Flowtech Fluidpower plc (FLO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Flowtech Fluidpower plc Annual General Meeting. Throughout this recorded meeting, attendees online will be in listen-only mode. Questions are encouraged. [Operator Instructions] I would now like to hand over to the Chairman of today's meeting, Roger McDowell. Good morning.

Good morning. Thank you, Mark. Ladies and gentlemen, welcome to our 2024 AGM. It's now just gone 10:00 am actually. We do have a quorum of members present, so I can declare the meeting open. I'm Roger McDowell, Non-Executive Chair. Under Article 45.1 of the company's Articles of Association, the directors of the company have appointed me to chair this Annual General Meeting. Can I introduce you to my fellow directors? We have Ailsa Webb; Non-Executive Director, Jamie Brooke, Non-Executive Director; Stuart Watson, Non-Executive Director, all of whom are attending via the IMC platform. And finally, we've got Mike England, Russell Cash and myself sitting here in the meeting room. Like last year, we understand that a number of the shareholders who are unable to attend physically would like to attend the AGM. So as such, we're pleased to announce that we are facilitating this online AGM experience, which you're all now enjoying. And then we would also like to invite questions. And if you have any questions that are specific to the resolutions that we're about to talk through, then I'm very happy to take them now. In addition, we've gotten Lorraine Lakey from Link Group present. So I'll just pause for a second to see whether there are any specific questions that relate the AGM resolutions. And I'm going to remind you that, before you ask a question, it would be really helpful if you would give your name, state whether you are a shareholder or a proxy or a corporate representative. If you are a proxy or corporate representative, then, again, please state your name. But nothing has popped through. I'll make an exception if somebody does think of something subsequent to the formal business. Then we can take those questions there. So moving on to the formal business of the AGM, may I remind you, when it comes to voting on resolutions, shareholders here in person, proxies here in person, who have a duly-appointed member, are entitled to vote and those who are here as corporate representatives are all able to vote on a show of hands on a poll. However, those attending through the IMC platform are not able to vote and should have appointed a proxy to vote on their behalf, such proxy being present at the meeting. This year, you were asked to approve 12 resolutions. Resolutions 1 to Resolution 11 will be proposed as ordinary resolutions. This means that, for each of those resolutions to be passed, more than 50% of the votes cast must be in favor. Resolution 12 is proposed as a special resolution. This means that, for this resolution to be passed, at least 75% of the votes cast must be in favor. May I also remind you that, while you are free to abstain from voting, an extension is not a vote in law and will not be counted in the calculation of votes for and against any particular resolution. So resolution #1 is to authorize the company's annual report accounts, strategic report and directors and auditors' report for the year ending 31st December 2023. And now let's put this resolution to the meeting. Please raise your hands to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders I advise that proxies were received in respect to 38,886,836 shares comprising 37,575,318 shares in favor of the resolution, 1,311,518 shares against the resolution and no shares in respect of which folks will be held. On the basis of the show of hands and proxy voting received, I declare the resolution carried. Resolution #2, second resolution, approves the final dividend for the year ended 31st December 2023 at 2.2p per ordinary share, usually a popular resolution, this one. Such dividend to be paid on 19th of July 2024 to shareholders whose name appear on the register at close of business on the 21st of June 2024 with the next dividend date of the 20th of June 2024. Please raise your hand to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares comprising 38,886,836 shares in favor of the resolution, no shares against the resolution and no shares in respect of which votes were withheld. On the basis of the show of hands and the proxy voting received, I declare the resolution carried. Moving on to Resolution 3, the third resolution approves the appointment of Mike England as the Director of the company. The company has made the decision to, in accordance with the principles of the QCA code, for corporate governance, request that, at every AGM, all directors of the company must retire and stand forr re-election, unless already doing so in accordance with the Articles of Association of the company. And therefore, myself, Stuart, Ailsa, Jamie and Russell will also seek reelection at this AGM. The brief biographical details of Mike are set out in Pages 52 to 53 of the annual report. I'll now put this resolution to the meeting. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares, comprising 38,869,256 shares in favor of the resolution, 17,580 against the resolution and no shares in respect of which votes were withheld. On the basis of the show of hands vote and proxy voting received, I declare the resolution carried. Moving on to Resolution 4, the fourth resolution approves the reappointment of Stuart Watson as a Director of the company in accordance with the principles of the QCA Corporate Governance Code. Brief biographical details for Stuart are set out in Pages 52 to 53 of the annual report. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise the proxies received in respect of 38,886,836 shares, comprising 38,885,790 shares in favor of the resolution, 1,046 shares against the resolution, no shares in respect of which votes were withheld, on the basis of the show of hands and the proxy voting received, I declare the resolution carried. We're approaching the halfway point now. Resolution 5, the fifth resolution, approves the reappointment of Russell Cash as a Director of the company in accordance with the principles of the QCA Corporate Governance Code. Brief biographical details for Russell are set out on Pages 52 to 53 of the Annual Report 2023. I now have put this resolution to the meeting. Please read your hands to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to 38,886,836 shares, comprising 38,885,790 shares in favor of the resolution, 1,046 shares against the resolution and no shares in respect of which votes [Technical Difficulty]. On the basis of a show of hands and the proxy vote [Technical Difficulty] carried. Resolution #6, the 6th resolution approves the reappointment of Ailsa Webb as a director of the company in accordance with the principles of the QCA Corporate Governance Code. Brief biographical details for Ailsa are set out on Pages 52 to 53 of the Annual Report 2023. I now put this resolution to the meeting. Please raise your hands to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares, comprising 38,869,256 shares in favor of the resolution, 17,580 shares against the resolution and no shares in respect to which votes were withheld. On the base of the show of hands and the proxy voting received, I declare the resolution carried. Moving on to Resolution 7, the seventh resolution approves the reappointment of Jamie Brooke as a director of the company in accordance with the principles of the QCA Corporate Governance Code. Brief biographical details for Jamie are set out on Pages 52 to 53 of the Annual Report 2023. I'll now put this resolution to the meeting. Please raise your hands to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares, comprising 32,633,897 shares in favor of the resolution, 1,496,732 shares against the resolution and 4,756,207 shares in respect to [Technical Difficulty] were withheld. On the basis of the show of hands vote and the proxy voting received, I declare this resolution carried. Moving on to Resolution 8, which confirms my own -- or otherwise, my own reappointment, I'm handing the chair over to Russell Cash, who will take the chair for this resolution.

