Preliminary results for the year to 1 April 2006
20 Jun 2006
Record results with record investment in people, products and markets
Halma, the leading safety, health and sensor technology group, today announces its preliminary results for the year to 1 April 2006.
Highlights include:
- Record pre-tax profit* from continuing operations up 20.3% to £58.1m (2005: £48.3m); organic** profit growth of 14.9%. On a statutory basis profit from continuing operations was up 17.9% to £56.6m.
- Organic** revenue growth of 10.8%; revenue from continuing operations up 15.7% at £310.8m (2005: £268.7m).
- Three acquisitions and eight disposals completed during the year, reflecting Halma's strategy to position the Group for higher rates of growth; acquisitions of Texecom, Netherlocks Safety Systems and Radio-Tech all performing ahead of expectations and giving Halma access to important new technology and growth markets.
- High margins maintained and significant shareholder value created as Halma delivers strong returns from its continuing businesses, with ROCE** of 56.9% and ROTIC** of 12.8%.
- Good cash generation with significant financial resources available to achieve the Group's growth plans; no gearing at year end.
- Continuation of progressive dividend policy with a recommended increase of 5%; high level of earnings growth helps to increase dividend cover to 1.6 times.
- Over 60% of Group revenue now comes from electronics-based products. Halma has been reclassified into the Electronic and Electrical Equipment Sector of the FTSE.
Notes:
The comparative figures for the 52 weeks to 2 April 2005 have been restated to reflect the adoption of International Financial Reporting Standards. See note 2 for details.
* Adjusted to remove the amortisation of acquired intangible assets of £1.5m (2005: £0.3m).
** Organic growth rates, Return on Capital Employed (ROCE) and Return on Total Invested Capital (ROTIC) are non-GAAP performance measures used by management in measuring the returns achieved from the Group's asset base. See note 7 for details.
Commenting on the results, Andrew Williams, Chief Executive of Halma, said:
"This is a record performance by a significant margin which was achieved against a background of major strategic change, and is testament to the quality of the contributions made by our employees. We have a clear and robust growth strategy and now have a stronger platform with enhanced growth potential.
"We will continue to pursue geographic expansion and new product development energetically. Continued investment to extend our presence in key developing markets and continuing development of senior management are key actions aimed at sustaining profitable revenue growth.
"Our underlying growth prospects are positive and we are in a better position to exploit them following the rapid recovery of our Water business and the acquisitions and disposals completed during the year. We enter the new year in good shape."
Geoff Unwin, Chairman of Halma, said:
"Behind these record results lies record investment - in people, innovation and new markets as well as in acquisitions. This, together with our clarity of direction and increased momentum, gives us confidence for the future."
For further information, please contact:
| Halma p.l.c. |
+44 (0)1494 721111 |
| Andrew Williams, Chief Executive |
| Kevin Thompson, Finance Director |
|
| Hogarth Partnership Limited |
+44 (0)20 7357 9477 |
| Rachel Hirst/Andrew Jaques |
|
A copy of the Annual Report and Accounts will be sent to shareholders on 3 July 2006 and will be available to the general public on written request to the Company's registered office at:
Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE.
PHOTOGRAPHS
High resolution photos of Halma senior management, including Chief Executive Andrew Williams, and images illustrating Halma business activities can be downloaded from this website. Click on the 'News' link, then 'Image Gallery'.
Photo queries: David Waller +44 (0)20 8205 0038, e-mail: dwaller@halmapr.com.
Note to editors:
- Halma develops and markets products used worldwide to protect life and improve the quality of life. The Group comprises three business sectors:
- Infrastructure Sensors
- Health and Analysis
- Industrial Safety
The key characteristics of Halma's businesses are that they are based on advanced technology and offer strong growth potential. Many Group businesses are a clear market leader in their specialist field and, in a number of cases, are the dominant world supplier.
HALMA p.l.c.
Group Results for the 52 weeks to 1 April 2006
Financial Highlights
|
Change |
52 weeks
1 April 2006 |
52 weeks
2 April 2005
(restated) |
| Continuing operations: |
|
|
|
| Revenue |
+ 16% |
£310.8m |
£268.7m |
| Adjusted profit before taxation (1) |
+ 20% |
£58.1m |
£48.3m |
| Statutory profit before taxation |
+ 18% |
£56.6m |
£48.0m
|
| Adjusted earnings per share (2) |
+ 20% |
11.01p |
9.16p |
| Statutory earnings per share |
+ 18% |
10.73p |
9.10p |
| Total dividends (paid and proposed) per share |
+ 5% |
6.83p |
6.50p
|
| Return on sales (3) |
|
18.7% |
18.0% |
| Return on total invested capital (4) |
|
12.8% |
12.1% |
| Return on capital employed (4) |
|
56.9% |
48.8% |
The comparative figures for the 52 weeks to 2 April 2005 have been restated to reflect the adoption of International Financial Reporting Standards. See note 2 for details.
