REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 2
14/06/2016 07:05
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providing diversification of Group funding.At the year end net debt was £246.7m (2015: £100.9m), a combination of £300.6m of debt and £53.9m of cash held around the world to finance local operations. The gearing ratio at year end (net debt to EBITDA) increased to
1.27 times (2015: 0.56 times) following strong acquisition expenditure this year. We are comfortable operating at this level of gearing and would increase to 2 times gearing if the timing of acquisitions required it. Net debt represents 7% (2015: 4%) 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.These sources of funding provide 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.
Average debt and interest rates
2016 2015
Average gross debt (£m) 208.1 164.8
Weighted average interest rate on gross debt 1.54% 1.38%
Average cash balances (£m) 57.7 45.6
Weighted average interest rate on cash 0.38% 0.29%
Average net debt (£m) 150.4 119.2
Weighted average interest rate on net debt 1.99% 1.80%
Pensions updateWe closed the two UK defined benefit (DB) plans to new members in 2002. In December 2014 we ceased future accrual within these plans with future pension benefits earned within the Group's Defined Contribution (DC) pension arrangements. These changes reduce Group risk for the future.The Group accounts for post-retirement benefits in accordance with IAS19 Employee Benefits. The Consolidated Balance Sheet reflects the net deficit on our pension plans at 2 April 2016 based on the market value of
assets at that date and the valuation of liabilities using year end AA corporate bond yields.On an IAS19 basis the deficit on the Group's DB plans at March 2016 has reduced to £52.3m (2015: £66.8m) before the related deferred tax asset. The value of plan assets reduced slightly to £221.9m (2015: £224.8m). 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 reduced to £274.2m (2015: £291.6m) primarily due
to the increase in the discount rate.The plan's actuarial valuation reviews, rather than the accounting basis, determine any cash deficit payments by Halma. Following the most recent triennial actuarial valuation of the two UK pension plans in 2014 and 2015, future cash contributions to eliminate the deficit have been agreed with the trustees. In 2015/16 these contributions amounted to £7.7m and it is planned that the annual amount will increase to £10.7m in 2016/17 with modest increases in subsequent
years.
Risk management Halma has a well-established business and financial model which has delivered 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. In the year we have continued to develop risk and control capability within each sector to support the growth of our businesses. 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. In addition key risks are highlighted in the Audit Committee Report and Auditor's Report in the Annual Report and Accounts 2016.The UK Corporate Governance Code issued 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 and this is discussed more fully in the Strategic Report and Governance sections within the Annual Report. We are conscious of the increased risks arising in the area of cyber security and have continued to be very active this year in monitoring such threats and improving our defences. 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' as described below. In addition a new Viability Statement is presented in an abridged form below, and in full in the Annual Report and Accounts 2016, extending the Board's review over a three year period. Both reviews have been concluded satisfactorily. The Annual Report and Accounts are 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. 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 and profit or loss on disposal of operations. All of these are included in the statutory figures. More details are given in note 11 to the Results.
2 See 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 SafetyWe met the challenges in the oil and gas sector by focusing on a continuing strategy of product and end-market diversification, geographic expansion and market-leading customer service. New product R&D investment to drive
diversification was maintained. At the same time, we carried out rigorous overhead control and reorganised management to align our businesses with changing market conditions. Market trends and growth driversThe underlying long-term drivers in our Process Safety markets are unchanged, despite challenging market conditions. We expect them to remain the key growth factors:- increasing and more stringent global health, safety and environmental regulations- population growth and industrialisation
stimulating rising energy demand- increasing development, complexity and geographic spread of energy resources and their safety requirementsThe global expectation of improvements in workplace health and safety is backed by government occupational safety and health programmes worldwide and continually increasing regulation. This will continue to drive long-term growth in our target process safety niches at rates above general economic growth.The dramatic fall in oil prices - 60% down from their high
point in 2014 - was caused by oversupply combined with lower demand due to slowing economic growth, particularly in China. Oil price decline has had a considerable impact on the oil and gas sector and on the wider global economy. Upstream capital expenditure (exploration and production) by the oil majors has been cut significantly, with many projects postponed. Capital investment in longer-term midstream and downstream projects (storage, processing and distribution), where our products have most exposure,
is continuing. Current market conditions are not expected to affect worldwide government and local authority programmes of imposing stricter legislation to protect people and the environment. We do not anticipate significant change in oil and gas upstream capital expenditure during 2016/17. Our businesses will continue to focus on market segments where investment continues and where our technical know-how translates into improved safety and operational efficiency for customers. Midstream petrochemical and
