Strategic Review

Significant milestones and our growth strategy enhanced

Halma made strong progress during the year and achieved record revenue and profit for the fifteenth consecutive year, surpassing £1 billion of revenue for the first time. In December 2017, Halma entered the FTSE 100 index reflecting both our outstanding track record of growth and exciting potential for the future.

We have a clear growth strategy, a sustainable financial model and a unique organisational structure, which is customer- focused and enables us to adapt quickly to market changes. During the year, the Halma 4.0 growth strategy was launched, which will support new ways to grow our business by embracing the opportunities and challenges of digital technologies with greater connectivity. At its centre is a revitalised commitment to make a major positive impact in the world through our renewed purpose of "Growing a safer, cleaner, healthier future for everyone, every day".

Underpinning our continuing success is the outstanding commitment, abilities and dedication of talented individuals in every part of Halma. I thank all of them for their contribution to not only delivering exceptional financial results but also for ensuring that Halma has a transformational impact on people's lives every day.

The Infrastructure Safety sector performed well. Revenue increased by 11% to £349m (2017: £315m), including 8% organic constant currency growth. Profit² grew by 13% to £73.3m (2017: £65.1m) including 10% organic constant currency growth. Both revenue and profit benefited by 2% from acquisitions and 1% from currency. Return on Sales was 21% (2017: 20.7%). R&D spend increased by 13% to £20.4m (2017: £18.0m). There were strong performances in the Fire and People Movement segments and solid progress in Security and Elevator Safety.

Regionally, the highest rates of organic constant currency revenue growth were in Asia Pacific and Other regions. There continues to be a gradual strengthening of safety regulation for public and commercial infrastructure in developing regions, which promises to support continued growth in the future. There were good rates of organic constant currency growth in the UK and Mainland Europe. Despite demand trends improving in the second half, there was a small organic constant currency decline in the USA.

Given this widespread growth, both geographically and in each market segment, the Infrastructure Safety sector is expected to make continued progress in the coming year.

The Medical sector achieved consistent revenue growth throughout the year and improved its rate of profitability as the year progressed.

Revenue increased by 9% to £284m (2017: £261m) including 7% organic constant currency growth and a 2% contribution from acquisitions. Profit² improved by 0.4% to £67.0m (2017: £66.7m) including a 0.4% organic constant currency decline and 1% contribution from acquisitions. There was a very small negative impact from currency on both revenue and profit. Return on Sales was 23.6% (2017: 25.6%). R&D spend increased by 4% to £11.8m (2017: £11.3m). The Ophthalmology, Patient Assessment, Diagnostic and Sensor segments all achieved revenue growth with increased investment and revenue mix reducing, as expected, the relative rate of profit growth.

There was good organic constant currency revenue growth in the USA, which is the largest regional market. There was solid growth in the UK, Mainland Europe and Asia Pacific and strong growth in Other regions.

The Medical sector is well positioned to make further progress in the coming year through sustained revenue growth and maintaining its improving profitability.

The Environmental & Analysis sector had an outstanding year, achieving strong underlying growth and also benefitting from the reorganisation completed in the prior year.

Revenue grew by 18% to £259m (2017: £219m) including organic constant currency growth of 15% and a 3% contribution from acquisitions. Profit² increased by 32% to £55.0m (2017: £41.7m) including organic constant currency growth of 28%, a 6% contribution from acquisitions and a 2% adverse currency movement. Return on Sales was 21.2% (2017: 19.0%). R&D spend increased by 17% to £17.8m (2017: £15.1m). The Photonics, Water and Environmental & Monitoring segments all contributed strongly to this outstanding result.

There was strong organic constant currency revenue growth in Asia Pacific, the UK and the USA with solid growth from Mainland Europe. The UK benefited from good demand from the water utilities. There was a decline in demand from Other regions, which represents around 5% of sector revenue.

The Environmental & Analysis sector has good momentum in its chosen market segments and is well placed to continue to make progress this year.

Five acquisitions completed across three sectors

Our core acquisition strategy is to find privately-owned businesses operating in niches, which are aligned with our purpose of "Growing a safer, cleaner, healthier future for everyone, every day". We focus the majority of our search efforts in our core, or closely adjacent, market niches although each sector board has freedom to explore new niches which might have the right product, market and financial characteristics. In most cases we acquire 100% of an entity, but we make minority investments to gain access to potentially valuable intellectual property if an outright purchase is not appropriate or possible. Every transaction is approved by the Group Chief Executive and Finance Director, with all deals of £10m or over requiring Halma plc Board approval.

Coming into the year, we had an improving acquisition pipeline having built stronger, sector-focused M&A search resources. It was pleasing to see this translate into five acquisitions completed in the year and it is encouraging that we maintained a healthy pipeline of opportunities as we entered the new financial year.

In July 2017, we acquired blood pressure monitoring technology and product lines from Cas Medical Systems, Inc for an initial consideration of US$4.5m (£3.4m), with a potential performance-based contingent payment of up to US$2.0m (£1.5m). The assets acquired were merged into SunTech within our Medical sector.