Pro-forma information:
- Adjusted to remove the amortisation of acquired intangible assets of £1,500,000 (2005: £343,000).
- Adjusted to remove the amortisation of acquired intangible assets. See note 4 for details.
- Return on sales is defined as adjusted(1) profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
- Organic growth rates, return on total invested capital and return on capital employed are non-GAAP performance measures used by management in measuring the returns achieved from the Group's asset base. See note 7 for details.
Chairman's statement
Geoff Unwin, Chairman of Halma, said:
During the last year, Halma has made significant progress
"First of all, the headline numbers. The total Group including discontinued operations, which is what we were responsible for throughout the year, increased revenue by 12.8% to £337.3 million (2004/05: £299.1 million). Profit before tax and amortisation of acquired intangibles on this basis increased by 19.4% to £59.6 million (2004/05: £49.9 million*). Revenue and profit before tax and amortisation of acquired intangibles from continuing operations increased by 15.7% to £310.8 million and 20.3% to £58.1 million respectively. Statutory profit before tax increased by 17.9% to £56.6 million. All these figures are clear records for the Group. These results reflect organic revenue growth** of 10.8% and organic profit growth** of 14.9%. The Board is recommending a final dividend of 4.12p per share, an increase of 5% for the year, in line with our policy of progressively increasing the dividend but also increasing cover which now moves to 1.6 times (2004/05: 1.5 times). Return on total invested capital** improved to 12.8% (2004/05: 12.1%).
"Over the last few years our focus has been on re-establishing organic growth; a point emphasised and supported by shareholders at last year's Annual General Meeting. In previous statements I highlighted some of the areas that may have been holding us back and some of our actions to address them, for example - more and faster innovation, upgrading our sales capabilities, more investment in training our people, sharpening and simplifying our devolved management structures, rethinking management incentives and so on. Well, the action we took certainly worked last year. The statistician in me would love to be able to determine what benefit we got from what changes - intriguing, but impossible to do with precision. What I can say, is that we are not resting on one year's results and we continue to examine and debate each and every factor that may be impeding us.
"What is also very noticeable is the impact of our new CEO Andrew Williams. Our strategy is clearer than it has been since I arrived on the Board. Speed of decision making has improved dramatically (the same piece of paper rarely gets picked up off his desk twice) and this is spreading throughout the Group, although Andrew would be the first to modestly say "it's a team effort", and he's right.
"With this strategy as a template, the direction of cash allocation is much clearer. In line with this, we have disposed of eight businesses during the year and acquired three, so, in turn, our structures and focus are also far clearer. Our balance sheet remains strong - at the year end we had net cash of £4 million despite investing £36 million in acquisitions and receiving £15 million from disposals. Including £60 million of debt capacity, we have significant firepower to acquire more companies in line with our strategic directions. We are also investing in more sales and production infrastructure in the new fast-growing economies - particularly China, the aim being to make it easier for our individual companies to make further, and in some cases first, steps there in developing more business.
"I should like to thank all of our employees for their dedication to our customers and their constant ability to come up with innovative ideas. The increased investment in people seems to be having a very significant payback with a healthy queue of excellent internal candidates now clamouring to participate in our customised management training.
"So, behind these record results also lies record investment - in people, innovation and new markets as well as new acquisitions. This, together with clarity of direction and increased momentum gives us confidence for the future.
"All in all, an excellent vintage."
* Restated under IFRS see note 1.
** See Financial Highlights.
Chief Executive's strategic review
Andrew Williams, Chief Executive of Halma, said:
Record profit and revenues achieved against a background of major strategic change
"We have had an outstanding year producing profit growth from continuing operations* of 20% (18% on a statutory basis) and revenue growth of 16%. Organic growth* was 15% and 11%, for profit and revenue respectively.
"This is a record performance by a significant margin and was achieved against a background of major strategic change. This is a testament to the robustness of our growth strategy and the quality of the contributions made by our employees.
"We now report our results under three market-defined sectors: Infrastructure Sensors, Health and Analysis and Industrial Safety. These replace the previous six product-based divisions and more closely reflect the coherent nature of our activities and the way we operate, as well as making it easier for shareholders to gain a better understanding of what we do.
"Our return to organic growth was widespread across the Group and was underpinned by a tremendous performance in the Health and Analysis sector. Strong organic growth was boosted further by a rapid recovery by our Water business. Infrastructure Sensors started to show promising revenue growth in the second half, although continued investment in the sales and support structure for the longer term suppressed short-term profits. All parts of our Industrial Safety sector performed strongly with the buoyant oil and petrochemical market contributing to healthy revenue and profit growth.
