REG - Halma PLC - Final Results <Origin Href="QuoteRef">HLMA.L</Origin> - Part 2
13/06/2017 07:05
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arrangements. These changes have reduced Group risk.The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net deficit on our pension plans at 1 April 2017 based on the market value of assets
at that date and the valuation of liabilities using year end AA corporate bond yields.On an IAS 19 basis the deficit on the Group's DB plans at the 2016/17 year end has increased to £74.9m (2016: £52.3m) before the related deferred tax asset. The value of plan assets increased to £265.0m (2016: £221.9m). 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 £339.9m (2016: £274.2m) primarily due
to the reduction in the discount rate from 3.4% to 2.5%.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, cash contributions aimed at eliminating the deficit were agreed with the trustees. In 2016/17 these contributions amounted to £10.2m (2016: £7.7m) with agreed modest future increases. The next triennial valuations are due in late 2017 and early 2018
and following these appropriate revised contribution rates will be set as necessary.
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 and we recruited a Director of Risk and Internal Audit at Group level to help support growth of our
businesses and our proactive approach to risk management.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 risk-based internal audit. The principal Group risks have been referenced below and in the Chief Executive's Strategic Review and Sector Reviews. In addition principal risks are highlighted in the Audit Committee Report and Auditor's
Report in the Annual Report and Accounts 2017.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.The UK referendum decision in June 2016 to leave the European Union has added a new
dimension to the uncertainties surrounding global economic growth. In 2016/17, approximately 10% of Group revenue came from direct sales between the UK and Mainland Europe. Our decentralised model with businesses in diverse markets and locations enables each Halma company to adapt quickly to changing trading conditions, such as weaker Sterling, offering competitive pricing opportunities for exports from the UK.Halma has formed an executive working group that is tasked with assessing and monitoring the
impacts on our business and to communicate updates and guidance as the Brexit process evolves. To date, the following risks have been identified as having an actual and/or potential impact on our business:- Economic conditions - increased overall uncertainty including the specific impacts on growth, inflation, interest and currency rates- Defined benefit pension liability - movements in bond yields affecting discount rates which may increase the liability- Laws and regulations - potential
changes to UK and EU based law and regulation including product approvals, patents and import/export tariffsCyber security represents an ongoing risk to our businesses. This year, in addition to continuing our online employee awareness programme, we have further strengthened the proactive monitoring of threats and our system resilience. We continue to extend our international team and also continue to design cyber security into our products.The Board considers all of the above factors in its review of
'Going Concern' as described below. In addition the Viability Statement is presented in an abridged form below, and in full in the Annual Report and Accounts 2017, extending the Board's review over a three year period. Both reviews have been concluded 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. Kevin Thompson, Finance Director
1 In addition to those figures reported under IFRS Halma uses adjusted figures as key performance indicators as management believe these measures enable them to better assess the underlying trading performance of the business. Adjusted profit excludes the amortisation and impairment of acquired intangible assets; acquisition items, restructuring cost and profit or loss on disposal of operations. All of these are included in the statutory figures. Note 11 to the Results gives further details with the
calculation and reconciliation of adjusted figures.
2 See Highlights.
Process Safety Sector Review
Products which protect people and assets at work. Specialised interlocks that control critical processes safely. Instruments that detect flammable and hazardous gases. Explosion protection and pressure relief systems, and corrosion monitoring products. Philippe Felten, Sector Chief Executive, Process SafetySector progress summaryThe sector has delivered both revenue and profit growth in difficult market conditions.In the first half of the year our major market, energy, was still impacted by low oil prices.
