REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 2
16/07/2015 10:27
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18.8
Working capital movements (6.0) (10.9)
Capital expenditure net of disposal proceeds (22.2) (15.6)
Additional payments to pension plans (6.6) (5.9)
Other adjustments (6.0) (2.0)
Adjusted operating cash flow 138.7 129.0
Cash conversion % 87% 89%
Non-operating cash flow and reconciliation to net debt
2015 £m 2014 £m
Adjusted operating cash flow 138.7 129.0
Tax paid (30.8) (28.3)
Acquisition of businesses and shares of associates including cash/debt acquired (88.2) (16.7)
Net movement in loan notes 2.1 (0.2)
Net finance costs and arrangement fees (3.0) (2.5)
Dividends paid (43.4) (40.5)
Issue of shares/treasury shares purchased (6.0) (7.3)
Disposal of businesses 4.2 1.9
Effects of foreign exchange - 0.4
Movement in net debt (26.4) 35.8
Opening net debt (74.5) (110.3)
Closing net debt (100.9) (74.5)
Net debt to EBITDA
2015 £m 2014 £m
Adjusted Operating profit 158.5 144.6
Depreciation and amortisation (excluding acquired intangible assets) 21.0 18.8
EBITDA 179.5 163.4
Net debt to EBITDA 0.56 0.46
A summary of the year's cash flow is shown in the table above. The largest outflows in the year were in relation to acquisitions (see below) dividends and taxation paid. Working capital movements, comprising changes in inventory, receivables and creditors, totalled £6.0m (2014: £10.9m) and reflects strong control of operations at local company level.Capital expenditure on property, plant and computer software this year was £23.2m (2014: £17.4m). This maintains investment in our operating capability and
includes investment of £5m in a property in our Medical sector with a further £5m expected in 2015/16. This year's spend represents 108% of depreciation, falling within the 100% to 125% range we expect. Dividends totalling £43.4m (2014: £40.5m) were paid to shareholders in the year. Taxation paid increased to £30.8m (2014: £28.3m).
Strong financial position maintainedHalma operations are inherently 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. We
hold a syndicated revolving credit facility of £360m which runs to November 2018. This facility 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 acquisitions. Our objective is to increase the pace of acquisitions whilst maintaining the disciplined approach we have adopted over many years. Over time we expect that funding of the Group will include an element of term debt.At the
year end net debt was £100.9m (2014: £74.5m), a combination of £142.1m of debt and £41.2m of cash held around the world to finance local operations. The ratio of net debt to EBITDA was 0.56 times (2014: 0.46 times). This is well below the level of 1.25 times within which we feel comfortable operating, although we would be prepared to exceed this level temporarily if the timing of acquisitions required it. Net debt represents 4% (2014: 3%) of the Group's year end market capitalisation. The Group continues to
operate well within its banking covenants with significant headroom under each financial ratio.
Average debt and interest rates
2015 2014
Average gross debt (£m) 164.8 150.9
Weighted average interest rate on gross debt 1.38% 1.26%
Average cash balances (£m) 45.6 47.1
Weighted average interest rate on cash 0.29% 0.54%
Average net debt (£m) 119.2 103.8
Weighted average interest rate on net debt 1.80% 1.59%
Continued acquisition and disposal activityAcquisitions and disposals are an important part of our growth strategy. We buy businesses already successful in, or adjacent to, the niches in which we operate. The acquisition pipeline remains healthy and each sector is increasing its own resource to accelerate acquisition activity. In the year we spent £84m on three acquisitions (net of cash/(debt) acquired of £9m). In addition we paid £4m in contingent consideration and settlement of loan notes for acquisitions
made in prior years.All acquisition and disposal transactions during the 2014/15 year were completed in May 2014:- Plasticspritzerei AG, a strategic supplier to one of our businesses in the Medical sector, was acquired for a net cash consideration of CHF6m (£4m).- Advanced Electronics Limited, a manufacturer of networked fire detection and control systems, was acquired for our Infrastructure Safety sector. We paid an initial consideration of £14m (excluding cash and debt acquired of £2m).