chemical processors have benefited significantly from falling oil prices due to cheaper feedstocks. In these markets we expect continued investment in raising safety standards and we expect to benefit from this trend. Our businesses focusing on machine automation, sequential equipment control and gas detection have minor revenue exposure to oil and gas. These companies continued to grow strongly throughout 2015/16 and we are confident of continued growth in 2016/17. Innovation, deep understanding of
customer applications and continuously improving geographic support are the main drivers for growth in the non-oil Process Safety markets.Geographic trendsWe performed well in US and Asian non-oil markets and these territories remain key growth targets for this sector. India is still a growth market where demand for improved safety throughout the process industries is rising and we anticipate stronger emphasis on safety and environmental protection regulation in the medium term. Europe was stable due to its
flat economy but we expect to expand our position with our recently merged and strengthened business units.In China our businesses are marketing collaboratively with shared sales teams and service facilities. This will reinforce our presence and deliver greater penetration in this market. The Tianjin chemical warehouse explosion in 2015, in which 173 people died, has prompted the Chinese government to raise safety standards in hazardous environments and actively enforce existing regulations.In oil markets,
the mature and declining North Sea and the USA will continue to be challenging. Production volumes are now falling even in the previously resilient US shale oil industry. While we expect the upstream oil market will remain subdued on a global basis, there are opportunities in Asia and the Middle East where the activity level remains attractive.StrategyOur strategy for growth in the Process Safety sector continues to focus on:- investment in new products to diversify our end markets and meet local
market needs - geographic market expansion via shared regional sector hubs- acquisitions, predominantly in adjacent markets with low oil and gas exposureDuring 2015/16 we combined several companies with similar end markets to raise operating efficiency and support growth in chemical, petrochemical, pharmaceutical, and food and beverage markets around the globe. The strategic goals were to:- speed up product innovation - increase market and geographic diversification- improve
customer servicesTwo businesses that specialise in safety control systems for process valves were merged to create a strong and innovative valve management company. The merger will help accelerate product innovation and improved control technologies to make valve operation simpler, more efficient and safer.Management of three of our machinery access safety businesses (based in the UK, USA and France) has been integrated with a single board. Each company continues to operate with its established branding and
local manufacture, but R&D has been centralised. This strategy reinforces our ability to add value through innovation but maintains a local footprint so that close contact with customers remains a strength. Our Process Safety businesses will continue to invest in R&D with an increased focus on understanding local customer needs, particularly in the new markets we enter. We encourage collaborative sharing of market intelligence about routes to market, sales channels, tender projects, OEM customers and end
-users. Our corrosion monitoring business, acquired in 2014, was impacted by the oil price fall and reduced capital and operating spend by customers. We have reorganised the business' structure and already see benefits in terms of market reach and increased efficiency.
Performance Revenue declined by 2% to £155m (2015: £159m) and profit1 fell by 12% to £40m (2015: £45m). At constant currency, organic revenue was down 5% and profit was down 15%. Return on sales was 25.4% (2015: 28.3%).Half of our Process Safety sector businesses are exposed to markets affected by the oil price. Many customers were forced to cut capital expenditure which negatively impacted our revenue. The other half of the sector, including gas detection, machine automation and sequential safety,
delivered growth in line with expectations. We grew revenue in the UK, US and China while facing more challenging conditions in Europe and Australia.Our companies active in valve management and pressure management have delivered consistent growth in recent years, driven by rising energy demand. In 2015/16 we faced significant capex reduction in the upstream oil and gas sector. R&D spend in the sector increased to 3.7% of revenue and focused on delivering products and solutions that support our market
diversification strategy. In addition, we have added monitoring capabilities allowing digital data communication with our safety-critical products. OutlookCost reduction and the diversification strategy focusing on, for instance, the chemical, pharmaceutical, and food and beverage process markets, combined with structural management changes, will let us make progress. Continued growth in our non-energy niches - machine automation, gas detection and sequential safety control systems - will continue to
support sector growth.We see growth opportunities for our gas safety products in niche applications and we expect growth in 2016/17 due to improved market intelligence and better sales execution, particularly in export markets.Well-designed process safety systems have the dual role of increasing safety while maintaining high productivity. The evolution of monitored process safety systems incorporating sensors and digital data communications for alarm triggering opens new possibilities to position our value
proposition: raising production process efficiency combined with regulatory safety compliance.There is a clear trend for greater regulation in the chemical and petrochemical markets, and this will continue to drive demand for our process safety solutions. Our Process Safety acquisition policy is to acquire in high growth sectors relatively immune to commodity price cyclicality.We do not expect recovery in oil and gas customer spend during 2016/17. The benefits of our cost reduction and diversification
efforts should help to mitigate these unfavourable market conditions as we move through the coming year. 1 See note 2 to the Results.
