Flowtech Fluidpower Strong growth and further significant progress

Flowtech Fluidpower Plc (LON:FLO) have today reported further significant progress in the development of the Group during the first half of 2018 with acquisitions having also contributed significantly towards growth in sales and underlying operating profits.

HALF YEAR REPORT – FOR THE SIX MONTHS ENDED 30 JUNE 2018

OPERATIONAL HIGHLIGHTS

· REVENUE AGAIN REFLECTS GROWTH ACROSS ALL DIVISIONS

· COMPLETED ACQUISITION OF DIRECT COMPETITORS IN THE UK – BEAUMANOR FLUIDPOWER AND DEREK LANE

· £11.0 MILLION CASH PLACING COMPLETED

· GROSS MARGIN % REMAINS STRONG AT 36.1%

· 26.6% GROWTH IN UNDERLYING OPERATING PROFIT

· DIVIDEND INCREASED IN LINE WITH PREVIOUS COMMITMENTS

POST PERIOD END HIGHLIGHT

· REVISED LEADERSHIP TEAM FOR NEXT STAGE OF BUSINESS DEVELOPMENT

“Our activities have created many more opportunities to grow through acquisition and we plan to take advantage of this in the medium to long term. However, in the short term it is appropriate to work with the infrastructure we presently have and continue to focus on delivering on our four layered synergy approach – back office, procurement, operational efficiency and commercial. We constantly seek to learn from the experiences, both positive and challenging, observed in each deal, and we strive to build a team attitude to risk management. However, our key experience to date is that our philosophy of allowing individual trading units to continue to trade independently under the umbrella of a “shared services” organisation, is giving us significant commercial traction post deal, with employee engagement established and, in many cases, enhanced.”

“Our markets have experienced a strong period of growth over 2017 and early 2018, and we have been able to enhance this with our own commercial activities, again bolstered by the benefits from our acquisition programme. Whilst recent trading has remained positive, there are some signs, particularly in some engineering businesses, that growth may be softening. As such while we remain confident in the prospects for the future growth in both our markets, and the enhancement our coordinated activities will bring, we are cautious about prospects in the short term until clarity is achieved on the post – Brexit UK economy. Beyond this short-term view, the Board remains confident in the overall Group strategy being adopted.” – MALCOLM DIAMOND, NON-EXECUTIVE CHAIRMAN

 

Presentation of HY results: a conference call facility will be held today at 09.30hrs (UK time)

– dial in details can be obtained by calling +44 (0) 7785 703523 or emailing [email protected]

HALF YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS

We are again pleased to report further significant progress in the development of the Group during the first half of 2018, with four acquisitions completed in the second half of 2017 being Hi-Power, Orange County, Hydroflex Hydraulics and Group HES and more recently in March 2018, Beaumanor Fluidpower and Derek Lane & Co. These acquisitions have contributed significantly towards growth in sales of 65.1% and underlying operating profits of 26.6%.

Although not defined under IFRS, the Directors believe that the underlying operating results give a better understanding of the business’ profit performance. The table below details this is in summary and further information is contained in note 3 of this Report.

*Underlying operating result is continuing operations’ operating profit before the fair value uplift of inventory acquired through business

combinations, acquisition costs, amortisation of acquired intangibles, share-based payment costs and restructuring costs. Underlying operating result is reconciled to statutory profit before tax in note 3 to the HY Report.

Flowtechnology – the original core operation of the Group’s portfolio has now been further strengthened with the acquisition of its competitor, Beaumanor Fluidpower. We are pleased to report that in the six months since the deal was completed the Beaumanor business has traded strongly. Our decision to continue operating as an autonomous trading brand has underpinned strong engagement in the business by staff and customers alike and ensured service levels have remained high. This has given us a good basis from which to move forward with synergy initiatives, particularly with combining order requirements for generic product supported from the Far East. As detailed later in this Report, we are also currently reviewing projects with our IT advisory partners with regard to the transition to a common platform in the medium-term, with the significant potential for further synergy in both warehousing costs and stock values, particularly in our Flowtechnology operations.

