achieved a pleasing full-year performance after a disappointing prior year and some reorganisation in the first half. Revenue increased by 9% to £166.5m (2013: £152.4m) and profit1 grew by 4% to £31.7m (2013: £30.4m). At constant currency, organic revenue growth was
5% and profit was up 2%.Return on Sales was 19.1% (2013: 19.9%) which represented a useful improvement from 18.2% at the end of the first half. The consolidation of our two optical coating business facilities has gone to plan with a newly expanded facility now operational in Florida and product lines being transferred from Colorado. In addition, our main photonics business, Ocean Optics, has spun-off a new Halma subsidiary in China while our water
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