Company Announcements

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the Company's obligations under Article 17 of MAR. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Tuesday, 7 September 2021

FLOWTECH FLUIDPOWER PLC

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

leading specialist supplier of technical fluid power components and services

2021 HALF-YEAR REPORT

For the six months ended 30 June 2021

"We are pleased that current trading continues to support our 'return to growth' agenda and we have made meaningful progress with each of our strategic goals. Volumes are recovering, margins are stable, and we are proactively addressing the short-term headwinds associated with problematic global supply chains."

Bryce Brooks, Chief Executive Officer

Ø Revenue much improved against comparative period but 7% down on a more representative H1 2019.

Ø Sustained strong gross margin.

Ø Overheads broadly flat, with savings achieved from restructuring activities funding new growth initiatives, such as digital agenda.

Ø Operating profit improvement directly linked to revenue recovery (H1 2020 result of £0.9m benefitted from £0.9m of furlough support).

Ø Working Capital increased by £4.7m in H1 2021, with Net Debt** up £1.6m from 2020 year-end position. This is in line with our planning and expectations and linked to increased activity levels, as well as our investment in inventory to combat global supply chain challenges.

Ø Results now reported on a 3-segment basis.

RESULTS PRESENTATIONS:

The Company is to hold a presentation of results for financial analysts at 9.00am (BST) today (7 September 2021), details of which can be obtained by contacting either the Company or advisers as detailed below.

In addition, tomorrow (8 September 2021) at 08.30am (BST) , CEO Bryce Brooks and CFO Russell Cash will provide a live presentation via the Investor Meet Company platform (IMC).  This presentation is open to all existing and potential shareholders.  Investors who already follow Flowtech Fluidpower plc on the IMC platform will automatically be invited.  Questions can be submitted pre-event via your Investor Meet Company dashboard up until 3.00pm the day before the meeting or at any time during the live presentation.  Investors can sign up to Investor Meet Company for free and add to meet Flowtech Fluidpower plc via:

https://www.investormeetcompany.com/flowtech-fluidpower-plc/register-investor

2021 HALF-YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS

REVENUE

Revenue was 18.7% up on H1 2020, although a more representative comparison is with H1 2019 where it was 7.2% down.  Whilst a return to growth is encouraging, we have been impacted by supply chain challenges in meeting customer demand, and in certain OEM sectors for our Solutions Division where demand remains below normal levels.

Gross profit margin 

Our gross profit margin remains strong at 35.4% (2020 35.1%).  It can vary from one period to another based on market conditions and mix of sales, but this figure demonstrates our determination to maintain its quality.

OPERATING Costs

Our underlying operating costs are £0.8m higher than in H1 2020, a period which benefitted from c.£0.9m of Government backed furlough support. The underlying position reflects the savings achieved in the parts of our business which have been restructured, offset by investment in areas such as E-business, and project management to support our long-term growth agenda.

UNDERLYING OPERATING PROFIT

Underlying operating profit is much improved compared with H1 2020 but remains suppressed in relation to H1 2019.  Despite sectoral challenges in the lockdown period, the Services division has returned to providing a positive contribution following our  ongoing performance improvement initiatives.

NET DEBT

Our Net Debt position has increased from £11.6m at 31 December 2020 to £13.2m at 30 June 2021.  Our increased activity levels, combined with our decision to invest in inventory to mitigate supply chain disruption, resulted in a planned and controlled £4.7m increase in working capital.  Clearly our profitability has also mitigated the impact of this.

CURRENT TRADING

It has been pleasing to see that in the first half of 2021 certain of our key customers exhibited demand levels above our original estimates, meaning in many cases, our volumes have returned to pre Covid-19 levels and enabled us to deliver a solid performance.

A challenge as we entered 2021 was to predict the changes in volume due to the lockdown which was then affecting the UK, and our other trading territories of Republic of Ireland and the Netherlands.   The post-Brexit trading structure between the UK and both Northern and Republic of Ireland has also been an issue, as approximately 17% of our revenue is undertaken by Nelson Hi-Power and Hi-Power Transport, with a further 4% from our English based operations to the island of Ireland.

We have been focusing our efforts on managing within this new framework, and in the first half of the year we have been able to maintain gross margins.  The Group is dependent on its own supply chains to service increased demand, and in Q2 and now into Q3, there have been difficulties in obtaining core product for short-term needs.  In addition, lead times from all major supply partners are being extended, often coupled with price increases. We are confident we can retain our gross margin position with pass through price increases into the market.

Having successfully managed our inventory position down over recent years, our need to support increased demand and ensure overall stock availability and service levels are maintained, has meant that our investment in stock is increasing.  We expect this to continue into H2 before this position rebalances.