Contingent consideration of up to £10.1m is payable on earnings growth for the period to March 2015. Of this we have settled £2.8m and our current estimate is that a further £3.4m will be paid subject to finalisation under the acquisition contract.- Rohrback Cosasco Systems Inc., a manufacturer of pipeline corrosion monitoring products and systems, was acquired for US$108m (£64m), net of cash acquired of US$9m (£5m). RCS adds valuable new technology and application know-how to the Process Safety
sector.We sold Monitor Elevator Products, Inc., a business within the Infrastructure Safety sector, for a consideration of US$6m (£4m). This continues our active approach to portfolio management. We have revised our accrual for contingent consideration on recent acquisitions in line with latest best estimates. This has resulted in a reduction in our estimate payable on the ASL acquisition and an upward revision on that payable for MicroSurgical Technologies (MST) following further growth in the year.
Following the year end in May 2015, we acquired Value Added Solutions LLC (VAS) for a cash consideration of $5m (£3.2m) with contingent consideration of up to $1.5m (£1m) payable on growth to October 2016. VAS designs and manufactures fluidic-related plastic machined components and assemblies for life science and analytical instruments. VAS will become part of our US-based Diba Industries within the Medical sector.The businesses acquired in 2014/15 and 2015/16, net of the disposal made in 2014/15, are
expected to add a net amount of £6m to revenue and £1.5m (after financing costs) to profit in 2015/16, based on their run rate at the time of each transaction.
Pensions updateThe Group accounts for post-retirement benefits in accordance with IAS19 Employee Benefits. The Balance Sheet reflects the net deficit on our pension plans at 28 March 2015 based on the market value of assets at that date and the valuation of liabilities using year end AA corporate bond yields. Following consultation with all stakeholders, we announced in March 2014 that the Defined Benefit (DB) sections of the Group's UK pension plans would cease future accrual as at 1 December 2014. This
change has been implemented. Members earn future pension benefits within the Group's Defined Contribution (DC) section of the pension plan with agreed transitional arrangements. This change reduces Group risk for the future. On an IAS19 basis the deficit on the Group's DB plans at March 2015 has increased significantly to £66.8m (2014: £36.8m) before the related deferred tax asset. Plan assets increased to £224.8m (2014: £190.5m) due to further recovery in equity values and cash contributions by Halma. In
total, about 50% of plan assets are invested in return seeking assets providing a higher expected level of return over the longer term. Plan liabilities increased to £291.6m (2014: £227.3m) primarily due to the significant fall in discount rates.We continue to make extra cash contributions to the UK pension plans to eliminate the pension deficit as agreed with the trustees and in 2014/15 these contributions amounted to £7m. We are in the process of reviewing, together with the trustees, the initial results
from the 2014 triennial actuarial valuation and will agree appropriate future contributions following this process.
New product investmentWe continue to innovate and invest in new products across all sectors. This year R&D expenditure increased by 8% with a higher rate of investment in the second half of the year. R&D expenditure as a percentage of revenue was 4.8% (2014: 4.7%). We have a good pipeline of new products which should benefit 2015/16 and beyond. In the medium-term we expect R&D expenditure to increase broadly in line with revenue. Under IFRS accounting rules we are required to capitalise certain development
projects and amortise the cost over an appropriate period, which we determine as three years. In 2014/15 we capitalised/reclassified £7.4m (2014: £5.2m), acquired £1.2m, and amortised/impaired £5.6m (2014: £3.9m). This results in an asset carried on the Consolidated Balance Sheet, after £0.1m of foreign exchange movements, of £15.9m (2014: £13.0m). All R&D projects and particularly those requiring capitalisation, are subject to rigorous review and approval processes.
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 and sector level, within a robust strategic framework supported by strong policies and clear procedures.Risk is managed closely and is spread across 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 below and in the Chief Executive's Strategic Review and Sector Reviews.The adoption of a clear four sector structure in April 2014 has enabled Sector Finance Directors to be appointed focusing on successful control and development of each sector. I have been working with them to ensure that our strong control framework is maintained as the Group's activities continue to grow.The updated UK Corporate Governance
Code issued recently by the Financial Reporting Council (FRC) requires regular monitoring of risk by the Board. As noted above, for many years we have had comprehensive and regular review of risk taking place at many levels throughout the organisation. Our focus will be to ensure that the output and actions from this review are communicated well, up and down the business, building on this strength.We have an ethical approach to business and this is reflected in our Code of Conduct which is adopted
internationally by all employees. We are conscious also of the increased risks arising in the area of cyber security and have been very active this year in monitoring such threats and acting accordingly. Awareness of these potential threats has been increased with our employees across the Group and good progress continues to be made.The Board considers all of the above factors in its review of 'Going Concern' 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.In the year ahead, in addition to organic growth, we will focus on the search for further acquisition opportunities within each sector and on achieving strong cash generation to fund investment and increasing dividends. Our aim is 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; profit or loss on disposal of operations and the effects of closure to future benefit accrual of the Defined Benefit pension plans net of associated costs (prior year only). All of these are
included in the statutory figures. More details are given in Note 11.
