Flowtech Fluidpower plc (FLO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Flowtech Fluidpower plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the Executive Management team from Flowtech Fluidpower plc. Mike, good morning, sir.

Good morning, and thank you to everybody that's joined us this morning, and welcome to the Flowtech 2023 full year results presentation. I just wanted to start by just making a thank you to all of the investment community. Thank you for your continued support towards Flowtech and also towards myself coming on board now, almost 12 months in the business. We've really appreciated your time, those that we've met personally and those that have also come to visit us. We've really welcomed the opportunity to showcase the business more readily with you and the improvements that we're making. But equally, thank you for those of you that are joining today, and we hope that this is a useful presentation and gives you a bit more clarity on where we're heading as an organization. I just wanted to just quickly [ with ] through the agenda. But before I do that, I'm Mike England, I'm the Group Chief Executive Officer. As I said, I joined the business in early April last year. So it's been a really exciting 12 months and we're looking forward to updating you on the progress that we're making. Russ, would you like to just introduce yourself?

Yes, Russell Cash, the Chief Financial Officer, and I've been with the business for just over 5 years.

Great. So in September, we provided a half year update. And we're going to stick to a very similar agenda. So just a very quick overview for myself. Russ is going to just give an update on the last year's financial performance for 2023. And then I'm going to spend some time explaining a bit more about our performance improvement plan, which we put in place in half 2, 2023. But more importantly, just talking to you about some of the progress that we're making because we're very confident that the work we're doing and the direction we're traveling in is certainly starting to deliver some more positive results. We're also going to spend a little bit more time helping you to understand our strategy. And ultimately and most importantly, how we believe we're executing against that strategy now moving forward. And then we'll just conclude with some current trading and outlook statements at the end. If I just spend a moment talking about Flowtech. When I joined this organization, I was really excited to be part of a company, which is very much a specialist and a leader within the industrial part of the market, which is Fluidpower. But equally, what I started to identify very quickly was this opportunity across the group, by being a provider of both products and services and systems to be actually far more for our customers in the world of motion. Ultimately, we exist as an organization to help businesses and to help industry to move and to do that more efficiently, to do that more safely and to do that more sustainably. And I'm really excited to be talking a little bit more today about our journey towards One Flowtech. And we're currently in the process of rebranding the whole company under the Flowtech: A world of motion brand and creating a very strong identity in the market. And so you'll start to see very much a different look and feel of the business as we go forward. And some of the imagery within this presentation is just a guide towards the fact that we, as an organization, are always with our customers, always supporting motion across industry. And we do that as a business, whether that's sourcing the right product through a very capable high-service distribution part of our business, but we also do that by designing and installing and building complex engineering solutions. And so we really can help our customers to deliver end-to-end technical solutions. And we're very proud of that as an organization, and we want to make that much simpler to understand, including our value proposition, which I'll come on to a little bit later on. In terms of an overview, I'm not going to steal Russ' thunder in terms of some of the financial numbers. But I guess from my side, 2023, other than coming in and really understanding and learning about the business, and most importantly, spending a significant amount of time with our customers, with our suppliers, listening and understanding how do they perceive us as a company, what do they think we do well, what do they think we don't do so well, and ultimately, making sure that we become a much more customer-centric, customer-first organization. For me, this has been all about fixing the basics and really trying to identify and unlock near-term self-help opportunities that can drive improved performance, whilst at the same time, recognizing that we've got some foundations that we need to build to be able to give us the scale that we need to drive accelerated growth in earnings, which we certainly feel that there's a good opportunity here to do. We've met our commitment around our EBITDA performance, which we talked about in September. And we've done that through a very strong focus on improving our gross margins, but also looking at cost management within the business. And Russ will talk a little bit more about the journey on these topics. And we've also been incredibly focused around working capital optimization and ultimately, cash generation. And we're very pleased with the progress we're making, and still plenty of headroom to improve, but we're pleased with the progress that we're making. I'll come back to the topics of the half 2 performance improvement plan, but we're very pleased with the early results that we're seeing. And most importantly, the assemblement of a new leadership team that's now very much embedded in the organization, bringing some new core capabilities to the business that will help us to scale for the future and also being very, very clear internally within the business and externally with our customers, our suppliers and you, our investors, around our strategy to make sure that everybody understands how we're going to go on the journey towards what we believe the opportunity is midterms operating profit margins. So Russ, I'll pass over to you, if that's okay, to talk us through the financial performance.