In August 2017, we acquired Cardios, also a blood pressure monitoring specialist, for R$50m (£12.4m), with a potential payment of up to R$5m (£1.2m) for further growth. Based in São Paulo, Brazil, this is our first ever acquisition in South America. Cardios has joined the Medical sector.

In October 2017, we acquired Mini-Cam, a pipeline inspection business focused on water utilities. We paid an initial consideration of £64.9m and there is potential further payment of £23.1m based on future profit growth. Mini-Cam is based in the UK and is now part of the Environmental & Analysis sector.

In November 2017, we acquired Setco, based near Barcelona, Spain for a consideration of €17m (£15.1m). Trading under the Microkey brand, this brings new telecommunications capabilities to our Elevator Safety business, Avire, which is part of the Infrastructure Safety sector.

In December 2017, we acquired Argus Security and its UK distributor, Sterling, for a combined consideration of €20.8m (£18.4m). Argus is based in Trieste, Italy and manufactures fire detection solutions. It will operate within our Infrastructure Safety sector.

Our sector-focused organisational model gives us the scalability we need to continue to acquire small-to-medium sized businesses or even to acquire small groups of companies. Our portfolio structure enables us to easily integrate new acquisitions as well as to merge or sell businesses should the longer-term market potential change adversely. This enables Halma to grow rapidly without becoming more complex. In 2008, Halma had revenue of £398m from 39 operating companies while today we have revenue of £1,076m and 41 operating companies.

Halma 4.0 growth strategy launched and increased digital investment

The Halma 4.0 growth strategy provides a clear framework which helps our companies to face the diverse challenges and opportunities presented by the digital age.

It maintains a focus on growing our 'Core' business as the foundation of Halma's success (for example, through new product development and international expansion) and, during the year, R&D spend increased by 12% to £56.5m (2017: £50.6m) representing 5.2% of Group revenue (2017: 5.3%). However, Halma 4.0 also adds two further growth strategies, called 'Convergence' and 'Edge'.

Convergence growth is achieved through the creation of new digital solutions, often with new business models, arising from the combination of capabilities or technologies from more than one Halma company and/or new partnerships outside the Group (for example, using a safety-related technology for a medical application).

Edge growth will come from creating new business opportunities via partnerships with external companies which have valuable capabilities which we do not wish to, or are unable to, acquire (for example, Artificial Intelligence).

At the fulcrum of executing the Halma 4.0 strategy are our Growth Enablers. These are the resources provided by the Group to every company to help them to grow. They include well-established components of our growth strategy including M&A, Talent, International Expansion, Innovation and Finance & Risk. To these, Halma 4.0 has added 'Digital Growth Engines' and 'Strategic Communications'.

As we have done successfully in the past, our approach is to make central investment in high-quality resources for our companies to use according to their needs and ambition.

In July 2017, we were delighted to welcome Inken Braunschmidt as our first Chief Innovation and Digital Officer and member of the Executive Board. Inken has already been working very closely with our operating companies and is building a much stronger collaborative network across the Group and with external expert partners to accelerate the development of our innovation and digital capabilities for Core, Convergence and Edge growth. We look forward to sharing success stories from these new initiatives in the future.

Executive Board changes

In order to leverage the benefit of stronger networking within Halma and to provide greater visibility to the company boards of what is available to them, the Executive Board was streamlined in December 2017.

The number of Sector Chief Executives (SCEs) was reduced from four to two. Paul Simmons became the SCE responsible for our two Safety sectors and Adam Meyers the SCE responsible for the Medical and Environmental sectors. I would like to thank Philippe Felten and Chuck Dubois for their contributions to Halma's success as members of the Executive Board over many years.

In addition, we re-established the Divisional Chief Executive (DCE) role. The DCEs chair each Halma operating company and report into a SCE. They have greater direct interaction with the Halma Executive Board than the previous Sector Vice President role and therefore will be well positioned to bring the value of the Group to each business.

Finance Director succession

At the close of the AGM on 19 July 2018, Kevin Thompson will retire from Halma after 30 years of service, including 20 years as Finance Director. Kevin has made a huge contribution to Halma's development over this long period, not least by ensuring that the critical elements of our success, such as organic growth, free cash flow and a strong balance sheet have remained at the forefront of our growth strategy. I would like to thank Kevin for his support to me and to the Board over this long period and wish him health and happiness in the future.

I am delighted that, after an extensive internal and external recruitment process, the Board selected Halma's Group Financial Controller, Marc Ronchetti, as Kevin's successor. Marc will start as Halma's new Chief Financial Officer on 1 July 2018³. He has been completing an extensive handover process from Kevin and the transition has progressed smoothly. I look forward to working closely with Marc in the years ahead and welcome him to the Board.