2 See Financial Highlights.
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. Philippe Felten, Sector Chief Executive, Process SafetyRecord sales and profits were achieved in our Process Safety sector despite volatile market conditions resulting from the slide in global oil prices. We increased our global footprint with additional regional offices and sector
-specific hubs to support collaboration and cooperation. Product development spend increased on the prior year to a new record level as we expanded our product portfolio to meet our twin aims of market and geographic diversification. The acquisition of RCS expanded our range of products and it has continued to perform well. Trading in the business met pre-acquisition targets. Market trends and growth driversLong-term growth in our Process Safety markets is supported by three key drivers:- population
growth resulting in rising energy demand- increasing and more stringent global health, safety and environmental regulations and legislation- increasing development, complexity and geographic spread of energy resources and their safety requirementsThe global process safety market is forecast to continue to grow. A key driver is aftermarket demand for replacement and upgrading of older safety systems to meet updated safety standards. Our commitment to developing new products designed to meet new
standards assists our customers in maintaining compliance while minimising downtime and degradation of assets.Due to the significant oil price fluctuation in the past year, many of the major players in the international oil market are facing exceptional short-term uncertainty. However, new energy industry projects have long lead times; despite the current global economic conditions, the world's population continues to grow and demand for energy will continue to rise.Global oil production continues to exceed
demand, but demand is forecast to continue to grow during 2015. The major oil producers are indicating varying levels of capital expenditure reduction in new oil exploration activity. The impact on mid and downstream activity is less severe and there are significant regional variations regarding the extent of proposed cut backs. With the majority of our sales in the mid and downstream sectors, the underpin of increasing safety awareness and our strong regional presence in the USA, Middle East and Asia, we
expect to maintain growth.We are committed to developing products and technology platforms which improve the safety and reliability of industrial operations. Investment in new oil and gas extraction techniques and the delivery of conventional, unconventional and renewable energy resources has continued to support our sales growth. Throughout the world governments continue to impose stricter regulations to protect people and the environment from avoidable process system failures. We support regulatory
development in our markets by having our staff on advisory bodies responsible for recommending legislative change. Geographic trendsUnderlying global growth in demand for energy, food, chemicals, water and metals continues to increase despite some regional variations due to macro-economic issues. The USA and Asia remain buoyant. The European market has returned to growth and the emerging market of South America has been a key contributor to our success in the last year. Economic factors have reduced demand
in India and Australia and we anticipate that a return to growth in these areas will be a slow process.While new offshore fields have been identified in North and South America, and Africa, the current oil price cycle is delaying their exploitation.Governments worldwide are increasing programmes to eliminate bribery and corruption from process safety contracting. We adhere to strict Group and government guidelines to avoid projects we believe are subject to these unwanted practices. StrategyIn the Process
Safety sector, our strategy for growth focuses on:- geographic market diversification via shared regional hubs - investment in new products to both diversify our markets and meet local market needs- acquisitions in adjacent marketsOur investment in new product development has increased again to a new record resulting in sales of products designed in the last three years maintaining a level of over 30% of total sales. New technology and shorter product lifecycles, coupled with industry
-leading quality and customer service, ensures that we maintain competitive advantage and improve customer value propositions. This results in sales growth ahead of market growth.The global footprint of our Process Safety companies continues to expand; we now have 22 manufacturing sites across five continents. Regional sales and service centres have risen from 22 to 35 and we opened a new sector hub in Houston, USA during 2014 adding to our existing sector hubs in Brazil, UAE and Poland. We continue to
decentralise marketing resources into these facilities to ensure that we rapidly identify local market opportunities and customer needs. Developing internal collaboration and alliances within the sector supports growth and we continue technology partnerships with external companies where they will help us meet our strategic product goals.The acquisition of RCS, in the adjacent market of pipeline corrosion monitoring, expands our portfolio of critical safety products sold into the energy and utility markets
to protect life and operational assets.