Yes. Thank you, Mike, and good morning to everybody. And to echo Mike, thanks for joining us. Thanks for your interest. So as I've briefly said, I have been with the business for just over 5 years. I guess, certainly, in relative terms, the world was a nicely stable place at that point. And I'm not sure, I had ever heard of the word, coronavirus, so it's been an interesting 5-year period. But roughly 5 years ago to the day I was sat here with the former CEO, just over a minute or so, if I may have reflected on the past, I think it's relevant. Looking at the 2018 performance, and in that year, the business delivered GBP 111 million of revenue and an EBITDA margin of 11%. And the balance sheet did have GBP 25 million of debt in it at that point in time, including some deferred consideration relating to the 15 acquisitions that have been performed in the previous 4 years. The share price a few months apart from that had been at GBP 1.80. So the reason I say that is that 5 years on, i.e., now, with a fresh team, with a multitude of fresh ideas and plans to deliver bottom line profit growth, but with the business with the same DNA that it's built up with over a 40-year period, which I know is a point Mike's going to come back to and a really important point, there is absolutely no reason why this business cannot get back to that 11% EBITDA multiple and actually materially beyond that. Our stated ambition is to achieve the mid-teens profit margin, bottom line profit margin. So we've got the confidence in our ability to do that. So that's a little bit about the past. Turning to the recent past, in 2023, I'm going to talk about both revenue and gross margin under the heading of the story at 2 halves, if I may. So revenue, 2.3% down year as a whole, which adds to the story of the 2 halves there is 2.8% up in the first half and 7.5% down in the second half. So it's clear, a limited number of points [indiscernible], it's clear that the market conditions did toughen as we enter the second half of the year. That manifested itself in certain of our OEM customers sort of reducing the volume of orders. I can see a question coming through, actually, so I'll address that now. But -- so the business temporarily declined, but it will come back. And at least in some of those cases, there are already signs that it has come back. So that customer has not moved away from Flowtech, it just sort of reduced its order requirements for a short period of time. Over and above that, so the market soften, certain of the customers sort of them fell away in terms of the short-term demand. But there is no getting away, that we did score some own goals within our GB product distribution business, the heartbeat of our business that traditionally has delivered significant return on revenue metrics, 20%, if not more, back in the day. And interestingly, its sister business in the Benelux continues to deliver those sorts of margins. The good news is that we definitely believe that we've diagnosed what were the root cause of the problems were and therein lies opportunities for us to not only get back to yesterday's revenue levels, but to build beyond that. In terms of the gross margin, again, given I've been in the business 5 years, so therefore, done 10 of these presentations, including the half years. And I, for some reason, remember saying that the gross margin has varied between 33.8% and 35.7% in that 5-year period. So it's obviously brilliant to be able to deliver a message for the year as a whole. The improvement is 111 basis points. But the even better headline beneath that is the first half figure was 35.5%, and the second half 38.3%. So I'll say that again, 38.3%. So put another way, we exited 2023, we entered 2024 with a gross profit margin that's 3 or 4 percentage points higher from the typical gross margin that we've enjoyed in the previous 5-year period. So the overriding message, I guess, on the P&L is that whilst the market hasn't been our friend, I think we've been friends to ourselves by controlling that gross margin quality. And that's underpinned by the input from a number of my new senior leadership team colleagues, to be fair. The other area that, of course, we can control is our overhead base. And given that 2/3 of our overhead costs related to people costs, just a couple of headlines within that. The year as a whole, our head count was modestly lower than 2022, 3% on average. But importantly, in the second half of the year, we reduced the head count by 7.6% between June '23 and December '23. So again, put another way, we enter 2024 with a cost base that's nicely lower than that in which we entered the prior year. Included within that, within our Skelmersdale fulfillment center, we've actually managed to improve the efficiency of the unit and at the same time, take 30% of our costs out in achieving them. So moving on to the cash generation. I guess whilst underlying EBITDA has been GBP 2.2 million lower, the fact that our cash generation is GBP 3.2 million higher fairly obviously, and I'll come on to a debt bridge in a couple of slides time, fairly obviously, represents the fact that our ability to control working capital has eased in 2023. In 2022, there was obviously some disruption in supply chain, given the actions of Mr. Putin and Ukraine earlier in that year. But pleasingly, supply chain stability has returned, is returning. And given that and given our utmost focus upon all aspects of working capital in '24 and beyond, we're very confident that, that control will continue. And fairly obviously, underpin our stated ambition of, broadly speaking, halving that bank debt position over a 2-year period. If I just talk briefly about the performance on a segment-by-segment basis. You'll note that we've introduced 3 new segments, geographical segments: Great Britain, the Island of Ireland and the Benelux. Had we reported under the old segmentation of Flowtech solutions and services, the key messages coming out of that would have been identical. Those key messages are that we're pleased, very pleased with the growth, which the businesses in the Island of Ireland have achieved and there is significant plans to improve that performance further, in particular, when it gets the ability of understanding what all other parts of the group can offer when we come together as One Flowtech. The growth in Benelux has been modest, but again, a healthy underlying operating margin, but we believe we can build on that significantly. But without a shadow of the doubt, the problems which we have already begun to address and which will come through strongly, I believe, is in Great Britain, and in particular, within the product distribution part of the business, the business that used to endure those 20% return on revenue measures and will get back to those sorts of levels. So just before handing back to Mike, in terms of the movement in the debt in 2023, if you're old fashion like me, you talk about bank debt, which reduced by GBP 1.3 million. If you're slightly more fashionable, you include the lease debt, which reduced by GBP 1.2 million. So take your pick, the debt either reduced by GBP 1.3 million or GBP 2.5 million. Those red boxes do add up to GBP 8 million. There's clearly not a lot you can do about having to pay tax and interest and lease liabilities. We choose to pay the 2.1p, 2.2p dividend, and we choose to invest in capital projects in 2023, that figure was GBP 2 million. Pleasingly, the green bars, the cash profit and supported by the working capital initiatives outweighed that. And if I was to look forward to what will that graph look like in 2024, in a nutshell, I'd say that the rates will be bigger because we're planning to spend more on capital projects and for all the right reasons, for the greater good. But equally, the green boxes will be bigger. And in particular, it comes back to that focus on working capital. And for those that have then seen the guidance in the marketplace, the old fashion bank debt number, as I said briefly before, is set to halve over a 2-year period. I think the number to be precise is GBP 7.1 million in the marketplace as opposed to the starting point of GBP 14.7 million. And so I'm sort of 5 years on from joining, as I said, coming back to my real headline, I think we've got a refreshed team with a whole host of ideas, a multitude of opportunity to grow the business and within each of those baskets, subcomponents of each, which I'm in danger of stealing Mike's thunder now. So that's a segue to handing back to Mike.

