Bryce Brooks Chief Financial Officer, Sean Fennon Chief Executive Officer
"Across our four divisions we employ over 550 skilled people throughout the UK, ROI and Benelux. Our ongoing strategy guides how we work together as a Group of complementary businesses to achieve one shared purpose; to be the trusted provider of products, solutions and services to the fluid power market."
Bryce Brooks, CFO
"We aim to have a market position as a full-service supplier of fluid power products and services. The ongoing expansion of ranges will see the Group capture a greater percentage of current customer spend and also open up new business opportunities in the wider market."
Sean Fennon, CEO
|Gross profit %||33.9%||35.5%||-1.6%|
|Group operating profit*||£6.61m||£6.14m||+7.7%|
|Underlying operating profit†||£9.08m||£7.45m||+21.9%|
Reconciliation of underlying operating profit to operating profit
|Underlying operating profit||9,081||7,454|
|Less separately disclosed items (note 4)||(2,467)||(1,317)|
* All results relate to continuing operations
† Underlying operating result is continuing operations' operating profit before acquisition costs, amortisation of intangible assets, share-based payment costs and restructuring costs.
We are again delighted to report a period of significant progress in the scope of our activities as a Group, with an uplift in revenue of 46% (2016: 20%), of which 38% is attributable to acquisition activity during the course of the year, with the balance of 8% derived from organic growth in our established operations. Below this we have seen a 7.7% increase in operating profit (2016: 11.8%), and a 21.9% improvement in underlying operating profit (2016: 8.5%). The well supported placing of shares in March 2017, which raised £9.6 million, has been fully invested in businesses complementary to the Group's core strategy.
The material currency movements in 2016 which rapidly increased input prices across our product portfolio when sourced from Europe or the Far East, have predominantly been moved through our sales pricing structures, albeit with some initial resistance with OEMs. The UK fluid power sector has also experienced relatively buoyant conditions during 2017, which has continued into the early part of 2018. It is particularly pleasing that the Euro-based acquisitions made in the year, being Hi-Power and Hydroflex, have also made immediate contributions.
Gross profit margins
Gross profit % remains one of our most important KPIs, and with the currency effects mentioned above, downward pressures were seen as a key risk to our progress as we entered 2017.
As a reminder, the Group is largely split into two separate and distinct pricing models:
- "Distribution" businesses – Flowtechnology and Process – who operate pricing policies based around smaller parcel size, a broader mix of global brand and own brand products, and a "list less discount" model
- PMC businesses who work in both pure component sales, that overlap with our distribution model, but also in markets where the precedent is for a more fixed approach to pricing to OEMs, and therefore have more challenging pricing issues to address
It is therefore pleasing to report that in 2017 we were able to broadly maintain margins in each of our divisions as shown below, and of particular note in our Flowtechnology division, which after targeted selling price initiatives in the early part of the year, had a final out-turn only 0.1% down on prior year. Overall, Group margins were 1.6% below previous year, which was attributable to mix effects from acquisitions in the lower gross margin (but higher average order size) PMC division.
|Power Motion Control||29.1||29.2|
Following the successful March fundraising, 2017 was our most active period since coming to market in 2014, and if we include the recent "Beaumanor" transaction post year being reported in March 2018 (note 32), we completed seven deals in just over 12 months. Throughout the year we have worked on our "four layered" focus on synergy gain:
- Back office – typically accounting, insurance, banking, HR and IT.
- Commercial – cross-selling allowing our complementary skill sets to be exploited.
- Procurement – a comprehensive and systematic approach to supplier pricing optimisation.
- Operational – with over 400,000 square feet of operational facilities across its 26 sites, the Group now has significant resources when compared to just two sites in 2014.
While back-office savings generally start to feed through within one year, we believe that retention of brand identity, reputation and customer relationships remains critical, and especially so during the initial period when often long-standing customer and supplier relationships are most tested. As such our pursuit of other gains, and in particular those achievable from operational activities, is always tempered by a low risk approach to change, and we believe that a proper perspective will be available after at least a three-year period.
Underlying operating profit
The underlying* operating profit can be summarised as follows:
Underlying operating profit*
|Power Motion Control||2,788||1,823||965||53%|
|Underlying operating profit||9,081||7,454||1,627||22%|
* Underlying operating profit is continuing operations' operating profit before acquisition costs, amortisation of intangible assets, share-based payment costs and restructuring costs.
† Restated to reflect £346,000 of cost previously shown in Central Costs and now part of Flowtechnology following a department reorganisation effected on 1 January 2017.
Underlying operating profit (2016: 1%)
|Revenue from external customers||37,239||35,133||6%|
The division continues to progress following the acquisition of Indequip in early 2016, with underlying operating returns maintained at over 20.2% of sales, despite the enhanced local staff bonus profile and only marginally down on 2016 when 21% was achieved.
With Beaumanor, acquired in March 2018 to join the division in the UK, and our Benelux operation enhanced with developments in the hydraulic sector by Hewi Slangen, and more significantly collaboration with Hydroflex, this very cash generative division has a secure base from which to continue to flourish.
Turnover (2016: 36%)
Underlying operating profit (2016: 48%)
|Revenue from external customers||34,806||15,830||120%|
Power Motion Control (PMC)
The division has been the most substantive representation of our acquisition programme and now combines the complementary product, service and skill sets of nine businesses across 19 sites in three countries.
Marketed collectively under a "Fluidpower Group" banner, as a showcase for the wider resources that are available to customers and suppliers alike, the combined net underlying operating margin achieved for the division of was 8%. Our target is to produce a minimum of at least 10% in each business within the division, and overall the 12% achieved on the legacy operation in 2016.