"I am very pleased with the record Return on Capital Employed (ROCE)* of 57% achieved during the year. Our success in achieving growth has not come at the expense of diluting the quality of our returns. Another year of strong cash generation has funded organic growth, acquisitions and, for the 27th consecutive year, enabled a further increase in our dividend of 5%. Between self-generated cash and a longer term debt facility of £60 million, we have sufficient capital resources to support our growth plans for the coming year.
"We completed three acquisitions, all of which are performing ahead of expectations. Netherlocks, acquired in July, increased our presence in the oil and petrochemical market and strengthened further our leadership in valve safety interlocks. Radio-Tech, acquired in August, brought important wireless communications technology to our Water business and offers new opportunities elsewhere in the Group. In November, we acquired Texecom giving us an entry into the strategically important security sensor market. Texecom offers us attractive growth potential in its own right. It has common sales distribution channels with Fire and similar technology platforms to our Door Safety activities, providing additional opportunities for the longer term.
"The disposal of eight businesses demonstrated our commitment to actively allocate capital and people resources. In February we sold our high power Resistors business for £14 million. While this business had generated good value for shareholders over many years, its recent performance relative to other Halma companies, and in absolute terms, fell short of expectations. The net result of the acquisitions and disposals made this year is that we are making more profit, we have allocated more resource to markets with higher growth potential and we have 10% fewer companies.
"We are expanding geographically. We have opened additional sales and technical support offices in China, India, Malaysia, Spain, Ireland, US and, most recently, Dubai. In addition, we have established new manufacturing facilities in Eastern Europe and Tunisia. Although we have manufactured Infrastructure Sensor products in China for over a decade, we are increasing our direct presence in this important long-term growth market at a faster pace. For example, we are creating new Halma "hubs" in Shanghai and Beijing to help our companies get new activities established or develop their existing activities more rapidly. We expect those companies which are successful to spin-out and develop as strong, independent operations in their own right.
"Last year, I mentioned the need for us not only to maintain our high level of investment in Research & Development (R&D), currently 4% of revenues, but improve speed to market too. This year we launched over 100 new products. There are some early signs of improvement in speed to market in some parts of the Group, although we can still do more. For example, high quality R&D resources in lower cost territories, such as India, can supplement our essential in-house technical capabilities to achieve shorter product development cycles.
"Our highly decentralised operating structure makes us particularly dependent on the quality of our local management teams. Following the significant people changes made at operating company board level over the past two years, it is pleasing to see this action translate into improved results. To build further momentum, we have created a bespoke development programme for our senior management at Henley Management College, a leading UK business school. This leadership development programme not only helps our management become even more successful in their current role, but also gives us a stronger pool of talent to draw on as new opportunities arise.
"I thank all the employees for their contribution during an exciting and successful year. We can take great confidence in the exceptional results that have been achieved during the year but recognise there is no room for complacency. Our goal is to achieve growth and create value for shareholders every year.
"We have made tremendous progress in 2005/06 in terms of both achieving organic growth in the short term and improving our growth potential for the future. Our underlying growth prospects remain good and we enter the new year better placed to exploit them due to the rapid recovery in our Water business and new acquisitions. I look forward to the year ahead with confidence."
* See Financial Highlights.
Financial review
Kevin Thompson, Finance Director of Halma, said:
Organic growth* in revenue of 11% and profit of 15%
"Revenue from continuing operations increased by £42 million (15.7%) to £310.8 million of which £13.1 million (4.9%) came from acquisitions made this year and from the extra months' benefit of acquisitions made last year. Underlying organic revenue growth* was therefore 10.8%. Profit before tax from continuing operations before amortisation of acquired intangibles grew by 20.3% to the record figure of £58.1 million and after adjusting for acquisitions, organic profit growth* was 14.9%. Statutory profit before tax was 17.9% higher at £56.6 million. Currency translation contributed a modest 1% to revenue and profit growth.
"We disposed of eight businesses in the year. The table below shows the results both excluding and including those businesses:
|
Continuing operations |
Including discontinued operations |
| £ million |
2006 |
2005 |
% change |
2006 |
2005 |
% change |
| Revenue |
310.8 |
268.7 |
15.7% |
337.3 |
299.1 |
12.8% |
| Profit before tax** |
58.1 |
48.3 |
20.3% |
59.6 |
49.9 |
19.4% |
| Return on sales |
18.7% |
18.0% |
|
17.7% |
16.7% |
|
**Excludes amortisation of acquired intangibles and profit on disposal of operations.
Comparatives have been restated on an IFRS basis. See Financial Highlights.
"In overview, revenue growth was strong in the year and gross margins held firm. Overheads were increased, in particular in the Infrastructure Sensors sector, to accelerate future opportunity across the world. The net result of our operational activity, acquisitions and disposals was to grow the return on sales to 18.7% and increase profit on continuing operations before amortisation of acquired intangibles and tax by £9.8 million.
