Infrastructure Sensors sector review

We make products which detect hazards to protect people and property in public and commercial buildings.

Sector overview

Infrastructure Sensors, our largest business, contributes 44% of Group revenue (£155 million) and 41% (£28 million) of Group profit^†. Our principal products are sensors for fire, security, automatic doors and elevator controls. There are four sub-sectors:

Fire detection

We make fire and smoke detectors and audible/visual warning devices. We are the second largest manufacturer of point smoke detectors in the world. We make fire products in the UK and US, with sales offices in the US, Europe, Africa, the Middle East and Asia.

Security sensors

We have a strong presence in this strategically important and fast growing market. We are the market leaders in the UK and South Africa for security sensors used in public and commercial property*. These products are made in the UK.

Automatic door sensors

We are one of the world’s largest manufacturers of sensors used on automatic doors in public and commercial buildings*. These products are made in China, Belgium and the US.

Elevator safety

We are the world’s largest manufacturer of elevator/lift door safety sensors*. We also make emergency communication devices, display modules and control panels for elevators. These products are made in the UK, the Czech Republic, New Zealand, the US, China and Singapore.

† See note 1 to the accounts

KPI	Group target	2007	2006
Revenue growth¹	>5%	17%	12%
Profit growth²	>5%	16%	2%
Return on sales³	~18%	18.1%	18.3%
ROCE⁴ (Return on capital employed)	>45%	64%	60%
R&D as a % of revenue⁵	~4%	4.2%	4.4%

KPIs are calculated on results from continuing operations.

Sector revenue compared with the prior year.
Adjusted⁶ sector profit before finance expense compared with the prior year.
Return on sales is defined as adjusted⁶ sector profit before finance expense and taxation expressed as a percentage of sector revenue.
Adjusted⁶ sector profit before finance expense expressed as a percentage of sector operating net assets.
Sector research and development expenditure expressed as a percentage of sector revenue.
Adjusted to remove the amortisation of acquired intangible assets.

Sector strategy

Our strategy in this sector is to become the leading supplier of safety-critical sensor components used in non-residential building monitoring and control systems. We focus on specialist components, not complete installed systems. The global manufacturers of complete building infrastructure systems see us as a strategic partner or specialist supplier of advanced technology components rather than a direct competitor.

To support our Elevator safety sales growth, during the past year we organised our companies into three regional businesses covering Asia, Europe and North America. Our strategy is to boost competitiveness by presenting customers with a single, seamless source for our complete range of elevator safety products in each region. As part of a strategy of getting closer to elevator customers than our competitors, we opened new regional sales offices in Delhi, Houston and Toronto adding to the new offices opened in Asia and the Middle East last year.

Continuous manufacturing cost reduction remains a key strategic activity within this sector balanced by the need to remain close to our customers. Consequently, we will continue to invest significantly in our Czech and Chinese factories.

Market trends

A significant trend in the Infrastructure Sensors market sector is rising demand for integrated fire, security, evacuation and access systems. To accommodate this need, we have developed a new technology platform which will be licensed to our fire alarm system partners so that our fire detectors can be specified in buildings with integrated fire and security monitoring.

Worldwide demand for fire detectors remains strong. With an estimated growth rate of 18%, China continues to offer the highest revenue growth potential. Europe, where our fire product revenues grew by over 15%, reversed the downward trend of last year due to recovery in the German market.

Downward pricing pressure continues in the fire detector market, particularly in the Middle East and Asia. Further investment in our sales channels, coupled with increased spending on R&D and the supply chain, delivered continued growth in these markets and gross margins remained solid.

Our ability to innovate and respond rapidly to frequent regulatory changes maintains competitive advantage. In addition to new technical standards, during the past year we accommodated new regulations covering: safe disposal and recycling of waste electrical products (WEEE Directive); restrictions on the use of hazardous substances in electrical products (RoHs Directive); and enhanced electromagnetic compatibility standards (CPD Directive).

Our Security sensors sell into a global market worth over £2 billion annually, which continues to grow at 6% per year. Following our acquisition of Texecom in November 2005, we established a strong presence in the UK and South African markets and are making good progress towards gaining the necessary product approvals to sell our products into China and the US. These markets offer us significant growth potential and we will be using expertise in our other Infrastructure Sensors businesses to develop our presence more rapidly.

Our internal estimate is a 3% to 4% global growth rate for the automatic door safety market. We have high market shares in Europe and the US where many of our competitors have chosen low prices as their main competitive strategy. Our strategy to maintain our margins and market share by reducing production costs and introducing new market leading products tailored for each region, continued to be successful.

We believe that the global market growth rate for new elevators (and elevator services) is in the region of 5% to 6%.** We calculate the annual value of the elevator markets that we serve at £180 million. The Middle East, India and China offer the highest growth rates for elevator safety sensors. Price competition is prevalent; severe in China, but moderate in Europe and the US.

New European legislation called "Safety Norm EN-81", designed to improve elevator safety and accessibility for people with disabilities, boosted European demand for our products in the building modernisation market.

Sector performance

Our Fire detector businesses produced record revenues and profits. In 2006/07, organic revenue and profit growth was more than double market growth rates thereby increasing market share while improving profitability. More than 10 significant new fire products were introduced and we obtained 450 new product approvals for global markets.

Despite strong revenue growth, profit growth from security sensor products suffered from currency volatility as well as high investment in new markets and product development.

Even with strong price competition in the automatic door sensor market, both revenues and profits grew significantly. We maintained our high market shares in Europe and the US and defended our good profit margins partly by cutting production costs through increased investment in our Chinese manufacturing capacity. However, we also benefited from launching innovative, market leading products, such as the 4Safe sensor which prevents people from being trapped or injured in automatic, revolving or swing doors. New legislation boosted sales of 4Safe in Germany.

Last year we began to increase our direct presence in key developing elevator markets and this year both revenue and profit moved ahead. We countered a slight dip in margins in the past year with new, lower cost products and by cutting production costs. Revenues from offices set up in Dubai and Mumbai have grown very successfully, whilst progress in new regional offices in China has been more varied.

ROCE for the sector as a whole continues to be excellent.

Sector outlook

With our Fire detector and Automatic door sensor businesses achieving solid organic profit growth on increased revenues, a flow of new products aimed at diversification and market expansion is planned to drive growth. Continued strengthening of senior management and IT investment in our Security sensor and Elevator safety businesses is well underway to improve the potential for profit growth in these businesses in the future.

Sources of information:

* Internal market analysis including confidential market sources

** Freedonia "Industry Study 2016-World Elevators" and elevator manufacturers' websites

Summary of Halma p.l.c. Annual report and accounts 2007

Business and financial review