WEDNESDAY, 30 AUGUST 2023

FLOWTECH FLUIDPOWER PLC

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

"a world of motion"

2023 HALF-YEAR REPORT

For the six months ended 30 June 2023

2023 HALF-YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS

REVENUE

Revenue increased by 2.8% in H1 23 compared to H1 22. The growth achieved in both the Solutions (11.5%) and Services (9.8%) segments was pleasing; this served to mitigate the impact of a disappointing performance within the Product Distribution segment where revenue declined by 5.6%. The second quarter of the year provided more challenging trading conditions across each segment than the first quarter.

Gross profit margin

Our gross profit margin remains strong at 35.5% (H1 22 36.3%); the modest movement relates primarily to the change in sales mix due to divisional margins being lower in the Solutions and Service segment as compared to the Product Distribution segment.

OPERATING Costs

Underlying operating costs have increased by £1.0m (6.2%), compared to the comparative 2022 period. Approximately two thirds of our cost base relate to people costs; our average number of employees in H1 23 decreased by 5.8% compared to H1 22 but this was offset by inflation on wages and other costs alongside the impact of investment in senior personnel (building future capability and scale).

UNDERLYING OPERATING PROFIT

Underlying operating profit of £3.4m is a decrease of £0.9m from the comparative period (H1 22: £4.3m).  

The performance of the Product Distribution segment was disappointing, as explained under the "Trading Review" section below.  We are pleased with the performance in the Solutions and Services divisions which both continued to show strong growth at attractive margins.

NET DEBT

Net debt (pre-lease debt) was £15.4m at 30 June 2023 (H1 22: £19.7m), with headroom of £9.6m under the Group's banking facilities. Key to achieving this reduction was a £3.9m reduction in inventory levels.  We expect this trend to continue as we benefit from a less volatile supply chain environment. If leases are taken into account, the reduction in Group debt was £5.1m.

TRADING REVIEW

We have highly skilled and capable people, passionate about providing the highest levels of technical and engineering expertise and customer service.  In a technical industrial market, this is a source of competitive advantage.  Positive progress has been made in H1 23 building our people capabilities including increased investment in training, learning and development, investment in health, safety and wellbeing and supporting them through these more challenging economic times.  We thank our people for their continued commitment and dedication.

In our Product Distribution segment (which accounts for 45% of Group revenue), the performance has been disappointing for over 12 months continuing through H1 23 with revenue decline of 5.6%.  This is in part due to the more volatile economic and industrial landscape but also due to internal challenges resulting from the consolidation of five businesses into one during 2021/2022 including the closure of the Leicester Distribution Centre, consolidating inventory into the main Skelmersdale Distribution Centre.  Whilst this consolidation has enabled improved scale and efficiency, aspects of this integration have impacted some parts of the customer experience.  Interventions are in flight to address this to ensure we have quickly returned to the levels of high service expected by our customers including further improvements to our website, catalogue, commercial discipline and our service.

In our Solutions and Services segments, we are pleased with the performance with H1 23 revenue growth of 11%.  We have improved the focus in offering a wide range of engineering services, further building our reputation for delivering technical products, designing, manufacturing and supporting our distributors, industrial end users and original equipment manufacturers across our geographies. 

Our international businesses in the Island of Ireland and Benelux which contribute c.28% of Group revenue have continued to perform well.  Ireland in particular, where we have consolidated our two businesses into one has seen revenue growth in H1 23 of 19%.  Our two businesses in Benelux have made a positive contribution of 16% return on revenues and we see further opportunity here to drive greater synergy and to further increase market share gains. 

Group Gross Margin performance was stable, and management has remained focused ensuring we stay ahead of supplier price rises and service labour costs during a continued inflationary market.  There is though gross profit impact resulting from the revenue mix between the higher gross margin Product Distribution segment and the Solutions and Services segment.  We see further opportunity for gross margin enhancement across the Group by improving our commercial effectiveness, pricing discipline and building greater procurement capability.