Thanks, Russ. So let's get into the performance improvement plan. So I guess coming into the organization last April, having been a customer of Flowtech, a competitor to Flowtech, but also a supplier into Flowtech over the years, and having spent over 27 years in industrial distribution, I guess I had a fairly good understanding for the Flowtech business. What I hadn't really understood as clearly was the construct. And actually, whilst this business has 40 years plus of a very, very strong reputation in the market, actually, it's also gone on a journey through lots of acquisitions, 2014 to 2018, and has a degree of complexity within the business and has been going on a journey to see how it can drive more synergies from those acquisitions but also harness the opportunity within the group and unlocking the real potential. So from my side, quite quickly and getting out and seeing customers, talking to key strategic supplier partners and really just most importantly, sort of talking to our people on the ground, it became very evident that there was some low-hanging fruit, self-help and just some fundamental basics that we need to put in place in order for us to be able to take this business to next level, and ultimately, improve our earnings and value creation. And for me, at the heart of that is creating a more customer centric, a leaner and more scalable platform for growth. And I introduced this framework back in September and very, very simple in terms of its construct. The first is being simple, to simplify the business. The second is becoming much more customer-centric. This is very much around driving decision-making and activities much more around the customer, but also getting into that growth focus and putting in the right ingredients to drive greater growth within the organization, and scalably getting back to doing the basics brilliantly whilst also looking at the efficiency of our operations and looking at our technology infrastructure so that as we do grow to the future, and we look to expand this organization, we've got the infrastructure and we've got the basics in place to allow us to project from. So what I'm going to do here is, I'm just going to take you through just some examples. And for each of the 3, I picked out 3, what I think to be some of the bigger areas where we've been focusing on. And for each of the 3, we're going to talk about what needs improving, what we've done to improve, and ultimately, some of the results so far. And we say the results so far because this is a continuum. It doesn't stop. The performance improvement plan continues. But we're pleased with the progress in a number of areas. And then in simplicity, I'll just start with what's written at the bottom. This, for me, has been very much around a significant step, change in leadership, key personnel and building core capability in the company that perhaps we were lacking, but also driving a material culture change with the customer at the heart of that, but also a culture change which is focusing on high performance and building scale. And so if we just think about these 3 areas, moving from an operating model, house of brands, it's not a bad model, and for many businesses, this model works well. We had moved into a divisional and quite fragmented structure with services and solutions over on one side, and ultimately, our product distribution business on another side, and not as much clarity within our country structures as probably we would need. Also that created some silos and inefficiencies, and most importantly, some confusion in the marketplace in terms of who are we because in many instances, the business is seen for the brand and the localization of that brand rather than the whole power of the group. And so we've been on the journey to be shifting the operating model towards a branded house. So in the first instance of that is moving to a simple country and functional structure and readiness for us to rebrand to One Flowtech, which is happening during Q2 2024. And we're already moving forward on that journey, as I expressed earlier on. So we've now got a much more simplified and scalable platform in order to build growth and scale for this organization. And importantly, at the heart of that is moving from over 10 cash-generating units to 3. And looking at it through Russ's eyes, having to produce over 60 segments of operations, moving that down to 3, very, very much simplifying the way in which we can operate as a business, but importantly, start to standardize processes, ways of working and becoming very much centered around a common purpose, a common vision, and ultimately, a common set of values and behaviors that we expect from our people across the One Flowtech organization. So we're very excited about the brand launch, which is kicking off in earnest as we come into the next month. Leadership capability and organizational effectiveness is really identifying where we've got gaps. Today, we haven't built in-house capability around our digital and insight, power up. And we've been very reliant on third parties to provide us with those capabilities. But equally, we've not invested in areas such as procurement. The question in the chat around how important our strategic supply partnerships are. They're incredibly important to us. We've been engaging with our suppliers in a slightly more fragmented way. And we're building a professional single procurement and product organization where we'll be able to be talking on behalf of Flowtech and on behalf of the group with our strategic suppliers, who as a distributor to market and as a service provider to market, are intrinsic to our growth strategy moving forward. It's also important that we understand any supply chain disruption and we need to make sure that we're alert always very quickly to any changes that are happening so that we can pivot to maintain great service levels for our customers. And so inviting a new leadership team and organization has been a key part over the last 6 months. We have the new leadership team in place in October. We went through a complete reorganization and a restructuring in the second half of the year and to make sure that we have the right people, in the right roles, with the right capabilities. And some great examples of individuals that have been with the business for many years, who perhaps have not been in the right role, but through the right conversations, and now in the role that we believe is best for them, and they believe it's best for them, delivering some fantastic results as well as powering up with some external hires that bring greater capability into the company. And certainly, many people that have operated in larger organizations that we've been able to attract through the story here and through the opportunity story, which we're really proud of. I guess the result of that, as Russ mentioned, is a reduction in head count by around about 7.5% whilst we've been investing in new capabilities as well. And ultimately, that's helping us to manage our cost base effectively whilst getting into the right shape. And then finally, in terms of simplicity, doing a lot of work to understand what we have within the business in terms of our value proposition, what we do offer our customers today in the various different businesses that we have, and how do we bring all that together under one single value proposition so we can bring the full strength of our offering to our customers. And that's something now that we're very pleased to say, whilst we've not done the rebrand yet, we've now got our teams organized in a way that means that we're going to market, talking about a singular value proposition. We've removed the silos that stop collaboration across the group. And we're seeing some really fantastic cross-selling and upselling opportunities being shared, not just within the geography, but equally with customers that are in Ireland, that ultimately have opportunities within GB and vice versa. And so we're quite pleased with the progress we're making here on simplifying the business. Still lots to do. If I move on to customer-centric. I guess 3 areas I'm just going to call out. Selling effectiveness, so quite siloed sales structures around the different businesses that we've been operating. We haven't really had what I would class as being best-in-class sales processes in place, things like having a group-wide sales pipeline, for example, the right performance management, the right accountability, being clear in the way that we're driving our selling effectiveness. We've restructured our sales organization at the back end of last year. That has meant that we've gone through quite a rigorous change and a rigorous assessment of our sales organization. We've brought in new leadership. We've started to embed CRM so that we're now able to track activity of our sales teams, and we're putting some of the basics in place so that we've got much better visibility of where the new business is coming from in terms of sales pipeline, how we're driving our quote conversion and also visibility of our order book moving forward. We believe that we've materially improved the quality of our sales effort. We still have some gaps because of the changes that we've made, and we're hiring up new capabilities to support that goal. But we are seeing an increase in customer interactions and activity and we're seeing a much more positive view of the pipeline. And a lot of that, by the way, is existing customers who are expressing that they have opportunity to do much more with us. And that's great because that gives us a lot of headroom as we think about growth for the future as well as starting to fire up the engines to attract more new customers to come to us as well. Our marketing effectiveness has been more limited around product distribution. We haven't really powered up marketing efforts around our engineering solutions businesses. Certainly within our Irish business and Benelux business, there's a lot more we can be doing. So we've effectively looked to be building out a group-wide marketing muscle and capability, bringing in-house and building digital and insight capability, which we're really proud of, and we have a new digital marketing leader who's got some extensive experience in building out the right platform for the future. And importantly, really doubling down in the last number of months on building a new catalog, which is really important to the Flowtech business. It's very important to our distributor partners who have relied on the Flowtech catalog and service for over 40 years. We didn't do a particularly good job with our previous catalog. Our customers have given us that feedback. And we're really excited now to have over 40,000 catalogs on order from over 100 of our distributor partners, which I think is a testament to the changes that we're making, but also the confidence in the brand and in what we stand for, and we're really excited to be launching that in later April. But also, we've done a lot of work to assess where we want to get to with our digital strategy. We've now put that in place very rigorously. Now we've assessed our journey map there, and we're looking at a digital replatforming project, which is in flight with Phase 1 launch of that in Q3 2024. And our focus initially is on creating a very strong white label websites opportunity for our distributor partners whilst building out the capability to replatform our existing web environment. And then on customer care, something that I'm personally very, very passionate about, which is really how we're measuring and understanding customer satisfaction, how are we ensuring that we're managing end-to-end sales and aftersales support, and in particular, dealing with customer complaints and putting the right processes in around that. We've powered up with leadership within our customer services environment and we're making some very good progress. Customer complaints are down at the end of the year by over 50%, and that's continued through January, February and through this month. And we're really proud of that because that frees up our teams also to be much more proactive in the way that we want to operate with our customers. And we've also now started work with the Institute of Customer Service to start looking at customer satisfaction metrics. We've done some surveys before Christmas. And at the end of the year, our satisfaction index was at 73.1, which is actually quite pleasing given where we're coming from, but we still got a long way to go, but we do have a benchmark now, which is part of the story here. So vastly better performance measurement and accountability, and very much listening and understanding our customer feedback so we can feed that directly into our strategy