The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as amended by the Market Abuse (Amendment) (EU Exit) Regulations 2019. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

NEWS RELEASE

Issued on behalf of Flowtech Fluidpower plc

Thursday, 26 September 2024

FLOWTECH FLUIDPOWER PLC

("Flowtech", the "Group" or "Company")

"a world of motion"

Everything we do at Flowtech is focused on keeping business moving, whether that's supplying a product or designing and building a complex engineering solution. Our vision is to be the trusted advisor in a world of motion.

2024 HALF-YEAR REPORT

For the six months ended 30 June 2024

"Whilst there are ongoing challenging market conditions, we have delivered further performance improvements, implemented cost control

measures and improved overall service levels, which have improved gross margin in the period. However, our market has deteriorated further, and we have, accordingly, significantly reduced our expectations for the full year outturn"

Mike England, Chief Executive Officer

2024 HALF-YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS

REVENUE

Revenue reduced by 5.7% in H1 24 compared to H1 23 with persistent market headwinds leading to reductions across all three geographical segments. The comparison with H2 23 is more positive with a 5.1% increase.

Gross profit margin

We are pleased to report that the positive trend started in H2 23 has been sustained into 2024; this has been particularly important in a market which is not currently supporting our top line growth ambitions. As a result of this, and despite the reduction in revenue, our gross profit margin increased to 38.4% (H1 23: 35.5%), delivering a £0.4m uplift in H1 24 v H1 23.

OPERATING Costs

Underlying operating costs have increased by £0.9m (5.6%), compared to the comparative 2023 period. Approximately two thirds of our cost base relate to people costs. Notwithstanding the average number of full-time equivalent employees reducing by 3.7% compared to H1 23 our overall payroll costs have increased by 2.7%. This reflects in part inflationary cost pressures and equally the investment we have made in certain areas of our business, including our outlay on in-house digital capabilities, and the breadth and depth of our management team to build capability and scale to serve the future needs of the business. The majority of the £0.9m increase relates to payroll costs with the balance essentially representing inflationary increases across other cost categories.

UNDERLYING OPERATING PROFIT

The £0.4m improvement in gross profit combined with the £0.9m increase in operating costs resulted in a £0.5m reduction in underlying operating profit to £2.9m in the first half ( H1 23: £3.4m). 

NET DEBT

Net debt (pre IFRS16 lease liabilities) was £13.5m at 30 June 2024 (H1 23: £15.4m), with significant headroom of £11.5m under the Group's £25m banking facilities. If leases are taken into account, the reduction in Group debt increases to £3.1m (June 2024: £18.5m: June 2023: £21.6m). A significant factor in achieving this debt reduction was the management of inventory which reduced by £4.0m in H1 24. The cash flow also benefitted by £1.4m from the issue of new share capital, primarily relating to the exercise of a £1.2m warrant instrument put in place when the Company was admitted to AIM in May 2014. As previously communicated ongoing net debt reduction remains a key priority for the Board.

TRADING REVIEW

Market conditions proved more challenging than anticipated in H1 24 across all geographical segments as further slowdown in many industrial verticals has led to extended project cycles, reduced component basket size and a reduction in project-based expenditure.  Trading in Q3 24 has been weaker than anticipated with customers, suppliers and competitors citing further challenges. Nevertheless, it is encouraging to report that our orderbook remains healthy, albeit a number of significant orders will now simply be pushed into 2025 where we anticipate a return to more normalised conditions.

Revenue performance impacted by persistent market slowdown

H1 24 revenue growth is 5.1% up on H2 23 with continued momentum in delivering service improvements and increased sales force productivity.

The forward order book is beginning to build with increased quantity and quality of the sales pipeline and order book. The timelines of some larger secured projects have been extended out however, we are confident OEM recovery and distribution volumes will bounce back although we recognise in part, this will be dependent on the timing of market recovery. Revenue decline is principally due to the following which we expect to continue through H2 based on Q3 trading:

Ø Slowdown in overall OEM customer demand and delays to larger project work

Of the customers who have reduced orders (down-traders), 90% of the top ten and 78% of the top fifty down-traders are OEM/project related.  Down-trading is largely external market related with our expectation being that more than 75% of these down-traders will increase orders as the market improves. Northern Ireland revenues have been specifically impacted due to a small number of long-standing large OEM customers with the crushing & screening industry output reducing by over 20% over the last two quarters. Specific larger, major turnkey projects Flowtech has won have been delayed or pushed out for delivery into 2025.