"During the year under review we increased revenues in all territories, with 73% of sales being made outside the UK. Indeed, sales outside of our traditional primary markets in the UK, mainland Europe and the USA grew by 20%.
"Revenue from continuing operations increased to all of our geographic destinations and is shown on the table below:
Revenue from continuing operations by destination
| £ million |
Revenue |
% change |
| United States of America |
94.0 |
19.4% |
| United Kingdom |
82.9 |
18.0% |
| Mainland Europe |
77.2 |
6.2% |
| Asia Pacific and Australasia |
33.3 |
10.2% |
| Africa, Near and Middle East |
14.8 |
49.5% |
| Other |
8.6 |
23.6% |
|
310.8 |
15.7% |
"The biggest absolute revenue growth came in our largest geographic sectors of the USA and UK where organic growth was strong. There was double-digit organic growth in Africa, Near and Middle East, in addition to the extra revenue in that region coming from the acquisition of our security sensor business, Texecom, which has a substantial branch network in South Africa. Mainland Europe showed a lower rate of growth and although Asia Pacific and Australasia grew by more than 10%, we see the opportunity for higher rates of growth here in the future.
"All three of our sectors increased revenue by more than 10%, with the Infrastructure Sensors sector benefiting from the acquisition of Texecom. The Industrial Safety sector grew revenues by 16.8% and the Health and Analysis sector increased by the highest rate at 20.0%, with the growth in these two sectors predominantly organic. All three sectors increased profits.
"Revenue, profit and returns are discussed on a sector basis in the Sector reviews below.
"Adjusted earnings per share* (which we consider gives a more consistent measure of underlying performance) and statutory earnings per share on continuing operations increased by 20% and 18% respectively, very good rates of growth. A reconciliation of adjusted earnings figures to statutory figures is given in note 4.
Important acquisitions and disposals were completed in the year
"We paid out cash of £36 million on acquisitions and received £15 million for disposals in 2005/06, a net outflow of £21 million. The acquisition payments included £8 million in deferred consideration, mainly in relation to Ocean Optics which we acquired in 2004/05 and which achieved its maximum targets. These acquisitions and disposals were an important part of reallocating Group resources and positioning us for higher rates of growth.
"The largest acquisition in the year was that of Texecom Limited (UK) in November 2005. We paid a total cash consideration of £26 million with the last audited accounts showing revenues of £19.2 million and earnings before interest and tax of £3.9 million. Prior to this we acquired Netherlocks Safety Systems B.V. (The Netherlands) in July 2005 for €3 million (£2.1 million) and Radio-Tech Limited (UK) in August 2005 for £2 million, these two businesses having a combined annual profit of £0.7 million on revenue of £3.2 million in their last audited accounts. There is no deferred consideration for Texecom but there is the potential to pay a further £7.3 million of consideration for the other two businesses conditional on substantial profit growth. The performance of each business has exceeded our expectations with all achieving very good growth and all delivering a return well in excess of the Group weighted average cost of capital which is calculated as being 8%.
"In April 2006, early in the new financial year, we purchased Mikropack GmbH Aufbautechnik in der Sensorik (Mikropack) for €2.3 million (£1.5 million) with up to a further €2.3 million (£1.5 million) payable depending on performance. Mikropack manufactures light sources and photonic accessories and joins our Ocean Optics business.
"Disposal of the eight businesses converted assets, which were performing below acceptable Group levels, into cash. In aggregate the businesses sold contributed operating profit of £1.5 million to total Group profit in 2005/06 and £1.6 million in the prior year. The largest element of the disposal proceeds came from the sale of our group of five high power Resistor businesses, sold for £14 million in February 2006. The Consolidated income statement shows a profit from discontinued operations of £1.3 million. This comprises a pre-tax gain on disposal of £5.9 million, tax on disposal of £0.1 million, operating profit less tax of £0.9 million and is after writing off goodwill of £5.4 million attributable to these businesses.
Growing investment in new products and business assets
"Expenditure on Research & Development (R&D) in our continuing operations increased by 20% to £13.5 million, representing 4.3% of revenue - a little higher than the prior year. R&D expenditure as a percentage of revenue in each of our three sectors was consistent with last year, with Health and Analysis the highest at 4.9% of sales and Infrastructure Sensors at a similar rate. Under IFRS we are required to capitalise certain development expenditure and include it as an asset on the Consolidated balance sheet and also to amortise expenditure from prior years. In the year we capitalised £2.5 million of such expenditure and amortised £1.4 million, resulting in an asset of £3.8 million on the closing balance sheet. All of these figures are at higher levels than in the prior year, demonstrating the increase in the amount of development work which we believe will have a future benefit. The net impact is that the Consolidated income statement was charged with an 11% higher cost than last year.