Corporate responsibility and sustainability is at Halma's core

Our primary market growth drivers mean that Halma companies operate in markets in which their products contribute positively to the wider community. These market characteristics and our commitment to health and safety, the environment and people development are reflected in the values held by our employees and our operating culture. We review our responsibility and sustainability reporting in accordance with best practice. Legislative changes, particularly concerning the environment and bribery and corruption, have provided an opportunity to review and ensure that our procedures in these important areas are accessible, compliant and firmly bedded within our business.

A detailed report on Sustainability is set out in the Annual Report and Accounts 2018.

Outlook

Halma has completed another successful year, achieving record results while increasing strategic investment as part of an enhanced growth strategy.

Halma's market and geographic diversity, combined with the agility of our business model, will be important assets as accelerating technological and geopolitical change continues to impact individual regions and industries. Trading since the last financial year end has been positive, with order intake ahead of the order intake last year and revenue this year. We expect to continue to make progress in the coming year.

Andrew Williams, Group Chief Executive

¹  See Highlights.
²  See note 2 to the Results.

³  There is no information to disclose under LR 9.6.13R in respect of Marc Ronchetti's appointment.

Financial Review

Record results

Halma achieved record revenue and profit for the fifteenth consecutive year, exceeding £1 billion of revenue and £200m of adjusted¹ profit for the first time. Revenue increased by 11.9% to £1,076.2m (2017: £961.7m) and adjusted¹ profit was up by 10.1% to £213.7m (2017: £194.0m). Our balance sheet remains strong with significant financial capacity to continue investment in growth and to acquire. The Board is proposing a further dividend increase of 7%, the 39th consecutive year of 5% or more dividend growth.

The 11.9% increase in revenue included 9.9% organic constant currency revenue growth. Acquisitions contributed 2.0% to growth.

The adjusted¹ profit increase of 10.1% included 8.5% organic constant currency profit growth. Acquisitions contributed 1.5% to growth.

Despite currency volatility during the year there was negligible net currency translation impact on revenue and adjusted¹ profit for the year as a whole.

Statutory profit before taxation increased by 9.0% to £171.9m (2017: £157.7m). Statutory profit is calculated after charging the amortisation and impairment of acquired intangible assets of £34.7m (2017: £43.9m) and after charging acquisition related items, including revisions to provision for acquisition contingent consideration, related foreign exchange movements and disposal of operations and restructuring, of £7.0m (2017: £9.5m credit) arising from current and prior year acquisitions. In the prior year the reduction in forecast acquisition contingent consideration, and the related impairment of acquired intangible assets were primarily attributable to Visiometrics as discussed in the 2016/17 Annual Report. Statutory profit in the prior year included a charge of £1.9m for the restructuring of Pixelteq, within the Environmental & Analysis sector.

Revenue grew by 14.5% in the first half and 9.7% in the second half. There was a 5% positive contribution from currency translation in the first half which reversed in the second half to give a neutral impact for the year. Organic revenue growth at constant currency was 9.1% in the first half increasing to 10.6% in the second half to give 9.9% growth for the year, with continued growth in the two Safety sectors and increased second half growth in the Medical and Environmental & Analysis sectors.

Adjusted¹ profit growth was 13.0% in the first half and 7.9% in the second half. As with revenue, there was a 5% positive contribution from currency translation in the first half which reversed in the second half, giving a neutral impact in the full year. Organic profit growth at constant currency was 7.9% in the first half increasing to 9.0% in the second half. The first half/second half split of adjusted¹ profit was 44%/56% in line with our typical 45%/55% pattern.

All four sectors delivered revenue and profit growth. At organic constant currency all sectors achieved strong revenue growth. All except the Medical sector delivered organic constant currency profit growth for the year, although it did deliver growth in the second half after a decline in the first half.

Central administration costs were £15.3m (2017: £10.5m). As expected there was increased investment in digital/innovation capability to support our growth strategy as well as the increased cost of performance-based rewards resulting from high rates of growth. In addition, we held our biennial HITEx conference in the year. We expect a further increase in central costs in 2018/19 with continued investment to support our growth strategy, although in the medium-term central costs are expected to grow no faster than revenue.

Based on the current mix of currency denominated revenue and profit, a 1% movement in the US Dollar relative to Sterling changes revenue by £4.9m and profit by £0.9m. Similarly, a 1% movement in the Euro changes revenue by £1.4m and profit by £0.3m.

We expect currency rates to continue to be volatile. If currency rates through the 2018/19 year were: US Dollar 1.35/Euro 1.13 relative to Sterling, and assuming a constant mix of currency results, we would expect approximately 1% adverse currency translation impact on revenue and profit in 2018/19 compared with 2017/18. On this basis there would be a higher adverse impact in the first half of the year, with some reversal in the second half of the year.

Increased financing cost

The net financing cost in the Income Statement of £9.7m was slightly above the prior year (2017: £9.3m). Average net borrowings were lower this year, despite significant acquisition expenditure, but the average cost of financing increased as interest rates edged up for US Dollars in particular (see the 'Average debt and interest rates' table below for more information).