Yes. Thank you, Roger. The eighth resolution approves the reappointment of Roger McDowell as a director of the company in accordance with the principles of the QCA Corporate Governance Code. Roger's brief biographical details are set out on Pages 52 to 53 of the Annual Report. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to 38,886,836 shares, comprising 37,550,104 [Technical Difficulty] the resolution and the balance of 1,336,732 shares against the resolution and no shares in respect to which votes were withheld. On the basis of the show of hands and the proxy voting received, I declare the resolution carried.

[indiscernible]

I'm obviously now handing the chair back to Roger McDowell.

Thanks, Russ. Moving on to Resolution 9, the ninth resolution, approving the reappointment of Grant Thornton UK LLP as auditors, I now put this resolution to the meeting. Please raise your hands to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares. 38,859,290 shares voted in favor of the resolution, 27,546 shares against the resolution and no shares in respect of which votes were withheld. On the base of the show of hands and proxy voting received, I declare the resolution carried. Moving on to Resolution 10, the 10th resolution authorizes the directors to determine the remuneration of auditors. And now, for the resolution to the meeting, please raise your hands to vote. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares, comprising 38,885,790 shares in favor of the resolution, 1,046 shares against the resolution and no shares in respect to which votes were withheld. On the base of the show of hands and the proxy voting received, I declare the resolution carried. Moving on now to Resolution 11, the 11th resolution authorizes the directors to allot shares at an aggregate nominal amount of 10,248,778. In line with the current institutional shareholder guidelines, this represents approximately 1/3 of the company's current issued share capital, together with an additional 1/3 being 10,248,778 to be used for rights issues only. The authority will expire at the next AGM of the company or the 12th of September 2025, whichever is the earlier -- or sorry, on the 12th of September 2025, whichever is the earlier. I now put this resolution to the meeting. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of 38,886,836 shares, comprising 23,638,332 shares in favor of the resolution, 15,248,504 shares against the resolution and no shares in respect to which votes were withheld. On the basis of the show of hands and the proxy voting received, I declare the resolution carried. Moving on now to the final resolution, Resolution 12, the 12th resolution authorizes the company to make market purchases of its own shares should the directors consider this to be appropriate and in the best interest of shareholders generally. In line with current institutional shareholder guidelines, the maximum number of shares which can be purchased is 6,149,267 ordinary shares, representing approximately 10% of the current issued share capital of the company. The authority will expire at the next AGM of the company or on the 12th of September 2025, whichever is the earlier. I now put this resolution to the meeting. Those in favor? Those against? Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to 38,886,836 shares, comprising 36,963,612 shares in favor of the resolution with 1,923,224 shares against the resolution and no shares in respect of which votes were withheld. On the basis of the show-of-hand vote and the proxy voting received, I declare this resolution carried. So, with the voting over, that completes the formal business of the AGM. So we are now moving to a brief presentation by Mike, our Chief Executive Officer. And subsequently, we're happy to take questions that we consider appropriate and can answer, and we'll do our best. So thank you for your patience during that piece. Over to you, Mike.