"Expenditure on property, plant, equipment and computer software was 34% (£3.2 million) higher than 2004/05 at £12.6 million. There was less expenditure on property this year but more investment in operating assets to improve the performance of our businesses. The year's expenditure was 150% of depreciation/amortisation, a higher ratio than typical but indicative of our continued intention to invest for future growth.
Strong cash flow with significant financial resource available
"Cash flow was once again very good. Cash generated from operations was £70 million, including a small cash outflow (£0.7 million, 2005: £2.5 million inflow) into working capital despite high rates of growth in the business overall. We started and finished the year ungeared. The following table summarises the change in net cash, the main elements of which are discussed in this financial review.
Change in net cash
| £ million |
2006 |
2005 |
| Cash generated from operations |
70.2 |
61.4 |
| Acquisition of businesses |
(36.2) |
(24.6) |
| Disposal of businesses |
14.6 |
(1.7) |
| Development costs capitalised |
(2.5) |
(1.1) |
| Net capital expenditure |
(11.6) |
(9.0) |
| Dividends paid |
(24.5) |
(23.3) |
| Taxation paid |
(16.8) |
(14.5) |
| Issue of shares |
0.6 |
2.5 |
| Net finance (expense)/income |
(0.4) |
0.2 |
| Exchange adjustments |
(1.9) |
0.6 |
|
(8.5) |
(9.5) |
| Net cash brought forward |
12.0 |
21.5 |
| Net cash carried forward |
3.5 |
12.0 |
"During the year we started to purchase Halma shares to be held in Treasury to fund the new Performance Share Plan. In the coming year we would expect to purchase £1 million to £2 million of Halma shares for this purpose and this is likely to be an ongoing activity. We also expect to increase the amount of cash paid into the Halma pension schemes each year following the anticipated outcome of the main scheme valuation now in progress. The additional cash contributions for 2006/07 are expected to be in the order of £4 million. These additional demands on our cash will have some impact on our financial position but we do not believe they will significantly affect our investment or growth potential.
"Whilst we were again ungeared at the year end we seek to maintain financial flexibility so that short and long-term funding needs can be met and to allow opportunities to be taken as they arise. The Group is able to borrow at competitive rates and therefore consider this the most effective means of funding increased investment in the immediate future. During the year we secured a £60 million five-year debt facility from our well-established banking partners, improving our ability to fund our medium-term growth plans.
Strong margins and returns with ROTIC increased to 12.8%
"High margins and strong returns underpin the resilience and strength of Halma. We have benefited from the improvement in returns resulting from the sale of lower return businesses and this is demonstrated by the fact that return on sales for the total Group, including discontinued operations, would have increased from 16.7% to 17.7% in the year. Return on sales on continuing operations* increased from 18.0% to 18.7% this year with Health and Analysis growing sharply from 16.1% to 21.0%, in part benefiting from the recovery in our Water business but across the Group we achieved a widespread improvement.
"We do not specifically target improvement in return on sales however we have found that as our businesses grow, many of them generate higher returns and higher margins due to significant operational leverage - we have high-margin businesses which benefit greatly from sales growth.
"Return on Capital Employed (ROCE) is our measure of operating performance (see the calculation in note 7) and it increased to 56.9% (2004/05: 48.8%), a high rate but not untypical for Halma. ROCE measures our stewardship of the assets we use and the efficiency with which we run our businesses to generate the Group's strong cash flows.
"Return on Total Invested Capital (ROTIC) increased to 12.8% (2004/05: 12.1%). The calculation basis is described in note 7 - it is a post-tax measure and includes in the denominator all historic goodwill but excludes the pension deficit and also excludes the creditor relating to the pension obligations for companies sold. We feel that a basis where an increased pension deficit improved ROTIC would not be appropriate. The increased ROTIC arises because we have grown earnings faster than the underlying capital base and we continue to exceed our weighted average cost of capital (WACC) by a large margin, sustaining the generation of significant value for shareholders. Together with Total Shareholder Return, ROTIC is the key measure of performance which we employ in our Performance Share Plan, aligning our senior executives with shareholders.
5% dividend increase and dividend cover raised
"We have a progressive dividend policy; growing our dividend but with the objective of increasing cover towards a figure of around 2 over time, a level we feel is appropriate for our business. With the high level of earnings growth this year we have taken a good step towards this objective. The Board has recommended a 5% increase in the final dividend to 4.12p which together with the interim dividend (which was also 5% higher than last year) will give a total dividend of 6.83p per share, assuming the final dividend is approved. The total cost of the final dividend is expected to be £15.2 million, giving a total cost of £25.2 million for the dividends paid in respect of the year ended 1 April 2006. We believe we have adequate distributable reserves for the foreseeable future after taking into account the impact of inclusion of the pension deficit discussed below. Dividend cover, based on continuing operations before amortisation of acquired intangibles, is 1.6 times (2004/05: 1.5 times).
