Flowtech Fluidpower : Half-Year Report for the Period Ending June 2024

About this update from Flowtech Fluidpower Plc

2024 Half Year Report for the six months ended 30 June 2024 2 Half Year Report for the six months ended 30 June 2024 Flowtech Fluidpower PLC ("Flowtech", the "Group" or "Company") A world of motion Everything we do at Flowtech is focused on keeping business moving, whether that's supplying a product or designing and building a complex engineering solution. Our vision is to be the trusted advisor in a world of motion. "Whilst there are ongoing challenging market conditions, we have delivered further performance improvements, implemented cost control measures and improved overall service levels, which have improved gross margin in the period. However, our market has deteriorated further, and we have, accordingly, significantly reduced our expectations for the full year outturn" Mike England, Chief Executive Officer Summary Headlines Persistent headwinds in our marketplace have continued to impact top line growth ambitions with revenue reducing 5.7% compared to H1 23. Revenue reduction is partially offset by further improvement in gross margin delivering 2% increase in gross profit in H1 24. Upward momentum of 5.1% revenue growth against the second half of last year, underpinned by our Performance Improvement Plan delivering greater service levels and operational efficiencies. Gross profit margin up 290bps against H1 23 and 160bps up on FY 2023; results in higher gross profit in H1 24 v H1 23 notwithstanding the reduction in revenue. Underlying EBITDA of £4.7m, reduction limited to £0.3m despite £3.4m reduction in revenue compared to H1 23. £1.9m decrease in net debt to £13.5m over 12-month period (pre IFRS16 lease liabilities) supported by £4.0m reduction in inventory in H1 24, with significant headroom versus bank facilities. Post period end The recent acquisition of the trade and assets of Thorite increases our market share and delivers a strong platform for growth and improved margins. The first five weeks of ownership has given management confidence in its ability to drive significant value and profitability in the near-term. Before this improvement is realised, we will absorb losses in 2024 although we expect to have repaid our acquisition costs within the next financial year. Current trading and outlook Q3 24 has seen a greater than expected market slowdown across all three geographical segments reducing underlying volumes and extending project timelines. This will impact our full-year revenues and, combined with the short-term impact of Thorite losses, will result in a significant downgrade in earnings expectations for 2024. Moving forward: Positive momentum in building the forward orderbook with over £50m of opportunities within the priority sales pipeline and over £15m of secured business. We are confident that the Performance Improvement Plan and Strategy for Growth (including the ecommerce upgrade in Q1 2025) is firmly on track and that we are well set to deliver the mid-term margin goals outlined in our recent annual report. Half Year Report for the six months ended 30 June 2024 3 Financial Highlights Half year ended 30 June 2024 Half year ended 30 June 2023 Year ended 31 December 2023 Unaudited Unaudited Audited Revenue £55.7m £59.1m £112.1m Gross profit £21.4m £21.0m £41.3m Gross profit % 38.4% 35.5% 36.8% Underlying EBITDA* £4.7m £5.0m £9.4m Underlying operating profit** £2.9m £3.4m £6.0m Operating profit / (loss) £1.2m £2.4m (£10.4m) Profit / (loss) before tax £0.3m £1.6m (£12.1m) Earnings per share (basic) 0.41p 2.28p (21.10p) Net debt*** £13.5m £15.4m £14.7m Underlying EBITDA is profit before interest, taxation, depreciation and separately disclosed items. Underlying operating profit is operating profit for continuing operations before separately disclosed items (note 3). Net debt is bank debt less cash and cash equivalents. It excludes lease liabilities under IFRS 16. 2024 Half-Year Financial Performance and Divisional Analysis Revenue by current segment Six months Six months Six months Year ended ended ended 31 December ended 31 December 2023 30 June 2023 2023 30 June 2024 (re-stated**) % (re-stated**) % (re-stated**) £000 £000 Change £000 Change £000 Great Britain 38,316 36,715 4.4% 40,713 -5.9% 77,428 Island of Ireland 11,786 11,507 2.4% 12,577 -6.3% 24,084 Benelux 5,610 4,803 16.8% 5,780 -2.9% 10,583 Total Group revenue 55,712 53,025 5.1% 59,070 -5.7% 112,095 Gross profit % 38.4% 38.3% 35.5% 36.8% Underlying segment Six months Six months Six months Year ended operating profit* Return on ended Return on ended Return on 31 December Return on ended 31 December 2023 30 June 2023 2023 30 June 2024 revenue (re-stated***) revenue (re-stated***) revenue (re-stated***) revenue £000 % £000 % £000 % £000 % Great Britain 4,900 12.8% 3,911 10.7% 4,464 11.0% 8,375 10.8% Island of Ireland 1,802 15.3% 1,615 14.0% 1,878 14.9% 3,493 14.5% Benelux 738 13.2% 961 20.0% 881 15.2% 1,842 17.4% Central costs (4,561) (3,922) (3,799) (7,721) Underlying operating profit* 2,879 2,565 3,424 5,989 * Underlying operating profit is operating profit for continuing operations before separately disclosed items (note 3). H1 23 and FY 23 figures have been re-stated between Great Britain and Island of Ireland to reflect the fact that certain elements of Irish revenues are now being controlled by Irish management. H1 23 and FY 23 figures have been re-stated between Great Britain and Island of Ireland to reflect the associated profit relating to the Irish revenues that are now being controlled by Irish management. Central costs have been re-stated to capture certain items such as insurance and IT spend which were previously recharged to operating segments. 