Thank you, Roger. Just a few comments from my side. I'm just over 12 months now in-role. And I would say that I'm continuing to be very encouraged, both with the opportunity that we see in front of us here at Flowtech, but also with the progress that we're making, in particular around the performance improvement plans we put in place in Q3 2023. We've been very much focused as a team on getting some of the fundamental basics in place within the business, and some of those very much operational basics, but also some of those are getting us back to a growth focus within the organization and very much looking at the self-help opportunities that are in front of us whilst we build some stronger foundations to scale for the future. So it's been an encouraging first 12 months. We're pleased with the progress we're making, both in terms of setting down very clearly the near-term improvement opportunities, but also setting down our strategic direction for the company, which is laid out very clearly within our Annual Report. If we just move forward, we are currently in the process of resetting Flowtech as a single brand in the marketplace. We have been operating in the market under 17 different brands. We believe that the opportunity to consolidate under one Flowtech, a World of Motion, as laid out in our strategy, is a very powerful proposition. And our ability to be able to supply our customers with everything from a single product all the way up to a complex engineered solution is a differentiated capability that we're looking to unleash. Over the next 3 weeks, we'll have completed the rebranding of our physical assets across the group with the exception of the Netherlands and Belgium, which will be following in the coming months. And I'm very pleased with the progress we're making to align the whole organization behind a very clear, singular value proposition, which we're currently in the process of launching to market. Very clearly, we are the largest provider of fluid power products and services. And we have got 3 clear pillars to our proposition. We're a high-service product provider, and we have a wide range of products. We have a very strong brand line [to us]. And we also have a very, very, very long-standing [own] brand capability, all of which we believe we [could exploit] to market as we move forward. Secondly, we have a capability, through acquisitions across 2014 to 2018, which we're now unleashing, whereby we design, we manufacture, we repair [our overall] assets across all manner of industry segments. Those businesses today have been operating in pretty much isolated fashion, and we're bringing those capabilities to bear now across the markets by which we operate. And then thirdly, we do deliver some very important major engineering projects and on-site solutions. And again, this is about scaling up that capability to make sure that we can continue to deliver real value and innovate for the future for our customers. So we're excited about our new proposition which we're launching to market. We've laid out very clearly [indiscernible] is our go-forward strategy. Within this, I just wanted to touch and direct you towards the margin engines, of which there are 6 engines that we have defined as a leadership team and as a Board. We're laying up very clear engine components, and we're setting down some very clear KPIs, key performance indicators, by which we believe we can take the business forward very positively over the coming 3 to 5 years and beyond. We are very focused on firing up these 6 margin engines, but doing it in a phased and sensible way, recognizing the level of change that's required within this organization and from where it is today to where we want to take the business for the future, which is very much market-leading and in a high-growth mode. So I just wanted to then conclude just to thank you for your continued support. Any business transformation, I would say, is both exciting, but it's also challenging. We've been stripping back the onion pretty hard. And I think we've been making good progress at that. And there were some surprises along the way, but those we're overcoming. But equally, we're seeing some huge opportunities as we start to move forward with our new plan of becoming one Flowtech. And we've got a reenergized leadership team who are very much onboarded now, and we're looking to the future with positivity and optimism. Roger?