Ø Continued depressed market recovery impacting core product distribution revenues

We have maintained a consistent underlying order frequency but with reduced basket size as customers curb general expenditure and burn off held inventories. Larger projects are being delayed which is reducing expected volumes.  The market slowdown has increased price competitiveness as customers seek cost reduction.  Our strong commercial discipline has protected our gross margin, and, in some cases, we have actively chosen to walk away from lower margin business.  The launch of the new catalogue in May was very positively received; whilst there are early signs of an increase in core catalogue product sales this has been more supressed than expected due to market deterioration and the reduction in larger project related order volume.

Gross profit & cost management focus has partially offset revenue headwinds

There has been continued progress executing all areas of self-help in the Performance Improvement Plan with many improving data points indicating that Flowtech is now in a far stronger position in commercial, operational and service performance capability.  Management focus has been on improving commercial excellence in gross margin management and in identifying and executing efficiency and cost reduction initiatives as part of the Plan. These initiatives combined have resulted in a 200bps increase in gross profit helping to offset the 5.7% reduction in H1 24 revenues.  Management of our cost base, in particular people related costs, restricted the increase in operating overheads to 5.6% allowing investment to be made in certain key areas.

Performance Improvement Plan continues to drive operational improvements

There has been further progress in the three areas of our improvement plan; 1) to simplify the operating model, 2) become more customer centric and 3) to build scalability.

1.    Simplify

Group-wide aligned objectives, KPIs and reward mechanisms have driven improved culture and performance.

The rebranding of fifteen brands to 'One Flowtech' across all UK and Island of Ireland locations was completed in June 2024 including the consolidation of over 50 websites and 20 social media accounts. Benelux rebranding will be completed in Q4 24.  The new leadership team is well embedded with over nine months of learned experience working within a simplified, scalable functional operating model.  In doing so, we have implemented a 60% change in leadership across the top 60 leaders as part of a Company-wide restructure with over 90% of organisational and restructuring changes implemented. Operational basics are embedded with a step change in service levels and commercial excellence. 

2.    Customer centric

There has been a sustained improvement in customer experience with a further 50% reduction in customer complaints in H1 24 and increase in customer enquiry responsiveness of 10%.  40,000 new Flowtech catalogues were deployed to over 100 distributor partners in May.  Selling effectiveness programmes were delivered and resulted in more than 5% increase in sales force activity productivity and quality of contact frequency resulting in quote conversion improvement of over 10%.  

Positive momentum in building the forward orderbook with over £50m opportunity within the priority sales pipeline and over £15m of secured business.

3.    Scalable

Product availability has improved and been sustained; we have increased product availability from a low point of 85% to approximately 96%; at the same time, we achieved a £4m reduction in inventory.  Improved accuracy and throughput in operations leading to a 50% reduction in service complaints and delivering stable and increased despatched volumes despite a further 25% reduction in operational headcount.

Continued progress in delivering our ESG goals

Health & safety performance has improved with high-risk events reducing by 69% in the past 12 months and a further 33% in the past three months.  There has been positive progress in the diversity of leaders with a 40% increase in leadership diversity over the last 12 months. There has also been strong focus on Group-wide skills and capability development with a 176% increase in training hours in the past 12 months with greater emphasis on upskilling commercial and technical application.

Execution of our strategic plan into a world of motion

Customer First: We are on track with our plans to fully re-platform the Flowtech website to a scalable and improved customer experience in readiness for a Q1 25 launch. This being a key growth enabler for the Group.

The Power of One: The launch of the new One Flowtech value proposition to the market in June 2024 as part of our rebrand event to over 200 customers, suppliers and partners.  This combining the high service product offering with the extensive range of engineering solutions.    