4 Half Year Report for the six months ended 30 June 2024 Revenue Revenue reduced by 5.7% in H1 24 compared to H1 23 with persistent market headwinds leading to reductions across all three geographical segments. The comparison with H2 23 is more positive with a 5.1% increase. Gross Profit Margin We are pleased to report that the positive trend started in H2 23 has been sustained into 2024; this has been particularly important in a market which is not currently supporting our top line growth ambitions. As a result of this, and despite the reduction in revenue, our gross profit margin increased to 38.4% (H1 23: 35.5%), delivering a £0.4m uplift in H1 24 v H1 23. Operating Costs Underlying operating costs have increased by £0.9m (5.6%), compared to the comparative 2023 period. Approximately two thirds of our cost base relates to people costs. Notwithstanding the average number of full-time equivalent employees reducing by 3.7% compared to H1 23 our overall payroll costs have increased by 2.7%. This reflects in part inflationary cost pressures and equally the investment we have made in certain areas of our business, including our outlay on in-house digital capabilities and the breadth and depth of our management team to build capability and scale to serve the future needs of the business. The majority of the £0.9m increase relates to payroll costs with the balance essentially representing inflationary increases across other cost categories. Underlying Operating Profit The £0.4m improvement in gross profit combined with the £0.9m increase in operating costs resulted in a £0.5m reduction in underlying operating profit to £2.9m in the first half (H1 23: £3.4m). Net Debt Net debt (pre IFRS16 lease liabilities) was £13.5m at 30 June 2024 (H1 23: £15.4m), with significant headroom of £11.5m under the Group's £25m banking facilities. If leases are taken into account, the reduction in Group debt increases to £3.1m (June 2024: £18.5m: June 2023: £21.6m). A significant factor in achieving this debt reduction was the management of inventory which reduced by £4.0m in H1 24. The cash flow also benefited by £1.4m from the issue of new share capital, primarily relating to the exercise of a £1.2m warrant instrument put in place when the Company was admitted to AIM in May 2014. As previously communicated ongoing net debt reduction remains a key priority for the Board. Trading Review Market conditions proved more challenging than anticipated in H1 24 across all geographical segments as further slowdown in many industrial verticals has led to extended project cycles, reduced component basket size and a reduction in project- based expenditure. Trading in Q3 24 has been weaker than anticipated with customers, suppliers and competitors citing further challenges. Nevertheless, it is encouraging to report that our orderbook remains healthy, albeit a number of significant orders will now simply be pushed into 2025 where we anticipate a return to more normalised conditions. Revenue performance impacted by persistent market slowdown H1 24 revenue growth is 5.1% up on H2 23 with continued momentum in delivering service improvements and increased sales force productivity. The forward order book is beginning to build with increased quantity and quality of the sales pipeline and order book. The timelines of some larger secured projects have been extended out however, we are confident OEM recovery and distribution volumes will bounce back although we recognise in part, this will be dependent on the timing of market recovery. Revenue decline is principally due to the following which we expect to continue through H2 based on Q3 trading: Slowdown in overall OEM customer demand and delays to larger project work Of the customers who have reduced orders (down-traders), 90% of the top ten and 78% of the top fifty down- traders are OEM/project related. Down-trading is largely external market related with our expectation being that more than 75% of these down-traders will increase orders as the market improves. Northern Ireland revenues have been specifically impacted due to a small number of long-standing large OEM customers with the crushing & screening industry output reducing by over 20% over the last two quarters. Specific larger, major turnkey projects Flowtech has won have been delayed or pushed out for delivery into 2025. Half Year Report for the six months ended 30 June 2024 5 Continued depressed market recovery impacting core product distribution revenues We have maintained a consistent underlying order frequency but with reduced basket size as customers