Sectors

This market commentary is an extract from the Halma 2016 Annual Report and Accounts published on 21 June 2016.

Strategy

Our 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
  • geographic market expansion via shared regional sector hubs
  • acquisitions, predominantly in adjacent markets with low oil and gas exposure

During 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 services

Two 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

Philippe Felten, Sector Chief Executive, Process Safety

Revenue % of Group

19%

Profit % of Group

22%

We 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.

Performance


KPIs

2016
Group
target
Revenue growth1 (1.8%)
Organic revenue growth1 (constant currency) (5.3%) >5%
Profit growth1 (11.6%)
Organic profit growth1 (constant currency) (14.8%) >5%
Return on sales2 25.4% >18%
R&D % of Revenue3 3.7% >4%

Contribution to Group


£m
2016 2015 2014 2013 2012
Revenue 155 159 127 126 122
Profit 40 45 35 32 29
  1. Sector revenue and adjusted4 sector profit before finance expense are compared to the equivalent prior year figures.
  2. Return on Sales is defined as adjusted4 sector profit before finance expense and taxation expressed as a percentage of sector revenue.
  3. Sector research and development expenditure expressed as a percentage of sector revenue.
  4. Adjusted to remove the amortisation of acquired intangible assets and acquisition items (see note 1 to the Accounts).

Revenue declined by 2% to £155m (2015: £159m) and profit 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.

1. See Note 1 to the Accounts.

Outlook

Cost 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.

Strategy

In 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

Nigel Trodd, Sector Chief Executive, Infrastructure Safety

Revenue % of Group

33%

Profit % of Group

31%

The 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.

Performance


KPIs

2016
Group
target
Revenue growth1 13.2%
Organic revenue growth1 (constant currency) 6.3% >5%
Profit growth1 12.3%
Organic profit growth1 (constant currency) 4.5% >5%
Return on Sales2 21.2% >18%
R&D % of Revenue3 5.3% >4%

Contribution to Group


£m
2016 2015 2014 2013 2012
Revenue 265 234 220 205 204
Profit 56 50 44 42 39
  1. Sector revenue and adjusted4 sector profit before finance expense are compared to the equivalent prior year figures.
  2. Return on Sales is defined as adjusted4 sector profit before finance expense and taxation expressed as a percentage of sector revenue.
  3. Sector research and development expenditure expressed as a percentage of sector revenue.
  4. Adjusted to remove the amortisation of acquired intangible assets and acquisition items (see note 1 to the Accounts).

The sector delivered strong revenue and profit growth in 2015/16. Revenue grew by 13% to £265m (2015: £234m) and profit 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.

1. See Note 1 to the Accounts.

Outlook

Our 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 stabilize 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.

Strategy

The 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 expansion

We 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

Adam Meyers, Sector Chief Executive, Medical

Revenue % of Group

25%

Profit % of Group

28%

The 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.

Performance


KPIs

2016
Group
target
Revenue growth1 17.4%
Organic revenue growth1 (constant currency) 9.8% >5%
Profit growth1 13.9%
Organic profit growth1 (constant currency) 9.1% >5%
Return on Sales2 26.0% >18%
R&D % of Revenue3 4.5% >4%

Contribution to Group


£m
2016 2015 2014 2013 2012
Revenue 199 169 163 136 100
Profit 52 45 42 36 26
  1. Sector revenue and adjusted4 sector profit before finance expense are compared to the equivalent prior year figures.
  2. Return on Sales is defined as adjusted4 sector profit before finance expense and taxation expressed as a percentage of sector revenue.
  3. Sector research and development expenditure expressed as a percentage of sector revenue.
  4. Adjusted to remove the amortisation of acquired intangible assets and acquisition items (see note 1 to the Accounts).

The Medical sector grew revenue by 17% to £199m (2015: £169m) and profit 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.

1. See Note 1 to the Accounts.

Outlook

In 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.

Strategy

Environmental & 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.

Performance

Chuck Dubois, Sector Chief Executive, Environmental & Analysis

Revenue % of Group

23%

Profit % of Group

19%

 

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.

Performance


KPIs

2016
Group
target
Revenue growth1 14.9%
Organic revenue growth1 (constant currency) 11.4% >5%
Profit growth1 26.0%
Organic profit growth1 (constant currency) 21.5% >5%
Return on Sales2 18.3% >18%
R&D % of Revenue3 6.6% >4%

Contribution to Group


£m
2016 2015 2014 2013 2012
Revenue 189 164 167 152 154
Profit 34 27 32 30 32
  1. Sector revenue and adjusted4 sector profit before finance expense are compared to the equivalent prior year figures.
  2. Return on Sales is defined as adjusted4 sector profit before finance expense and taxation expressed as a percentage of sector revenue.
  3. Sector research and development expenditure expressed as a percentage of sector revenue.
  4. Adjusted to remove the amortisation of acquired intangible assets and acquisition items (see note 1 to the Accounts).

The Environmental & Analysis sector grew revenue by 15% to £189m (2015: £164m) and profit 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.

1. See Note 1 to the Accounts.

Outlook

Externally, 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.