WEDNESDAY, 31 AUGUST 2022

FLOWTECH FLUIDPOWER PLC

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

"A vital partner in the fluid power supply chain"

Flowtech Fluidpower is a Group of specialist fluid power businesses.  Working in partnership with customers and suppliers, we deliver essential components, custom solutions and high-quality servicing support to keep global industry moving.

2022 HALF-YEAR REPORT

For the six months ended 30 June 2022

ENQUIRIES:

Flowtech Fluidpower plc

Bryce Brooks, Chief Executive

Russell Cash, Chief Financial Officer

Tel: +44 (0) 1695 52759

Email: [email protected]

Liberum Capital Limited (Nominated adviser and Sole Broker)

Richard Lindley / Ben Cryer / William Hall / Will King

Tel: 44 (0) 20 3100 2000

TooleyStreet Communications (IR and media relations)

Fiona Tooley

Tel: +44 (0) 7785 703523 or email: [email protected]

2022 HALF-YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS

REVENUE

Revenue was 3.9% up on H1 2021, 4.8% on a like for like trading day basis.  Revenue across our three segments increased at differing rates, with the growth in the Flowtech division coming via price rather than volume; this is to be expected given the different focus each of our segments has.  Data collated by our industry body suggests the pneumatics sector declined in H1 2022 whilst there was growth in the hydraulics sector; this correlates with the figures seen in our segments with Flowtech being pneumatics biased whilst Solutions and Services are more closely aligned with the hydraulics market.  Further information is shown in our Trading Review section below.

Gross profit margin

Our gross profit margin remains strong at 36.3% (H1 21 35.4%).  It can vary from one period to another based on market conditions and mix of sales; in H1 2022 our ability to reflect inflationary pressures in our selling prices has assisted in further improving this key performance measure.

OPERATING Costs

Underlying operating costs are £0.3m (2%) up on the comparative 2021 period.  Our ability to restrict the increase to a modest level reflects the impact of operational savings we have achieved to offset inflationary pressures and areas we have chosen to invest in.  Our average number of employees in H1 2022 was 2.1% down on the comparative period with headcount at the end of June 2022 of 605 compared with 636 at June 2021; we are anticipating that this number will reduce further in the second half of the year based on restructuring activities which have already been announced.

UNDERLYING OPERATING PROFIT

Underlying operating profit of £4.3m is an increase of £0.9m from the comparative period (H1 21: £3.4m).  The improvement is principally driven by our Solutions segment which has shown a strong recovery from the impact of COVID-19, and which is now yielding the benefit of the implementation of recent operational improvements.

In our 2021 Annual Report we outlined our targets for our respective segments; referencing return on revenue targets of 15% and 10% for Flowtech and Solutions respectively.  We are pleased that this target has been exceeded for Solutions (H1 22: 13.9%) and we remain confident that we can achieve the 15% target for Flowtech (H1 22: 13.9%), where the closure of our Leicester warehouse function (referred to below) will most benefit.

The first half contribution provided by Services is in line with our expectations; we expect the result in the second half of the year will be improved as it finished H1 2022 with a strong order book for delivery in the second half of the year.

NET DEBT

Net debt was £19.7m at 30 June 2022 (H1 21: £13.3m), with headroom of £5.3m compared to the Group's banking facilities.  Given the supply chain related pressures encountered in late 2021, and early 2022, we invested in inventory, which has increased by £11m in the 12-month period to 30 June 2022.  This has supported the delivery of a solid trading performance in the first half of 2022.  Inventory levels are a key focus of management; we expect a degree of unwind of this position in the remainder of the year as we benefit from a more predictable supply chain environment, and which will reduce the Group's net debt position.

TRADING REVIEW

At the time of our annual reporting in March 2022 we reported that trading in the year to date had been encouraging across all aspects of our business.  In hydraulic sectors, predominantly Solutions and Services and around 30% of Flowtech, this positive market position has continued throughout Q2 and Q3, albeit there are some signs of the rate of demand beginning to flatten.  However, in the pneumatic and broader industrial sectors of the Flowtech division, there has been a noticeable decline in demand in Q2 when measured against the 2021 comparative, and this is best reflected in the data provided by our industry body, the BFPDA, which has indicated an overall decline in pneumatic distribution sales of -6.3% for the year to June 2022 when compared to the same period in 2021 (hydraulics +9.7%).  This, combined with our offering from the UK to our Irish customers being adversely impacted by the post Brexit environment, has led to a more challenging market for our Flowtech division as the year has progressed.

In our Services division, we have a profitable order book of scheduled deliverables for this year for both assembled products and installations, and therefore we are expecting a stronger contribution in the second half of the year.