curb general expenditure and burn off held inventories. Larger projects are being delayed which is reducing expected volumes. The market slowdown has increased price competitiveness as customers seek cost reduction. Our strong commercial discipline has protected our gross margin, and, in some cases, we have actively chosen to walk away from lower margin business. The launch of the new catalogue in May was very positively received; whilst there are early signs of an increase in core catalogue product sales this has been more suppressed than expected due to market deterioration and the reduction in larger project related order volume. Gross profit and cost management focus has partially offset revenue headwinds There has been continued progress executing all areas of self-help in the Performance Improvement Plan with many improving data points indicating that Flowtech is now in a far stronger position in commercial, operational and service performance capability. Management focus has been on improving commercial excellence in gross margin management and in identifying and executing efficiency and cost reduction initiatives as part of the Plan. These initiatives combined have resulted in a 200bps increase in gross profit helping to offset the 5.7% reduction in H1 24 revenues. Management of our cost base, in particular people related costs, restricted the increase in operating overheads to 5.6% allowing investment to be made in certain key areas. Performance Improvement Plan continues to drive operational improvements There has been further progress in the three areas of our improvement plan; 1) to simplify the operating model, 2) become more customer centric and 3) to build scalability. 1. Simplify Group-wide aligned objectives, KPIs and reward mechanisms have driven improved culture and performance. The rebranding of fifteen brands to 'One Flowtech' across all UK and Island of Ireland locations was completed in June 2024 including the consolidation of over 50 websites and 20 social media accounts. Benelux rebranding will be completed in Q4 24. The new leadership team is well embedded with over nine months of learned experience working within a simplified, scalable functional operating model. In doing so, we have implemented a 60% change in leadership across the top 60 leaders as part of a Company-wide restructure with over 90% of organisational and restructuring changes implemented. Operational basics are embedded with a step change in service levels and commercial excellence. 2. Customer centric There has been a sustained improvement in customer experience with a further 50% reduction in customer complaints in H1 24 and increase in customer enquiry responsiveness of 10%. 40,000 new Flowtech catalogues were deployed to over 100 distributor partners in May. Selling effectiveness programmes were delivered and resulted in more than 5% increase in sales force activity productivity and quality of contact frequency resulting in quote conversion improvement of over 10%. Positive momentum in building the forward orderbook with over £50m opportunity within the priority sales pipeline and over £15m of secured business. 3. Scalable Product availability has improved and been sustained; we have increased product availability from a low point of 85% to approximately 96%; at the same time, we achieved a £4m reduction in inventory. Improved accuracy and throughput in operations leading to a 50% reduction in service complaints and delivering stable and increased despatched volumes despite a further 25% reduction in operational headcount. Continued progress in delivering our ESG goals Health & safety performance has improved with high-risk events reducing by 69% in the past 12 months and a further 33% in the past three months. There has been positive progress in the diversity of leaders with a 40% increase in leadership diversity in the past 12 months. There has also been strong focus on Group-wide skills and capability development with a 176% increase in training hours in the past 12 months with greater emphasis on upskilling commercial and technical application. 6 Half Year Report for the six months ended 30 June 2024 Execution of our strategic plan to a world of motion Customer First: We are on track with our plans to fully re-platform the Flowtech website to a scalable and improved customer experience in readiness for a Q1 25 launch. This being a key growth enabler for the Group. The Power of One: The Launch of new single Flowtech value proposition to the market in June 2024 as part of rebrand event to over 200 customers, suppliers and partners. This combining the high service product offering with the extensive range of engineering solutions. A World of Motion: Expanded the brand, product and service offering through the acquisition of the business and certain assets of Thorite. Thorite is a leading UK provider of pneumatics, compressed air, vacuum and fluid handling products and systems and has traded since 1850. It operates from seven sales and service centres across the UK. The transaction completed immediately following the appointment of Administrators, Interpath Advisory to Thorite. Under the terms of the Acquisition, Flowtech acquired all the plant and machinery, vehicles, stocks, and intangible assets of Thorite for a total cash consideration of £350,000 which was funded from the Group's existing bank facilities. Flowtech has also repaid Thorite's outstanding debtor finance facility of c.