RNS Item

FLOWTECH FLUIDPOWER PLC

INTERIM FINANCIAL REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2015

INTRODUCTION

We are pleased to report a solid underlying first half performance which has seen our portfolio businesses trading well in their individual market places against a backdrop where the economic conditions remain challenging in both the UK and Mainland Europe.  The profile of the Group has also continued to increase over the last twelve months, and this is assisting us in growing our market share and reinforcing our position as one of the leading players in the fluid power sector.  By refining our offer we ensure that the Group maintains its competitive advantage in each of the markets in which it trades.

OUR BUSINESS STRATEGY FOR GROWTH

Our focus remains - to develop a specialist fluid power organisation focused on its core competencies and 'class-leading' service.

Flowtech has already demonstrated that it can deliver profitable, consistent levels of service to a diverse customer base.  There is significant opportunity for the business to achieve further organic growth through a mix of product development and value add services.  In addition, we believe there is also a strong opportunity to accelerate this growth through complementary channel development, geographic expansion and adding niche bolt-on acquisitions.

In 2014, our maiden year as a PLC, we were pleased to add Primary Fluid Holdings to the Group, strengthening the Flowtech offering in hydraulics.  Against this backdrop, we were pleased to announce that in 2015 we added two successful businesses to the Group further enhancing our exposure to this important part of the industrials market sector. 

·      Albroco, based in North Wales was acquired in May - it specialises in the distribution of hydraulic and electro-mechanical components to the mobile, on- and off-highway and construction markets. 

·      Nelson Fluid Power (NFP) joined the Group in July - it is a distributor of hydraulic equipment, components and hose assemblies from its locations at Lisburn and Dungannon (Northern Ireland) and Dublin (Republic of Ireland).  The long established NFP business has a broad customer base in Ireland across the crushing and screening, agricultural and marine and fishing sectors.  

Albroco is expected to be fully integrated into the Primary site in Knowsley by the end of this month while NFP will operate as an independent sister company within the Flowtech Group.  Both will add significantly to the Group's procurement position in hydraulic components, hose and couplings.  With our growing interest in this sector, we have therefore formed a new division, Power Motion Control (PMC), incorporating Primary, Albroco and NFP.  We are optimistic that this division will benefit from the introduction of more sophisticated IT and stock systems (that are already used within Flowtech's Flowtechnology businesses), and coupled with commercial synergies and buying power, will deliver an increasing contribution in terms of revenue and profitability over the next twelve months.  

As a business we are in a unique position within the fluid power supply chain, as we are aligned to both the global supply base and its distributor network.  We are in an exciting phase; Flowtech's progress continues apace to the varied industrial and manufacturing customers it supplies everyday around the UK and overseas.  We remain confident in the future of the business - we have a clear strategy to develop the opportunities that will deliver future growth and returns to shareholders.

HALF-YEAR FINANCIAL PERFORMANCE

Although not defined under IFRS, the Directors believe that the underlying operating results give a better understanding of the business' performance.  The table below details this is in summary and further information is contained in note 3 of this Interim Report.

* Underlying operating result is continuing operations' operating profit before acquisition costs, amortisation of acquired intangibles, share-based payment costs, restructuring costs, and IPO costs. Underlying operating result is reconciled to statutory profit before tax in note 3 to the Interim Report.

In the Flowtechnology division, UK revenue in the first half grew by 2.7% to £15.617m, while in the Benelux a reduction of 5.8% was experienced, albeit this includes a negative impact of 9.6% due to movements in the Euro conversion rate and therefore, local currency growth remains positive at 5.8%.

As previously reported Primary experienced a rapid reduction in demand from the oil and gas related sectors in late 2014 and as has been widely seen in similar companies the related drag on revenues has remained present throughout H1 2015.  However, a sensible cost management focus has ensured profitability was retained and with recent evidence indicating growth in other sectors.

Gross profit margins across all divisions remained consistent and strong for each sector with no erosion experienced despite market conditions. The Group is therefore able to report an underlying operating profit of £3.404m (2014: £3.281m), an increase of 3.7% year on year. 

