Flowtech Fluidpower : Half-Year Report - six months ended 30 June 2019

FINANCIAL STATEMENT

HALF-YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS

Revenue	Six months ended 30 June 2019 £000	Six months ended 30 June 2018* £000	% Change	Year ended 31 December 2018 £000
Components Services	50,001 9,639	46,961 9,460	6.3% 1.9%	93,524 17,527
Total Group revenue	59,640	56,422	5.7%	£111,051
Gross profit %	35.6%	34.3%		34.8%

Underlying operating result**	Six months ended 30 June 2019 £000	Six months ended 30 June 2018* £000	% Change	Year ended 31 December 2018 £000
Components Services Central Costs	7,945 241 (2,091)	6,731 239 (1,268)	18.0% 0.8% 64.9%	14,254 314 (3,187)
Underlying operating result**	6,095	5,701	6.9%	11,380

* We have restated the H1 2018 to align with the classification of costs adopted in both the H1 2019 and 2018 full year analysis

**Underlying operating result is continuing operations' operating profit before the fair value uplift of inventory acquired through business combinations (IFRS 3), 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.

OUR STRUCTURE

Flowtech Fluidpower is a full-service provider of fluid power. In 2018 we operated across three divisions. In 2019, Flowtech Fluidpower moved to a two-division structure to more clearly define its business under the broad categories of:

Ø COMPONENTS -the supply of both hydraulic and pneumatic consumables, predominantly through distribution for maintenance and repair operations across all industry markets but supported by supply agreements direct to a broad range of original equipment manufacturers (OEMs). Consistent operational high margin revenue.

Ø SERVICES- the bespoke design, manufacturing, commissioning, installation and servicing of systems to manufacturers of specialised industrial and mobile hydraulic OEMs and, additionally a wide range of industrial end users.

REVENUE

Revenue increased by 5.7%. Organic growth was 2.9% with the balance resulting from a full contribution from the Balu businesses which were acquired in March 2018. Our Components division which accounts for c84% of Group revenue grew by 6.3% (organic growth of 3.2%) whilst the Services division grew by 1.9% (all organic).

Gross profit margins

Our gross margin can vary from period to period dependent on market conditions and mix of sales. In the period under review our gross margin percentage increased from 34.3% to 35.6%. Margins within our Components division have benefitted from the impact the Balu acquisition in March 2018 has had throughout H1 2019. Margins in our Services division tend to be more variable dependent on the extent of labour involved in value-add activities.

OPERATING Costs

In the first half of the year our underlying cost base can be analysed as follows:

	Unaudited Six months ended 30 June 2019 £000	Unaudited Six months ended 30 June 2018 £000	Audited Year ended 31 December 2018 £000
Distribution expenses	2,139	2,090	4,216
As % of turnover	3.6%	3.7%	3.8%
Administrative expenses*:
-Divisional	11,009	10,491	20,202
% of turnover	18.5%	18.6%	18.2%
-Central	2,091	1,269	3,187
% of turnover	3.5%	2.2%	2.9%
Total administrative expenses	13,100	11,760	23,389
% of turnover	22.0%	20.8%	21.1%
*before separately disclosed items

Distribution expensesare primarily costs paid to the various parcel and pallet carriers. While turnover has increased by 5.7% the increase in distribution costs has been restricted to 2.3%.

Administrative costsat divisional level represent the operational infrastructure to run the Group's trading activities across 29 sites in the UK, Ireland and the Netherlands. The impact of the Balu acquisition has added c£0.5m of costs, meaning there has been minimal movement in other divisional costs; this reflects a movement of certain costs (c£0.2m) from Divisional to Central offsetting a small element of inflationary increase.