and to the work we're doing. And then on scalability, this is about doing the basics brilliantly. In industrial distribution and services, it's all about doing the basics brilliantly. We operate with over 2,900 suppliers, we're carrying over 30 million of inventory, and we're carrying over 70,000 lines of stock. And we need to make sure that those are accessible to our customers. And we do talk about very clearly, next-day delivery up to 10:00 at night, and certainly, if we look at our U.K. product distribution business. And so that's something that our customers wholly rely on. Our stock availability had -- have we had let slip. We were seeing that the availability of our fast-moving products, top 15,000 products are making up 60% of revenue within our product distribution business had slipped and have dropped down in July to around 88%. That means that 12% at the time, we're not getting it right or the product is not available, which isn't good enough. We did make a decision to invest in over 1 million of fast-moving stock to recover the service. And we're very pleased that from December, our availability on our fast-moving products is back up at 97%, which is best in class and where we would expect it to be, and it stayed very, very rigorously there through the first quarter of this year. I'm also pleased to say that whilst we have invested in one point in over 1 million of inventory in order to recover that service, and what we've also done is done a lot of work to also manage our working capital down, and in the first quarter of this year, we're seeing some very good progress in reduction in working capital. Underpinning that as well is operational effectiveness, making sure, particularly in our GB Fulfillment Center that we're driving greater efficiency, that we're making sure increasing our pick accuracy and making sure that the goods that do go to our customers are going out on time in full, but ultimately, that the quality is there. We've stepped up leadership in this area. We've done a lot of restructuring in the way that we operate our material flow and processes within our U.K. Fulfillment Center. And I'm really excited to report that we've seen a 22% capacity increase per operator. We've seen a 30% reduction in touch points. Why is that important? Well, the less that we touch the product, the more chance of it not going wrong when it -- before it goes out to the customer. And we've also been able to drive a 35% reduction in head count. And we've got further targeted efficiency improvements as we roll out our throughput project to invest in automation in our distribution center, which will increase capacity by 2x within our fulfillment center and drive some cost benefits as we come through 2024. And that head count reduction is almost exclusively a reduction in agency labor. And we're really proud that we've got fantastic, permanent full-time employees in our performance center, very passionate about the improvements we're trying to drive and the continuous improvement culture that we're building. And that's important, that we're less reliant on agency, and we want to make sure that our people are passionate every day to make sure that we're serving our customers. Then on visibility and measurement. We have had some lack -- some of our visibility measurement lacking in some core areas. And so I'm a big believer, if you can measure it, you can manage it. And so we have put a lot of time and effort in putting some data integration in place across the different parts of our business so that we now do have single view of inventory across the group. So all parts of our business can see all of our inventory that's materially important. We also have a group-wide view of the customer order book so we can understand the flow of orders coming through, and we can also expedite that more readily within the time scales. And we've also made sure that we're starting to roll out our CRM tools that we have more readily across the business so we can track activity more readily in the organization. But this is all about getting back to the basics, which is for us, getting the service levels back to what our customers will expect. And that's certainly bringing back trust and confidence in product distribution, and we're seeing that feedback very readily in the business. So that's just an update on the performance improvement plan, progress, lots to do. In terms of strategy, our journey to the future. We laid out very, very clearly that we believe that this is a very big and fragmented market across Europe, a 30 billion market in the world of motion, in the world of power motion and control, which means that we have a very low market share, and we see a huge opportunity for a higher growth over time as we fix these basics and we get ourselves on track. Certainly, we believe that there's an opportunity to extract higher quality earnings and we believe that we can move up this business to become best-in-class in our field and then ultimately, across the industry. We're very proud to work across virtually all vertical industry sectors. And we're working with customers that are designing, building, maintaining and improving industrial plant equipment and operations. And so I would say today, whether direct or through our partnership programs, 2/3 of our business is in maintenance, repair and operations, which typically is less cyclical, and 1/3 of our business is servicing OEMs. And ultimately, I think one of the questions was, are we seeing with some of those bigger down-trading OEMs that Russ mentioned, lower demand or are we seeing that they're buying from somewhere else. I'd say that almost exclusively, it's lower demand in certain segments. We are though seeing more positively in some instances, some recovery. And in fact, one customer recently has given us an indication that they think that they're going to be firing up the engines earlier than they thought, and we're very encouraged by that. And that's not to say that we think there's going to be an immediate market recovery. And I do think that the markets are going to remain -- the industrial markets are going to remain suppressed through certainly the first half of this year into the second half of the year. But we do see some green shoots, but this is a volatile world, and so we have to make our own success, which we will continue to do. In terms of our strategy for growth. Our business is all about providing power motion and control solutions, keeping industry moving and creating a more sustainable world. And we're doing that by focusing on 3 fundamental pillars. The first is customer first. It is driving a diverse customer base, which I'm going to come on to. And it's about driving an omnichannel approach. So harmonizing the power of digital and data with the human touch, which this business has a really great capability of doing that, both in terms of the supply of product and engineering capability. And by doing that effectively in what is a very traditional industry space, we believe that over time, we can be outperforming the market by 2x. The power of one is about bringing together differentiated value proposition, but ultimately, it's about operating as One Flowtech across our organization as one team. There are efficiency gains to drive through this as well as driving the top line and gross margin, and we believe that this is going to be a key enabler towards mid-teens EBITDA margins. Albeit, we also know that areas such as own brand is critical to that. A world of motion then is the recognition that we're already dominating a very, very strong position in the world of fluid power, which is primarily the transfer of energy through air, which is pneumatics and fluid, which is hydraulics. And there isn't an industrial application on the planet that doesn't have some form of pneumatics and hydraulics. But attached to those products is also filtration, is also motors and pumps and gearboxes and controls. And in an increasingly digitized world, there is also a push towards sensor technology and more electrification of industry around sustainability. And so it's important that we put one eye towards our growth opportunity, particularly within customers where we're already supplying a broad range of technical products and engineering services, and we can expand that over time that takes us into that 30 billion market opportunity, all of which we're very much embedding over with the digital and data capability that we have as an organization. So I wanted to just put in focus the power of one, just to bring to life one of those strategic pillars, and then I'll get on to strategy, execution and the growth engines. The power of one for me is how we're going to unlock the true unique differentiation of this organization. And something that right from the start I certainly saw this as being a real reason why I wanted to be part of this organization, and the reason being is that customers are ultimately increasingly seeking a specialist solutions partner. There's less engineers out there. There's less skilled people in industry. And so they're leaning heavily on specialists to help them and to support them. We're also seeing supply chains starting to come together more readily. And so we're getting involved much more with customers who are looking for us to subassemble and manufacture products into systems as part of their wider assembly lines that they're driving. And so they're looking for partners that can support the design, manufacture, assemble and maintain their systems but they're also wanting to access the brands and products needed to manufacture, assemble and maintain their systems. And I believe that the secret sauce for this company is having the products so we can supply a kit and modify a very vast range of products across what we believe to be some of the biggest brands in the industry. But equally, we design, we manufacture and assemble and maintain systems through our solutions and engineering capabilities, which allows us to scale the value curve and it allows us to create more sticky relationships with our customers. The primary channel for this business is very much through our distributor network and our partner network and our service provider network, it's something we've been doing brilliantly for over 40 years. This gives us an enormous reach to market. And by working with our distributor partners and our service providers, and having capabilities such as white label websites, white label catalogs, and even putting our distributor labels on the boxes that are going to their customers, this is a unique opportunity for us to partner and work very much together to support them in supporting their end-user customers. We also work directly with original equipment manufacturers across the group. Some of the times, that's through the distributors and partner network, but also that might be direct with original equipment manufacturers. And that increasingly takes us into the design, manufacture and assembly and maintenance of systems. And then where it makes sense to do so, we will work directly with end users, but we won't do that in the sense of creating channel conflict with our distributors and service providers. And actually, by bringing ourselves together in a simpler operating model, by having one sales organization across the organization, this does also allow us to control much more of our channel strategy to market, and as we digitize, we can manage that much more effectively through the channel going forward. Over the course of the next month to 2 months, we're bringing together over 17 different brands that we operate across in GB, the Island of Ireland and the Benelux. And that's going to come together all under One Flowtech: A world of motion. And so we will be moving away from these brands to one clear brand, Flowtech: A world of motion. The groundwork has been done, and we're ready for that change. And that doesn't mean that we're going to be linking all of our systems together under one, but we are building data integration layers, and we are building tools to allow ourselves to operate across the group more effectively as One Flowtech, whilst we work through our decisions as it relates to harmonizing our fundamental enterprise systems over time. And with that, we're also launching to market a very simple value proposition that brings together the unrivaled choice of high-performance brands and products with a huge expertise that we have across power motion and control with our people and our engineering capability, the deep sector knowledge and specialism that we have across the organization, bringing together the design and engineering expertise and the in-house capabilities that we have through our engineering solution centers, our Flowtech