Interest cover (EBITDA as a multiple of net interest expense as defined by our Revolving Credit Facility) was 32 times (2017: 30 times) which was well in excess of the four times minimum required in our banking covenants.

The net pension financing charge under IAS 19 is included within the net financing cost. This year it was in line with the prior year at £1.7m (2017: £1.6m).

Reduced group tax rate

This year the Board published the Group's Tax Strategy which sets out the Group's approach to tax matters. The strategy is available on our website at www.halma.com/responsibility/tax.

The Group's approach to tax is to ensure compliance with the tax regulations in all of the countries in which it operates, paying in full all taxes that are due. The key features of this are: (1) Tax compliance - Halma is committed to maintaining good relationships with tax authorities based on cooperation, transparency and paying in full the tax due in each jurisdiction; (2) Tax strategy - our tax arrangements have an underlying business purpose and, where possible, we consider mitigating tax in compliance with local legislation; and (3) Tax policy - the Board of Directors is regularly updated, either directly or through the Audit Committee, on the Group's Tax policy and management of tax risks.

The Group has major operating subsidiaries in 10 countries and the Group's effective tax rate is a blend of these national tax rates applied to locally generated profits. A significant proportion (approximately one quarter) of Group profit is generated and taxed in the UK. The Group's effective tax rate on adjusted¹ profit is lower than the prior year at 19.7% (2017: 21.5%) due to the lower US corporate income tax rate, the mix of profits earned in different jurisdictions and increased benefit under UK 'Patent Box' rules.

We expect the recently enacted US Tax Cuts and Jobs Act ('the Act') to positively impact the Group's current and future US after tax adjusted earnings due primarily to a reduction in US federal corporate income tax rates. This year, the changes in the Act had a positive impact of 0.7% on the Group's effective tax rate on adjusted¹ profit. The changes also resulted in a one-off non-cash tax credit of £15m relating to the revaluation of US deferred tax assets and liabilities. This credit has been included within Adjustments in the Consolidated Income Statement. We will continue to review and provide updated guidance in light of future clarifications that are expected to be issued by the US authorities on the complex provisions in the Act.

For the year to 31 March 2019 we currently anticipate (based on the forecast mix of adjusted¹ profits) a Group effective tax rate on adjusted¹ profits of approximately 20%.

A summary of the year's cash flow is shown in the table above. The largest outflows in the year were in relation to acquisitions, dividends and taxation paid. Working capital outflow, comprising changes in inventory, receivables and creditors, totalled £24.4m (2017: £13.9m). This outflow was higher than the prior year due to increased debtors following continued strong revenue momentum in the final quarter and higher inventory levels supporting new product introductions. Debtor days remain in line with the prior year and outstanding debtor balances are actively reviewed as part of our year-end process.

Dividends totalling £53.4m (2017: £49.8m) were paid to shareholders in the year. Taxation paid was £41.1m (2017: £33.2m).

Capital allocation and funding

Halma aims to deliver high returns, measured by ROTIC, well in excess of our cost of capital. Future earnings growth and strong cash returns underpin ROTIC and our capital allocation as follows:

Investment for organic growth

Organic growth is our priority and is driven by investment in our businesses, in particular through capital expenditure, innovation for digital growth and in new products, international expansion and the development of our people.

Regular and increasing returns to shareholders

We have maintained a long-term progressive dividend policy as our preferred route for delivering cash returns to shareholders.

Value enhancing acquisitions

We supplement organic growth with acquisitions in related markets. This brings new technology and intellectual property into the Group and can expand our market reach.

Investment for organic growth

All sectors continue to innovate and invest in new products with R&D spend determined by each individual Halma company. This year R&D expenditure grew by 12%, in line with Group revenue, with increased investment through the year. R&D expenditure as a percentage of revenue was 5.2% (2017: 5.3%). In the medium term we expect R&D expenditure to continue to increase broadly in line with revenue growth.

Under IFRS accounting rules we are required to capitalise certain development projects and amortise the cost over an appropriate period, which we determine as three years.

In 2017/18 we capitalised and acquired £9.7m (2017: £10.7m), impaired £0.7m (2017: £0.1m) and amortised £6.9m (2017: £6.8m). This results in an asset carried on the Consolidated Balance Sheet, after £1.0m (2017: £1.4m gain) of foreign exchange loss, of £29.9m (2017: £28.8m). All R&D projects and particularly those requiring capitalisation, are subject to rigorous review and approval processes.

Capital expenditure on property, plant, equipment and computer software this year was £22.1m (2017: £24.4m). The prior year included additional investment in Group properties. The expenditure on fixed assets was spread across the four sectors supporting our operating capability, capacity and growth.

There was reduced spend in the Process Safety and Medical sectors following completion of projects in the prior year, and the highest increase was in the Environmental & Analysis sector accompanying high rates of growth. We anticipate capital expenditure of £34m in the coming year.