The second half saw improvements with a combination of stabilised oil prices and positive progress in our diversification strategy.These factors and investment made during the year have positioned the sector to continue to grow in 2017/18. Market trends and growth driversPopulation growth and economic development drive demand for life-critical resources. The industrial processes supporting this development are at risk from accidents caused by explosions, radiation, fire, corrosion and other hazards. Workers
and assets are exposed to these dangers.Every year, industrial accidents have significant human, environmental and economic consequences. These accidents have many causes, including component failure, human error or procedure deviations. The consequences vary in severity from minor (such as loss of production) to major (serious injury, death, closure of business).The companies in Halma's Process Safety sector have a deep understanding of our customers' safety challenges. We offer innovative and reliable
products and technology that reduce accidents and enhance the efficiency of industrial processes by isolating, detecting or removing hazards.Our end markets are diverse and our products can be found in energy (mainly oil and gas), chemical, pharmaceutical, food and beverage, automotive, transport and logistics installations across the globe.The underlying long term drivers in our Process Safety markets remain relatively unchanged, despite some sectors, such as oil and gas, having faced economic challenges
over the last 18 months.Our main drivers are:- increasing health, safety and environmental regulations- industrialisation and population growth, stimulating rising energy demand- increasing development, complexity and geographic spread of energy resources and their safety requirements- automation and digitalisation, requiring connected safety controls systemsGovernments continue to support increased health and safety regulations to protect people and the environment. This drives the
demand for our products at rates that are higher than general economic growth. In a challenging oil and gas environment, the Process Safety sector delivered performance in 2016/17 that demonstrated the robustness of our growth drivers.Oil prices fell from a high in 2014 due to oversupply and reduced demand as economic growth slowed. The reduction in capital expenditure by the oil majors was significant in the upstream segment, and to a lesser extent in the midstream segment. The sector started to see the
impact of this in mid-2015. Chemicals and petrochemicals processing benefited from the low oil price and, in those markets, we saw more resilient demand.In the first half of 2016/17, market conditions did not change significantly. Oil price stability offered some comfort, but overall, capital expenditure in upstream and midstream markets remained subdued.In the second half of 2016/17 the oil and gas market was more active, with oil price stability, cost-efficiency efforts, and non-conventional oil
extraction in the US creating a slightly more positive environment for our businesses. Although upstream capital expenditure remained tightly controlled, the need to upgrade and maintain safety products led to higher activity levels. These improvements were, however, modest relative to levels seen a couple of years earlier.In these challenging and complex market conditions, we adapted our strategy by diversifying into non-oil and gas end markets. This demonstrated our flexibility and deep understanding of
the applications in which our products can be used. This ability to use our technologies for new applications and new end markets has been a key factor in our improved performance. Geographic trendsRevenue increased in most major regions. The US revenue grew by 12% helped by the gradual increase in non-conventional oil extraction in the second half of the year. Europe revenue rose as we diversified our explosion protection business into chemical and pharmaceutical applications, while our safety interlocks
businesses saw good momentum in the automotive, food, beverage and transport/logistics markets. UK market activities were flat compared to last year, with continuing low activity in the North Sea.In China, our business grew by 18% with good progress in the gas detection and machine automation/sequential safety sub sectors. Stricter safety regulations continue to be enforced, creating growing demand for our products in China.Sales in the Middle East grew strongly by 37% as oil and gas production has been
maintained at reasonable levels.In South America, economic conditions were still depressed. Supported by our Brazil sector hub, we were able to achieve some growth, mainly in the explosion protection market.We saw good growth in India particularly in our pipeline management sub-sector. StrategyOur strategy of investing in new products in order to diversify our end markets and meet specific local requirements has delivered improving results. We reduced costs in some of our oil and gas-exposed businesses and
were able to focus our activities on new application niches in non-oil and gas markets.At the start of the year we combined some of our businesses in order to raise operating efficiency and support diversification. This strategy has led to faster product innovation, increased geographic market reach and improved customer service. Combining these businesses also allowed us to offer customers an extended product portfolio.Investment in innovation and application engineering capabilities was increased,
providing local markets with quick product adaptation for specific requirements.Our companies embrace globalisation, diversification and the need to develop connected technology. We are upgrading and developing talent across our businesses.Greater emphasis has been placed on strategic marketing, with our companies researching new market opportunities.Our acquisition strategy is to focus on businesses that will reinforce our diversification, accelerate our digital transformation, and contribute to our
geographic expansion.