Our Power Motion Control (“PMC”) division was established in 2014 through the acquisition of Primary Fluid Power and, since then it has developed into a broad based fluidpower division, focused on hydraulic component distribution and engineering. The result for the first half of the year represents a period of steady progress with comparisons for previous years boosted by the acquisitions of Hi-Power, Group HES and Hydroflex Hydraulics in 2017, and Derek Lane & Co. in 2018. This division is predominantly focused on supplying OEMs and broader manufacturing environments which have also performed well during the first half of 2018.

The Process Division covers the Hydravalve and Orange County profit centres, both of which have traded favourably in the period. The sector represents an area with huge potential for development, with valves and actuators alone accounting for an estimated 46% of the €12.6bn European fluidpower market, and whilst in the past three years acquisition activity has focused on progressing our Flowtechnology and PMC operations, the Board expects to take advantage of the many options for further expansion in this division in the years ahead.

As previously announced the development of an Onsite Services division has not progressed as quickly as planned following the acquisition of Group HES in October 2017. Although the delivery of these services remains an important activity for the Group whether as a separate division or part of a larger operation the Board considers that a focus on a wider initiative to integrate activities within the PMC division sites, where opportunities to reduce operating costs, maximise technical capabilities and further improve our offer are clear. Consequently, Stuart Diesel, the previous owner and Managing Director of Group HES, has been asked to prioritise this initiative in preference to developing a stand-alone onsite services division for the time being. We look forward to updating on this project at the year end.

GROSS PROFIT MARGINS

Overall Gross Margin %, one of our most important KPIs, has increased year on year by 2% to 36.1% (2017 H1: 34.1%) and on full year 2017 by 2.2%. The main factor behind these increases are mix related with our recent acquisitions being in high gross margin operations. However, it is important to note that amongst our legacy operations, Flowtechnology UK and Hydravalve we have seen some immediate benefit from co-ordinated activities in Q2 following the acquisition of Beaumanor. In the medium-term the Board believes that the broad spread of our offer, both in product, customer base and diverse trading sites will continue to provide resilience in this key measure in each division, particularly with the present apparent risk of further currency disruption post Brexit.

OPERATING COSTS

In the first half of the year our underlying cost base can be analysed as follows:

Distribution expenses are primarily costs paid to the various parcel and pallet carriers, principally FedEx, across the Group, and have moved in line with the mix of activities.

Administrative costs at Divisional level represent the operational infrastructure to run the Group’s trading activities and after our prolonged period of acquisition activity is now spread across 29 sites in the UK, Ireland and the Netherlands. The increase in proportion of turnover (being from 13.7% to 20.0%) is largely mix related amongst our newer acquisitions when compared to our legacy operations and illustrates the potential for cost reduction initiatives over the medium term, and therefore the Board is confident that the prospects for the rationalisation of our operational cost base remain good. This will be an important measure for the newly established Executive team in 2019 and beyond.

At Central cost level, which covers Service Centre activities such as accounting, as well as costs associated with operating the PLC, the Board is continuing to ensure that personnel are recruited to cover not just for today, but to provide resilience for the expected growth in the future.

FINANCIAL POSITION INCLUDING CASH FLOW AND BANK DEBT

After reaching a peak during Q2, inventory has fallen and the outlook for the remainder of 2018 and early next year is positive as the Group looks to leverage off the benefits of being a multi-site organisation. Trade Receivables at 30 June 2018 were £27.2m and clearly represent a significant element of our working capital. Credit collection resources remain spread across the Group, and with this is in mind the new position of Group Credit Manager has been created with an appointment expected in early Q4. The remit will be to ensure we improve cash collection efficiencies where possible. With a combined inventory and Trade Receivables value of over £55m, the Board is determined to use the benefits of being part of an integrated Group to optimise our working capital position over the short to medium term, whilst retaining a customer centric focus and high service offer at Profit Centre level.

Away from this, the Group has continued to service its commitments in terms of dividend payments, under various deferred arrangements and, has worked effectively within bank facilities and covenants.

OUR PEOPLE

After the period of significant growth, we have seen since coming to market in 2014, we are now able to call on a wide range of skilled directors and managers who lead our operations at local and group level. A key initiative over the next year and into the future, will be to ensure that these leaders, many of whom have come from previously family owned organisations, have access to the high quality training and mentoring resources that can be obtained as part of a public company, and we firmly believe the likelihood of significant return in both employee engagement and financial return is compelling.