Regular and increasing returns for shareholders

Adjusted¹ earnings per share increased by 13% to 45.26p (2017: 40.21p), higher than the increase in Adjusted¹ Profit due to the lower effective tax rate this year. Statutory earnings per share increased by 19% to 40.69p (2017: 34.25p). Statutory earnings per share benefited from the one-off credit arising from revisions to US taxation rates discussed above.

The Board is recommending a 7.0% increase in the final dividend to 8.97p per share (2017: 8.38p per share), which together with the 5.71p per share interim dividend gives a total dividend of 14.68p (2017: 13.71p), up 7.1%. This year dividend cover (the ratio of adjusted¹ profit after tax to dividends paid and proposed) is 3.08 times (2017: 2.93 times).

The final dividend for 2017/18 is subject to approval by shareholders at the AGM on 19 July 2018 and will be paid on 15 August 2018 to shareholders on the register at 13 July 2018.

Dividend growth has been an important contributor to our Total Shareholder Return over many years. Halma has a long-term progressive dividend policy which aims to deliver consistent, sustainable and affordable dividend growth, whilst maintaining a prudent level of dividend cover.

We aim to increase the per share dividend amount each year, with approximately 35-40% of the anticipated total dividend being declared as an interim dividend. The Board's determination of recommended annual dividend increases takes into account the medium-term rate of organic constant currency growth and the financial resources required in executing our strategy, including organic investment needs and acquisition opportunities, whilst maintaining moderate debt levels.

Five acquisitions completed

Acquisitions and disposals are an important part of our growth strategy. We buy businesses already successful in, or adjacent to, the niches in which we operate.

In the year we spent £116m on five acquisitions (net of cash/(debt) acquired of £1m including acquisition costs). In addition, we paid £1m in contingent consideration for acquisitions made in prior years, giving a total spend of £117m.

The acquisitions made in 2017/18 were as follows:

In July 2017, we acquired Cas Medical Systems, Inc's (CasMed) non-invasive blood pressure monitoring product line for an initial cash consideration of US$4.5m (£3.4m) with up to a further US$2m (£1.5m) payable based on achievement of certain sales targets. We expect the majority of this deferred consideration to be paid.

In August 2017, we completed the acquisition of Cardios Sistemas Comercial e Industrial Ltda (Cardios) located in Brazil. The initial cash consideration was R$50m (£12.4m) with further payment of up to R$5m (£1.2m) payable based on future growth. Our current estimate is that R$2.5m (£0.6m) will be paid.

In October 2017, we acquired Mini-Cam Enterprises Limited and its subsidiaries (Mini-Cam). The initial consideration was £62m, on a cash and debt-free basis, with up to a further £23.1m payable based on annualised profit growth to the end of March 2020. Our current estimate is that £8.1m will be paid in deferred contingent consideration and this has been provided for in these accounts.

In November 2017, we acquired Setco S.A. for a cash consideration of €17m (£15.1m).

In December 2017, we acquired Argus Security S.r.l (Argus) and its UK-based distributor Sterling Safety Systems Limited (Sterling) for a combined cash consideration of €20.8m (£18.4m).

The acquisitions completed in the current and prior year contributed to revenue in 2017/18 in line with expectations. Their aggregate profit contribution was lower than the annualised run-rate at the time of acquisition due to the timing of certain acquisitions and additional investment under Halma ownership.

We expect a good performance from these acquisitions in the coming year and in the long term.

Funding capacity extended

Halma operations are cash generative and the Group has access to competitively priced debt finance providing good liquidity for the Group. Group treasury policy remains conservative and no speculative transactions are undertaken. We continue to fund organic and acquisition growth through our strong cash flow and use of debt facilities.

In November 2017 we extended the £550m Revolving Credit Facility, put in place in November 2016, by a further year to 2022. This supplements the US$250m US Private Placement drawn down in January 2016 which provided diversification of Group funding.

At the year end net debt was £220.3m (2017: £196.4m), a combination of £291.0m of debt and £70.7m of cash held around the world to finance local operations. The gearing ratio at year end (net debt to EBITDA) was 0.87 times (2017: 0.86 times). We are comfortable operating at this level of gearing and would increase to 2 times gearing if the timing of acquisitions required it. Net debt represents 5% (2017: 5%) of the Group's year-end market capitalisation. The Group continues to operate well within its banking covenants with significant headroom under each financial ratio.

These sources of funding provide Halma with the financial resources to operate within its existing business model for the medium term, continuing investment in our business and with substantial capacity for further acquisitions.

Pensions update

We closed the two UK defined benefit (DB) plans to new members in 2002. In December 2014 we ceased future accrual within these plans with future pension benefits earned within the Group's Defined Contribution (DC) pension arrangements.

The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net deficit on our pension plans at 31 March 2018 based on the market value of assets at that date and the valuation of liabilities using year end AA corporate bond yields.

On an IAS 19 basis the deficit on the Group's DB plans at the 2017/18 year end had decreased to £53.9m (2017: £74.9m) before the related deferred tax asset. The value of plan assets increased to £271.7m (2017: £265.0m).