We indicated previously that our sector has been subject at product level to the strong inflation experienced across many industries.  Beyond this we have also seen enhanced upward pressures on key cost areas, such as property facilities and carriers, with salary uplift to some degree offset by productivity improvements (outlined below).  We have been successful in passing these costs through in sales pricing and it is pleasing that our gross margin is slightly enhanced in the first half of the year, and at the date of this report we remain at, or above, the comparable measure from 12 months ago.  We are alert to the likelihood of inflationary pressures continuing, potentially strengthening, and are confident all measures will be taken to protect our profitability.

We previously flagged that due to the extended lead times and volatility of supply from all our major supply partners, we felt it necessary to invest significantly in additional buffer stocks.  This has had the commensurate positive impact on stock availability and customer service. However, a clear impact is that we now have the burden of additional storage capacity that has been built using a mixture of semi-permanent and temporary offsite resources, with an associated annualised cost of approximately £400,000; when we are able to rebalance to more normalised lead times and supplier performance, which we are now starting to see, this additional cost will be reduced.

The last two and a half years has seen significant challenges, in the form of the COVID-19 pandemic and related supply chain disruption, more recently exacerbated by the difficulties in Ukraine.  We believe we have responded and demonstrated a robust and determined approach and the resilience of our business.

DEVELOPMENTS IN GROUP STRATEGY

We continue to have a clear focus on creating the platform to provide the best base for future profitable growth.  In the first part of the year, key achievements in this regard are as follows:

·      Digital - Our completely rebuilt web platform went 'live' on 17 May 2022, and in the months since that time we have continued to enhance functionality with further upgrades that the new architecture allows us to smoothly introduce.  During this initial period we have had to transition our long-term customers from a variety of legacy web platforms to this single site; to date we are pleased with the progress that has been made.  Having delivered this and ensured stability, we look forward to yielding the benefit of rolling out the digital marketing techniques which this investment should enable us to deploy; we expect the impact of this to build over time.

·      Branding - we updated shareholders previously on the creation of the coordinated Flowtech division on 4 January 2022, and this has now been augmented by the previous Primary Components operation merging into Flowtech to form a significantly enhanced Flowtech Hydraulics team on 1 July 2022.  We are also pleased to update on progress elsewhere with the coordination of our remaining businesses in England under the Fluidpower Group banner.  This has recently been announced internally with legacy operations integrating commercially to service Mobile and Industrial sectors, with full rebranding by the end of the year.  

·      Productivity - Following the deferment of more complex integration work during the period of the COVID-19 pandemic, we have picked up the pace with the change process originally envisaged.  The largest such project implemented during the course of this year is the relocation of our Leicester warehousing operation to Skelmersdale; this is expected to be complete by the end of 2022.  As part of this process the commercial function and all staff positions will relocate to an office environment in the Leicester area.  In addition, we have completed the restructuring of our Gloucester Services facility, which has both improved throughput capacity and allowed us to exit peripheral property leases.  Since we started this wide-ranging integration project in 2020, we have reduced our overall facilities footprint by eight properties, focused all UK warehousing activity for the Flowtech division in Skelmersdale, reduced our headcount from 636 in June 2021, to just above 600, with the changes outlined above delivering further reductions during the remainder of this year.

OUTLOOK

Global economies, including the UK, are now undoubtedly in a period of uncertainty. Current run rates overall give us a degree of confidence, however, in our Flowtech business in particular, our visibility beyond the short term is limited.  As a result, we are more than ever focused on monitoring short term demand variations.

Management efforts are focused on alleviating these short-term risks, whilst at the same time completing the key pillars of our long-term strategy, supporting the legacy skill sets enshrined in our Flowtech and Fluidpower Group divisions.  The Group has also invested in sector leading digital capability and has restructured the internal organisation of the business to maximise efficiencies.  As a result of these investments, the Group is well placed to continue to grow and increase market share.  We remain confident that this strategy will bring future financial rewards in the medium term and we look forward to updating shareholders on our progress in our next update in the early part of 2023.

By order of the Board

30 August 2022

(*) H1 2021 and FY 2021 includes net proceeds from disposal of right of use property located at Willenhall £119k.  The lease agreement included a clause for compulsory purchase of the property on payment of £300k on termination of lease, shown as repayment of lease liabilities.  The right of use asset was disposed immediately, realising £419k, after expenses.

The operations of the business are reviewed based on three segments - Flowtech, Fluidpower Group Solutions and Fluidpower Group Services (as explained in note 2.18 of the Annual report 2022).  These operating 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.

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.

Segment information for the reporting periods is as follows:

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