IFRS adopted with little impact on profits
"During 2005/06 the Group adopted International Financial Reporting Standards (IFRS) in common with other listed companies in the European Union. This has required restatement of the 2004/05 results reported previously under UK GAAP.
"There was little overall impact on Halma's reported financial results from the adoption of IFRS. The Group's underlying business economics are unchanged. Profit before taxation and amortisation of acquired intangibles/goodwill under IFRS was £0.1 million higher than under the accounting policies used in 2004/05.
"The main IFRS changes on the Consolidated balance sheet are that dividends are now only accrued when the dividend is approved and the net pension liability on the Group's two defined benefit schemes, which are closed to new members, is now included in the Consolidated balance sheet.
Tax rate stays at 30%
"The effective rate of tax on profit from continuing operations, before amortisation of acquired intangibles, is 30.1% (2004/05: 30.2%). This year's tax rate is expected to be representative of the tax rate in the near future, depending on the actual mix of profits made across the world.
Foreign exchange movements were not significant this year
"The Group has both translational and transactional currency exposures. Translational exposures arise on the consolidation of overseas company results into Sterling. Transactional exposures arise where the currency of sale or purchase differs from the functional currency in which each company prepares its local accounts and these exposures are the responsibility of local management. The largest translational exposures are to the US Dollar and to a lesser extent the Euro.
"Translational impacts on the 2005/06 results were modest and increased revenue and profit by approximately 1%. US Dollar results were translated into Sterling at a rate of 1.78 (2004/05: 1.84) and Euros were translated at 1.47 (2004/05: 1.47). Around one-third of Halma's revenue and profit is generated in US Dollars and so a 1% weakening of the US Dollar relative to Sterling would reduce revenue and profit by approximately 0.33% which represents £1 million in terms of revenue and £0.2 million of profit.
Sector reporting changed to improve clarity and collaboration
"On 28 November 2005 we announced the change to reporting the Group's financial performance under three new sectors, defined by markets rather than product type. A restatement of the last three years' financial results under the new sector headings was given at that time together with growth drivers and market characteristics by sector.
"Each new sector, Infrastructure Sensors, Health and Analysis and Industrial Safety, includes businesses with similar operating and market characteristics. This makes the Group more simple to understand, helps us further develop our market driven strategies and enables more proactive collaboration across the Group."
* See Financial Highlights.
Business review
Infrastructure Sensors sector review
Infrastructure Sensors is our largest business contributing 42% of Group revenue (£132 million) and 40% (£24 million) of Group profits.
Sector strategy
In this sector, our strategy is to be the leading supplier of sensors (and other critical components) and not an installer of complete fire, security, automatic door or elevator systems. Our strong focus on safety-critical sensor components enables us to sell to the major global players in the building infrastructure markets who supply complete, installed systems such as GE, Honeywell and Tyco in Fire, and OTIS, Mitsubishi and Kone in Elevator Safety. By concentrating all our efforts on a single system component, we can offer high performance products complying with all the major international and national regulations and standards.
Our Infrastructure Sensor products are used in both new build and refurbishment projects so we work hard to ensure new sensor products are backwards-compatible with existing installations.
R&D investment and product innovation is central to maintaining competitive advantage in this sector. This is because constantly changing technical standards and regulations drive our infrastructure sensor markets. We make an active contribution to the development of international technical standards. In the past year we worked closely with trade bodies such as CENELEC and EURALARM which set standards in the EU for intruder alarms, and also with the British Security Industry Association and the British Standards Institute on the interpretation and implementation of EU standards.
To enhance public safety, governments worldwide set increasingly stringent standards for fire protection products. In the past year alone, our fire products companies have added 500 new technical approvals which allow us to sell our products worldwide.
Market trends
Our security sensors sell into a global market, worth approximately £2 billion annually, which is growing at 6% to 7% per year. Since acquisition, Texecom has continued to grow faster than the market and we hold a dominant market share in the UK and South Africa.
A global fire detection market growth of 4% per year is expected to continue for the foreseeable future. Demand for fire detectors is particularly strong in China and India, where infrastructure investment is generating annual market growth of 15%, and in the Middle East which is growing by 8% per year. Conversely, demand in developed markets such as Europe and the US has lagged behind the global market growth rate. Falling end-user fire detector prices coupled with shorter product life cycles have been characteristics of this market since we first entered it over 20 years ago. However, we believe that our investment in product development, manufacturing and the supply chain will continue to deliver organic growth and maintain our excellent margins.
During 2005/06 we saw continuing price competition in our elevator products and automatic door sensor markets. The Middle East, China and India are experiencing some of the highest rates of high-rise building development in the world. To strengthen our local presence, we recently established new elevator product sales offices in Dubai, Mumbai and Chongqing (our fourth regional office in China).
In our 2004/05 Operating review we identified growing demand for products which assist evacuation during fire emergencies. Our investment in advanced technology audible and visual devices which assist safe building evacuation produced double-digit sales growth for these products.