Performance Sector revenues grew by 7% to £167m (2016: £155m) and profit1 grew by 2% to £40m (2016: £40m). At constant currency, organic revenue was up by 1% and profit down 4%. Return on Sales was 24.1%.The first half of the year was challenging while the second half saw some positive signs in the non-conventional oil market. This welcome increase in activity, combined with our restructuring efforts aimed at increasing diversification, delivered revenue and profit growth through the second half of the
year.Our machine automation, sequential safety and gas safety companies enjoyed good levels of demand for existing safety products, while offering innovative solutions in new, specific niche applications.The newly combined sequential safety businesses delivered excellent performance thanks to strong regional activity and centrally-located innovation. Our machine automation business continues to perform well, with good progress in North America and China. The gas detection business also made good progress in
China.Our pressure management companies performed better in the second half due to efforts in chemical and pharmaceutical markets and a slight recovery in the US oil industry.Our pipeline management businesses had mixed results. The corrosion monitoring business delivered flat profit while our valve interlock businesses faced difficult market conditions, as their products come late in the cycle when capital expenditures are released. Efforts to grasp new opportunities with valve drive units and valve
monitoring solutions have started to improve results.New products (not older than three years) accounted for 29% of sector revenues. R&D spend has remained at good levels, providing new products and innovations to support our growth ambitions. OutlookOverall industrial production is expected to increase on the three major continents, with China and the US leading this growth. In parallel, the food and beverage, automotive, and transport and logistics industries will continue to be attractive markets for the
sector.Non-conventional US oil extraction is set to rebound in 2017 and we will benefit from this increased activity. The chemical market will continue to develop further mainly in the USA.The evolution of smart factories using the internet of things and cloud computing will continue to drive the demand for safety products. We see the possibility to offer extended capabilities as we move to digitalise our products.We will continue to push on our diversification strategy, constantly looking at specific niche
applications.The combination of market diversification, our newly-combined businesses, and a slow economic improvement in the oil and gas industry will enable us to make further progress in the coming year. 1 See note 2 to the Results.
Infrastructure Safety Sector Review Products and services that improve the safety and mobility of people and protect commercially and publicly owned infrastructure. Fire detection systems, smoke detectors, specialist fire suppression systems, people and vehicle flow solutions, security systems and elevator safety products. Paul Simmons, Sector Chief Executive, Infrastructure SafetySector progress summaryThe Infrastructure Safety sector delivered strong organic revenue and profit growth with revenue growth
across all geographic regions and most sub-sectors. Record results in the Fire detection and People and vehicle flow sub-sectors more than compensated for a more challenging year for the Fire suppression sub-sector.Return on Sales and Return on Capital Employed remained comfortably above the Group's targets with good cash generation. Investment in R&D in absolute terms and as a percentage of sales continued to increase. New sensing technologies, increased product functionality and inter-connectivity were
the predominant themes in building the sector's new product pipeline. Market trends and growth driversThe long-term growth drivers of global population growth, urbanisation and increasing health and safety regulation worldwide remain central to our strategy. We are also increasingly focusing on two additional drivers:- the need for increased efficiency in buildings and people movement- the need for protection from increasing threats to securityThese growth drivers provide the potential for each
of our sub-sectors to grow at a faster rate than their wider markets.Technology trends across all sector businesses include the increasing inter-connectivity of devices and systems, wireless technology and an increase in the use of cloud based applications to share data and facilitate data analysis.The combined effect of the market growth drivers and technology trends are reflected in each sub-sector's market growth rates:- the global elevator market is expected to grow at around 6% per year. The
elevator refurbishment market is forecast to grow above that due to an ever-increasing installed base. Due to the high cost of fixed telephone lines, mobile telecommunications technology is increasingly being utilised to connect elevator cars to call centres for emergency communications and to facilitate data transmission for applications such as predictive maintenance- the fire detection market is forecast to grow at over 5% annually with premium products such as multi-function sensors, wireless