Performance Process Safety grew sales by 25% to £159m (2014: £127m) and profit1 by 28% to £45m (2014: £35m). As a consequence of strong product margins and good operational management, return on sales increased to 28.3% (2014: 27.5%). New product introductions contributed to both margin expansion and revenue growth through diversification into new application niches.We achieved strong revenue growth in the USA, which was mostly organic, and in Asia Pacific, Middle East and South America mainly due to the
contribution from the RCS acquisition. The UK increased only marginally as a result of reduced North Sea investment.Two sector companies relocated to new factories during 2014/15 and an additional two undertook significant facility expansion, all without disruption to supply performance. These investments ensured that we maintained the quality and service expected by our customers. OutlookThe long term growth prospects in the Process Safety sector remain positive as we continue geographic and product
expansion. Our progress in the food, pharmaceutical and chemical process markets will continue to allow us to counter a short-term slowdown in the oil and gas market. In the medium term these markets will continue to be a major contributor to our ongoing success. Specialist markets in railway infrastructure and logistics are expanding in line with our previous plans.We continue to search for acquisitions, particularly in non-intrusive corrosion monitoring, hazardous area maintenance and machinery safe
access control. 1 See Note 2 to the Results.
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 SafetyThe Infrastructure Safety sector delivered strong revenue and profit growth in 2014/15. We achieved good results in both recently
acquired and established businesses. Advanced Electronics was acquired in May 2014 to broaden our fire product portfolio and further strengthen Halma's position in the global fire systems market. Market trends and growth driversIncreasing health and safety regulation remains the primary driver in our Infrastructure Safety sector. Rising infrastructure investment is also driven by:- population ageing, rising safety awareness, continuing global trend of urbanisation and population growth- rising
demand in emerging markets where existing infrastructure requires modernisation and rapid economic growth requires high infrastructure investment- growing need for 'connectivity', with rising demand for wireless technologies alongside automation in 'smart' buildingsGovernments throughout the world continue to implement increasingly stringent health and safety regulations. In mature markets, safety standards are constantly updated and compliance becomes increasingly demanding for our customers. New
European fire regulations, for example, require fire detection devices to be totally compatible with all other components of a fire alarm system. This ensures maximum protection from fire risk in modern buildings while minimising disruption from false alarms. Developing markets increasingly adopt and enforce globally-recognised safety standards which protect assets and eliminate hazards to people in domestic, public and industrial environments.Increasing urbanisation, especially in Asia, drives demand for
high-rise properties with elevators. Strengthened health and safety legislation in Europe requires elevators to be upgraded with emergency communication devices.The global elevator market is forecast to continue to grow with the principal growth in Asia, where, as well as ongoing infrastructure development, we see increasing elevator density due to use in low and mid-rise buildings. This trend is partly due to population ageing and demand for higher living standards. With a 2013 global installed elevator
base of 12m units, tight regulation of elevator maintenance further stimulates demand for our elevator safety products.The world market for pedestrian automatic door controls is driven by regulation; safety standards continue to evolve in all regions. Introduced in 2013, the first pan-European safety regulations that protect users of power-operated pedestrian doors from hazards have reached mature implementation in Western Europe. Implementation is still underway in the rest of Europe.Demand for safety
sensors in the industrial door market is growing, for both door activation and safeguarding the area around a door to prevent crushing injuries. New European standards are due in 2015/16. In the Americas we have seen increasing use of high performance industrial security doors for parking and automotive markets as well as for mining and heavy industrial applications.The trend of convergence of building automation and information technology in smart buildings drives growth of our wireless communications
intrusion detection security products. Product certifications remain important for intrusion detection systems in Europe, particularly those with police-response remote monitoring.