Engineering Solutions Centers, as that will be branded. And our aftermarket services and support packages to help our customers in the maintenance, repair and operations world. And so this, we believe, is going to be a really key turning point as we start to roll this out into markets over the coming months. What this does mean is that it gives us an opportunity to cross-sell and upsell more of our products and more of our services to more of our customers, which gives us an opportunity for further growth. And as I called out in September, we've defined very clearly 6 margin engines for the organization, which we are really wrapping around in terms of our strategy execution. So I'm not going to go through every single line on this slide but it's really just to demonstrate that we've got now some very specific components to each of our growth engines. And this lays out very clearly our 3-year plan in order to get us to the mid-teens operating profit numbers that we've been talking about. So customer growth is very, very much around the top line growth and it's around driving our channel strategy digitally and also through the sales organizations and the market organizations that we have. Commercial excellence, I'd say, has been very much one of the engines that we've managed to get fired up in the second half of the year. I'd say more on the selling well and driving greater commercial discipline, which is improving our gross margins. We're also building a capability to be able to procure more effectively across the group, harmonizing all of our buying so that it's not being done in a fragmented way, it's being done much more through procurement experts within the company, putting a lot of work into starting to improve receivables and debtor days where that can certainly generate improvement in cash flow. And optimize inventory availability and stock turns is an absolute key component of that. Making some progress, a lot still to do. Products and service expansion comes a little bit later. We're doing range filling at the moment with our existing lines and our existing suppliers, but this is about over time, new product launches and brand expansion and it's about introducing new services, and in the future, increasing geographical reach. Our own brand is critical to us. It's currently about 15% of our revenue today. And we've been operating the 12 different brands. We're bringing all of that under one brand over the coming months. And so there's going to be a lot more -- there's going to be a lot more around that into the marketplace. And we see this as being a critical pillar of our growth strategy as we go forward, as we introduce new ranges, and we're working very closely with our strategic supply partners, also as we build out our own brand ranges. And by the way, own brand is something that we've been working as a business around for over 40 years. So we have a lot of expertise in this area and we believe there's an opportunity to take that to the next level. Operating for less is about distribution efficiency and productivity, which we've been making good progress with some capital investment coming through this year in order to put some light touch automation to drive greater productivity. We're also starting to look to see how we optimize throughput and manufacturing capability within our engineering centers, which is a key focus for this year and into next. And we're going to be putting a lot more emphasis around improving our sustainability and environmental impact credentials around the wider ESG agenda. And then finally, good progress being made, but lots to do in terms of people, talents and capability. Employee engagement is a critical measure, improving diversity and building an inclusive culture, which I'm very proud that we're making good progress around. And ultimately, always at the top of this, the health and safety and well-being of our people. We're going to be launching some clear key performance indicators, of which we're going to be measuring ourselves around and we'll be reporting on. The financial indicators are pretty straightforward. Revenue, adjusted operating profit margin, ROCE, cash flow conversion, net debt. And then nonfinancial, now we have a benchmark around customer satisfaction, that's going to be very important to our business. Obviously, health and safety, our employee engagement of which we're building a benchmark for that shortly. The carbon emissions, and we're very pleased to have reduced our like-for-like carbon emissions by over 23% in the last 12 months, but lots of work to do there. And we're going to be looking to track our percentage of women in leadership as a key metric as we go forward. And all of that has been laid out very clearly in the strategy execution plan, which we believe that is a sensible plan where we're firing up the growth engines that I've just gone through, the 6 growth engines, in a sensible way over the coming 3 years. Last year, '23 was about the performance improvement plan, it was about embedding the new leadership team and the new operating model, getting ready for the consolidation to One Flowtech, it was launching the strategy, and it was getting the basics fixed. And so we've initiated all of the growth engines, I arguably, with an emphasis on operating for less at the heart of that, particularly with the restructuring. This year, it's about One Flowtech. It's about driving selling effectiveness and commercial effectiveness across the business. It's about investing in the digital replatforming, which is an important part of our capital investment program this year. Building some data integration layers so that we're effectively making sure that we're getting more traction across the group in more areas and the investment we're making within the fulfillment center with some automation. Again, another part of the CapEx investment in order to drive greater efficiency on around about an 18-month payback on that investment. And so we're developing more of the growth engines and we're advancing our commercial excellence engine this year around improvements -- continuing improvements to gross margin and working capital gains, but also continuing to focus on operating for less whilst we get the growth engines more readily fired up. Equally, the 2025 is about the digital ramp-up, that's about, again, selling effectiveness and marketing effectiveness. It's the own brand power up and the offer expansion work that we've talked about into the world of motion, and it's then moving towards systems upgrades and starting to make sure that we synthesize our enterprise systems, and you can start seeing that we're advancing and embedding our growth engines with the view to 2026, where we're into steady state, continuing to look at improvement offer expansion, further systems upgrades and ultimately, through 2025 and 2026, start to build out opportunities for inorganic expansion, knowing that we've got our growth engines embedded. And all of that, we believe, can deliver improved margin for this group. We don't think that the market is going to be particularly helpful through the remainder of 2024 but we think things will improve into 2025 and beyond. We've got plenty of headroom through all those opportunities that I've just narrated around self-help, and we believe that, that will certainly take us through to 2025. The CapEx projects that I've just mentioned around improving throughput and efficiency and service through the digital replatforming and building greater data and digital capability and looking at some of our systems upgrades, we believe will start to drive greater gains as we go forward into '25 and '26. And all of that, we believe, combined, takes us from our current EBIT margin up to what we believe to be accelerated growth in earnings as we get through 2025 and through to 2026. And so today, we're very much passionate about this being our execution plan, and the team are very, very focused and are incentivized around executing against this plan. A word to ESG. We've been focusing very much on setting in place our ESG focus and embedding that across the business. I'd say that we're still quite embryonic. We have seen the reduction in carbon I mentioned. We have been increasing quite significantly, waste being recycled, both hazardous and nonhazardous. And we've also been doing some work to make sure that our fleet is now over 50% hybrid and electric. And so some good results there. From the people side, we've had 0 RIDDORs. And on near miss reporting on health and safety incidents has increased by over 100%, something we're really proud of. That's a big cultural shift for the company. We've now got over 50% of the top tier leadership are women. And I'm really proud that we're starting to be trailblazers in this industry to make sure that, that whole piece around diversity and inclusion is being driven through very actively. And we're increasing the number of training activities attended by our people, and we will continue to invest in our people for the future. And on governance, we're reviewing all of our group policies as we move towards One Flowtech, and we're looking at our governance and our processes across the business, and we'll be launching new policies across the group in Q2 2024. And at the heart of all of this, just in summary of strategy, is culture. Some say that culture eats strategy for breakfast. I do believe that it does. These are just some examples here, really, on our determination to make sure that we're putting a purpose-led culture and One Flowtech and our people at the heart of what we do. And over on the right-hand side, we brought our top 50 leaders together for the first time a few weeks ago to really launch our One Flowtech purpose, our vision and certainly, the values that we, as leaders, are committing to work towards, that really set this business apart in terms of driving a progressive inclusive culture where everybody is being aligned around common incentive plans and common objectives, all working together for the good of company. And that's very much aligned on the incentive plans for that, for every single employee in the company, around EBITDA and debt as a key component across group incentive plans. And then just a bit of fun, really, on the left-hand side, bringing our customer confidences into the business and having actual customers with us in our meetings, that we can take into our meetings, so we've always got our customers at the heart of what we do. And we got some of our employees to draw their customers and their customers' needs, and we have them made up to 26 life-sized customer [ consensus ] is, I'm having fun in the business, but the serious some of the current here is, if we're not delighting our customers every single day, and then we're not going to succeed as an organization. So that just brings me now to the current trading and outlook. And I think it's a fairly simple message. Current trading is in line with expectations. We feel very confident that despite industrial markets remaining pretty suppressed and those headwinds will continue, this is about making our own success. We've got a very, very clear focus on the performance improvement plan initiatives that are embedded now in what we're doing. We expect continued improvement in gross margins and further efficiencies to be delivered, and we're certainly seeing that in the first quarter of this year. We've got a positive recovery happening within product distribution in GB, which has been a key focus. And the benefits there also of the improved service levels that we've spoken about. But also the launch of our new catalog and the enhancements to the websites that are coming on stream are all indicators to what's getting ourselves back on track, but actually beyond on track. Those self-help opportunities that we've been talking about, the rebranding to One Flowtech in Q2 2024, we believe unlocks further synergies and also it starts to accelerate those cross-selling and upselling opportunities for our customers. And we believe that many of the foundations now to recover performance and scale have been put in place. There are some bigger CapEx projects that I've just called out, but we're very confident that 2024 will be an important turning point for Flowtech for the future. So in summary, I just asked all of our investors and for those of you attending today that aren't in the investment community, do you think Flowtech can think differently? We very, very much, our business, which is on track, to be moving to the next level. And we're putting ourselves around this world of motion, being very customer-centric for future. And I guess that leaves us now to questions, which we're very, very happy to take in the time that we have remaining.