detectors and networked panels expected to grow beyond the general market growth rate. Increased regulation continues to be important in the fire market. For example, China's fire regulator (CCCF) will introduce more stringent standards in the next few years. A change to Underwriter Laboratories' (UL) fire regulation requirements to deal with new types of fire and to eliminate nuisance alarms will increase detector specifications in 40% of the global market by 2020. The global fire suppression market is
expected to grow at 5% per year- the core of our People and vehicle flow sub-sector is pedestrian sensing. Our strategy of diversification into other applications such as vehicle sensing and people counting is reducing our dependence on the 4% growth global door market and providing higher growth opportunities- increasingly home owners are looking to integrate their home security systems with the automation of other functions of property management, all controlled and monitored from smart
phones. These connected systems are poised to deliver annual growth of 9% as part of the total security market growth of 5% annually
Geographic trendsWhile all sub-sectors enjoy positive market growth worldwide, there are regional variations. These are driven by specific local opportunities (for example vehicle inspection in China), local changes in regulations (for example fire regulations changes) or regional economic growth rates. For example, the fire detection market is due to grow 12% per year in India, 7% in China and below 5% in the USA and Europe.The sector's regional companies can see changes within a geographic market. For
example, the Chinese elevator OEM supply market is very large but highly competitive. The elevator service and refurbishment market in China is much less mature and offers both higher margin and higher growth opportunities. Another example is the opportunity created for people flow technologies created by China's significant investment in its high-speed rail network.
StrategyThe Infrastructure Safety sector is focused on improving the safety and mobility of people and protecting commercially and publicly owned infrastructure worldwide. We target high return, niche markets that have low cyclicality and have high barriers to entry. We build our business globally by developing products and services within our sector companies or by acquiring companies that are already leaders in targeted, adjacent markets.The trend towards the interconnectivity of devices to form more
intelligent systems is playing an increasingly important part in the sector's strategic actions, with the opportunity to offer customers broader solutions than simply detecting hazards. Many sector companies are well placed to generate data and data analysis through their sensor technologies. This trend is driving increased collaboration between our companies as they co-operate on joint development programmes.Geographic expansion remains a priority. We continue to strengthen our teams and our product
offerings in China, India and South East Asia. These geographies are particularly attractive due to their higher growth rates and the support that the Halma hub infrastructure can provide.Our key strategic objectives to drive growth include:- acquiring companies to strengthen our core technologies- acquiring companies in adjacent niche markets- launching new products to create additional value in existing and new applications- developing new products to expand our offerings along the
digital value chain- establishing R&D capabilities close to our customers- developing top talent and hiring a capable and diverse team to meet the changing challenges in our markets- operational excellence and the sharing of best practice to sustain growth in existing product areas and market segments
Performance Revenue grew by 19% to £315m (2016: £265m) and profit1 by 17% to £65m (2016: £56m). Organic constant currency revenue and organic constant currency profit growth were both 7%.All geographic regions contributed strongly to revenue growth. Mainland Europe grew by 29%, the US grew by 16% and the UK increased by 11%. Growth outside these established markets was particularly encouraging at 20%.The Fire detection and People and vehicle flow sub-sectors performed very well. The Security and Elevator
sub-sectors delivered a solid performance, while the Fire suppression sub-sector declined.New products played an important role in driving revenue growth. A new generation laser product achieved rapid success in the People and vehicle flow sub-sector and a new fire detection platform, consisting of multiple products complete with a new operating protocol, was launched.Our recent acquisitions made a significant impact on the sector's results. Advanced Electronics (Fire detection), acquired in 2014, performed
above expectations. In 2015 we acquired Firetrace, our specialist Fire suppression company. The company's performance was below expectations and we made senior management changes to position the business for growth.Return on Capital Employed remained high and well ahead of the Halma minimum target of 45%. There was significant investment in capitalised R&D programmes and substantial spend on targeted automation of our manufacturing processes. The benefits of the investment in automation contributed
immediately in increased capacity and increased labour efficiency.Gross margins were maintained and Return on Sales was 20.7%, after increased investment in R&D. Cash generation was strong. OutlookThe strategic growth drivers of population growth, urbanisation and increasing regulation remain key to the sector. Our new product pipeline is strong, with significant products due to be launched across multiple sub-sectors in the next year. As devices are becoming increasingly interconnected, new opportunities
