Sectors

This market commentary is an extract from the Halma 2017 Annual Report and Accounts published on 21 June 2017.

Overview and Performance

Our Process Safety sector makes products which protect assets and people at work.

Philippe Felten, Sector Chief Executive, Process Safety

The 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.

Revenue % of Group

17% of Group Revenue

Profit % of sector total

19% of sector total revenue


KPIs

2017
Group
target
Revenue growth1 7.4%
Organic revenue growth1 (constant currency) 0.8% >5%
Profit growth1 1.7%
Organic profit growth1 (constant currency) (4.3%) >5%
Return on Sales2 24.1% >18%
R&D % of Revenue3 3.6% >4%

Contribution to Group


£m
2017 2016 2015 2014 2013
Revenue 167 155 159 127 126
Profit 40 40 45 35 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).

Sector revenues grew by 7% to £167m and profit grew by 2% to £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 nonconventional 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.

Strategy

Our 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.

Outlook

Overall 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 improvement in the oil and gas industry will enable us to make further progress in the coming year.

Overview and Performance
Paul Simmons

Our Infrastructure Safety sector improves the safety & mobility of people and protects infrastructure.

Paul Simmons, Sector Chief Executive, Infrastructure Safety

The 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 interconnectivity were the predominant themes in building the sector’s new product pipeline.

Revenue % of Group

33% of Group Revenue

Profit % of sector total

30% of sector total Profit


KPIs

2017
Group
target
Revenue growth1 19.0%
Organic revenue growth1 (constant currency) 6.9% >5%
Profit growth1 17.2%
Organic profit growth1 (constant currency) 7.2% >5%
Return on Sales2 20.7% >18%
R&D % of Revenue3 5.7% >4%

Contribution to Group


£m
2017 2016 2015 2014 2013
Revenue 315 265 234 220 205
Profit 65 56 50 44 42
  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 grew by 19% to £315m (2016: £265m) and profit 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.

Strategy

The 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 inexisting 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
Outlook

The 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.

Overview and Performance

Our Medical sector is dedicated to enhancing quality of life and improving the quality of care.

Adam Meyers, Sector Chief Executive, Medical

The 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.

Revenue % of Group

27% of Group Revenue

Profit % of sector total

31% of sector total Profit


KPIs

2017
Group
target
Revenue growth1 31.1%
Organic revenue growth1 (constant currency) 4.3% >5%
Profit growth1 29.0%
Organic profit growth1 (constant currency) 6.0% >5%
Return on Sales2 25.6% >18%
R&D % of Revenue3 4.3% >4%

Contribution to Group


£m
2017 2016 2015 2014 2013
Revenue 261 199 169 163 136
Profit 67 52 45 42 36
  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 31% to £261m (2016: £199m) and profit 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, the 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.

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 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 niches

We 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.

Outlook

In 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.

Overview and Performance
Chuck Dubois

Our Environmental & Analysis sector makes products and technologies that improve the quality and efficient use of critical resources.

Chuck Dubois, Sector Chief Executive, Environmental & Analysis

The 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 co-ordinated strategy. We expect to see the benefits of this restructuring in the coming financial year.

Revenue % of Group

23% of Group Revenue

Profit % of sector total

20% of sector total Profit


KPIs

2017
Group
target
Revenue growth1 16.0%
Organic revenue growth1 (constant currency) 3.5% >5%
Profit growth1 20.8%
Organic profit growth1 (constant currency) 5.9% >5%
Return on Sales2 19.0% >18%
R&D % of Revenue3 6.9% >4%

Contribution to Group


£m
2017 2016 2015 2014 2013
Revenue 219 189 164 167 152
Profit 42 34 27 32 30
  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 grew revenue by 16% to £219m (2016: £189m) and profit 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.

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.

Outlook

Global 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.