In total, about 50% of plan assets are invested in return seeking assets providing a higher expected level of return over the longer term. Plan liabilities reduced to £325.6m (2017: £339.9m) due primarily to the revision to mortality assumptions based on latest guidance.

The plans' actuarial valuation reviews, rather than the accounting basis, determine any cash deficit payments by Halma. Following the 2014/15 triennial actuarial valuation of the two UK pension plans, cash contributions aimed at eliminating the deficit were agreed with the trustees. In 2017/18 these contributions amounted to £10.8m (2017: £10.2m). The latest triennial valuation for the two UK plans are in the process of completion and review. Appropriate contribution rates will be set following discussion between the Company and the pension plan trustees.

Process Safety Sector Review

We create products that protect people and assets at work.

Sector progress summary

The sector delivered strong organic revenue and profit¹ growth. The first half of the year was particularly strong against a weaker comparison period, but solid progress was also made in the second half.

The Pressure Management sub-sector took advantage of their strong product portfolios and the improving US onshore oil and gas market, to produce outstanding results with double digit revenue and profit growth. The Pipeline Management sub-sector also produced strong organic growth, capitalising on the improving capex spending in Asia and the Middle East. The remaining sub-sectors also contributed organic revenue growth.

Market trends and growth drivers

Our Safety Interlocks and Gas Detection businesses are continuing to benefit from increasing health and safety regulation and a growing population. With an estimated 374 million injuries and 2.74 million fatalities occurring in the workplace each year, it is likely that the ongoing tightening and advancement of health and safety regulations will continue.

Our companies have been adept at expanding into adjacent markets. Examples include the use of interlock technology in warehousing applications while also keeping pace with technology changes in core markets, such as the increasing use of collaborative robots in the workplace. With the global demand for collaborative robots expected to grow further, an agile approach to complement or leverage such technological developments is key for our companies.

As a critical global resource, energy demand continues to be a significant growth driver for our Pressure Management and Pipeline Management businesses. The global demand for energy remains high, growing by 2.1% in 2017 with 70% of the demand being met by oil, natural gas and coal.

Current projections indicate that the demand for oil is likely to remain relatively flat through to the year 2040, partly due to the rise in renewable energy and demand for electric vehicles. However, the additional new supply required to offset the decline in natural production will require new production, equal to nearly 5% of the total, be added each year.

The Pressure Management sub-sector has particularly benefited from the recent resurgence in investment in unconventional oil and gas and the growing use of Natural Gas Liquids as chemical feedstock in the USA. These trends are expected to continue for the next 20 years.

Geographic trends

The Sector performed strongly in all geographies. Asia Pacific, the USA and Other regions were particularly strong. The US performance was driven by the improving Oil and Gas market and, while upstream capex remains well below the record levels of 2014, it grew by 35% in the USA in 2017 (4% globally). Upstream capex should grow by an estimated 8% in 2018 compared to 2017, again led by the USA.

Strategy

The sector's markets are diverse and its products provide valuable safety solutions in a wide variety of niche applications within the energy, chemical, pharmaceutical, biotechnology, automotive, transportation and industrial end markets. Our companies are strengthening their international presence whilst accelerating activities to moderate our dependency the Oil and Gas market.

Through partnering and acquisition activity we are seeking new opportunities in specialised niches where we can provide valuable solutions to high stake problems. As an example, our corrosion monitoring business, Cosasco, entered into an exclusive commercial partnership with Sensorlink AS, a Norwegian business with novel ultrasonic non-intrusive corrosion monitoring technology. This moves Cosasco to the forefront of its market with a broader range of sensing and connected data solutions.

Increasingly we are looking to increase the value we provide our customers through combining new digital technology with our existing, market-leading conventional technologies. Targeted acquisitions will be sought to accelerate this process. We are also finding more ways for the operating companies within Process Safety with other Halma sectors to collaborate on solutions that combine technology and insight from two or more operating companies.

Performance

The Process Safety sector has increased revenue by 11% to £185m and grew profit¹ by 8% to £43m. On an organic constant currency basis, revenue and profit grew by 11% and 8%, respectively. The Pressure Management sub-sector enjoyed a year of strong revenue and profit growth, primarily in the US chemical and energy markets. The Pipeline Management sub-sector benefited from several large capital project awards in Asia and the Middle East. Our Gas Sensors and Safety Interlock business also grew. We strengthened our acquisition pipeline, although all the growth delivered in the year was organic.

Gross margins remained healthy. Overheads were controlled with spend increasing in line with revenue growth. Return on Sales remained above Halma group target at 23.5%. Strong working capital management and profit generation helped improve Return on Capital Employed, maintaining it well above target. R&D spend at 3.4% of revenue was below the Group target, but is expected to increase as we focus on digital technology and new product development.

New product and process development continued to play a large role in our success. The Salvo product extended our sequential safety companies' markets into trailer loading bay safety. The Pressure Management sub-sector developed industry leading technology for their scored rupture disc and welded disc assembly product lines.