Perfect. Mike and Russell, if I may, just jump back in here. Thank you very much, indeed, for your presentation this morning. [Operator Instructions] I would like to remind you that a recording of this presentation along with the copy of the slides and the published Q&A can be accessed via your invested dashboard. And Russell, Mike, as you can see there in the Q&A tab, we have received a number of questions throughout your presentation this morning. A thank you to all of those on the call for taking the time to submit their questions. But guys, at this point, if I may just hand back to you to read out those questions and give your responses where it's appropriate to do so. And then I'll pick up from you at the end.

Great. So [ Ian ], I think we covered off the strategic supplier partnership piece. Then I think we talked about -- I don't know, we're talking about those bigger OEMs, and we've covered that off as well. Ben, you've asked about, how we're leveraging customer feedback to refine your operations and customer service strategies, can you provide examples? Well, as I would say, certainly, from the second half of the year, we've been working with the Institute of Customer Service. We've done a series of customer surveys across the U.K. market, across the Island of Ireland and across Benelux. And as I said, we've now got that customer service index benchmark. But more importantly, we've got pages and pages of customer feedback. We know very, very clearly what our customer is like. We know what they don't like. When we talk about our own goals, I think we know very, very clearly where we've perhaps scored them. And we've been leading all of that into that performance improvement plan to make the improvements there. And so we'll continue to share that customer feedback and that's very much at the heart of the business. Just in relation to -- I think this is a great question, Gary. How is the execution of the WOLF strategic plan progressing? And what are the key milestones achieved to date? And how are these milestones directly contributing to expected EBITDA growth? So for those of you who don't know, just a very quick story. Internally within the business, we came up with a really simple formula, which was using the Flow from Flowtech, the F being fabulous performance or financial performance; and that being equal to the L being love our customers; the O being operational excellence; and the W being creating a winning team. And Russ here had a wonderful epiphany actually one day and said, if you reverse Flow, you get the WOLF, and we sat there for minutes and we smiled. And I googled the wolf, and I realized that it is the apex predator in its territory by which it lives. It is one of the most resilient animals on the planet, highly intelligent, highly resilient. It hunts in packs, and it also looks after and protects the pack, and supports the young and looks after the elders. And so we decided that as part of our strategic -- internal strategic execution plan, we would introduce the WOLF. And we're also using the WOLF very much to epitomize the culture that we want within the organization. And so thank you to Russ, really, on my behalf for showing the WOLF and for turning Flow into the WOLF. I've gone through our margin growth engines and I've gone through our strategic plan. I think from that, you should see very much how a winning team, which is assembled, operational excellence, loving our customers, ultimately, the work we're doing there through the performance improvement plan and the strategy, is delivering improved financial performance. And a good example of that will be the gross margin improvements that we're seeing.