Geographic trendsThe global fire protection systems market is forecast to grow with Asia leading the way driven by urbanisation and increasing safety requirements. In the USA residential fire protection is increasingly based on wireless detectors as home automation and security systems including smoke detection grow in popularity.The global elevator market is growing strongly and is forecast to continue to rise by about 7% per year at least until 2017. China remains the principal growth market for elevator
products. Of the 2013 elevator global market estimate of E54bn, China accounted for 26% of the sales value, and 67% of the new elevator installations. Asia as a whole accounts for 78% of new installations. India is forecast to become the next big elevator and escalator growth market and increasing urbanisation could see new installations rise to 100,000 units per year by 2018. Elevator installations in Europe and the Americas remained flat, though mild growth in construction starts are expected in the next
couple of years. Our focus in these territories remains in elevator upgrades and maintenance.Our automatic door control products continued to penetrate more geographic markets in Eastern and Northern Europe, South America, Canada, Australia, Japan, India and the Middle East.Despite a growing focus on safety in China, implementation of safety regulations for automatic pedestrian doors is slow. In the transportation door controls niche, we saw rising safety awareness (not regulation), especially in the subway
train Platform Screen Doors market. Japan is considering adopting the latest European automatic door safety regulations as national industry standards by 2017. This could open a considerable new door safety control market.We achieved strong sales growth of intrusion detection products outside our traditional UK and Western European markets, with good progress in South Africa, the Middle East and China. We significantly improved UK market share in 2014/15.
StrategyNew market penetration is a primary growth strategy in the Infrastructure Safety sector, particularly in high infrastructure investment territories such as Russia and Eastern Europe, ASEAN nations and Brazil.In our fire products sub-sector, we continue a strategy of growth through international expansion, new products, new detection technologies and acquisitions. In 2014/15 we strengthened our fire sales presence in both India and China and we will open an ASEAN sales office in Singapore in 2015. We
have changed strategy in China to focus on premium fire products. Over 70% of our elevator product sales are door safety light curtain detectors but increasing competition is putting pressure on margins. We will continue to develop premium products for upgrade and refurbishment alongside economy ranges for the new installation market. The global market for in-car elevator telephones is estimated to be the same size as the light curtain market; the in-car display market is at least twice the size. To deliver
long-term growth, we will invest in development of our telephone and display business. Elevator emergency telephone and display markets are fragmented and present an opportunity for consolidation, potentially via acquisition. Our strategy for automatic door sensor growth focuses on expanding outside our established pedestrian and industrial door sectors into new applications such as detecting and counting flows of people and vehicles. In Western Europe, we anticipate increasing adoption of smart security
and building automation systems. During 2014/15 we increased investment in European sales resources for intrusion detection alarm systems on the back of new product approvals.
Performance Revenue growth of 6% was in line with expectations while sector profit1 growth was 6% higher than revenue growth as reported and 7% ahead at constant currency. We continue to exceed Group targets on Return on Capital Employed and cash generation.Return on Sales increased to 21.4%, due primarily to successful new product launches and an effective balance between investment and cost control to maintain strong margins.Revenue in all major markets increased during the year, with 23% growth in the UK
and 44% in Africa and the Middle East. In the USA, excluding the Monitor disposal, we achieved 5% growth and this should continue as home security OEMs source increasingly from Apollo America. Our strategy of increasing investment in locally based sales and technical resources continues to pay dividends.The Advanced Electronics business, acquired in 2014, has strengthened our position to offer small fire systems in selected markets and has broadened our understanding of fire control panels globally. We will
continue to leverage the synergies we have experienced with the Advanced teams on board.We sold Monitor Elevator Products Inc, a New York-based manufacturer of elevator control panels to another industry player, Innovation Industries, in May 2014. Monitor did not have the international growth potential we believed was necessary to maintain growth and high returns in the medium term.We continued integration and reorganisation of our four elevator companies into a single business unit. New in-elevator
emergency telephone products and in-car displays extended penetration of these niche markets. Trading in the elevator door sensor market has been challenging, with increasing competition from Asian light curtain manufacturers. Despite this, we maintained high elevator business Return on Sales by focusing on higher margin telephone and display products.In the past year we strengthened our global leadership of the pedestrian and industrial high speed door sensors markets and increased market share in public
transportation and security. OutlookContinued growth is anticipated due to rising demand driven by the demographic trends of population ageing and urbanisation, increasing regulatory pressure, technology advances and localised manufacture.We expect to see revenue growth remaining ahead of market growth rates in most of our niches. This will be driven by geographic and market expansion, the launch of new products into established channels and by acquisition. Developing economies are an exciting market for
all Infrastructure Safety businesses as buildings and homes become increasingly more complex and sophisticated.The acquisition pipeline for the sector is very promising and we aim to add complementary businesses during the coming years. 1 See Note 2 to the Results.