Outlook

We are aiming to acquire businesses in core and adjacent markets with a strong emphasis on digital technology and new business models. Through diversifying our product and service offerings, both at the individual company level and at the sector level through acquisition, we plan to steadily reduce our exposure to Oil and Gas over the medium term.

With strong growth prospects in core and adjacent markets and a steadily improving Oil and Gas market we expect to make progress in the coming year.

¹ See note 2 to the Results.

Infrastructure Safety Sector Review

We create products that save lives protect infrastructure and enable safe movement.

Sector progress summary

The sector has had a strong year, led by robust organic growth in our Fire businesses and our People and Vehicle Flow business. All the sector's companies posted record revenue and the majority record profits¹. Return on Sales and Return on Capital Employed both showed good improvements, with the increased levels of R&D spend of recent years maintained.

The sector added two important technologies to the portfolio via the acquisition of a wireless smoke detection business and an elevator safety communication company.

Market trends and growth drivers

Our Fire businesses operate in markets driven by increasingly tight regulations, an expanding world population and greater urbanisation. As a result, the industry is experiencing global growth, with Fire Detection growing an estimated 5.3% per annum between 2015 and 2020 and Fire Suppression growing 4.7% per annum.

Increasing population growth and urbanisation, allied to a heightened focus on life safety, are driving even higher rates of growth for fire systems in many developing markets across the world. For example, the Indian market for both Fire Detection and Fire Suppression systems is forecast to grow 12% -13% each year between 2015 and 2020.

Tens of thousands of people worldwide die every year due to fire. Most of these deaths are preventable and employers and building owners are under increasing pressure to comply with stricter government laws and regulations to protect their workers.

High-profile tragedies are driving welcome improvements in the fire safety of existing infrastructure, and we expect to see more regulations coming into force to protect people's lives in both commercial and residential property. Although standards and practices vary between countries, these standards are improving every year and becoming more closely aligned.

Wireless fire systems provide a fast, effective and non-intrusive way of improving the safety of existing infrastructure. As a result, we expect demand for wireless products to continue accelerating in the coming years as governments, regulators and business owners all respond to the need to improve fire safety. Our recent acquisition, Argus, which manufactures wireless fire sensors, is poised to benefit from this trend.

The market for security products is increasingly linked to the emergence of intelligent buildings. It is estimated that by 2024 there will be 2.1 million connections in the intelligent buildings sector in the UK, with 70% of those connections related to security.

Our Security business is ideally positioned to benefit from the connected trend with its cloud based platform, which enables remote monitoring and control of a building's intrusion system.

The OEM elevator market continues to be highly competitive although the fast-growing maintenance market is more attractive, with a faster growth rate (4%) and higher profitability. The increasing use of mobile technology in elevators for emergency and monitoring communications was the driver behind our acquisition of Setco, a Spanish M2M communications technology company.

In both developed and developing countries there is a significant increase of people moving into urban areas and living in larger buildings. A recent United Nations report has highlighted this trend, estimating that by 2050 68% of the global population will be living in an urban area. This long-term trend is creating demand for better infrastructure and better transportation services, as people from all countries move into more densely populated areas.

Our People and Vehicle Flow and our Elevator businesses are positioning themselves to capitalise on this growing trend, providing products and services that enable safer transportation and people flow control in and around buildings, transportation networks and public spaces.

Geographic trends

The sector has a strong international footprint although most principal businesses are located in the UK, Mainland Europe and the USA. There was strong growth of 16% in Asia Pacific and Other regions which compares favourably to the sector's overall revenue growth rate of 11%. The performance in Asia Pacific was underpinned by large projects in vehicle registration and mass transit safety.

Revenue grew well in the UK and Mainland Europe with the USA underperforming due to weaker performances by our fire companies.

Strategy

Our strategy aims to accelerate growth due to increasing life safety concerns and the digitalisation of infrastructure, whilst maintaining a focus on less cyclical, niche applications with high barriers to entry. There are three main elements as follows:

-       Core growth

-       Organically expand our geographic footprint, especially in China, India and South East Asia and accelerate this international growth through acquisition.

-       Accelerate the pace of innovation and product development to continue delivering sustainable and differentiated value to our customers.

-       Convergence towards connected systems and infrastructure

-       Move our companies' offerings along the digital value chain, to leverage our strong sensor technology portfolio and new cloud-based systems.

-       Acquire technology in the integrated buildings market.

-       Acquisition

-       Continue to acquire businesses in our core markets and close adjacencies.

-       Focus increasingly on digital and connected technologies to accelerate growth and enable convergence opportunities.

Our strategy is supported by a strong focus on talent: developing our people and recruiting the best talent in the market.

Performance

The sector delivered a strong performance, with revenue up 11% (8% organic constant currency) and profit¹ increasing by 13% (10% organic constant currency).

The People and Vehicle Flow business performed very strongly due to new product introductions and larger project successes in Asia Pacific. Buoyed by the acquisition of Setco, our Elevator Safety business had a good year both in terms of financial results and transitioning the business to more profitable products and services.