A World of Motion: Expanded the brand, product and service offering through the acquisition of the business and certain assets of Thorite.

Thorite is a leading UK provider of pneumatics, compressed air, vacuum and fluid handling products and systems and has traded since 1850. It operates from seven sales and service centres across the UK.

The transaction completed immediately following the appointment of Administrators, Interpath Advisory to Thorite.  Under the terms of the Acquisition, Flowtech acquired all the plant and machinery, vehicles, stocks, and intangible assets of Thorite for a total cash consideration of £350,000 which was funded from the Group's existing bank facilities. Flowtech has also repaid Thorite's outstanding debtor finance facility of c.£1.7m in return for an assignment to the Group of a debtor book totalling c.£2.6m; this was also funded from the Group's bank facilities. A sharing arrangement relating to the excess of debtor book recoveries over and above the c.£1.7m paid has been agreed with the Administrator of Thorite.

In the audited accounts for the year ended 31 March 2023, Thorite generated revenue of £21.2m and delivered an operating profit of £79,000. The gross value of asset classes being acquired at the same date was £8.8m, inclusive of £3.8m in respect of the debtor book at that point in time. Thorite has since experienced cash flow challenges and incurred operating losses due to a combination of internal issues and market headwinds. Thorite's operating losses in the year to 31 March 2024 are estimated at £1.2m.

There was a strong strategic rationale for the Acquisition and the potential for significant synergies for the combined businesses including:

a) operational efficiencies, procurement leverage opportunities and economies of scale, which will lead to material cost savings and improved margins for the Group over the medium term

b) a well-developed value proposition, Thorite's trading locations and only limited product overlap with Flowtech will provide expansion into new and complementary geographies within the UK, together with new products and services; and,

c) It is anticipated that the enlarged business will also benefit from strong cross selling prospects across the respective complementary customer bases. The business we inherited was heavily loss making but we are confident that focus on revenue, gross profit margins and addressing the cost base will quickly return the business to profitability.

OUTLOOK

Q3 24 has seen continued difficult conditions and a delay to recovery in the global marketplace with a market recovery likely to be delayed into 2025. In addition to some de-stocking, there have been further delays to some larger OEM and major projects and continued suppression in underlying product volumes.  Notwithstanding our strong and growing orderbook and sales discipline and focus on profitable growth, we are not yet seeing the anticipated positive gains we had expected.

We are pleased with the Thorite acquisition and confident that it will pay for itself and deliver accretive revenues and margins into 2025. However, in 2024 there will be a negative operating profit impact term on our results whilst actions are taken to right size the cost base, improve gross margins and make necessary investments to generate improved revenues and operational stability.  

Consequently, the impact of the Thorite acquisition and losses, combined with the slower than expected market recovery will result in trading results for the year ending 31 December 2024 being significantly below current market expectations ¹.

Despite this backdrop, the Directors remain confident that the Group's Performance Improvement Plan, and the Strategy for Growth is on track to deliver the increased mid-term earnings ambitions as we recently outlined in our recent annual report. Underpinned by improved KPIs, we remain optimistic that we are setting the foundations for the Company to deliver a stronger performance in 2025 and 2026.

By order of the Board

26 September 2024

The operations of the business are reviewed based on three geographical segments - Great Britain, Island of Ireland and Benelux (as explained in note 3 Segment Reporting (page 98) of the Annual report 2023).  These geographical segments are monitored by the Group's Chief Operating Decision Maker and strategic decisions are made on the basis of adjusted segment operating results. Inter-segment revenue arises on the sale of goods between Group undertakings.

Segment information for the reporting periods is as follows:

(*) Underlying operating result is continuing operations' operating profit before separately disclosed items

The Directors believe that the Underlying Operating Profit provides additional useful information on underlying trends to Shareholders. The term 'underlying' is not a defined term under IFRS and may not be comparable with similarly titled profit measurements reported by other companies. A reconciliation of the underlying operating result to operating result from continuing operations is shown below. The principal adjustments made are in respect of the separately disclosed items as detailed later in this note; the Directors consider that these should be reported separately as they do not relate to the performance of the segments.