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 again delivered record revenue and profit with strong contributions both from recent acquisitions and long-established businesses. Profit performance was very strong and constant currency revenue growth was
above Group target. Returns remain high and continue well above Group targets. The Medical sector set a new Return on Sales record and cash generation remained strong.Continued investment in innovative technology and products is increasing the proportion of sector revenue from products launched in the last three years. Our Medical business acquisition pipeline is robust and we continue to focus on acquiring in this sector. In May 2015 we acquired VAS LLC which will operate within Diba Industries and brings
in important new component technology.Market trends and growth driversThe Medical sector growth driver of increasing demand for healthcare is underpinned by:- worldwide population ageing and increasing life expectancy- increasing prevalence of diabetes, obesity and hypertension- increasing healthcare access in developing economies- new medical diagnostic technologies - new or improved surgical and pharmaceutical therapiesThe proportion of the global population aged over 60
continues to rise steadily 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 high blood pressure are both age-related. For example, one in three American adults has high blood pressure which causes, or leads to, over 2.4 million American deaths annually. Rising obesity increases both hypertension-related illness and diabetes-related eye disorders. In
China, people suffering from hypertension increased by 34% between 2002 and 2010, but less than 20% of those affected were controlling their condition. We expect continued growth in spending on hypertension management instruments.The global growth rate for medical devices is expected to be 4% to 5% in the near term with developing economies offering slightly stronger growth. Within the overall medical market, cataract operations, one of the most frequent surgical procedures throughout the world and a strong
focus of our ophthalmic surgery companies, are growing annually at about 5%. Eye surgeons continue to switch to the type of single-use instruments we make so our growth rate should continue to outpace the procedure growth rate. Increasing healthcare access and ageing populations are also strong drivers in the laboratory automation market, where demand is forecast to rise annually by 6% through 2017, underpinning demand for our critical fluidic components. Ageing populations require higher level medical
testing and laboratories need faster throughput and more specialised equipment. North America and Europe are the largest laboratory automation markets while growth in Asia is expected to outpace all other geographies, with forecast annual growth of over 8%. One of the fastest growing laboratory automation segments is molecular diagnostics (tests on patients' genetic codes), forecast to grow worldwide by 11% annually through 2019.The global medical product regulatory environment continues to get tougher -
higher registration costs, increasing testing and more audits. We continue to invest in personnel to address these market pressures including hiring local regulatory affairs staff in key territories. Increasingly complex medical device registration requirements, combined with current macro-economic conditions, places significantly more value on Halma's well-established Medical sector channels and market access. Each year we add staff in our Asian and South American healthcare markets, particularly in China,
India, Brazil and the Middle East.
Geographic trendsContinued expansion of the global medical device market provides opportunity for sustained revenue growth but we are also prepared for market variation due to local economic conditions, government spending programmes and currency fluctuations.US healthcare spending is forecast to continue to grow above 4% for the next few years. Over 16 million Americans have gained health insurance since the Affordable Care Act became law in 2010. This has begun to raise patient flows but has yet to drive
increased market revenue, so the US market is uncertain. The market for single-use surgical devices in America is set to continue to grow, but capital equipment sales may grow more slowly until increased patient flow raises medical revenues or economic growth accelerates. The US healthcare market was stronger than anticipated in the past year and may continue to compensate for a weaker European market. Recent Euro exchange weakness should aid US market penetration for our European businesses, but our US and
Swiss businesses will face higher price pressure when selling into Europe.The major European economies should see medical device demand grow between 2% and 6% over the next few years. However, stagnant economies and continued austerity measures are expected to challenge sales growth elsewhere in Europe. Our non-Euro Zone companies expect increased price pressure due to exchange rates.While growth in Asia, and in particular China, may be slowing, these markets are still expected to grow faster than other
regions. Our Chinese investment continues with more product registrations, more R&D engineers and development of localised products. About 400,000 Chinese people become blind from cataracts each year but China has the lowest cataract surgery rate in Asia. China will see increasing rates of cataract surgery as access is improved, particularly in rural areas, and as more surgeons are trained to perform this surgery. A third of China's adult population, about 330 million people, have high blood pressure with
prevalence increasing particularly among the young and rural populations. Raised awareness and programmes to combat hypertension will increase demand for our diagnostic devices. Other territories, such as South and Latin America, the Middle East and Africa are forecast to grow annually by 7% to 8% for the next few years. Medical sector companies are increasing sales and marketing collaboration here and in particular we are increasing the use of our Brazil Sector hub.