Thank you, Mike. So now we're moving on to questions. Have we had any questions sent to us?

Yes. So the technology is such that I can see the questions, but Roger and Mike can't. There were 2 questions that have come in. I think, Mike, you've addressed at least part of them. So as to the question, what are the 2 or 3 changes you and your team have implemented that are most significant? And what is the most significant challenge you have not yet overcome? Where, in broad terms, do you see the business in 3 to 5 years?

Yes. Great questions. So I guess I just touched on it briefly in that very short presentation. But if I was to look at 3 areas, I would say right at the heart of this would be resetting the organization and the operating model for the business so that we can operate very much under one Flowtech, and we can start to release the potential of that value proposition across the geographies that we operate today and to build scale for the future. And so underpinning that, I would say number one is around capable leadership who have experience of scaling a business, but also, within that, a real culture shift in the business, perhaps from where we have been in the past, and bringing both the existing teams on that journey but also welcoming many new people to the organization to bring some fresh ideas and some experiences, which can help us going forward. And secondly, we've been working very hard to fix the operational basics. We did, I believe, allow some fundamental basics to slip. For example, our stock availability on fast-moving products within our product distribution business, as I stated in the Performance Improvement Plan, had dropped down to around 85% availability. We're now back up to 70% -- 97%, and that's very much consistent now and has been for the last 6 months. So we're very encouraged with some of the operational basics that we're putting in place. The third is very much on resetting our growth engines across the group. So this has to do with reengaging our sales organization and our marketing capabilities, pressing some of the known challenges we have within our digital offering that we have to market. And some of that is very much [Technical Difficulty] now implementing. Some of that is work in progress as we re-platform some of our digital estate. So those will be the 3 fundamental areas: leadership in organization, operational basics and getting the growth engine fundamentals fired up. In terms of challenges, I think we've overcome many in the last 12 months. I do think we've got some further consolidation of our technology platforms and some work going on there in order to make sure that we look at that in a careful and sensible way over the coming years as we bring the business together under the One Flowtech brand. And as we look to the future, what do we believe this business will look like in the 3 to 5 years? Very much One Flowtech under one brand a World of Motion. And we want to very much drive that market-leading position. We have a strong reputation in the market. I do think there's been some confusion as to who Flowtech is, and we're resetting that with the external markets as we speak. So that clarity of our proposition and that clarity of who Flowtech are and where we're heading is important. Secondly, it's very much around the performance criteria for the business. We have underperformed over the coming period. Our goal is to move to mid-teens operating profit margins, which we've stated, and that very much is in our sights. And we have some very clear building blocks, as laid out within the annual report, in order to take the business on that journey. Again, I would say that there are some challenges to overcome on that journey, but we're very confident that this business presents a wealth of opportunities under those 6 margin engines in order for us to realize the true potential of this group.

I think that answered the question very comprehensively. Thank you for that, Mike. Moving on, we have a question from James, which is what milestones should we look out for in the next 6 months?

Mike, do you want to talk to that?

Yes, I can. If we're looking at the next 6 months, and again, I'll just say that, in the annual report presentation pack that's available, on Slide 23 in that pack, we now have very clearly the milestones through '23, '24, '25 and '26. But if I look at this year, the milestones are very much around the -- bringing the business together under One Flowtech. By the end of this year, we believe that we will also have replatformed our digital estate in the U.K. and in Ireland with a rollout in the -- early in the new year in Benelux. And the milestones this year is going to be about growth momentum as we're coming out of the second half of the year and certainly as we get into 2025. And we're very confident, as we've stated, in terms of the focus we've had around gross margin improvement and managing our costs effectively. But the main focus for this year and milestones is about gaining momentum as we bring the improvements through that we've been talking about.