Infrastructure Safety Sector Review Products which detect hazards to protect assets and people in public spaces, transportation and commercial buildings. Fire and smoke detectors, fire detection and suppression 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 2015/16. Our results
benefited from good performances from both established and recently acquired businesses. Firetrace LLC was acquired in October 2015, adding fire suppression products to our global fire portfolio. Market trends and growth driversIncreasing health and safety regulation and rising safety awareness in both developed and developing regions is the primary driver in our Infrastructure Safety sector. Customer demand in this sector is also driven by:- continuing global trends of population ageing, urbanisation
and population growth- economic growth in the developing world leading to increased investment in infrastructure and modernisation- increasing desire for wireless connectivity, enabling automation in 'smart' buildingsGovernments throughout the world continue to introduce increasingly stringent health and safety regulations. In mature markets, safety standards are constantly updated and compliance becomes increasingly demanding for our customers. For example, the adoption of new standards is
advancing technology in elevator phones and door detectors which will stimulate market growth. Developing markets increasingly adopt and enforce globally-recognised safety standards in domestic, public and industrial environments. This includes the industrial high-speed door market which shows a clear trend towards the use of more sensors, not only to activate the door but also to increase safety around the door area.Urbanisation in Asia continues to drive demand for high-rise properties and, although new
elevator installations in China have declined slightly for the first time in over 10 years, growth in all other regions mitigates the global position. Over the next five years the number of new elevator installations is expected to remain relatively flat. Currently over half of elevator market revenue comes from maintenance and refurbishment and this is set to continue its current growth trajectory of around 5% per year.An increasing focus on home security is driving market growth in wireless security
systems that often integrate fire detection as a secondary function. We are establishing ourselves as a major wireless smoke detector supplier in this sizeable, growing market. The automatic door market is also evolving towards system integration. Our ability to link up with alarm and building management systems and with the outside world in general is becoming an increasingly important part of our strategy.
Geographic trendsOur automatic door control products continued to penetrate more geographic markets. Action has been taken in Eastern Europe, the Nordics, South America, Canada, Australia, Japan, India and the Middle East. Dedicated resources have been put in place to fuel our growth in those regions. A new regional sales office in Singapore was established in 2015. Our global account management and local presence allows us to efficiently supply and support those regions. Additionally, we actively seek
local distributors to grow our market share. The EMEA and US fire detection markets have predicted growth rates of 4% which, together with increasing our market share, provides healthy growth opportunities. China is projected to have the fastest growing fire detection market with growth estimated to be over 8% per year. South East Asia is also exhibiting strong growth of over 7%.China remains a key growth market for our elevator products. As it matures from a market predominately dependent on new
installations, to one driven by maintenance and refurbishment, the market will continue to grow. The mature western markets are forecast to continue to grow broadly in line with GDP while the rest of Asia-Pacific (including India) is forecast to grow in the region of 10%.In security, we have a strong position in the UK market. There is an increasing contribution from India where many new bank branches are being built outside major cities and all are required to install intruder alarm systems.
StrategyIn automatic door sensors our strategy is based on the application of our core competency - detecting people, vehicles and objects - into a broader range of markets such as transport and security. We have developed novel new laser-based sensor platforms which are enabling us to grow market share in our core pedestrian door market and open up new opportunities.Halma's fire companies are increasingly focused on meeting customers' needs by supplying systems in addition to our system components, such as
fire detectors. The acquisition of Advanced Electronics last year has accelerated this approach. The US market continues to deliver strong returns and this will be boosted by the introduction of significant new products over the next few years. In China we are focusing on the upper market segment as this important market continues to grow and is becoming more regulated. Despite the changes in regulatory standards for elevator door detectors, this remains a market with price pressure, especially on new
installations. However, as maintenance and refurbishment increasingly becomes the main global market our focus on premium products will, over time, increase sales and margins. We continue to diversify into other sections of the elevator market, namely LCD displays and elevator phones. The global market for phones is estimated to be around the same size as the elevator door detector market and the in-car display market is at least twice the size.Our security sensors business growth strategy is based on new
product innovation which provides added functionality and ease of installation. We increased investment in the development of new wireless intrusion detection products and associated 'smart' security and building automation systems.