are being created which we are positioned to exploit. Consequently, in the medium-term we expect all sub-sectors to grow at, or better than, market rates through the increased penetration of core markets and geographic expansion.The level of acquisition activity has increased. We expect acquisitions to both enhance our technology offering in our core markets and accelerate our regional growth in core sub-sectors. Acquisitions also provide an opportunity to build platforms in adjacent sub-sectors. The sector
is positioned to make further 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, MedicalSector progress summaryThe Medical sector delivered record revenue and profit on both an as
reported and organic constant currency basis. Revenue grew in all our major geographies.Including recent acquisitions and currency movement, the sector achieved 31% revenue growth and 29% profit growth. Medical has averaged greater than 15% growth in both revenue and profit since it began reporting as a sector in 2013.On an organic constant currency basis, revenue grew 4% and profit was ahead 6%.R&D spending increased again by more than £2m, with continued investment in our core businesses and investment in
recent acquisitions adding new capabilities to our research teams.We continued to focus on talent development, investing in our key people both at the sector level and throughout our subsidiaries.Return on Sales remained flat at 26% and Return on Capital Employed and cash production continue to be strong.The performance of our recent acquisitions improved in the second half and we continued to focus on acquiring new businesses. 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 healthcare spending is forecast to rise over 4% per year through to 2020 with higher rates in Asia Pacific.The world population is expected to increase by 1 billion by
2025 with 300 million of that increase predicted to come from people over 65. Because eyesight problems and high blood pressure are both age-related, population ageing is a key driver for our businesses, especially in ophthalmology and hypertension management.With the continued growth of the middle class in developing economies, it is forecast that 65% of the global population will be middle class by 2025. Coupled with increased urbanisation, rising affluence is likely to lead to more sedentary lifestyles
which increases obesity and hypertension-related illness and diabetes-related eye disorders.Currently, one in every three US adults has high blood pressure and only half of these individuals have their condition under control. A further one third have prehypertension which means they should continue to have their blood pressure monitored by the type of products made by our patient assessment companies.Cataract surgery is one of the most frequent surgical operations carried out worldwide at more than 25
million annually. Continued growth in the number of cataract surgeries and an ongoing shift towards disposable instrumentation will drive global spending on ophthalmic surgical instrumentation over 5% per year through to 2022.In addition to the prevalence of eye disease with ageing, demand is increasing for improved visual outcomes and premium procedures due to people's lifestyles. By 2020, premium cataract procedures are expected to account for 34% of total cataract surgery revenue as wealthier and younger
patients are demanding perfect vision at every stage in life. This market for high-revenue, personal payment premium procedures is of increasing importance to our ophthalmic companies which focus on improved patient outcomes.Hospitals remain under pressure to improve patient outcomes, reduce costs, improve throughput and ensure safety of staff and patients. The global market for the real time location systems that we recently added to our portfolio, is forecast to grow at 24% per year between 2016 and
2022.The increasing prevalence of lifestyle-connected and chronic disease, along with a growing acceptance of molecular diagnostics in personalised medicine, is driving growth in the in vitro diagnostics and laboratory markets served by our diagnostic companies. This market is projected to grow at 5.5% through to 2021.We are starting to see other macro trends around healthcare delivery impacting our markets and offering growth opportunities. Telemedicine is growing at almost 19% annually as it offers
dramatically different ways to deliver healthcare by sharing information and data across a wide range of service providers. One of our ophthalmology companies is using remote diagnosis via telecoms to help prevent blindness in diabetic patients.Trends like increasing global healthcare costs are putting pressure on product pricing and government expenditure, increasing market volatility in some geographies.Globally regulated markets continue to shift as increased medical product and procedure approvals delay
product launches, especially in geographies such as China and Brazil, and more recently Europe. Recent changes suggest India is introducing tighter regulation too. Overall, our strong channels and regulatory experience position us well to navigate this environment and provide barriers to entry for new entrants.