And whilst we had a little bit fun with the WOLF internally, it doesn't have to make people remember what's at the heart of the strategy, whether or not it's WOLF or Flow. And it is embedded into everyday life there, there's a little bit of [ Derren Brown ] imagery going on around the buildings, to be honest. So we're reminding ourselves constantly that the characteristics of the WOLF aren't actually bad characteristics to have at all, it just goes to prove that old-fashioned accountants do occasionally have creative moments.

Yes, Russ. Brilliant. Look, on people matters and also linking that to inflation, where there's a good two or three questions around inflation. The first question on people. How do you retain your skilled resource? For me, I believe very, very strongly, whilst we have to look at some of the basics in terms of making sure that we're market competitive in terms of our pay. And ultimately, that we harness and we build the right development pathways for our people. Ultimately, it starts with culture. More and more, and we saw this through COVID, people more and more are making choices about the type of organization that they want to work for, and that starts with association with the purpose of that organization. I'm a big believer in the Simon Sinek's starts with why. You have to understand why you exist as a company. We exist to help the world to move. We help it to move more safely, more sustainably and more efficiently. I think that's a great reason to get out of bed every day. And we're very much bringing that purpose and that vision to our people across the organization. And then it's about creating immersive culture. It's creating a safe environment for our people, a big believer in servant leadership. So less hierarchical in terms of leadership and more of the fact that everybody is in it together, aligning our incentive plans and objectives so that we're creating an environment where our people can thrive. And underpinning all of that, making sure that we recognize where we've got some pinch points. It's not easy. There is a shortage of skilled engineers in Europe, but I won't say the U.K., in Europe. It's a real problem for the industry and it's a problem for us. And so we have to make sure that we're working really hard, not only to bring the best into the industry, but also to make sure that we retain them. And that's in part about giving them opportunities to thrive, but also creating environments for them to be able to enjoy the work that they do with their colleagues. And lots of work to do on cultural change. Russ, do you want to pick up on how much is wage inflation last year and also, how are we coping with the general inflation?

