Interim Report - six months ended 30 June 2014

FLOWTECH FLUIDPOWER PLC

INTERIM REPORT

SIX MONTHS ENDED 30 JUNE 2014

STATEMENT BY NON EXECUTIVE CHAIRMAN, MALCOLM DIAMOND MBE

AND CHIEF EXECUTIVE, SEAN FENNON

INTRODUCTION

Firstly as a Group, we would like to thank all shareholders who since our Admission to AIM in May 2014 have so enthusiastically supported us - investing in our business, its philosophy and culture. We are now entering a period we see as an exciting stage of evolution, not only for the Flowtech Group but the fluid power market as a whole.

As a team we firmly believe that the business is now well positioned to improve further through successfully building on its leading position and taking advantage of the opportunities that lie ahead.

The AIM market provides a platform for smaller companies like ourselves with aspirations to grow, to enhance our profile, and access new channels to support future development.  We look forward to keeping an open dialogue with all investors and delivering on our key objectives.

DIVIDEND

As we indicated in the Admission document, the Board intend to implement a progressive dividend policy by paying both an interim and a final dividend - split approximately one third, two thirds - in respect of the year ending 31 December 2014.

The Board is therefore pleased to declare an interim dividend of 1.67p; this will be paid on 24 October 2014 to Shareholders on the Register at the close of business on 26 September 2014.  The shares will become ex-dividend on 24 September 2014. 

BUSINESS REVIEW

The portfolio businesses have continued to perform well in their individual market places, although the economic conditions remain challenging in both the UK and Europe. The Group strategy of continued development of the product range, targeted at specific market sectors, has ensured that the businesses have been able to deliver sustained growth and continue to add value to its customer base.

The focus on core competencies within the fluid power market has been central to the continued success of the Group, and this focus will support the long term strategy of the Group, which we expect to be enhanced by further complementary acquisitions. This continued refinement of the offering has ensured that the Group maintained its competitive advantages in each of the markets in which it trades.

The UK business has maintained its growth focus and a continued investment in staff training and resource which has underpinned this development process.

After a significant restructuring process in 2012 and 2013, the Benelux operation has performed positively in the first half of 2014, with the foundations put in place in that period now delivering strong revenue growth linked to progressive margin development. 

The Initial Public Offering ("IPO") in May 2014 had a fundamental positive impact on the Group's core financial position. We expect that this change will open up further opportunity for expansion of the Group within the fluid power sector, both organically and by strategic acquisitions.

ALIGNING GROWTH WITH OUR STRATEGY

The Directors are committed to the business strategy which was outlined as part of the Admission document in May 2014. 

Flowtech is a very successful business and a leader in its field; we have demonstrated that we can deliver profitable, consistent levels of service to our diverse customer base.  There is also significant opportunity for us to achieve, organic growth through product development and international expansion and enhancing this through adding 'niche bolt-on' businesses that have effective people who can assist us to deliver our corporate strategy as well as accelerate complementary channel development and geographic expansion. We continue to see this as paramount for all stakeholders.

Against this backdrop, we are delighted that we have already started to deliver on our aspirations and strategic objectives, adding a very successful business to the Group's portfolio and starting to further enhance customer offering.  As detailed in

Note 13, on 4 August 2014, we added Primary Fluid Holdings Limited to the Flowtech portfolio.  The trading business, Primary Fluid Power ('PFP'), based in Knowsley, Merseyside, in addition to a significant distribution operation in hydraulic parts, also designs and manufactures hydraulic systems and purifiers, which are complemented by a service and repair function.  The PFP business in total employs 59 staff, and like Flowtech has a strong brand and commanding position in its marketplace. Whilst we expect to deliver some positive synergies across the business over the coming year, we intend to retain the way the PFP and Flowtech portfolio models currently operate - highly focused, commercially independent operations delivering quality customer service at all times.

As a Board, we see PFP as the exciting first step in our development as a broad-based fluid power group. PFP adds significant value to the Group's current brand portfolio principally by strengthening our offering in hydraulics, a market which is widely predicted to continue its strong growth momentum.  We also see this as a great opportunity to extend our in-house knowledge and expertise in the design and manufacture of hydraulic systems and purifiers and not least, the further enhancement of our market leading position in the fluid power industry.

OUR PEOPLE

The Group today employs 203 people through its five locations across three countries.

As a Board, we would like to take this opportunity to thank all our people around the globe for their continued hard work, dedication and commitment, all of which has helped us to deliver these solid creditable results.  This year has marked a year of change and opportunity; we welcome everyone from PFP into the Group; together as a team we look forward to sharing with every one of our colleagues future success over many years to come.

