2016_Halma_ARA_160610_2

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Sector Review Process Safety Products which protect assets and people at work. Specialised interlocks which safely control critical processes. Instruments which detect flammable and hazardous gases. Explosion protection and corrosion monitoring products. Philippe Felten Sector Chief Executive, Process Safety Performance KPIs 2016 Group target Revenue growth 1 (1.8%) – Organic revenue growth 1 (constant currency) (5.3%) >5% Profit growth 1 (11.6%) – Organic profit growth 1 (constant currency) (14.8%) >5% Return on Sales 2 25.4% >18% 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. Revenue % of Group 19% Profit % of Group 22% R&D % of Revenue 3 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 adjusted 4 sector profit before finance expense are compared to the equivalent prior year figures. 2 Return on Sales is defined as adjusted 4 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). MARKET TRENDS AND GROWTH DRIVERS The underlying long-term drivers in our Process Safety markets are unchanged, despite challenging market conditions. We expect them to remain the key growth factors: • increasing and more stringent global health, safety and environmental regulations • population growth and industrialisation stimulating rising energy demand • increasing development, complexity and geographic spread of energy resources and their safety requirements The global expectation of improvements in workplace health and safety is backed by government occupational safety and health programmes worldwide and continually increasing regulation. This will continue to drive long-term growth in our target process safety niches at rates above general economic growth. The dramatic fall in oil prices – 60% down from their high point in 2014 – was caused by oversupply combined with lower demand due to slowing economic growth, particularly in China. Oil price decline has had 34 Halma plc Annual Report and Accounts 2016
a considerable impact on the oil and gas sector and on the wider global economy. Upstream capital expenditure (exploration and production) by the oil majors has been cut significantly, with many projects postponed. Capital investment in longer-term midstream and downstream projects (storage, processing and distribution), where our products have most exposure, is continuing. Current market conditions are not expected to affect worldwide government and local authority programmes of imposing stricter legislation to protect people and the environment. We do not anticipate significant change in oil and gas upstream capital expenditure during 2016/17. Our businesses will continue to focus on market segments where investment continues and where our technical know-how translates into improved safety and operational efficiency for customers. Midstream petrochemical and chemical processors have benefited significantly from falling oil prices due to cheaper feedstocks. In these markets we expect continued investment in raising safety standards and we expect to benefit from this trend. Our businesses focusing on machine automation, sequential equipment control and gas detection have minor revenue exposure to oil and gas. These companies continued to grow strongly throughout 2015/16 and we are confident of continued growth in 2016/17. Innovation, deep understanding of customer applications and continuously improving geographic support are the main drivers for growth in the non-oil Process Safety markets. GEOGRAPHIC TRENDS We performed well in US and Asian non-oil markets and these territories remain key growth targets for this sector. India is still a growth market where demand for improved safety throughout the process industries is rising and we anticipate stronger emphasis on safety and environmental protection regulation in the medium term. Europe was stable due to its flat economy but we expect to expand our position with our recently merged and strengthened business units. In China our businesses are marketing collaboratively with shared sales teams and service facilities. This will reinforce our presence and deliver greater penetration in this market. The Tianjin chemical warehouse explosion in 2015, in which 173 people died, has prompted the Chinese government to raise safety standards in hazardous environments and actively enforce existing regulations. In oil markets, the mature and declining North Sea and the USA will continue to be challenging. Production volumes are now falling even in the previously resilient US shale oil industry. While we expect the upstream oil market will remain subdued on a global basis, there are opportunities in Asia and the Middle East where the activity level remains attractive. 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 needs • 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 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. 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. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Halma plc Annual Report and Accounts 2016 35
Page 1 and 2: Halma plc Annual Report and Account
Page 3 and 4: Highlights Another record year of r
Page 5 and 6: Infrastructure Safety Products whic
Page 7 and 8: Revenue from outside the USA, UK an
Page 9 and 10: Our decentralised organisational st
Page 11 and 12: INCREASING HEALTH AND SAFETY REGULA
Page 13 and 14: INCREASING DEMAND FOR LIFE-CRITICAL
Page 15 and 16: Acquisition focus Insight Our marke
Page 17 and 18: Insight Trapped key interlocking is
Page 19 and 20: Insight Regulations around the worl
Page 21 and 22: Insight People are living longer th
Page 23 and 24: Insight Many processes rely on prec
Page 25 and 26: Resources and relationships Committ
Page 27 and 28: GROW INNOVATE ACQUIRE EMPOWER STRAT
Page 29 and 30: INNOVATE GROW ACQUIRE EMPOWER STRAT
Page 31 and 32: process and one which is subject to
Page 33 and 34: Mitigation Increased risk No change
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Page 39 and 40: towards the use of more sensors, no
Page 41 and 42: A third of American adults suffer f
Page 43 and 44: Today 1.8 billion people drink faec
Page 45 and 46: Adjusted profit bridge £m 160 155
Page 47 and 48: fell from 21% to 20% this year, and
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Page 53 and 54: In return, we offer: • The opport
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Page 59 and 60: CAROLE CRAN NON-EXECUTIVE DIRECTOR
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The three-year period over which th
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PERCENTAGE CHANGE IN CEO REMUNERATI
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Date of grant As at 28 March 2015 G
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C12 RESERVES The Capital redemption
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C14 EXPLANATION OF TRANSITION TO FR
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2009/10 £000 2010/11 £000 2011/12
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Principal locations Telephone E-mai
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Principal locations Telephone E-mai
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DIVIDEND REINVESTMENT PLAN The Comp
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