£1.7m in return for an assignment to the Group of a debtor book totalling c.£2.6m; this was also funded from the Group's bank facilities. A sharing arrangement relating to the excess of debtor book recoveries over and above the c.£1.7m paid has been agreed with the Administrator of Thorite. In the audited accounts for the year ended 31 March 2023, Thorite generated revenue of £21.2m and delivered an operating profit of £79,000. The gross value of asset classes being acquired at the same date was £8.8m, inclusive of £3.8m in respect of the debtor book at that point in time. Thorite has since experienced cash flow challenges and incurred operating losses due to a combination of internal issues and market headwinds. Thorite's operating losses in the year to 31 March 2024 are estimated at £1.2m. There was a strong strategic rationale for the Acquisition and the potential for significant synergies for the combined businesses including: operational efficiencies, procurement leverage opportunities and economies of scale, which will lead to material cost savings and improved margins for the Group over the medium term a well-developed value proposition, Thorite's trading locations and only limited product overlap with Flowtech will provide expansion into new and complementary geographies within the UK, together with new products and services; and, It is anticipated that the enlarged business will also benefit from strong cross selling prospects across the respective complementary customer bases. The business we inherited was heavily loss making but we are confident that focus on revenue, gross profit margins and addressing the cost base will quickly return the business to profitability. Outlook Q3 24 has seen continued difficult conditions and a delay to recovery in the global marketplace with a market recovery likely to be delayed into 2025. In addition to some de-stocking, there have been further delays to some larger OEM and major projects and continued suppression in underlying product volumes. Notwithstanding our strong and growing orderbook and sales discipline and focus on profitable growth, we are not yet seeing the anticipated positive gains we had expected. We are pleased with the Thorite acquisition and confident that it will pay for itself and deliver accretive revenues and margins into 2025. However, in 2024 there will be a negative operating profit impact term on our results whilst actions are taken to right size the cost base, improve gross margins and make necessary investments to generate improved revenues and operational stability. Consequently, the impact of the Thorite acquisition and losses, combined with the slower than expected market recovery will result in trading results for the year ending 31 December 2024 being significantly below current market expectations 1. Despite this backdrop, the Directors remain confident that the Group's Performance Improvement Plan, and the Strategy for Growth is on track to deliver the increased mid-term earnings ambitions as we recently outlined in our recent annual report. Underpinned by improved KPIs, we remain optimistic that we are setting the foundations for the Company to deliver a stronger performance in 2025 and 2026. By order of the Board 26 September 2024 Half Year Report for the six months ended 30 June 2024 7 Consolidated Income Statement For the six months ended 30 June 2024 Unaudited Unaudited Audited Note Six months ended Six months ended Year ended 30 June 2024 30 June 2023 31 December 2023 £000 £000 £000 Continuing operations Revenue 55,712 59,070 112,095 Cost of sales (34,301) (38,089) (70,832) Gross profit 21,411 20,981 41,263 Distribution expenses (2,188) (2,288) (4,534) Administrative expenses before separately disclosed items: (16,344) (15,269) (30,740) - Separately disclosed items 3 (1,663) (987) (16,356) Total administrative expenses (18,007) (16,256) (47,096) Operating (loss)/profit 1,216 2,437 (10,367) Financial expenses (878) (813) (1,735) Profit/(loss) from continuing operations before tax 338 1,624 (12,102) Taxation 4 (87) (220) (875) Profit/(loss) from continuing operations 251 1,404 (12,977) Earnings per share 5 Basic earnings per share - continuing operations 0.41p 2.28p (21.10p) Diluted earnings per share - continuing operations 0.41p 2.28p (21.10p) Consolidated Statement of Comprehensive Income For the six months ended 30 June 2024 Unaudited Unaudited Audited Six months ending Six months ending Year ended 30 June 2024 30 June 2023 31 December 2023 £000 £000 £000 Profit / (loss) for the period 251 1,404 (12,977) Other comprehensive income Items that will be reclassified subsequently to profit or loss - Exchange differences on translating foreign operations (158) (225) (136) Total comprehensive income in the period 93 1,179 (13,113) 8 Half Year Report for the six months ended 30 June 2024 Consolidated Statement