The Group has a clear view of growth objectives – to create a specialist fluid power organisation that remains focused on its core competencies through its delivery of class-leading service and support.
Our long-term growth model is based on organic growth through offline and online activities, coupled with complementary acquisitions in the UK and Ireland, in a fragmented marketplace.
The Board regularly monitors a range of financial and non-financial performance indicators to allow it to measure performance against expected targets. In late 2020, we completed a full strategy review to create focus and provide a framework for future developments, including our ambition to achieve significant growth. Whilst progress in many areas was slowed by COVID-19, we believe that significant development has been undertaken in 2021 and 2022, and the CEO’s Year in Review details progress made in our structural goals read.
The KPIs we established at that time remain relevant, our comments in each area being provided below:
Sales Growth
Target to ensure continuous above ‘market’ sales growth with strong gross and net margin contribution. At Profit Centre level, we review sales and gross profit on a daily basis, comparing performance against prior year and plan. Each business has additional reporting available from local systems detailing overall sales and gross margin performance on a summarised customer and product group basis, with further detail available at individual product level. The Group also measures organic sales growth on a quarterly basis and compares this to market information produced by our industry trade associations. Whilst there are some differences in the composition of the index to our own business, this does give us a guide as to how we are performing against the sector.
A key component in our strategy is to develop our e-business capabilities which are referred to in both the Chair’s Statement and the CEO’s Year in Review sections of this Report.
Daily Gross profit
£000
Total Value of Sales from Online & EDI
£000
FY2023 Plan
We will complete the transition to a single e-business platform available to all business units, and supported by new market leading SEO capabilities.
We will introduce advanced data analysis tools using a new Customer Data Platform across all business units, and which will be enhanced by e-marketing campaigns built around the data insight provided.
In addition to the Flowtech Division, which now operates on a single platform, we will now look to create a consolidated structure in the Solutions and Services segments under the “Fluidpower Group” banner.
Warehousing productivity improvement
In the past three years the Group has implemented an extensive programme to centralise the majority of its mainland UK warehouse and logistic operations into a single location in Skelmersdale, Lancashire. In 2022 this process was largely completed with the closure of a major site in Leicester over the summer. In addition, with the planned expansion of buffer stocks to reduce risk associated with extended lead times following the COVID-19 pandemic, the Group has been incurring additional storage costs that we also expect to reduce in the latter part of 2023, and therefore continue to reduce total warehousing costs as a proportion of turnover.
Warehousing costs (2022)*
7.2%
Warehousing costs (2021)*
7.6%
Warehousing costs (2020)*
8.9%
*Being the Group’s cost of warehousing, including property and people, divided by associated turnover
FY2023 Plan
In 2023 this key productivity measure will naturally reduce with the full year impact of the closure of Leicester, and our focus will be on ensuring that new working practices are firmly established with no further significant cost reductions expected in the near term.
With the majority of the “pick and ship” activity for the UK now in one facility, we will therefore operate a continuous improvement approach, which will include the use of automation where returns can be clearly identified.
Cash Generation and Management of Net Debt
A continued focus on reducing gearing in the balance sheet, and the creation of excess cash positions, will protect the business from any macroeconomic uncertainties.
This proved beneficial in the pandemic period when working capital reduction allowed Net Debt to be managed down, and now that volumes have increased, we are using the capacity created to invest in an enhanced inventory profile.
A continued focus on controlling credit risk and, where possible, putting in place more favourable terms.
Working Capital as a % of Total Revenue (2022)
32.2%
Net Debt £million (*) (2022)
16m
*Bank Debt less cash and cash equivalents
Turn & Earn %(†)(2022)
85%
† Turn & Earn calculations have been revised to include total cost of sales in the calculation of stock turn. Turn & Earn Index is calculated by multiplying gross margin by stock turn. In 2022, the gross margin achieved was 35.8% and the average stock turn achieved was 2.38, therefore the Turn & Earn index was 85%.
FY2023 Plan
Our target remains to achieve a Turn & Earn KPI of 130% by 2025, and segment managing directors have been set clear targets for the middle and end of 2023 to achieve net inventory levels in line with this timetable. As a result of the above actions, we believe that we will be able to reduce working capital as % to total revenue to below 30% by end of 2023, with a view to falling below 25% by end of 2025, and a commensurate reduction in net debt. *
IT Strategy
Cost-effective, secure IT environments that provide long-term stability for the Group’s activities remains a key part of the Group’s strategy.
The Board believes that a reduction in the number of IT systems that operate within the Group is a key element in improving overall efficiency and control and reducing risk. Our strategy is to eventually standardise on two Process Systems – one covering Flowtech and Solutions segments where the majority of operational activity is involved in product movement using logistics-based software, and a second platform covering Services which involves more bespoke activities, manufacturing, and site-based activities.
Process Systems
Accounting Systems
FY2023 Plan
Replace the current 3 IT environments used within our Services segment with a single solution.
Our Flowtech segment now operates on a single IT environment characterised by the amalgamation of several software modules and which operate in a co-ordinated manner. We have identified that those elements that operate on older software platforms should be replaced on a module by module basis in order to reduce change risk, and we expect to start this in late 2023 with a new Warehouse Management System currently at shortlist stage. In addition, in 2023 we will be transitioning the accounting module in Flowtech thereby completing a single platform approach.
*Increase due to acquisition activity.
People
Investing in our management teams and staff brings the benefits of improved retention and talent identification for succession planning. We see training and development of employees as key to our long-term success.
The Group conducts an annual Employee Engagement Survey to measure employee satisfaction, and subsequent activities are tailored to improve overall engagement.
In 2022, given the general economic climate and the headcount reductions we have implemented, we have seen a small drop in certain areas of the business that particularly encompass lower paid roles, such as in our warehousing activities. However, overall “Challenge,” “Freedom” and “Clarity” score highly across the Group, and we believe that we are improving at providing enjoyable, relevant work, that allows for flexibility and gives clear goals and purpose.
Employee Engagement (2022)
64%
Employee Engagement (2021)
66%
FY2023 Plan
Our ambition is to achieve a score of 75% over the medium term.
Recent survey analysis identifies Recognition and Reward as an area for greater focus and improvement. Our new initiatives, such as The Accelerate Programme, will seek to ensure that our high potential staff do development and receive the recognition they deserve.
Our local leadership style is empowering for employees, with high levels of trust and responsibility. However, it can also lead to a lack of clarity of objectives in more junior roles. We will therefore continue to educate and train our managers, to ensure they succeed, and their teams thrive.
We will also bring new focus on our younger staff, ensuring they feel part of the Group immediately, with improved induction processes, and a career line of sight for development opportunities. To support this, we have increased our apprenticeship schemes, particularly at our main warehousing location in Skelmersdale.