On an annual basis the Group purchases a foreign currency 'hedge' to fix the Euro rate for the anticipated profitability of its overseas operations (i.e. Flowtechnology Benelux and in part the Republic of Ireland operations of NFP).  The net change in value of this hedge is accounted for as financial income under IFRS and is shown as Financial income of £33,000 (2014: £1,000).

FINANCIAL POSITION

With the soft market conditions experienced during the early part of 2015, the Group has focused to ensure that working capital continues to be managed effectively.  Inventories at 30 June 2015 were £10.466m, a reduction of £0.697m from 31 December 2014, although to some degree this has been offset by a reduction in trade payables of £0.264m.

Net cash collection remains excellent and net debt at 30 June 2015 of £7.459m (2014: £6.133m) is ahead of expectations.  This allowed the Group to complete both the acquisitions of Albroco and NFP from within current cash and debt resources.  The NFP transaction, completed post the period end (3 July 2015) was part satisfied by £4.460m in cash. However, this included the purchase of £1.500m of cash held by NFP and therefore, the net cash outlay was £2.960m funded through our own resources at completion.  Two further contingent payments are due in 2016 and 2017 which are based on the profitability of NFP post acquisition.  The maximum payable as contingent consideration is £2.375m.  Further details are given in note 8 of this report.

BANKING

In September 2015, in addition to its term loan, the Group secured enhanced facilities from its bankers, Barclays Bank PLC.  These replace the £6.00m Confidential Invoice Discounting (CID) facility that was in place with a new Revolving Credit Facility (RCF) of £8.00m, with an agreed further extension (so called "Accordion") of up to £7.00m as required in order to assist with growth both organically and by acquisition. This new facility has a three year commitment.

OUR PEOPLE

Implementing the Group's strategy is also down to our people, their skills and expertise.  The Board thank everyone around the business for their continuous hard work, dedication and loyalty, which underpins both the high level customer relationships and the Group's overall performance.

We also take this opportunity to welcome NFP's Managing Director, Mark Nelson to Flowtech's Operational Board.  Also, all new colleagues who have joined Flowtech in the period or the Group as part of Albroco and NFP.

The Group today employs 270 people through its seven locations across four countries. 

CURRENT TRADING AND OUTLOOK

We are fortunate at this time to have both strength and depth across our product portfolio and extensive customer exposure.  Our recent acquisitions also widen the geographical areas and the industrial fluid power markets we serve.

The formation of a Power Motion Control Division showcases our significant technical expertise as well as opening up a new important OEM channel in hydraulics; combined with our high service levels we have a solid platform for ongoing growth.

Management remain optimistic about both the commercial opportunities and the prospects of the Group as a whole, despite some headwinds from the ongoing weakness and competitive pressures being witnessed within certain sectors of the industrial and manufacturing arena, both in the UK and across Europe.  However, the Board is confident that the Company can deliver another year of solid progress.

DIVIDEND

The focus is on capital growth through investment in the business and increasing ROCE.  As a Board, we are also committed to a progressive dividend policy based on the year's performance as a whole whilst balancing our investment in the business for the future benefit of all stakeholders, customers and colleagues.

The Board is pleased to declare a 5% increase on the half year dividend to 1.75p per share (2014: 1.67p).  This will be paid on 23 October 2015 to shareholders on the Register at the close of business on 2 October 2015.  The shares will become ex-dividend on 1 October 2015.  The dividend is covered 3.11 times by earnings.

PRINCIPAL RISKS AND UNCERTAINTIES

In common with all organisations, Flowtech faces risks which may affect its performance.  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 management processes.  The long term success of the Group depends on the continual review, assessment and control of the key business risks it faces.  In view of this the Board has recently engaged with a team of risk specialists to ensure risk identification and mitigation is a key strategy focus for the Group.

The Directors set out in the 2014 Annual Report and Financial Statements the principal risks identified during this exercise, including quality control, systems and site disruption and employee retention.  The Board does not consider that these risks have changed materially in the last six months.

By order of the Board

7 September 2015