Sector performance
Revenue growth at 12% for this sector included the benefit of the Texecom acquisition made in the year. Despite this, profit growth at 2% was below our target largely because of the extra investment in overheads made this year to improve longer-term growth potential. This also has had the effect of reducing the return on sales although this remains at a high level because product margins were sustained. ROCE continues to be excellent.
Sector outlook
Investment to increase our direct presence in key developing markets and changes to senior management are aimed at accelerating profitable revenue growth. In the coming year, we expect those actions taken in 2005/06 to start to deliver organic profit growth. Growth in this sector will also be boosted by a full year's contribution from our new security business, Texecom. We will continue to explore collaboration opportunities across all Infrastructure Sensor businesses.
Health and Analysis sector review
Health and Analysis is our fastest growing business sector and contributed 36% (£112 million) of Group revenue and 38% (£23 million) of Group profit.
Sector strategy
After a year of restructuring, our Water business recovered ahead of schedule. The costly product rationalisation completed on our network monitoring and leak detection product range and the changes to US management in our UV business, enabled double-digit organic revenue and profit growth to be delivered this year. Market conditions helped because UK water companies increased capital investment as they started a new five-year AMP period (a five-yearly capital investment cycle regulated by the Drinking Water Inspectorate).
The acquisition of Radio-Tech brought new RF wireless communications technology to our Water business and a broader asset monitoring and wireless connectivity opportunity to many other businesses across the Group.
Our rate of innovation and that of our customers, in new products and processes, is a major driver of success in this sector. During the year we increased our investment in R&D at 4.9% of revenue and launched over 60 new products.
Relative to our other two sectors, Health and Analysis has a larger proportion of revenue and profit made in US Dollars, hence significant movement in this currency can have an impact on Sterling results.
Market trends
We sell fluid technology products into the analytical, life science and medical instrumentation markets which continue to grow at high single-digit rates. Demand is driven by growing populations, improving conditions in developing countries and biotech/pharmaceutical research. Typically, instrumentation for these markets must meet stringent testing and regulatory requirements which make it difficult for the instrumentation manufacturer to change key components once they are designed-in and certified. Our primary global market, life science instrumentation, continued to grow in the high single-digit range.
As we indicated in our 2004/05 Operating review, the United States Postal Service awarded further contracts for biohazard detection equipment which created additional demand for our components. Also predicted last year, the fuel cell market is moving slowly from prototyping towards low production volumes.
Markets for our ophthalmic instruments are heavily regulated. New health optics products require lengthy technical approvals, and instruments using new diagnostic methods need clinical trials. These factors add cost and time to new product development, but are a strong disincentive to new competitors.
There are very strong underlying drivers for moderate growth to continue in the health optics sector. An increasing number of older people in the developed world inevitably promotes demand for eye care. Added to this, as GDP rises in developing countries, demand for healthcare rises too.
We estimate the size of the global market for ultraviolet (UV) water treatment systems to be in the region of £350 million per year. Forecast growth rates vary from 5% to 15%, with highest growth predicted in the municipal sector. Demand for UV drinking water treatment systems in the US was boosted in 2005/06 when the Environmental Protection Agency (the principal regulator) approved UV technology for controlling the cryptosporidium micro-organism in drinking water.
UV water treatment is another market dominated by product certifications. During 2005/06 we launched new products to satisfy the latest European DVGW and Önorm approvals and a product line complying with the new US National Water Research Institute standards will be launched in 2006/07. The forecast recovery in our UV business, following reorganisation in the US, delivered 20% sales growth. The leisure industry is showing high growth and sales to semiconductor fabricators were the highest for several years.
Our photonics business saw record revenue and profit with the latter 24% ahead. Our core photonics products, miniature spectrometers which measure light, are sold into a highly fragmented but rapidly growing global market valued at between £50 million and £150 million per year.
The largest market for water leakage control products remains the UK due to its ageing water network, environmental and regulatory pressures on water companies, regional population growth and recent drought conditions. We expect these factors to drive UK demand for the foreseeable future. The US is our second largest leakage control market where we won further large contracts in 2005/06, notably for the cities of Albuquerque, New Mexico, and Birmingham, Alabama, and for the island of Hawaii. There is little regulatory pressure on US water companies to reduce leakage and rising US demand for our products is driven by water shortages and increasing energy costs.
Sector performance
The strong revenue and profit growth (20% and 56% respectively) continued the trend of the previous year. This growth came in part from acquisitions but predominantly from the recovery in our Water businesses and strong performances across the sector. These factors restored the return on sales to a more typically high figure of 21%. ROCE and investment in new products were both at good levels.
Sector outlook
The exceptional growth levels achieved in 2005/06 included the benefit of a rapid recovery in our Water business. We expect the Health and Analysis sector to make further progress in the coming year albeit without this one-off extra boost to profits.