Performance The sector delivered strong revenue and profit growth in 2015/16. Revenue grew by 13% to £265m (2015: £234m) and profit1 rose by 12% to £56m (2015: £50m). At constant currency, organic revenue was up 6% and profit up 5%. We continue to exceed Group targets on Return on Capital Employed and cash generation. Return on Sales remained strong at 21.2%, due primarily to successful new product launches and an effective balance between investment and cost control to maintain margins. Revenue in all
major markets increased during the year, with 4% growth in the UK and 48% in Africa, Near and Middle East. In the USA we achieved 39% growth.Our door sensors business performed well in all segments, driven by increased market demand for safety around the door and an enlarged customer base. Our strategy of diversification, with its focus on the transportation and security market, also delivered strong growth thanks to increased demand for sensor applications based on our advanced laser technology.Our fire
business surpassed the previous year's performance. The first full year of the Advanced Electronics acquisition went well and the company performed above expectations. Firetrace met expectations in the first six months post acquisition. Due to increased competition, especially in China, demand for our elevator door sensors was lower and sales of our elevator displays were flat. However, there was strong growth in sales of our telephone products. In Security, we experienced a challenging year, due primarily
to currency headwinds in our two major market areas, Europe and South Africa.OutlookOur door sensors business is expected to continue its growth in all regions. We will continue to invest in geographic growth and in all segments, supported by ongoing investment in new technologies, the development of new competitive products and sales and marketing.The outlook for our fire companies is strong, with a growing market and several new products on the horizon.Profitability is expected to stabilise in elevator
safety due to a more regional-based sales structure and an increased focus on new product development.In security markets, we foresee a recovery due primarily to a higher level of interest in wireless security systems and continued growth of the 'smart buildings' market.We have a pipeline of potential acquisitions and aim to continue to add complementary businesses to the sector. The sector expects to make progress in the year ahead. 1 See note 2 to the Results.
Medical Sector Review
Products which enhance the quality of life for patients and improve the quality of care delivered by providers. Devices that assess eye health, assist with eye surgery and primary care applications. Critical fluidic components used by medical diagnostic OEMs and laboratories. Sensor technologies used in hospitals to track assets and support patient and staff safety. Adam Meyers, Sector Chief Executive, MedicalThe Medical sector delivered good organic revenue and profit growth in all of our niches, reaching
record revenue and profit levels yet again. Profit and revenue growth, ROS and ROCE continue well above Group targets. We continued to strengthen the Medical sector organisation to support organic growth and acquisition activity.Revenue allocated to R&D has increased, strengthening our innovative technology development pipeline and helping to fuel revenue growth. Despite this and other investments our cash contribution was still above Group target. Three new businesses were acquired during the year. We
continue to focus on acquiring in this sector.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 therapiesGlobal demand for medical devices is forecast to
continue to grow by about 5% per year for the next few years with the highest growth of 8.5% in Asia. A steady rise in the proportion of the global population aged over 60 drives demand for healthcare, in both developed and developing countries. Because eyesight problems and high blood pressure are both age-related, population ageing is a key driver for our ophthalmology and hypertension management businesses. A third of American adults suffer from high blood pressure; this chronic disease is the primary,
or contributing, cause of over 2.4 million American deaths each year. The prevalence of obesity throughout the world has almost doubled in the past 25 years leading to increases in both hypertension-related illness and diabetes-related eye disorders. In China about 325 million adults have high blood pressure (the primary cardiovascular disease risk factor). Half of Chinese adults with hypertension are unaware of their condition and only 34% use anti-hypertensive drugs. Cataract surgery is one of the most
frequent surgical operations carried out worldwide. The estimated 20 million cataract operations carried out globally each year is forecast to grow by 5% annually until 2019. Hospitals in both developed and developing markets are under pressure to improve patient outcomes, reduce costs, improve throughput and ensure safety of staff and patients. Our Real Time Location Systems (RTLS) let hospital managers track and monitor the location of patients, equipment and staff to cut costs and improve patient care.