Underlying operating profit
|Revenue from external customers||6,242||2,837||120%|
Now comprises two business following the addition of Orange County in July 2017, which has traded in line with expectation since that time.
The founding Hydravalve business, itself acquired only in 2016, has performed steadily during its first full year despite substantial change in property and IT infrastructure, following the creation of its first specialist industry catalogue in late 2017, developed in conjunction with our dedicated team at Flowtechnology UK, it has seen an immediate benefit that lifted Q4 trading and brought a buoyant start to 2018.
Central costs comprise executive management, finance and IT departments, divisional sales and the cost of running the plc; we continue to manage cost carefully, with the overall increase of 7% (2016: 21%). Planned increases for 2018 and beyond remain limited and are in support of the cost-out synergies being targeted at divisional level.
Acquisition and restructuring costs
The total cost for the year represents 7.0% (2016: 9.5%) of the total consideration paid for acquisitions. The Group uses a mixture of professional advisers for due diligence services with a view to managing costs. Any initiatives to transfer to "internal" resources, with a view to reducing transaction costs, will be managed carefully.
Restructuring costs incurred during the year of £117,000 (2016: £84,000) primarily relate to the reorganisation of administrative functions following acquisition, as well as further streamlining of the Group following advice from our legal and tax advisers.
Statement of financial position and cash flow
The net debt position at the year end was £14.9 million (2016: £13.1m).
Net debt bridge
On top of strong operating profit growth, cash collections have remained consistent, with the total charge for bad and doubtful debt related issues being £38,000 (2016: £67,000), representing only 0.1% of turnover. In addition, net stock investment has been more than covered by trade supplier support, with a result that over the year the movement in total working capital has resulted in a net cash inflow of £0.1 million (2016: an outflow of £1.8m).
The Group has undertaken its largest year of capital expenditure in its history with the central piece being redevelopment of the 25-year old facility at Skelmersdale. Expenditure to cover offices, car parking, racking, plant and IT development totalled £0.8 million and has given the site a new long-term identity. Outside of this, IT systems development in order to ensure both resilience and efficiency remains a key focus, and again when coupled with our objective of achieving medium term synergy benefit from our acquisition programme.
On 1 March 2018, the Group entered into a restated facilities agreement with Barclays Bank PLC to replace our existing facilities with a £16 million committed revolving credit facility and £4 million loan with a single "bullet" repayment at the end of a three-year term. Attached rates and terms were broadly consistent with those previously enjoyed and are detailed further in note 18.
Subject to Shareholder approval at the Annual General Meeting which is to be held on 6 June 2018, the Directors are proposing a final dividend of 3.85p per share. This, together with the interim dividend of 1.93p (paid on 24 October 2017), brings the total for the year to 5.78p which again matches the commitment made at the date of the IPO of 5% growth. The outlook for further enhancement to dividend flow remains good and the Board would like to reiterate its view that the retention of a strong dividend policy is a foundation for the investment case in the Group.
The tax charge for the year was £1.21 million (2016: £1.15m), with an effective tax rate of 17.0% (2016: 20.3% ) and a blended tax rate based on the geographical regimes of 18.8% (2016: 19.5%).
As a direct result of our acquisition activity during the course of the year, the depth and quality of the management teams across the Group continues to improve. Managing Directors appointed during the year include Alan Willis at HTL, Maurice Kearney at Hi-Power, Spencer Rogers at Orange County, Chris Way at Group HES and Dave Maher at Branch Hydraulic Systems. In addition, in early 2018, following a review of our overall medium term objectives, we introduced a regional Managing Director structure with the following appointments:
- Nick Fossey in the UK & Ireland with a focus on synergy extraction, cash generation and continued development of commercial and cross-selling opportunities; and
- Mark Richardson in the Benelux with a focus on operational efficiencies between Hydroflex and Flowtechnology Benelux, and providing a platform for future growth by organic and acquisitive means in the region.
We are always acutely aware that our progress is achieved with the continued commitment and effort of all our employees – in both "new" and "old" businesses – and with enhanced profit sharing arrangements now available across the Group we are confident of our ability to attract and retain the best staff the industry can offer.
Group Operating Profit Growth
The growth made by acquisitive means in 2017 has resulted in time being invested in the careful integration of the businesses now covered by our operational reach. This focus will continue through 2018, as we seek to achieve synergistic benefit and capitalise on the entrepreneurial and technical skills of the new operations.
The Board does not intend to implement further significant acquisition activity in 2018, and our focus will therefore be on extracting valuable efficiencies from the businesses to date, and in particular:
- Expanding intercompany procurement and stockholding benefits by using logistics centres in Skelmersdale (FTUK) and Leicester (Beaumanor)
- A wider operational review to identify efficiencies that could be achieved through geographic consolidation of existing assets
- Upgrading information systems, with Sage X3 financials to be implemented Group-wide by the end of 2018 giving a single reporting system for the Group with multi-lingual and multi-currency capabilities
That said, the heightened profile that Flowtech Fluidpower has established has enabled opportunities for further expansion to continue to be presented. It therefore remains a key part of our strategy to ensure we can exploit these openings, while retaining a stable financial and operational structure to ensure that the progress made to date is only enhanced.
Our objective remains growth through both acquisitive and organic means. Our targeted approach ensures we can achieve both a concentration and enhancement to our product set – which lies at the centre of our business model – entirely focused on fluid power.
We have entered 2018 with confidence. Following our recent placing of shares raising a further £10.5 million (after costs) in permanent capital, the acquisition of Beaumanor adds a further significant element to our customer and supplier base.