The Fire and Security businesses outperformed the market through a combination of new products and international growth, making a strong contribution to the sector's performance. The recently acquired Fire business, Argus, performed in line with expectation in its first three months.

Gross margins remained strong despite component cost headwinds. With good overhead control, Return on Sales increased to 21.0%.

All key financial metrics met or exceeded Halma targets, with strong cash generation and Return on Capital Employed.

Outlook

Our key growth drivers of increasing regulation, population growth and urbanisation will continue to prevail in the coming years. We expect our robust growth trend to continue, supported by sound investment decisions in innovation and people, and by strategic acquisitions in both our core markets and in digital adjacencies.

Whilst we will continue to grow steadily in developed markets, our geographic footprint will continue to shift to Asia.

Alongside our sales of core sensor products, we will grow our share of revenues from services and data insight.

¹ See note 2 to the Results.

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.

Key sector strategic initiatives to increase growth organically and via acquisition include:

-       recruiting and retaining high calibre, diversified talent

-       increasing collaboration to drive geographic expansion and product development with a high focus on data an digital solutions

-       increasing R&D investment to adapt to quickly changing market needs and respond to increased ageing population trends

-       acquiring businesses in both core and adjacent market niches

Geographic trends

The global medical device market is expected to continue to grow at 5% through to 2021. North America will remain the largest market for medical device technologies, growing at 4%. In the Asia Pacific market, growth is forecast to continue above 7%, with Europe recovering at 5% through to 2021.

However, geographic variations in the global medical device market continue due to local economic conditions, government spending programmes, currency fluctuations and regulatory mandates. Therefore, our growth strategies will continue to vary by region.

Performance

The Medical sector grew revenue by 8.9% to £284m (2017: £261m) and profit¹ by 0.4% to £67m (2017: £67m). Organic constant currency revenue growth was stronger than prior year at 7% (2017: 4%). First half organic constant currency profit growth was below expectations, declining 6% due mostly to investments in sales, marketing and innovation. Second half organic constant currency profit growth rebounded to 4% growth as overhead growth slowed and good revenue growth continued.

We delivered revenue growth in all major regions with the USA ahead 8%, Europe up 6%, the UK 3% higher and Asia Pacific ahead 4%. South & Central America increased by 46% bolstered by our acquisition of Cardios in Brazil.

The sector continues to deliver high returns. Return on Sales remained high at 23.6% (2017: 25.6%). Return on Capital Employed and cash generation was also strong.

We completed two acquisitions. These businesses delivered encouraging second half performances and will contribute to sector growth in the years ahead.

Outlook

In the medium term, we expect our Patient care and Provider solutions segments to outperform the market with rising revenue driven by product innovation and increased penetration in key markets. The impact of global population growth and ageing on the healthcare market will continue as key drivers of our growth.

We will continue to build our acquisition targets pipeline within existing and adjacent niches, and expect continued growth from the businesses acquired. This and the profit and revenue momentum from the second half, should position us well to make progress in 2018/19.

¹ See note 2 to the Results.

Strategy

Our products improve the quality of air, water and food for everyone, every day. They also enable the development and manufacture of products that improve our health and well-being.

Our growth strategy encompasses the development of market-led new products and services, acquisitions building on our existing technologies and/or market knowledge, geographic expansion and collaboration to extend market reach.

R&D is focused on applications addressing these long-term growth drivers. We continue to seek, foster and invest for growth in emerging markets.

Most of our companies provide sensors that collect data and our companies are increasing their efforts to explore innovative ways to use digital technologies to capture, manage, analyse and utilise data.

We continually seek to attract, develop and promote high quality talent and ensure our talent is representative of our diverse end markets and matched to our strategic needs.

Performance

The sector grew revenue by 18.4% to £259m (2017: £219m) and profit¹ by 32% to £55m (2017: £42m). Organic revenue growth at constant currency was 15.3% and profit growth was 27.5%, both well above Group targets. Return on Sales continued to improve to 21.2% (2017: 19.0%) and Return on Capital Employed also increased. We achieved these improved returns while continuing to increase R&D spending, which rose by 17% and was maintained at 6.9% of revenue.

We achieved the projected benefits associated with the 2016/17 Pixelteq restructuring and have successfully transferred its core technology and assets into Ocean Optics.

Mini-Cam was acquired during the year and added new capabilities in monitoring and inspecting of sewage and waste water networks to ensure both proper sanitation and compliance with environmental regulations.

Outlook

Global population growth, population ageing and increasing standards of living will continue to drive demand for energy resources, cleaner air, safer food and water. Our products, technologies and companies continue to build on these long-term growth drivers to deliver growth throughout the world.

We will continue to invest in our businesses to drive collaboration, technology development, business model evolution and development of digital and data management capabilities.

Our acquisition pipeline is growing and we continue to actively search for businesses complimentary to our existing portfolio along with those in adjacent areas.

We expect to continue to deliver good revenue and profit growth while maintaining our existing high level of returns.

¹ See note 2 to the Results.