The global market for RTLS is forecast to grow at about 33% per year between 2015 and 2020. Liquid handling is the principal process in laboratory automation and demand for our critical fluidic components is poised to grow at a CAGR of over 6%, at least until 2020. The largest geographic markets for laboratory automation are North America and Europe while Asia is expected to have the highest growth rate. Each year the medical product regulatory environment gets tougher; product registration costs rise,
testing is more rigorous and more audits are needed. The growing complexity of medical device registration underlines the value of our investment in well-established medical sales channels and market access.
Geographic trendsWhile the global medical device market growth should provide opportunity for sustained revenue growth, we anticipate geographic variation due to local economic conditions, government spending programmes and currency fluctuations. Medical device demand in North America, the largest global market for medical device technologies, is forecast to have a 3.7% CAGR until 2018, whereas Asia is expected to grow at a CAGR of 8.5%. In Europe medical device demand is forecast to grow at a CAGR of about
4% until 2018. US healthcare spending was again stronger than anticipated in the past year and is forecast to rise by about 6% per year until 2024. This strong growth is due to many more Americans benefiting from health insurance through the Affordable Care Act, economic growth and the transition of an ageing population into the Medicare system. By 2024 the US government predicts that nearly US$1 in every US$5 spent will be on healthcare. We expect continued growth in the market for single-use surgical
devices in the USA, but capital equipment sales may grow slowly.Demand for ophthalmic products in China is growing fast at about 15% a year and the market is forecast to double in size by 2021. Our Chinese investment continues - more product registrations, more R&D engineers and development of localised products. Although 400,000 people become blind from cataracts every year in China, it has the lowest cataract surgery rate in Asia. Cataract surgery rates in China will increase as access is improved,
particularly in rural areas. However, government pressure on top urban hospitals and preferences for local products is producing a more challenging environment in China in the short term.
StrategyThe Medical sector is focused on enhancing the quality of life for patients and improving the quality of care delivered by providers. We serve niche applications in global markets. By investing in our current portfolio, and through acquiring additional companies, we aim to continue to deliver growth rates above Group targets.Our businesses fall into two segments; Patient Care and Provider Solutions. The Patient Care segment involves businesses that develop and market devices to measure the health of
patients. Areas of focus include ophthalmology and vital signs monitoring. In the Provider Solutions segment, we deliver products to diagnostic equipment manufacturers, laboratories and hospitals. Areas of focus here include critical fluidic components for instruments such as blood analysers, finished devices for laboratories, and sensor technologies that track assets and support patient and staff safety.Key strategic initiatives to increase growth organically and via acquisition include:- increasing
collaboration to drive expansion and joint product development- increasing R&D investment to broaden product lines and commercialise innovative new products- further geographic penetration and increased local manufacturing- improving talent and increasing diversity- adjacent market niche expansionWe measure active collaboration across the sector and have seen an increase of 83% in inter-company trading this year. Collaboration on R&D projects continues within and outside the sector.
As indicated last year, R&D investment increased and reached 4.5% of revenue. This is an increase in spending of £2m and is now above Group target. Increased investment was mostly within the Patient Care segment. Medical sector R&D focuses on components and instrumentation that will be readily accepted by our existing conservative customer base. We have begun expanding local development and manufacturing efforts in emerging markets to better satisfy local customer needs. This year we launched a locally
developed and manufactured blood pressure device in China and began registering more devices for local manufacture there.A growing Medical sector sales team in China jointly markets many of our ophthalmologic products. Collaborative selling helps us recruit high calibre talent and share customer intelligence and distribution channels. We also plan to set up a medical product manufacturing hub in Shenzhen.
Performance The Medical sector grew revenue by 17% to £199m (2015: £169m) and profit1 by 14% to £52m (2015: £45m). Organic constant currency revenue growth and organic constant currency profit growth were 10% and 9% respectively.We delivered revenue growth in major geographies with the USA ahead 23%, Europe up 19% and Asia Pacific ahead 20%. We also delivered 8% growth in the UK but were disappointed in Rest of World growth down 3%, largely due to a slowdown in Latin America. Return on Sales remained strong
at 26% despite increased investment, particularly in R&D. Cash generation was above the Group target of 85% as we make investments to continue our strong revenue growth. We completed three acquisitions: VAS; Visiometrics; and CenTrak.