I mean, I'd just stress what Mike just said there. I mean, it's a piece around communication, it's a two-way communication. It's not just the leader, the leaders communicating, which is important, but it's listening to the communication sort of coming up the organization chart as well. And I think we've been pretty good at that recently. So the wage inflation piece. We obviously have to respect that there are different pressures within different geographies and sub-geographies even. But the simple answer to the question raised is, on average, about 6%, we've equally recognized that the cost of the new leadership team is not that significantly incremental to the cost of the old leadership team, but it is incremental. But should we just say that we're extremely pleased with the payback that we're getting for that investment. So hopeful that deals with the wage inflation piece. But to the separate question around general inflation, Well, yes, it's been tough, hasn't it? What I would say there is that, we're having -- we're having, past tense, present tense, future tense, a long hard look at all areas of our cost base. I think I briefly alluded to that, the 2/3 of our cost is payroll-related. So therefore, 1/3, about 10 million to 12 million is not payroll related. So we've got new people, professional procurement people looking at different categories of costs, whether or not it's carriage or the way we operate a company car scheme or utilities or travel costs. So by looking after our pennies in all of those different baskets, we're pretty confident that we'll do whatever we possibly can to look after the pound. That's the best answer I can give to that question.

And just a number of questions, Russ, around capital intensity. And just how do we expect that to evolve over the next 3 years in terms of CapEx plans, the projects we're running. And a specific question around how do we manage the investment costs around our IT investment on ERP. And do you want to just talk about that in terms of capital intensity?

I can, yes, there's also a question about the dividend. I mean, look, you can't win with a dividend, can you? I mean, some people said, " Why on earth do you bother about it?" Some people say, "Why on earth aren't you increasing it?" So I'm sorry, but we think the approach to dividends is proportionate, 2.0p becoming 2.1p, 2.2p. We reset it after the pandemic, it have got up to over 6p per share, which would have liked the idea of GBP 4 million going out of our cash flow for dividend, but we think GBP 1.3 million is proportionate. And easily manageable within the constraints of our debt package. In terms of the CapEx, I think I already alluded to the fact that we've got plans to spend GBP 9 million over a 2-year period. How do we do that? Well, the market expectation is for us to deliver aggregate GBP 25 million of EBITDA, and yes, we have to pay interest and tax and lease payments and dividends, but there's -- provided that we're alert to that working capital management, and by the way, we are. It's definitely within my DNA. I come from a restructuring and turnaround background, personally. And some of my new colleagues, certainly it's within their DNA. So we're backing ourselves to do that. So we, as I said briefly before, we are planning to reduce our bank debt to circa GBP 7 million by the end of 2025, well within our Barclays banking facilities, obviously, and the GBP 9 million CapEx gives us what we want to spend. We don't feel constrained, and we think we've got some good projects with sensible returns. And in the case of ERP systems, well, yes, we need to do that to safeguard the future of the business as well as seeing some short-term benefits.

Yes. Look, I mean there's always going to be a concern on that one in terms of business stability and maintaining great customer service, but also in terms of cost and investment. We're not a significantly large company. We are building data integration layers so that we can really start to derisk dependency on some of the ERP platforms. So at the right time, in the right order and phasing that in a way that doesn't take the business off track in terms of its customer focus, we will make some sensible changes in the way that we want to upgrade our systems, which we have to do to, A, future-proof the business; and B, to scale for the future. It's also important, certainly, if we look at inorganic opportunities in the future, that we're able to integrate businesses more seamlessly because we don't want to end up back where we started, we used to have lots of companies in and actually, we can't extract the synergy opportunities from them. And so rest assured, I think we have the right people on the pitch. And we'll also bring the right people onto the pitch to make sure that we don't make the wrong choices there. And we'll obviously keep you updated as we go through that. Now look, I think that summarizes pretty much all the questions actually. So we're over time. So maybe I'll just pass back to our wonderful host just to close it out.

Perfect. And Mike, Russell, thank you very much indeed for addressing all of those questions that came in from investors. And of course, we will be asking you back all of the questions that were submitted today just for you to review and to then add any additional responses, of course, where it's appropriate to do so. And we'll publish those responses out on the platform. But Mike, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Yes. So again, I'd just like to extend a huge thank you to those of you that have taken the time to listen through. And also, if you have available input, we really welcome it and we learn all the time as a team, and so that's important. After almost 12 months in this business, I'm more confident now than ever, I have the opportunity for this business to accelerate and to create real value. And certainly, when I look at that through the lens of that list of margin growth opportunities, we really are touching the surface over what is an enormous opportunity for the future. I'm really delighted with the traction we're gaining within the near-term performance improvement plan and the self-help that we're unlocking this year. And I'm very, very pleased with the way in which our leaders and our people are really rallying together now around One Flowtech. And I think that this is going to be a really critical turning point for this business through 2024 and to set us up for a very, very bright future, one team, stronger together, brighter future. Thank you.

Perfect. Mike, that's great. And thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of management team of Flowtech Fluidpower plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.

Thank you.