Industrial Safety sector review
This is our smallest sector, contributing 22% of Group revenue (£67 million) and 22% of Group profit (£13 million).
Sector strategy
Competition in the portable gas detectors sector is stepping up, particularly for fixed-life disposable products. Our response has been to differentiate our offering through technical innovation and high quality customer service. To maintain competitive position in gas detectors, we are strengthening management, focusing on reducing manufacturing costs and sharpening procurement. This strategy led to improved margins and gas detector profit 7% ahead in 2005/06.
Speeding up product development cycles to continually refresh product lines is a key strategic objective to drive gas detector growth during the next five years. Our R&D function has been extended and we are also using development resources in China and India to help cut development timescales.
Our bursting disc competitors consolidated during 2005/06; we now compete with just six other manufacturers worldwide. On a global scale, we rank fourth. To realise our aim of raising global market share, we will extend our sales operations and continue to improve our operating efficiencies.
During the year, one of our French safety interlock businesses established a new manufacturing operation in Tunisia. This offers an interesting alternative to "traditional" low cost locations giving us a highly educated work force and no language or time zone issues. The early signs of this strategic move are positive.
Market trends
The trend towards higher levels of health, safety and environmental awareness globally provides long-term growth prospects for our Industrial Safety businesses. While a lot of manufacturing industry is moving East, much of it is still driven by the relocation of Western companies who are "exporting" safety standards. Overall, we believe the long-term growth rate of the market to be 3% to 4% per year.
The global market for portable personal protection gas detectors is estimated to be valued at £275 million per year. We also sell fixed gas detection systems into a global market worth approximately £250 million per year. Both markets are expanding annually at about 3%. Because gas detection equipment is safety-critical, it requires regular servicing and calibration. Service is a key component of our gas instrumentation offer and makes a substantial contribution to sales.
We have built a market-leading position in the UK for boiler combustion test instruments which optimise gas burning efficiency and minimise energy use. We recently won a tender valued at £1 million to supply these instruments to British Gas. The world market for bursting disc pressure safety devices continues to grow slowly. We are seeing a gradual relocation of our customers' manufacturing activities to low labour cost countries. Our response is to step up selling operations in Eastern Europe, India and China. We won significant new business in both Europe and the US due to our strategy of providing industry-leading technical support and fast deliveries. This contributed to bursting disc profit growth of 30% in 2005/06.
The acquisition of Netherlocks, based in The Netherlands, extended our presence in the growing petrochemical, oil and gas market. We believe this market offers attractive prospects for the next decade and beyond. Adoption of Western safety standards in China and Eastern Europe is a clear trend but sales of interlocks to these territories will build more slowly than for petrochemical, oil and gas.
Over the past two years we have been creating a new market for interlocking devices in the logistics industry. Our Salvo safety system, which prevents accidents to forklift truck operators, has been very well received by the market and has contributed over £1 million of revenue.
Sector performance
Following the sale of our Resistors business, we achieved organic growth in all sub-sectors and in all major geographic territories. Revenue growth was particularly strong in our traditional markets of the UK, mainland Europe and the USA. Revenue and profit growth included some benefit from acquisitions but also strong organic growth in our businesses serving the oil and gas markets. Return on sales improved and product margins increased. ROCE continued to be very strong. As planned a relatively lower percentage of sales was invested in R&D in this sector than in our other sectors as the markets served here tend to be more mature and conservative. However, good growth opportunities continue to exist.
Sector outlook
Whilst we have had an excellent year, we will continue to pursue our geographic expansion and new product development plans energetically. Regulation and legislation and reducing the risk of accidents play an increasingly important role in the working environment. We are well placed to deliver growth in line with market growth rates, at least, for the coming year.
Group outlook
As well as achieving excellent short-term progress during 2005/06 by substantially raising organic growth, we established firm foundations for the long-term growth of our business.
We will pursue geographic expansion and new product development energetically. Continued investment to extend our presence in key developing markets and continuing development of senior management are key actions aimed at sustaining profitable revenue growth.
Key growth drivers, like regulation, legislation and attitudes to the risk of accidents, will continue to play an important role in creating favourable market conditions. Growth in the coming year will be aided by a full year's contribution from our new acquisitions and we will continue to explore collaboration opportunities between our businesses.
Our underlying growth prospects are positive and we are in a better position to exploit them following the rapid recovery of our Water business and the acquisitions and disposals completed during the year. We enter the new year in good shape.
Cautionary note
This Preliminary Announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the Announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.
Further details of Halma's Preliminary Results for the year to 1 April 2006 are available as a pdf document. To download the full announcement in PDF format, right click on the red PDF symbol below, select 'Save Target As', and then choose a folder to save the file in.
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Preliminary Results for the Year to 1 April 2006
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