of Financial Position At 30 June 2024 Unaudited Unaudited Audited Six months ended Six months ended Year ended 30 June 2024 30 June 2023 31 December 2023 £000 £000 £000 Assets Non-current assets Goodwill 40,066 53,092 40,066 Other intangible assets 2,644 2,979 2,529 Right of use assets 4,307 5,921 4,829 Property, plant and equipment 7,848 7,900 7,822 Total non-current assets 54,865 69,892 55,246 Current assets Inventories 27,948 30,843 32,009 Trade and other receivables 24,260 25,257 23,725 Prepayments 1,653 1,130 856 Cash and cash equivalents 6,367 4,446 5,184 Total current assets 60,228 61,676 61,774 Liabilities Current liabilities Interest-bearing borrowings - - - Lease liability 1,568 1,453 1,695 Trade and other payables 18,378 20,248 21,558 Tax payable 720 1,123 767 Total current liabilities 20,666 22,824 24,020 Net current assets 39,562 38,852 37,754 Non-current liabilities Interest-bearing borrowings 19,883 19,889 19,915 Lease liability 3,436 4,705 3,822 Provisions 361 339 330 Deferred tax liabilities 1,422 1,196 1,534 Total non-current liabilities 25,102 26,129 25,601 Net assets 69,325 82,615 67,399 Equity directly attributable to owners of the parent Share capital 31,637 30,746 30,746 Share premium 61,662 60,959 60,959 Other reserves 187 187 187 Shares owned by the Employee Benefit Trust (124) (124) (124) Merger reserve 293 293 293 Merger relief reserve 3,646 3,646 3,646 Currency translation reserve (135) (66) 23 Retained losses (27,841) (13,026) (28,331) Total equity attributable to the owners of the parent company 69,325 82,615 67,399 Half Year Report for the six months ended 30 June 2024 9 Consolidated Statement of Changes in Equity For the six months ending 30 June 2024 Share Share Other Shares Merger Currency owned by Merger relief translation Retained Total capital premium reserves EBT reserve reserve reserve losses equity £000 £000 £000 £000 £000 £000 £000 £000 £000 Six months ended 30 June 2024 Unaudited Balance at 1 January 2024 30,746 60,959 187 (124) 293 3,646 23 (28,331) 67,399 Profit for the period - - - - - - - 251 251 Other comprehensive income - - - - - - (158) - (158) Total comprehensive income for - - - - - - (158) 251 93 the year Transaction with owners Issue of share capital 891 703 - (200) - - - - 1,394 Share options settled - - - 200 - - - (71) 129 Share-based payment charge - - - - - - - 310 310 Balance at 30 June 2024 31,637 61,662 187 (124) 293 3,646 (135) (27,841) 69,325 Six months ended 30 June 2023 Unaudited Balance at 1 January 2023 30,746 60,959 187 (124) 293 3,646 159 (14,527) 81,339 Profit for the period - - - - - - - 1,404 1,404 Other comprehensive income - - - - - - (225) - (225) Total comprehensive income for - - - - - - (225) (1,404) (1,179) the year Transaction with owners Share-based payment charge - - - - - - - 97 97 Share options settled - - - - - - - - - Balance at 30 June 2023 30,746 60,959 187 (124) 293 3,646 (66) (13,026) 82,615 Twelve months ended 31 December 2023 Audited Balance at 1 January 2023 30,746 60,959 187 (124) 293 3,646 159 (14,527) 81,339 Profit or the year - - - - - - - (12,977) (12,977) Other comprehensive income - - - - - - (136) - (136) Total comprehensive income for - - - - - - (136) (12,977) (13,113) the year Transaction with owners: - - - - - - - - Shares options settled - - - - - - - - Share-based payment charge - - - - - - 462 462 Dividends paid - - - - - - (1,289) (1,289) Transfers between reserves - - - - - - - - Total transactions with owners - - - - - - - (827) (827) Balance at 31 December 2023 30,746 60,959 187 (124) 293 3,646 23 (28,331) 67,399 10 Half Year Report for the six months ended 30 June 2024 Consolidated Statement of Cash Flows For the six months ending 30 June 2024 Unaudited Unaudited Audited Note Six months ended Six months ended Year ended 30 June 2024 30 June 2023 31 December 2023 £000 £000 £000 Net cash from operating activities 6 2,799 3,607 8,202 Cash flow from investing activities Acquisition of property, plant, and equipment (822) (1,340) (2,092) Acquisition of intangible assets (633) - (121) Proceeds from sale of property, plant and equipment 20 3 135 Net cash used in investing activities (1,435) (1,337) (2,078) Cash flows from financing activities Net proceeds from issue of share capital 1,393 - - Repayment of lease liabilities (854) (880) (1,818) Interest on lease liabilities (117) (116) (221) Other interest (792) (776) (1,567) Proceeds from sale of shares held by EBT 200 - - Dividends paid - - (1,289) Net cash generated from / (used in) financing (170) (1,772) (4,895) activities Net change in cash and cash equivalents 1,194 498 1,229 Cash and cash equivalents at start of period 5,184 3,972 3,972 Exchange differences on cash and cash equivalents (11) (24) (17) Cash and cash equivalents at end of period 6,367 4,446 5,184 Short-term Long-term Lease borrowings borrowings liabilities £000 £000 £000 Total At 1 January 2024 - 19,915 5,517 25,432 Cash flows Repayment - - (854) (854) Movement between short-term and long-term - - - - Other movements - (32) 358 326 Non-cash Foreign exchange - - (17) (17) At 30 June 2024 - 19,883 5,004 24,887

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