Summary of Halma p.l.c. Annual report and accounts 2007
Accounting Policies and Notes
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We make components and products used to improve personal and public health. We also develop technologies and products which are used for analysis in safety, environmental and leisure related markets, including Water.
Health and Analysis contributed 34% (£120 million) of Group revenue and 36% (£24 million) of Group profit†. There are four principal sub-sectors:
We estimate that we are the world leaders in monitoring and finding leaks in underground water pipelines and among the world leaders in UV technology for disinfecting and treating water. We manufacture our water products in the UK, The Netherlands, France and the US.
We make critical components such as pumps, probes, valves, connectors and tubing used by scientific, environmental and medical diagnostic instrument manufacturers for demanding fluid handling applications. These products are made in the US and UK.
We have market leading technologies and products which generate, measure and condition light and analyse the interaction of light with substances. We have manufacturing sites in the US, Germany and The Netherlands.
We make handheld devices used to assess eye health, diagnose disease and assist with eye surgery. Our ophthalmic products are made in the UK and the US.
† See note 1 to the accounts
| KPI | Group target | 2007 | 2006 (restated)* |
|---|---|---|---|
| Revenue growth1 | >5% | 9% | 18% |
| Profit growth2 | >5% | 7% | 52% |
| Return on sales3 | ~18% | 20.4% | 20.7% |
| ROCE4 (Return on capital employed) |
>45% | 75% | 79% |
| R&D as a % of revenue5 | ~4% | 5.3% | 4.9% |
* restated to reflect the reclassification of Radio-Tech Limited to the Industrial Safety sector.
KPIs are calculated on results from continuing operations.
In Water management we aim to be the technology leaders and offer water utilities worldwide new solutions to their water supply problems. Our Water UV treatment growth strategy is to unlock new regulated markets via further product validations, and to adapt existing product lines for new applications.
We aim to grow our Fluid technology business by broadening our product range and our presence outside of our traditional US stronghold both via organic growth and acquisitions.
Geographic expansion and innovative product development are our twin organic growth strategies for Photonics. The Mikropack and Labsphere acquisitions completed this year added complementary light generation and measurement technologies. We will seek further photonics acquisitions which we can grow rapidly using our well-established sales channels.
In Health optics, higher R&D investment is resulting in an increased rate of new product introduction. This will enable us to grow market share in developed countries whilst we build sales channels in the developing world for the longer term.
Confidential market research values the US market for UV water treatment plant at £120 million annually which our internal estimates suggest equates to the rest of the world’s combined markets. Market growth is estimated to be over 15%, driven by increasing health regulation and an expanding industrial customer base including semiconductors, aquaculture and leisure pools.
Regulation plays an increasingly important role in developing regional water markets. The US Environmental Protection Agency recently issued guidance* that will accelerate adoption of UV treatment for controlling water-borne diseases in drinking water. EU expansion is driving demand; new member states must adopt EU health and safety regulations.
Using internal data, we estimate that the global market for water pipework monitoring and leak location equipment is worth over £45 million annually. We estimate the market has grown by 7% per year for the past four years and we anticipate similar growth as a minimum for the next five years.
In Fluid technology, there has been greater consolidation within the clinical diagnostic instrumentation market than in previous years due to M&A activity. We are broadening our product offering into the medical and environmental instrumentation segments which are also growing fast. For example, China plans to invest £87 billion between 2006 and 2010 on environmental protection projects**.
Photonics continues to offer us exciting organic and acquisition growth prospects. We are global leaders in the miniature spectrometer market niche which we estimate to be worth £70 million annually and growing at 15% per year.
The use of photonic methods is increasing rapidly in a vast range of end markets. The advantages of optical sensors over traditional methods can include lower cost, greater sensitivity, in-situ measurement capability (particularly in hazardous environments), immunity from electromagnetic interference, repeatability and stability. Over 60% of Halma companies use optical technologies.
Growth drivers for our Health optics products include rising demand for eye care due to demographic changes in the developed world plus increasing access to health services in developing countries. We estimate*** that the health optics market is growing in developing countries by 5% annually and 2% to 3% worldwide.
New ophthalmic products undergo lengthy clinical trials and rigorous medical product regulation which is a disincentive to market entrants. Digital and video imaging technology for examining the eye continues to evolve and a disruptive technology could emerge to change the market dynamics in the medium term. We continue to monitor this closely and have established relationships with some of the leading digital imaging companies where our products can be complementary to their technology.
In our Water businesses we consolidated the strong recovery achieved in 2005/06. Although progress in the US market remained patchy, revenues in European markets rose sharply.
Fluid technology revenues increased although profits were flat due to increased investment in new products as well as in sales and distribution.
Revenues and profits from Photonics products grew to record levels. A new photonics sales and technical support office was opened in Shanghai and European activities were strengthened by the Mikropack acquisition.
In Health optics our strong brand positioning and a healthy stream of new and enhanced products delivered record revenues and profit.
The increased rate of investment in R&D (now 5.3% of revenue) is an important element in maintaining the excellent operating returns in this sector.
New product innovation and technical collaboration are increasingly important organic growth drivers.
Geographic expansion into developed and developing regions offers further organic growth opportunities and we hope to benefit from the higher investment in 2006/07 in the coming year.
Increased acquisition search resources are identifying opportunities which can strengthen our technology and market presence.
This combination of organic and acquisitive growth prospects should lead to further progress during 2007/08.
Sources of information:
* EPA - Long-Term 2 Enhanced Surface Water Treatment Rule
** Chinese official Xinhua News Agency
*** Discussions with competitors, company country visits, confidential market reports
Australia
China
France
Germany
The Netherlands
UK
USA
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