FINANCIAL PERFORMANCE

The financial highlight during the period under review was the IPO in May which resulted in the exit of the previous Private Equity owners, coupled with a fundamental restructuring of the Group's debt position.  As detailed in Note 12, "Analysis of net debt", the total net debt position at the period end was £6.1m, compared to £69.8m at 31 December 2013.  After funding the overall costs of the IPO of £4.4m (which under accounting rules has been split as £2.2m charged to operating profit - see Note 3 for details - and £2.2m charged to share premium account), the balance of the £47.0m equity and net bank debt raised was used to part clear Shareholder loans.  The remaining £29.0m of shareholder loans were subject to a debt for equity swap with the resultant gain on settlement of £29.0m being recognised in the consolidated income statement. Other than the clear benefit of a significantly reduced leverage position, the Group now enjoys a low interest burden which is highlighted by the table below:

As detailed in Note 2, the Group has applied merger accounting principles in the creation of the consolidated balance sheet.  Under these principles the Group has a total equity position of £51.559m (30 June 2013 £(12.138m) and 31 December 2014 £(13.188m)).

In April 2014 our loss making subsidiary, Industrial Products and Supplies Ltd ("IPS"), was sold to its management for £1; IPS operated in the pipe, tube and valve sector and following its disposal we have been able to focus entirely on the fluid power sector.  Further details are given in Note 14.

For continuing operations, revenue in the first half grew by 6.3% to £17.191m, against £16.167m in the comparable 2013 period (year ended 31 December 2013 £32.104m).  This growth was achieved consistently across the UK and Benelux operations in line with the relative size of the two businesses.  This had a similar commensurate effect on gross profit which also increased by 3.9%, although dampened by the effect of growth related customer rebate payments. When coupled with a broadly static cost base, this progression has seen the Group report an underlying operating profit of £3.281m (2013: £3.058m and £5.324m respectively), an increase of 7.3% year on year.  Although not defined under IFRS, the Directors believe that the underlying results give a better understanding of the business' performance, and further detail is contained in note 3 contained in this report.

FINANCIAL POSITION

Working capital continues to be managed effectively with inventories at 30 June 2014 of £9.230 million (30 June 2013: £9.409 million and at 31 December 2013 £9.804 million).

The Group has enjoyed a stable trade receivables position, although as expected with an expanding Far East supply line, trade payables contracted in line with expectations from £4.555m at 31 December 2013 to £3.830m at the period end 30 June 2014.

As a business we currently have only a limited capex requirement with no material projects currently required or envisaged.

As mentioned earlier, post the period end, we completed the PFP transaction on 4 August 2014, which was part satisfied by £4.65 million in cash. However, this included the purchase of £1.7m of cash held by PFP and therefore the net cash outlay was £2.95m funded through our own resources at completion, with a final balance of £1.62 million due to be paid in August 2015. Further details are given in Note 13.

PRINCIPAL RISKS AND UNCERTAINTIES

In common with all organisations, the Group faces risks which may affect its performance. These are general in nature and include: obtaining business on competitive terms, retaining key personnel, successful integration of new business streams and market competition.  The Directors set out in the Admission document published in May 2014 under Part III the key risks that could have a material effect on our results.  The Board does consider that these risks, which were identified at the time, have not changed materially since that time.

The Group operates a system of internal control and risk management in order to provide assurance that we are managing risk whilst achieving our business objectives. No system can fully eliminate risk and therefore the understanding of operational risk is central to the management process within Flowtech Group.  The long-term success of the Group depends on the continual review, assessment and control of the key business risks it faces.

The future financial performance of the Group could be influenced by the success achieved in integrating the PFP business into the Group's wider operations, coupled with the reaction of both suppliers and customers to the Group venturing into complementary distribution channels which is highlighted by this acquisition.

IN SUMMARY

Trading continues to be encouraging and to date, in line with our expectations; in addition, we have a number of opportunities that we are pursuing which could accelerate complementary channel development and geographic expansion.  The Board remains confident that it can deliver the expected results at the end of the financial year.

By order of the Board

Malcolm Diamond MBE

Non-Executive Chairman

Sean Fennon

Chief Executive Officer

15 September 2014

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements which reflect the knowledge and information available to the Company during the preparation and up to the publication of this document.  By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty.  Although the Group believes that the expectations reflected in these statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Given that these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.