Geographic trendsThere continues to be considerable geographic variation in the global medical device market due to local economic conditions, government spending programmes and currency fluctuations. Our growth strategies will continue to vary by region.The global medical device market is expected to continue to grow 5% through to 2021. North America will remain the largest market for medical device technologies, growing at 4%. In the Asia Pacific market growth is forecast to continue above 7%, with Europe
recovering at 5% through to 2021.US healthcare expenditure continues to have the highest spending per capita, but we may see significant change under the new political administration. Hospitals are seeing relief from covering the uninsured as more Americans benefit from health insurance through the Affordable Care Act, allowing them to invest in new technologies, although, this may change. We expect continued growth for our single-use surgical devices in the USA and growing demand in Europe.The Chinese
ophthalmology market could double by 2021 and we continue to expand our engineering, sales and marketing staff to drive the development and commercialisation of local products. Changing government restrictions from pricing controls to regulatory tightening continue to make this a dynamic market.The Latin American market continues to experience volatility although should continue to grow on average across the region. The in vitro diagnostic business, a focus of our diagnostic companies in the region, is
forecast to grow 7% annually to 2020.
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 acquiring additional companies, we aim to continue to deliver growth rates at, or above, Group targets.We organise our medical businesses into two segments: Patient care and Provider solutions. Patient care includes businesses that develop and market devices to monitor and improve
the health of patients. Current focus areas include ophthalmology and patient assessment.Provider solutions features products sold to diagnostic equipment manufacturers, laboratories and hospitals. Current focus areas include critical fluidic components for instruments such as blood analysers, finished devices for laboratories, and sensor technologies that track assets in healthcare facilities and support patient and staff safety.Key sector strategic initiatives to increase growth organically and via
acquisition include:- improving talent and increasing diversity- increasing collaboration to drive geographic expansion and product development- increasing R&D investment to adapt to quickly changing market needs and respond to consumerisation of healthcare globally- empowering regional leaders to expand geographic penetration and increase local manufacturing and R&D- acquisitions in both core and adjacent market nichesWe continue to seek and develop higher calibre talent. We
have increased our gender and international diversity to drive innovation, collaboration and better meet market needs.Collaboration between our Medical sector businesses continues to increase with shared R&D projects reaching commercialisation and sales and marketing projects like shared service technicians in Brazil.R&D spending increased by £2.4m to 4.3% of revenue, which is above Group target.This is a 27% increase over last year and 68% higher than two years ago. The increase has come throughout our
core businesses as well as new acquisitions.Our R&D focuses on components and instruments that will be readily accepted by our existing customer base as well as technologies that will advance patient care, reduce cost and improve outcomes. Efforts continue in emerging markets to better satisfy local customer needs including expanding local resources and increasing local R&D and manufacturing capability.During 2017 we will expand our collaborative efforts in China, jointly marketing a wider range of
ophthalmic and diagnostic products.
Performance The Medical sector grew revenue by 31% to £261m (2016: £199m) and profit1 by 29% to £67m (2016: £52m). This includes a favourable currency impact of 14%. Organic constant currency revenue growth and organic constant currency profit growth were 4% (2016: 10%) and 6% (2016: 9%) respectively.We delivered revenue growth in all major regions with the USA ahead 43%, Europe up 13%, the UK 13% higher and Asia Pacific ahead 36%.Growth outside the UK, USA and Europe was 29%, contributing 25% of sector
revenue.The sector continues to deliver high returns. Return on Sales remained high at 25.6% (2016: 26.0%). Return on Capital Employed and cash generation remained strong.We did not complete any acquisitions in 2016/17, but continued the integration of the three businesses acquired in the prior year. These businesses delivered strong second half performances and will continue to contribute to sector growth in the year ahead.
