RNS Item

FLOWTECH FLUIDPOWER PLC

HALF-YEAR FINANCIAL REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2016

INTRODUCTION

It is pleasing to report that since joining AiM in 2014 the Group has:

ü Expanded its portfolio through the launch of over 3,000 new lines across existing and new product categories

ü Completed six acquisitions: Primary, Albroco, Nelson, Indequip, Hydravalve and TSL

ü Established three clearly-focussed divisions: Flowtechnology, Power Motion Control and Process; and

ü Developed new strategic sales refinements and data processing resources which will deliver improved operating efficiencies across the organisation in the long term

As a business:

Ø 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. Our offer continues to develop to the varied industrial and manufacturing customers we supply everyday around the UK and overseas. 

As a Board:

Ø We remain optimistic that our wide range of revenue enhancing development programmes, when linked to our acquisition strategy based on a clear multi-channel approach, will continue to create significant opportunity for further growth and increased market penetration. By developing our offer, we ensure that the Group maintains its competitive advantage in each of the markets in which it trades.

2016 HALF-YEAR FINANCIAL PERFORMANCE

We are pleased to report an encouraging first half trading performance, all achieved against a backdrop where the economic conditions have been challenging in most industrial markets across the key territories of the UK and mainland Europe.  Whilst accomplished primarily on the back of acquisition activity, overall turnover growth year on year of 28% has continued to raise our profile across new channels, assisting the business in adding market share and reinforcing our position as one of the leading players in the fluid power sector.

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 Report.

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

At divisional level, Flowtechnology UK was able to replace business lost mainly in larger accounts with exposure to more difficult sectors, such as the oil and gas industry.  In addition, the acquisition of the trade and assets of Indequip has added to our product portfolio, and allowed a more direct market approach with significant sections of the potential customer base.  There remain many opportunities to develop our offer and the Group has continued to invest in sales and marketing functions to exploit these.  In the Benelux, sales grew by 11.3% (5.3% in constant currency) which has again lifted bottom line contribution proportionately.

In the Power Motion Control division, revenue in the first half grew by 110% to £8.3m, with the majority coming from the year on year effects of the acquisitions of Nelson and Albroco. However, Primary also continued to expand its sales profile after the erosion of its oil and gas related business in early 2015.  The Process division, established in the first half of the 2016 has started well and contributed £1.0m to revenue.

Gross profit margins across all divisions remained consistent and strong with no erosion experienced.

Our cost profiles in people, property and administration remain on target.  Central costs have increased year on year by £0.219m which includes bonuses of £0.113m paid to the executive directors to reflect the increased scale and complexity of the Group achieved since 2014. Overall the Group continues to ensure that its central resources are able to support an expanding operational profile as necessary whilst obtaining appropriate "economies of scale", and it is firmly believed that the current resources available can support considerable further growth in the Group's activities.

The Group is therefore able to report an underlying operating profit of £4.059m (2015: £3.404m), an increase of 19% year on year. 

Restructuring costs of £0.118m (2015: £0.010m) relate exclusively to the cost of integration of new acquisitions into the Group and include redundant short term property lease costs and redundancy of back office services. 

The Group outsources all professional services required to cover due diligence and administrative integration, including IT, of new acquisitions into the group and with three completed in the year to the date of this report these costs have therefore increased to £0.238m (2015: £0.050m).

OUR BUSINESS STRATEGY FOR GROWTH

Our Group's core philosophy is unchanged - ie. to deliver profitable growth while maintaining consistent high levels of service to our diverse customer base.  We have a solid technically based and resilient business model which is underpinned by its ability to deliver strong cash generation and profitable returns for all stakeholders.

During the last six months, we have added three successful businesses to the Group further enhancing our exposure to specialist hydraulics, pneumatics and the process industrial sectors: -

*the trading style of Triplesix Ltd

There remains significant opportunity to add more niche acquisitions and enhance organic growth through a mix of product development, value add services and new customer opportunities. 

FINANCIAL POSITION INCLUDING CASH FLOW AND BANK DEBT

Net operating cash flows (note 9) were £0.188m (2015: £1.659m), a reduction of £1.471m.  However, the majority of this variance relates to the expected build-up of working capital in Indequip following the purchase of the trade in February 2016, as well as the seasonal nature of working capital movements in the Nelson operation, which was not included in the comparative due to the acquisition date being after June 2015. The balance of the variance represents the heavier bias in stock investment year on year as previously reported. This was carried out to take advantage primarily of better pricing opportunities in the Far East.   This also has the added advantage of providing some cushion against recent currency movements following the Brexit vote in June 2016.

Net borrowings at 30 June 2016 were £14.1m. The extended bank facilities agreed with Barclays and first reported last year have supported the Group's acquisition activity and current headroom and covenants remain comfortable. Overall the Board expects strong cash generation in the second half of 2016. Cash collections remain good across all sectors.

OUR PEOPLE

Delivering our goals and objectives we now have over 324 technically-skilled staff employed across four countries and in nine locations.  In order to continue our development, we need good people with determination, drive and technical know-how.  We take this opportunity to welcome all new colleagues who joined us during the first half of the year.  The Board thanks 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.

At Operating Board level, we congratulate John Farmer in his promotion to Managing Director of Flowtechnology UK, and, we welcome both Hydravalve's Managing Director, Andrew Newham and TSL's Managing Director, Steve Rushworth.  In March, we also welcomed Nick Fossey, joining the group from Eaton Corporation, in his key role leading the future development of the PMC division across the UK and Europe, where the opportunities for us to grow are extensive. 

OUTLOOK

The Flowtech Group is developing both strength and depth across its product portfolio, customer reach and, following recent acquisitions, it has been able to widen the geographical areas and the industrial fluid power markets it serves.  It continues to develop a theme based on being a "specialist" rather than a "generalist" and the margin opportunities this allows.

Low global confidence and economic uncertainty is influencing many industrial sectors, particularly in the UK. We do believe this hiatus to be short term, and remain confident for the future. As we previously indicated, the Group operates in a "live" pricing environment and it is increasingly certain that input prices for many core product lines will increase in HY2 and early 2017 on the back of the sterling downgrade. The Board is confident that we will be able to maintain overall margins by a mixture of selling price increases and supplier support.  The fluid power sector as a whole has come to expect a heavy bias towards US Dollar and Euro denominated supply lines and the macro economic situation is well understood by the sector's decision makers.

Trading is in line with management expectations despite some disruption over the immediate post Brexit vote period.  Overall, we remain positive that we can deliver results in line with market consensus forecasts and are confident about the future.  Our acquisition pipeline remains dynamic and the Group is now established as a very credible option for investors and owner managers across the sector who wish to exit their position.

DIVIDEND

As shareholders are aware, the Board is focused on capital growth and increasing ROCE.  We are also committed to a progressive dividend policy based on the Group's operational performance as a whole whilst balancing our investments in the business for the future. 

The Board is therefore pleased to declare a half-year dividend of 1.84p (2015: 1.75p), a 5% increase.  This interim dividend will be paid on 25 October 2016 to Members on the Register at the close of business on 30 September 2016.  The shares will become ex-dividend on 29 September 2016.  The dividend is covered 3.4 times by earnings.

We look forward to keeping investors updated on our progress over the coming months.

By order of the Board

12 September 2016