Thanks, Mike. Our next question relates to share repurchases. And the question is, under what conditions would the Board consider instituting share repurchases rather than increasing the dividend? I'm afraid I'm going to answer that question with a question. This is something that we would keep under constant review. And it's all of our shareholder value. So in the event that the Board felt we've got the capacity to be able to repurchase shares and the shares were at such a price that it would be overall -- in overall terms, shareholder value-enhancing, we'd consider it. But we wouldn't do that, I think, at the expense of [indiscernible]. Hopefully, that answers your question. Moving on, the next one, this is a question that is -- there is seemingly increasing occurrences of flooding. Solutions depend obviously in appropriate finance being available, but Flowtech has a strategy of promoting products towards flooding solutions. Mike, do we have a strategy of promoting products towards flooding solutions?

I'm not sure I totally understand the question. If we're talking about flooding as in rain and that type of flooding, then I think this business is heavily involved in projects relating to waterways. I wouldn't say specifically flooding solutions, but it's certainly something that I'll go and explore further. But I would say that, in terms of water causeways, when we're looking at engineering projects involving the retention of water structurally, we're very heavily involved in that, actually. Most structures that are holding back and retaining water, so for example sluice gates and civil engineering projects such as even swing bridges or locks, are powered by hydraulic systems. And we're actually very involved as an organization in overhauling and refurbishing what are actually becoming very under-maintained assets around the U.K. And also in the Netherlands, we're talking very openly there in terms of the waterways and water systems there and what that presents us with. So that's probably as much as I can answer. Roger [indiscernible].

Yes, just I think, adding to that, we were very actively involved. And I think you would describe it as a flooding solution. We are very actively involved in providing services and equipment and technology to the Thames Tideway project. So hopefully that answers your question. We now have a question, which is, where is the largest growth opportunity for the business? Mike, do you want to comment on that?

Yes. Again, I think I've covered it. For me, it's recognizing that we've been operating today under many different brands. [Both] brands have been operating independently in many instances within a geographical area. And under our new value proposition, we're defining very, very clearly those 3 pillars, which we're then going to be taking to market more broadly across our existing customer base. But we also believe that that will enhance the opportunity for us to drive greater customer acquisition, which is an area where we haven't been particularly active, I would say, in recent years. If we just think that a customer today might know us more for being a local company within a particular area with local capabilities, we're bringing the complete capabilities of the organization and of our proposition to all of our customers. And already, we can start to see some very unique cross-selling and upselling opportunities occurring as we start to cross-pollinate the offering across our existing customer base and then start to promote our offering to attract more new customers to come.

Thanks, Mike. And now we have a question which I'd like to put to Russell, our CFO. The question is, could you please comment on the current leverage stroke debt situation?

Yes. I'll answer that by reminding the audience that 2023 saw the business deliver underlying EBITDA of just over GBP 9 million and a debt number, old-fashioned debt, this is excluding lease debt, which is the definition that our bank uses, of GBP 15 million. So at the end of '23, it was roughly GBP 1.6 million. And I'll remind the audience what the numbers in the marketplace are in 2024. We've got EBITDA expectation of GBP 11 million, debt expectation of GBP 11 million, so a ratio of 1 by the end of the year. And the numbers in the marketplace for 2025 have GBP 14 million of EBITDA and GBP 7 million of debt, so a leverage of 0.5[%].

Yes, so I think the underlying question there is, are we comfortable with that? And the answer is we are very comfortable with that. And if we move as was indicated, in line with the expectations of the Board and the market, then we would have additional debt headroom and capability for the right opportunity. Having said that, I'm a little bit old fashioned in that I would not want to see us to go to, can I say, private equity levels of debt. That would keep me awake nights.

The only build I'd make there is that we're obviously looking to use our capital wisely in terms of various CapEx projects of the greater good. There's obviously control that's needed to be taken on all aspects of working capital. And those things combined, obviously, underpin the reduction of debt from GBP 15 million to GBP 11 million to GBP 7 million.

It looks as if we have no more questions, so I would like to take the opportunity of thanking all those of you who have attended today. Particularly thanks to those who have asked some very interesting questions. Thanks to the team around the table, Mike and Russell. And I would wish you a very good remainder of the day. Thank you.

Great. Thank you to the Board of Flowtech for your time this morning. Could please ask attendees not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the Board can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the Board of Flowtech Fluidpower plc, I would like to thank you for attending today's Annual General Meeting and wish you all a very pleasant rest of your day.