OutlookIn the medium term, we expect our Patient care and Provider solutions segments to outperform the market with rising revenue driven by export growth, new products, increased penetration in existing markets and acquisitions.We will continue to build our acquisition targets pipeline within existing and adjacent niches, and expect continued growth from the businesses acquired in 2015/16. 1 See note 2 to the Results.
Environmental & Analysis Sector Review
Products and technologies for analysis in environmental safety and life sciences markets. Market-leading opto-electronic technology and sensors. Flow measurement instruments and gas conditioning products. Products for environmental data recording, water quality testing and water distribution network monitoring, and UV water treatment. Chuck Dubois, Sector Chief Executive, Environmental & Analysis Sector progress summaryThe Environmental & Analysis sector achieved record results with good organic revenue
and profit growth, continuing the progress made last year.Global emphasis on climate change and pollution monitoring continues to strengthen the position of our environmental applications. We grew significantly in emerging markets, particularly in the Asia Pacific region, led by environmental monitoring applications. Our water businesses had a successful year with a strong performance in North America. Our photonics businesses continued to find new applications in a variety of diversified markets and
industries.The acquisition of FluxData strengthened our technological capabilities, greatly increasing the number of opportunities for the sector in spectral imaging and sensing.We completed the restructuring of our photonics coating business, Pixelteq, by transferring key technologies and assets into Ocean Optics, while Ocean Optics Asia was folded back into the Ocean group under a strong leadership team and coordinated strategy. We expect to see the benefits of this restructuring in the coming financial
year. Market trends and growth driversThe Environmental & Analysis sector's long-term growth is sustained by three key drivers:- rising demand for life-critical resources such as energy, water and food- increasing environmental monitoring and regulations- worldwide population growth, urbanisation and rising standards of livingGlobally, water demand is predicted to increase significantly over the coming decades in all sectors from agriculture and industry to energy production. Accelerated
urbanisation and the expansion of municipal water supply and sanitation systems, particularly in developing regions, also contribute to the rising demand. At the same time, limited water resources are increasingly stressed by over abstraction, pollution and climate change.Two thirds of the world's population currently live in areas that experience water scarcity for at least one month a year. About 500 million people live in areas where water consumption exceeds the locally renewable water resources by a
factor of two. Our products monitor surface, municipal and waste water conditions, helping improve water conservation both in developing and developed countries.Water quality testing applications use our products to assess the presence of faecal coliforms, which originate from human and animal excreta, and are used as an indicator of the presence of all potential pathogens in surface waters. This is especially important in developing countries and rural areas. It is estimated that severe pathogen pollution
affects around one third of all river stretches in Africa, Asia and Latin America, putting the health of millions of people at risk.Population growth has outpaced gains in sanitation and drinking water coverage, especially in urban areas. Only 26% of urban sanitation and wastewater services effectively prevent human contact with contaminants along the entire sanitation chain. Our water testing systems help identify the contaminants in these water networks, while our UV systems disinfect drinking and waste
water in major cities around the world as well as being the primary method of disinfection for many bottled water plants.Outdoor air pollution is a major environmental health risk affecting everyone in developing and developed countries alike. In 2014, 92% of the world population lived in places where the World Health Organization air quality guidelines levels were not met, and ambient air quality (outdoor air pollution) in both cities and rural areas was estimated to cause three million premature deaths
worldwide. For example, in China only 25 of 190 cities studied could meet the country's National Ambient Air Quality Standards.We provide systems that assist in the precise detection of contaminants as well as other products that aid in the calibration of pollution monitoring equipment. Further, our gas conditioning equipment is ideally suited for stack emission monitoring of gases such as SO2 and NOx as well as for measuring the fine particles (PM2.5) which are believed to be the greatest risk to health.
These applications are also beginning to find success in India, which overtook China in air pollution levels in cities in 2015.Our recent acquisition of FluxData has strengthened our position in spectroscopy and spectral specific imaging. By looking at specific spectral bands, they provide much more information in far less time than traditional methods, thus allowing for higher efficiency and decreased waste.Applications include inspection during industrial processes including the production of food and
beverages, pharmaceuticals and agriculture. The non-invasive nature of the technology is also best suited for security applications such as detection of explosive or hazardous chemicals, non-invasive medical diagnostics, and environmental and remote sensing applications. Process spectroscopy is forecasted to grow at 6% annually until 2020, but some of the newer technologies that we employ such as Raman spectroscopy and spectral imaging are forecast to grow at even faster rates.