StrategyMedical sector strategy is to increase growth organically and via acquisition by:- increasing collaboration and shared resources to drive expansion and joint product development- increasing R&D investment to broaden product lines and commercialise innovative new products- further geographic penetration- improving talent and increasing diversity- expansion into adjacent market nichesOur Medical sector companies are increasing collaboration as they have multi-company
sales and marketing teams in China, India and the Middle East and are looking to add parts of Europe and South America to the mix in 2015/16. As a result, a new collaboratively-developed product is scheduled for launch in our hypertension management niche and we have appointed a 'President of Ophthalmology, Greater China' to assist our Medical sector companies with growth in China.R&D investment will rise to capitalise on our competitive advantage from strong sales channels in niche markets and excellent
customer relationships. Medical sector R&D spend as a percentage of sales has historically been below the group target as recent acquisitions typically spent less on R&D than we did as a sector. This is being built up as we increase investment in our newer businesses and continue to pursue product development activities in our long standing businesses. Medical sector R&D focuses on high quality components and instrumentation that will be readily accepted by our conservative customer base. However, local
development and manufacture in emerging markets to satisfy local customer needs better is increasingly important and is a key strategic priority.Acquisition of a small Swiss ophthalmic component producer in May 2014 secured important manufacturing IP and the purchase of VAS LLC in May 2015 adds important component technology. We still seek to acquire value-enhancing healthcare businesses within existing and adjacent niches and we have focused more resources on achieving this objective.
Performance The Medical sector grew revenue by 4% to £169m (2014: £163m) and profit1 by 9% to £45m (2014: £42m). This was virtually all organic as we only made one small acquisition in 2014/15. Organic revenue growth at constant currency was 6% and organic constant currency profit growth was 10% both above Group targets.Return on Sales improved to 26.8%, a new Medical sector record. Margin improvement is due to improved ratios at recent acquisitions, cost reductions and overhead control. Currency
translation had an adverse impact in 2014/15. If exchange rates remain at current levels we expect an opposite impact in 2015/16 due to reversal of the relative strength of the US Dollar and Swiss Franc against Sterling.
OutlookAgeing populations in both developed and developing economies, increasing access and higher demand for healthcare in the developing world, and increasing prevalence of hypertension, diabetes and obesity globally, create a favourable environment of increasing demand for our high quality medical components and instrumentation.We expect our Medical businesses to outperform the market in the medium term driven by enhanced distribution in export markets, new products and acquisitions. We expect growth to
vary across territories and market niches in developed markets due to currency volatility, government austerity and spending controls. We still see strong short-term growth opportunities in developing markets, especially Asia and the Middle East with Latin and South America. We seek to acquire value-enhancing businesses in the healthcare market and our pipeline remains very active. 1 See Note 2 to the Results.
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 This was a year of significant change for the Environmental & Analysis sector with several restructuring projects completed. Facilities were combined and businesses
rationalised to focus on those areas of the market that are best poised for growth in the coming years. In addition, we established a stand-alone business in China to better pursue that geographic market. While the markets were stable or growing for the most part, we did have some headwind in the UK water market, as well as being impacted by some of the turmoil in the Middle East. We achieved strong growth in Asia.With the restructuring largely behind us, as evidenced by the improvements in the second half
of the year, we are in a strong position for growth in FY16. Market trends and growth driversOur products monitor and treat water, air and food. They enable the development and manufacture of new products that improve our health. We operate in sustained growth markets that are underpinned by four key drivers:- rising demand for basic resources such as energy and water- increasing environmental monitoring and regulation- growing demand for healthcare- scientific advances transferring
into new industriesToday, 1.8 billion people drink faecally contaminated water and an even greater number drink water that is unsanitary. Approximately 3.5 million people die each year due to inadequate water supply, sanitation and hygiene. According to the UN, by 2025 two thirds of the world's population could live under water stress conditions as demands are placed on water usage by agriculture, manufacturing, energy production and domestic usage. By 2050 global water withdrawals are expected to increase
by 55%.These trends and forecasts continue to drive regulation and enforcement. Some of the greatest improvements have been made in water quality and environmental monitoring in China and other developing countries. Here we see increasing demand for our pollution monitoring equipment and we have developed products to meet the specific needs of these markets. There are also significant opportunities in new markets as our technologies developed for scientific applications are used in industrial settings for
product improvement and quality control. Increasing demand for improved food safety has brought use of our spectroscopy products into food processing and even crop management. The shipping industry is undergoing changes to its monitoring and treatment practices. Ship stack emissions monitoring has begun. Pollution and concerns over invasive species are key drivers behind the International Maritime Organization's (IMO) Ballast Water Management initiative. Manufacture of new technologies, such as LED
lighting, requires new levels of quality control, which can be met by our products. Our technology is also used to ensure the quality of pharmaceuticals, particularly as manufacturing is increasingly outsourced. Advances in communication technologies which allow remote monitoring data collection are creating new markets for our sensors and data-loggers used to monitor water distribution networks.