OutlookIn the medium term we expect our Patient Care and Provider Solutions segments to outperform the market with sales driven by enhanced distribution in export markets, new products, increased penetration in existing markets and acquisitions. The Medical businesses acquired in 2015/16 will have a significant positive impact on the sector's results in 2016/17 and beyond. We continue to build our pipeline of acquisition targets both within existing and adjacent niches. 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 The Environmental & Analysis sector achieved record revenue and profit. There was strong growth in emerging markets, in particular China and India. Our water network
monitoring companies benefited from the new five-year investment cycle in the UK water industry. Renewed international emphasis on climate change is strengthening the position of our environmental applications.The contribution to growth from new products continues to rise, specifically for our photonics businesses, and places us in a strong position for sustained growth in the future. Market trends and growth driversOur products protect and analyse the air we breathe, the water we drink and the food we eat.
They enable the development and manufacture of new products that improve our health and well-being. The Environmental & Analysis sector long-term growth is sustained by four key drivers:- increasing demand for life-critical resources such as energy and water- increasing environmental monitoring and regulations- scientific advances transferring into new industries- worldwide population ageing and increasing standards of livingAccording to the United Nations, by 2030 demand for water
may be 40% higher than supply. By 2050 water shortages are expected to affect over 50% of the global population due to increasing water usage by agriculture, manufacturing, domestic usage and energy production. Energy production is water-intensive and, with the world's population expected to reach 8 billion by 2025, an ever stronger emphasis is placed on energy management and efficiency. Our diversification in energy monitoring and building management systems, and continued efforts in water conservation
technologies capture growth from these trends.Today 1.8 billion people drink faecally-contaminated water and an even greater number drink water that is unsanitary. Our water testing kits help protect an increasing number of people in remote areas. The UN Climate Change Conference in Paris in 2015 reiterated the efforts to limit global warming, and reach carbon neutrality in the second part of the 21st century. The EU is targeting a 40% emission reduction by 2030 compared to 1990 levels. This will multiply
the opportunities for our environmental monitoring and analysis products.Rapid urbanisation particularly affects air pollution. An estimated 80% of global greenhouse gas emissions are derived from cities, where 50% of the population being monitored is exposed to air pollution that is at least 2.5 times higher than the WHO recommended levels. Our mass flow meters are used to calibrate pollution monitoring equipment.In China only 9% of the 190 largest cities meet the National Ambient Air Quality Standards.
Our new gas conditioning equipment is suitable to measure the finest particles which are believed to be the greatest risk to health.R&D investment continues to generate opportunities in adjacent and new markets. Increasing demand for calibration and quality control sensors is a strong driver for our technologies in food processing, pharmaceuticals and agriculture. Increasing adoption of cloud computing and extension of digital communications into new areas boosts demand for our technologies that enhance
data communication. Rising concerns about food safety are creating opportunities in both developed and developing economies. By 2030, 150 million more city dwellers will be 65 or older, increasing the share of the population at higher risk from contamination of food and water.
Geographic trendsThe Environmental & Analysis sector sells into diverse market niches. The modest growth rates of the developed economies are being exceeded by, and at a more accelerated pace in, emerging economies. Sales in emerging markets continue to grow strongly, reaching 30% of sector revenue. Developing world economic growth is driving profound transformations, raising expectations for cleaner air, purer water and safer food. China's environmental concerns are driving strong sales in environmental
monitoring water testing, building on expanded R&D and manufacturing. Food contamination scandals throughout the world are rising. Governments in emerging markets are tightening food quality regulations and the Food Safety Modernization Act is beginning to have an impact in the USA. Opportunities for our spectroscopy applications in the food safety market are appearing globally.India is a key market for our light measurement equipment, where our technology is used to calibrate scientific instruments for
remote sensing. We expect this to continue to grow in the coming year as governmental spending grows. Our water network monitoring companies are benefiting from the new five-year investment cycle in the UK water industry, while diversification into energy distribution monitoring is a growing niche for sales of their sensors and data loggers.Demand for water quality testing by NGOs, particularly in Africa and South America, continues to grow. Implementation of water safety regulations in China is also
fuelling growth for our water quality test kits.