OUR BUSINESS STRATEGY FOR GROWTH

Our placing in Spring 2018 for £11m allowed us to complete the acquisition of Balu Ltd, with its two trading subsidiaries Beaumanor Fluidpower and Derek Lane. After our previous placing for £10m in March 2017, and a series of twelve acquisitions starting in August 2014 with Primary Fluid Power the Group has established a strong commercial position in the UK and Irish markets, and a good position in the Benelux from which to expand. Our activities have created many more opportunities to grow through acquisition and we plan to take advantage of this in the medium to long term. However, in the short term it is appropriate to work with the infrastructure we presently have and continue to focus on delivering on our four layered synergy approach – back office, procurement, operational efficiency and commercial. We constantly seek to learn from the experiences, both positive and challenging, observed in each deal, and we strive to build a team attitude to risk management. However, our key experience to date is that our philosophy of allowing individual trading units to continue to trade independently under the umbrella of a “shared services” organisation, is giving us significant commercial traction post deal, with employee engagement established and, in many cases, enhanced. On the flip side, there remain important challenges around IT and accounting, with reporting to public company standards as well as the building of protections around cyber-crime, network and data security adding to local complexity, and to some degree, cost.

INVESTMENT FOR THE FUTURE

In late 2017, the Board engaged with our IT strategy advisor, PwC, to establish a clear framework on which to build a resilient plan for the future of our IT infrastructure. Whilst the plan that was subsequently approved was multi-faceted, there were essentially two clear building blocks.

1. A single IT system encompassing Business Process and Accounting must be the aim

2. The creation of a comprehensive cyber security framework and a resilient IT environment

The strong belief of the Board is that the benefits of this simple approach are likely to be significant, both in operational efficiency – the drive to “best practice” – and the ability to leverage the value of the huge data pools on customers, products and suppliers that are held across the eight IT environments that we currently operate. Under the revised leadership team our plan is to move gradually towards this aim, whilst ensuring that local efficiency is not compromised. In short, the benefits of applying modern enterprise management systems, to industrial markets is clear, and now is the time to start to address this situation to further underpin our long-term growth strategy. The implementation of the first stage of this process – Sage X3 financials (now rebranded as Sage Enterprise Management) – is progressing well and is expected to significantly improve information flow in 2019.

EARNINGS PER SHARE AND DIVIDEND

In the first half, earnings per share increased to 5.78p, from 5.22p in 2017. With the continued outlook for growth at “underlying” measures, the Board is pleased to declare a half year dividend of 2.03p (2017: 1.93p), a 5% increase. This interim dividend will be paid on 26 October 2018, to members on the Register at close of business on 28 September 2018.

The shares will become ex-dividend on 27 September 2018.

OUTLOOK

Our markets have experienced a strong period of growth over 2017 and early 2018, and we have been able to enhance this with our own commercial activities, again bolstered by the benefits from our acquisition programme. Whilst recent trading has remained positive, there are some signs, particularly in some engineering businesses, that growth may be softening. As such while we remain confident in the prospects for the future growth in both our markets, and the enhancement our coordinated activities will bring, we are cautious about prospects in the short term until clarity is achieved on the post – Brexit UK economy.

In late 2017 we were awarded an order for c£1.5m to design, manufacture and supply several hydraulic cylinders and power units to an appointed sub-contractor on the Thames Tideway project. The expected completion date was mid – 2018, however due to delays we currently understand that this project is unlikely to complete before early 2019 and further, that the contractual liabilities to be assumed have been subject to revision, to a point where we are currently discussing both these terms and pricing. The Board is firmly of the view that we will not accept risk that is disproportionate to our potential return, and inconsistent with our normal activities. Our ability to replace such income in the short term is very limited and it is likely, therefore, to result in a Group performance at underlying operating profit level being marginally below market expectations for the year ending 31 December 2018.

Beyond this short-term view, the Board remains confident in the overall Group strategy being adopted. After a short period to allow the new leadership/executive team to become established, the outlook for future growth remains strong. We will continue to keep investors informed over the coming months and will provide further information on progress in our Q3 Trading Update which we expect to announce on 23 October 2018.

By order of Flowtech Fluidpower Board

17 September 2018