Central costscomprise those relating to executive management, finance, business process/audit functions as well as the costs associated with running the plc. The investments made have been in a wide range of areas including:

· Tailored programmes designed with third party providers to develop the skills of our current and future business leaders at profit centre and divisional and central management levels;

· Investment in technology to provide ever-improving platforms of information, to gain commercial leverage and a transition to common IT systems on a sensibly phased basis across all parts of our business;

· To provide defence mechanisms to the ever-increasing threat of Cyber-attacks;

· Enhancing our Business Process and Audit functions to ensure we have the ability to effectively deliver change programmes and to ensure compliance with important internal processes and controls.

We strongly believe this sees us well-placed to control the business we have today, as well as being able to fully capitalise on opportunities to grow the business in the future. In particular we feel we have a much more resilient framework and ability to effectively implement change within our business.

UNDERLYING OPERATING PROFIT

The Components Division continues to deliver a strong underlying operating margin prior to central costs of 15.9% (H1 2018: 14.0%). Of the £1.2m increase, £0.4m relates to Beaumanor and Derek Lane (acquired in March 2018) which have contributed throughout H1 2019 as opposed to only part of the comparative period. Prior to allocation of central costs, the combined underlying operating profit of these businesses in H1 2019 was £0.9m, and in the 12 months to 30 June £1.6m.

The less working capital-intensive Services division has delivered a modest underlying operating margin of 2.5% (H1 2018: 2.5%).

FINANCIAL POSITION INCLUDING CASH FLOW AND BANK DEBT

On a like for like basis (i.e. discounting for the impact of IFRS16) we generated £4.9m, from operating activities in H1 2019; this compares favourably to an absorption of £1.8m in H1 2018 and reflects the focus all areas of the business have, and will continue to apply, to working capital management.

Bank debt reduced by £1.1m in H1 2019. This was achieved after paying c£1.6m relating to contingent consideration in respect of historic acquisition activity. The overall £2.7m reduction in aggregate debt compares favourably to a £3.0m increase in the comparative H1 2018 period.

2019 has seen the introduction of a new International Financial Reporting Standard, IFRS16, which provides guidance for accounting for leases. This has led to us recognising £8.8m of additional assets in our balance sheet and an equivalent liability in respect of the aggregate obligations under these leases. The adoption of the standard reduces our profit by £67k.

EARNINGS PER SHARE AND DIVIDEND

In the first half, earnings per share was 5.00p, compared to 5.78p in 2018. Given the positive progress being made with cash generation across the Group the Board is again pleased to confirm a 5% increase in our half-year dividend to 2.13p (2018: 2.03p), This interim dividend will be paid on 29 October 2019, to members on the Register at close of business on 4 October 2019. The shares will become ex-dividend on 3 October 2019.

OUTLOOK

With great progress being made in our strategic objectives, the Board remains confident in the outlook for the Group as we seek to improve our complementary revenue streams in Components and Services. This confidence is reflected in our continuing attitude towards dividend growth.

However, after a prolonged period of solid organic growth across the Group, Brexit induced nervousness in the UK and Ireland is impacting our markets and over the summer months we have experienced a period of reduced sales activity. Whilst our heavy bias towards servicing Maintenance, Repair and Overhaul markets gives us natural defences against significant setbacks, our view is that a return to organic growth will be suppressed until the political situation is resolved. We expect little or no sales growth for the remainder of 2019 and on this basis, we advise that the likely 2019 out-turn for profit before tax will be in the range of £10.8m to £11.2m.

The Board also believes that current conditions are likely to persist well into 2020 before returning to long-term growth trends. As a result, we expect revenue growth to be suppressed relative to previous expectations. We are focused on controlling what we can control and are actioning the cost improvement initiatives described above. Accordingly, we hope to significantly mitigate the effect of reduced revenue growth on adjusted profit before tax in 2020.

We anticipate cash conversion to continue to improve as working capital is reduced. This will offset any cash costs associated with our cost reduction initiatives. Further detail will be available as we make progress, and by the time of our trading updates in October 2019 and January 2020.

By order of the Board

24 September 2019