StrategyEnvironmental & Analysis growth strategy centres on market-led new product development, geographic expansion and collaboration to increase market reach.R&D is focused on applications with long-term drivers and defensible positions. Our businesses have increased marketing spend to ensure that new products fulfil specific market needs.We continue to invest in hiring high calibre people in developing regions. As the sector expands in emerging markets, products to meet regional customer need and local
manufacture continues to increase. Our businesses share knowledge and have a strong pipeline of joint development projects. Several businesses re-sell other sector companies' products, and there are many active joint sales and marketing projects.Acquisitions are integral to our sector growth strategy and we expect this to be a key part of our growth story in the future. PerformanceThe Environmental & Analysis sector grew revenue by 15% to £189m (2015: £164m) and profit1 by 26% to £34m (2015: £27m). At
constant currency, organic revenue growth was 11% and organic profit growth was 21%. Return on Sales improved to 18.3% (2015: 16.7%) and was back above Group target.This was a strong year for our photonics businesses. R&D projects created opportunities in existing and new markets, geographies and applications. As increasing numbers of industrial processes need more sophisticated measurement devices, we have been able to capture substantial growth. China provided substantial growth for our water business, as
we developed test kits specific to new environmental regulations. The return of business in the Middle East, along with the start of the new AMP five-year capital investment cycle in the UK, drove growth at our water monitoring businesses. Continuing emerging market growth created a favourable environment for rising sales at our gas conditioning businesses where new products penetrated growth markets in China and India and increased developed region revenue. OutlookExternally, global population growth,
population ageing and increasing standards of living are driving demand for basic energy resources, cleaner air, safer water and food and healthcare spending. Our products and companies are well positioned to continue to take advantage of these long-term growth drivers.We are strengthening our acquisition pipeline, and we expect to add complementary businesses in the coming years. 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 2016.
Risk description Potential impact Mitigation
GlobalisationThe global interconnectedness of operations poses wide-ranging challenges across the Group especially where businesses manage operational matters via remote locations; the increasing global spread of our businesses, particularly in China, requires additional vigilance over communication, culture, training and export controls/sanctions in order to anticipate and contain any vulnerabilities. - Weakening of financial, tax, audit and legal control and divergence from overall Group strategy in remote operations, leading to businesses taking on more risks than intended or unexpected financial outcomes.- Failure to comply with local laws and regulations in unfamiliar territories, leading to reputational issues and legal or regulatory disputes.- Continued international growth increases risk.- Missed opportunities due to failure to mobilise resources efficiently. - Control is exercised locally in accordance with the Group's policy of autonomous management. We seek to employ local high-quality experts.- The increasing
geographic diversity of operating personnel emphasises the importance the Group places on local knowledge and experience.- The Group's acquisition model ensures
retention of management and staff in acquired businesses, meaning that local expertise is retained.- Sector Chief Executives ensure that overall Group strategy is
fulfilled through ongoing review of the businesses. The right balance between autonomy and adherence to the overall objectives of the Group is a key function of the
Sector Chief Executives, Sector Vice Presidents and Senior Finance Executives.- Regular visits to remote operations and maintenance of key adviser relationships by
senior management, finance staff and Internal Audit support local control.- The Group's geographic and product diversity reduces risk.
CompetitionThe Group faces competition in the form of pricing, service, reliability and substitution. - Loss of market share due to price pressure and changing markets.- Reduced financial performance arising from competitive threats both from third parties and customers bringing production in-house. - By empowering and resourcing innovation in local operations to respond to changing market needs, the potential adverse impact of downward price pressure and
competition can be mitigated and growth maintained.- We recognise the competitive threat coming from emerging economies and by operating within these economies,
typically using local staff, we are better placed to make fast progress ourselves.- The Group operates in specialised global niche markets offering high barriers-to
-entry.
Economic conditions In times of uncertain economic conditions, businesses face additional or elevated levels of risk. These include market and customer risk, customer default, fraud, supply chain risk and liquidity risk. - Reduced financial performance.- Loss of market share.- Unforeseen liabilities. - Disruption of service to customers.- Breaches of legal or regulatory requirements resulting in fines/ penalties impacting the Group financially and reputationally. - Potential impairment of goodwill. - Risks are primarily
- More to follow, for following part double click ID:nRSN0651BcRecent news on Halma
See all newsREG - Halma PLC - Director/PDMR Shareholding
AnnouncementREG - Halma PLC - Director/PDMR Shareholding
AnnouncementREG - Halma PLC - Acquisition
AnnouncementREG - Halma PLC - Acquisition
AnnouncementREG - Halma PLC - Half Year Results
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