Geographic trendsThis sector sells into a significant number of market niches. While growth rates in the western economies are modest, our niche markets are expected to expand at rates between 4% and 7%. We see opportunities for US market growth and improved market share in the UK and Europe. In particular, the deregulation of the UK water market is beginning to provide new opportunities. We are putting resources in place to take advantage of opportunities in Europe for our products that support
manufacturing.China offers the greatest growth opportunity for our Environmental & Analysis businesses geographically. We continue to invest in China and now have over 80 employees there. We expect continued growth in the coming year as we take full advantage of our expanded R&D and production capabilities. We have revamped some product lines that assist water quality testing by NGOs, particularly in Africa and South America, and we are seeing increased demand for these products.
StrategyOur organic profit growth strategy centres on R&D investment in new product development, geographic expansion (with a strong focus on Asia) and diversification of existing technologies into adjacent and growing regulated markets.R&D is focused on applications that have long-term drivers and defensible market positions. More new products are the result of collaboration between companies and one company now has established development projects with six other companies in the sector.An increasing
number of our companies manufacture in China. Our Chinese markets continue to improve as regulations enacted in the past few years are increasingly enforced. China's advance into more technological manufacturing also benefits our quality and assurance products.Our strategy within core geographies, such as the USA and Europe, is to grow by finding new applications for our existing technologies. For example, our spectrometers are being used on drones to monitor crop development, enabling farmers to optimise
fertilisation and irrigation. PerformanceRevenue declined by 1% to £164m (2014: £167m) and profit1 fell by 14% to £27m (2014: £32m). At constant currency, organic revenue was marginally positive and profit was down 12%. Return on Sales was 16.7% (2014: 19.1%).The downturn was partly due to business restructuring. The cost of consolidation of our optical coatings businesses were roughly within budget (less than £1m), but ramp-up and customer qualifications took longer and were much more expensive than
anticipated. We saw improvement in the second half of the year and having further strengthened the management team, we have positioned this business for further progress in 2015/16.The establishment of Ocean Optics Asia was an important step in our overall strategy, and met performance expectations. However, in our other spectroscopy businesses some significant OEM customers had over-purchased in 2013, resulting in diminished orders this year. These customers are now back on track and should drive growth in
the coming year.We restructured our UV water treatment businesses and rationalised some product lines. Sensing products developed by this group have been moved to other group companies with greater market potential for these products.Our water quality testing businesses continued to grow. Uptake of our products in emerging markets was brisk and should remain that way through the coming year. Overall, we enter 2015/16 with a much stronger and focused approach, and anticipate greater year-on-year growth. Our
gas conditioning businesses performed well due to the introduction of new products designed for emerging markets and continuing penetration of our existing markets. We expect these businesses to continue to grow based on these initiatives in the medium term. Outlook2015/16 should deliver solid growth as we capitalise on the business restructuring changes made over the last two years. The improved sector performance in the second half of 2014/15 bears this out. New products introduced towards the end of last
year are having a positive impact and we expect to see markets with difficult trading conditions return to growth. These include the UK water utilities, which started a new five-year investment cycle in 2015. We expect this to have a positive impact on our water monitoring business in the second half of 2015/16 onwards.Many new products have been launched in this sector in the last year. The proportion of sector revenue due to sales of products introduced in the last three years improved significantly in
2014/15 and we expect this to increase again in the coming year. 1 See Note 2 to the Results.
Principal Risks and Uncertainties Halma's principal risks and uncertainties are detailed below and are supported by the robust risk management and internal control systems and procedures noted in the Annual Report and Accounts 2015.
Risk description Potential impact Mitigation
GlobalisationA key operational risk emanates from the remoteness of operations from Head Office and the increasing global spread of our businesses. - Weakening of financial, tax, audit and legal control and divergence from overall Group strategy in remote operations, leading to businesses
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