Our cost management remains disciplined and whilst we have taken all necessary action to react to inflationary market pressures, we continue to support our highly skilled and talented workforce and build enhanced capabilities as we look to underpin our mid-term strategy to deliver scalable and sustainable growth and value creation.  However, we see significant further opportunity for delivering efficiencies across the Group as we scale through the deployment of our refreshed strategy, further simplifying the operating model, underpinned by investment in improved automation, technology and processes.

We have continued to focus on cash and optimising our working capital which resulted in the £5.1m reported reduction in net debt.  As we look forward, our focus will remain on achieving further working capital optimisation and improved cash efficiencies across the Group whilst seeking to improve overall stock availability and service by adopting a more rigorous approach to inventory and supplier management.

STRATEGY

We are pleased to report good progress in implementing an immediate Performance Improvement Plan and the refreshed strategy (our journey to the future), across the Group. 

i)    Performance Improvement Plan

The Performance Improvement Plan focusses on near-term performance improvement to quickly deliver a more customer centric, lean and scalable platform for growth.  It consists of three key components;

a) Simple - we are implementing a simple operating model releasing the full potential of our people and our capabilities,

b) Customer centric - moving decision making and activities to be more centred around the customer with a renewed growth focus across all channels, and

c) Scalable - Re-focusing on doing the basics brilliantly whilst improving our operational and technology infrastructure to power future growth.

ii)   Refreshed strategy

Our refreshed strategy (our journey to the future) sets out our ambition and has two key components;

a) A world of motion - We will expand on our product and engineering capabilities across the wider power, motion and control sector. In doing so, we increase our market share opportunity in Europe from c£10bn to c£30bn.  We will target two times market growth rate.  This also serves to future proof the Group with a focus on new emerging technologies.

b) The power of one - we will release the full potential, scalability and efficiency of the Group by transitioning to a single brand and operating model.  We will launch a simplified value proposition for our target customers. 

As part of the strategy, we are focused on delivering a measurable value creation plan consisting of defined strategic focus areas to deliver mid-teens underlying operating profit margin.

The Performance Improvement Plan and refreshed strategy is enabled by the formation of a new, diverse and highly skilled leadership team organised into a functional, country led structure where we are building greater core competence and capabilities.  Five of the previous leadership team have exited the business and the new team, consisting of a strong mix of existing and new talent, has now been appointed; a number of the new members of the team are already operating within the business with the final three leaders onboarding in October.  The accountability of this team will be to deliver the defined areas of strategic focus, known internally as growth engines.

The immediate priority is on short-term 'self-help' interventions to deliver improved performance throughout H2 23 and into 2024 focused on improvements in a) our growth capabilities (including our marketing, digital and sales capabilities), b) our core service and delivery capabilities (doing the basics brilliantly) and c) simplifying how we work (to deliver greater speed, agility and efficiencies).

OUTLOOK

We expect external economic headwinds to continue to bite through H2 23 and into 2024 with continued slowdown in industrial output and production.  We have deployed a number of focused interventions to address weaker performing areas underpinned by a change in leadership and capability and providing greater clarity on our forward strategy and plans.  Our people are motivated and committed to delivering high performance and whilst we expect H2 23 to remain challenging, we are optimistic in our outlook in building our momentum and capabilities into 2024 and beyond through the deployment of our refreshed strategy.

By order of the Board

29 August 2023

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.

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.

Segment information for the half year ended June 2022 has been re-stated following the movement of Primary Components, excluding OEM customers, from Fluidpower Group Solutions to Flowtech, as this reflects the information reported to the Chief Operating Decision Maker. Segment information for the year ended December 2022 has also been restated to include sales from OEM customers within the Solutions segment. Some overheads costs relating to Divisional management have been re-categorised as segment operating overheads to present a more comparable segment result. The re-statement of the prior year periods does not impact Group profitability.

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

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