DEVELOPMENTS IN GROUP STRATEGY

In April 2021 we detailed the key elements of our growth strategy, and we have continued to make progress in several areas:

·        Branding - The commercial consolidation of the constituents of our Flowtech division is going to plan and we expect to have completed this project in Q1 2022.  Warehousing and Logistics are already shared, and we will now integrate commercial and IT.  Customer reaction has been positive as this creates a co-ordinated approach for many who run separate accounts at each legacy business.

·        Digital - Our near-term objective has been to create a fully-fledged E-business. Progress is good and we expect to have a rebuilt Flowtech.co.uk trading platform by the end of 2021.  This will be supported by SEO capabilities that are new to the Group, and insight from our new Customer Data Platform.   

·        People - We have further strengthened our management team.  Of note is in early 2021 when we recruited into two new roles: Stephen Ashton as Operations Development Director and Howard Ormesher as Director of Customer Insight.  Both have brought considerable additional skills to our Management Board, with Howard heavily involved in our digital strategy, and Stephen working on plans for further operational cost reductions in 2022.  We have also recently welcomed Trasie Woolley as our first Director of Human Capital, and she is leading a programme to improve our skill base across the Group.  This is particularly important for our technical agenda, which is based on a Minimum Educational Requirement framework for all commercial and operational employees.

Our investment in these areas has increased our central cost base in the short-term as we remain committed to ensuring we have the resources necessary to support long-term growth in both online and offline trading.

BOARD CHANGES

Non-Executive Director, Paul Gedman has decided to stand down from the Board with effect from the end of November 2021.  We would like to thank him for his significant contribution to the development of our E-business platform and wish him well with his new executive role.  The Board will look to recruit a replacement with appropriate experience to provide valuable support to the Executive Team as we  further develop our digital agenda.

OUTLOOK & DIVIDEND

We remain encouraged by the way the fluid power distribution market continues to recover.  The volatility of global supply chains will continue to be a challenge in the short-term, however we expect our FY2021 result to be in line with current market guidance.  Overall, the Board is  satisfied with the recent and current trading performance and pleased with the progress  made against each of our key strategic objectives.

The Board remains determined to reintroduce a final dividend payment for the financial year 2021. Thereafter we will recognise both the growth requirements of the business and the interests of our shareholders.

By order of the Board

7 September 2021

(*) H1 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.

2.1 Basis of preparation

The financial information set out in this consolidated Half-year Report has been prepared under International Accounting Standards in conformity with the requirements of the IFRIC interpretations issued by the International Accounting Standards Board (IASB) and the Companies Act 2006 and in accordance with the accounting policies which will be adopted in presenting the Group's Annual Report and Financial Statements for the year ended 31 December 2021.  These are consistent with the accounting policies used in the Financial Statements for the year ended 31 December 2020.

2.2 Going concern

The financial statements are prepared on a going concern basis. The Directors believe this to be the most appropriate basis for the following reasons:

·              The Group generated underlying operating profit of £3.4m

·              The Group is financed by revolving credit facilities totalling £20m (recently extended to November 2023) and £5m overdraft facility, repayable on demand.

·              The Group has operated, and is expected to continue to operate, well within its Banking facilities.

The Directors have revisited the forecasts and continue to anticipate a profitable performance in the second half of 2021.  Updated cash flow forecasts continue to show the business operating well within the limits of its Banking facilities.

Naturally, these forecasts include a number of key assumptions notably relating, inter alia, to revenue, margins, costs and working capital.  In any set of forecasts there are inherent risks relating to each of these assumptions.  If future trading performance significantly underperformed expectations, management believe there would be the ability to mitigate the impact of this by careful management of the Group's cost base and working capital and that this would assist in seeking to ensure all bank covenants were complied with and the business continued to operate well within its aggregate £25m banking facility.

The Group therefore continues to adopt the going concern basis in preparing its financial statements.

The Group monitors and reports business performance based on three segments, Flowtech, Fluidpower Group Solutions, and Fluidpower Group Services.  The segments "Flowtech" and "Fluidpower Group Solutions" taken together make up what was previously called "Components".  For a description of each segment please see the Editors note on page 2 of the release.   Segment results for 6 months ending June 20 and full year ending December 20 have been re-stated on a comparable basis.

The Board is considered to be the chief operating decision maker (CODM). The CODM manages the business using an underlying profit figure.  Only finance income and costs secured on the assets of the operating segment are included in the segment results. Finance income and costs relating to loans held by the Company are not included in the segment result that is assessed by the CODM.  Transfer prices between operating segments are on an arm's length basis.

The Directors believe that the underlying operating profit provides additional useful information on key performance 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 profit / (loss) from continuing operations is shown below.  The principal adjustments made are in respect of the separately disclosed items and are as detailed at the end of this note.  Segment information for the reporting periods is as follows:

*Underlying operating result is continuing operations' operating profit before separately disclosed items (note 3).