Geographic trendsWe sell into a wide variety of diverse market niches. These niches exhibit different characteristics that vary according to each specific country's requirements, their economy and their regulatory environment.The China National 13th Five-Year Plan is having a profound impact on the environmental landscape of China. Stricter compliance measures for urban air quality, standardisation of the regulations around industrial pollutant emissions and ultra-low emissions of coal-fired power plants
are all aimed at improving the quality of air, especially in urban areas. Similarly, other control plans are being enacted for water and soil pollution. For example, there is continued emphasis on improving rural access to clean water and improving the water distribution network and wastewater treatment.In India, emissions monitoring and concerns over air pollution are increasing and we have designed products that specifically address the needs of this market. We expect that stronger water monitoring
protocols are next. We are ready to supply products suited to their needs, benefiting from our experience in China.We continue to grow well in the developed countries. While growth in pollution monitoring in some regions might not be as significant as in the emerging markets, there are other niches that we continue to serve through a variety of technologies. Performance in the USA was particularly strong this year, as our life science and research products continued to grow sales, as did some of our water
monitoring businesses. Designing products in, and for, emerging markets is important to our growth, although we continue to develop products for our core markets too.
StrategyOur products improve the quality of air, water and food for everyone on the planet. They enable the development and manufacture of products that improve our health and well-being. Our growth strategy centres on market-led new product development, geographic expansion and collaboration between the companies in the sector. Through this we will enhance our ability to help solve the problems our world faces.We continue to seek, foster and invest for growth in emerging markets. Revenue from countries
outside the UK, the USA and Europe has grown 55% in the past five years, as we have captured larger opportunities thanks to more stringent regulations driven by a demand for environmental protection, safer food and water, and better health and sanitation.Most of our companies provide sensors that are a data collection point. Data availability has dramatically changed in the last few years, and our companies are increasing their efforts in exploring new ways to capture, manage, manipulate and utilise
data.Talent management and development has been a major contributor to the continued success of the sector. The introduction of a Sector Talent Director has supported our sector-level initiative to achieve stronger and more diverse company boards across the sector.We are targeting acquisitions in segments that tie to our existing technologies and/or market knowledge, have good long-term growth drivers and defensible positions through regulations or intellectual property. For example, our most recent
acquisition, FluxData, extends our spectroscopic capability into spectral imaging to provide more valuable information to our customers. PerformanceThe sector grew revenue by 16% to £219m (2016: £189m) and profit1 by 21% to £42m (2016: £34m). At constant currency, organic revenue growth was 4% and organic profit growth was 6%. Return on Sales improved to 19.0% (2016: 18.3%) and was within the Group target range.This year, and following the geographic consolidation of our photonics coatings business
(Pixelteq) in 2014/15, we transferred its core technology and assets to Ocean Optics. This restructuring benefited the sector's full year adjusted profit by £0.5m in 2016/17 and will also add £1.5m in 2017/18, while simultaneously improving key returns metrics. This restructuring resulted in exceptional costs amounting to £1.9m, which are included within the adjustments to the Income Statement.The acquisition of FluxData during the year opens up many new growth opportunities. Prior to joining Halma,
FluxData worked with two of our existing businesses and we expect that number to rise as they become fully integrated. OutlookGlobal population growth, population ageing and increasing standards of living will continue to drive demand for basic energy resources, cleaner air, safer water and food, and improved health. Our products and companies are well-positioned to continue to take advantage of these long-term growth drivers both in developing and developed countries.
We will continue to improve collaboration between our sector companies in terms of technology, processes, and sales and marketing, to improve efficiency, innovation and performance.Our acquisition pipeline is growing 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 2017.
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 supports
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
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