Flowtech Fluidpower plc (FLO) Earnings Call Transcript & Summary

Even with the ambition and confidence our management team has about significantly growing that top line, GBP 160 million to GBP 170 million is what gets you to that 15% mid-teens EBITDA margin. Once you're challenged and, of course, have to go through the scrutiny that comes with the year-end audit process, you're simply not permitted to bake in anything other than genuinely conservative assumptions within those figures. And unfortunately, the algorithm produces a material impairment. So we head into 2025 carrying goodwill on the balance sheet of GBP 13 million — GBP 14 million, I believe the number stands at now — which is materially below where it sat 2 or 3 years back. But to repeat once more, in relation to historic acquisitions, it's a noncash, separately disclosed item. We've made the decision not to pay a dividend in 2025. There are 2 reasons behind that. First, we do expect there will be incremental opportunities to acquire businesses at varying degrees of distress. Thorite and Allswage are recent illustrations of that, though we suspect there are probably more to come. And we think that GBP 1.5 million, which would otherwise have gone out as dividend, could prove valuable in the year we're in right now. And, quite plainly — I'll go on to explain this — the returns on those investments are fantastic.

Also, second, I've stated—and it's accurate—that the debt situation is fine. Our relationship with the bank is excellent, we're covenant compliant, but we do acknowledge that leverage isn't at the level we'd ideally like. So that will assist us in bringing down our debt position while we're clearly working to improve EBITDA performance. Now, on to the following slide, please. Regarding how that appears across our 3 geographical segments, I'll just highlight a couple of points here, but I mentioned the two-halves narrative concerning revenue performance, and I'll put some like-for-like figures on it. We generated GBP 56 million in revenue during the first half of '24 and GBP 47 million in the second half. The second half proved challenging. My best illustration is the Island of Ireland, which, against a strong—very strong 2023 performance and therefore strong comparators, saw revenue fall by 20%—2-0, 20%—in the latter half of last year, but that was mainly attributable to the crushing and screening sector, which is concentrated in Northern Ireland, and which represented a GBP 6 million revenue stream that dropped to broadly half that figure in the tough year of 2024.

On the brighter side, we are starting to see some green shoots of recovery emerging in the early part of 2025. Honestly, we are especially happy with the way the Irish business is performing at the moment. Another one worth highlighting is Benelux, where, if you felt the PMI index was difficult in GB, it was actually worse in the Netherlands for most of 2024. So it's no surprise that it lost some top line. But the important thing there is that we've put investment into our people in the Benelux, including some of the new local leadership — Francisco Terol came into the business about 12 months ago, and Francisco has strengthened his supporting management teams and made some fabulous hires there. We believe it is beautifully positioned to take advantage of better market conditions. It has just relocated to a fabulous new site in the Rotterdam Harbor. So again, that reflects a balanced approach to managing our cost base really, really hard, while at the same time not being afraid to invest in areas where we believe we can achieve really good upside dividends over the medium term. Next slide, please. So I've referred to a couple of slides — moving on, despite a disappointing profit performance, we have generated more cash from operations.

The largest item on that debt bridge, as you can see, is working capital, which fell by GBP 5.2 million. Thinking about it across a 2-year window is probably the clearest way to frame it — and that 2-year stretch, naturally, is the period under new management. Even so, taken as a whole, our working capital has come down 23%, which is GBP 8 million in other terms. For those in the audience inclined to doubt it, should they argue that this simply reflects lower revenue, then removing the receivables piece from what I just mentioned means the like-for-like decline is not 23% but 34%. So I believe we've shown that we've done a good job here. In that area, we know what we're doing. Let me highlight just one more bar on that chart: the GBP 3.3 million of assets purchased, our CapEx, and the largest single element within it is GBP 1.8 million relating to investment in the web. As we've said before, we're on the cusp of launching that, and we're excited about what it will deliver. My guess is the payoff will build incrementally. There will be something in 2025, but we can look forward to more in '26 and beyond. So yes, if you could move on to the next slide, please.

There are just 3 charts here, and I think they're nice visuals supporting what I've already covered. The chart on the left shows the GP percentage materially higher over the last couple of years versus where it used to be. The middle chart breaks out the different components of the working capital story I just walked you through. You can see the debtors bar has come down in line with a revenue reduction, although debtor days outstanding did improve — I can assure you of that. So it's not all tied to revenue. But as I said, the 23% reduction, I think that's actually over a 2-year period rather than a 3-year period. On the chart at the right, I could have picked other ways to illustrate this, but I thought it was a pretty good example. It relates to our Skelmersdale site, our biggest stockholding site — roughly 50% of our inventories sit in Skelmersdale — and across a 12- to 15-month period, the orange line represents a level of activity that has, if anything, trended upwards. Yet we've picked and dispatched more items with 30% fewer people. That 30% fewer people is probably a 7-digit cost saving in total.

There are additional instances of that as well, though I'd say those 3 charts are pretty clean — you can likely connect them back to the control on the controllable slide that I presented earlier. Let's move to the next slide, please.

Thanks, Russ. So a quick point about the market. Obviously, last year was a tough market. As I mentioned, conditions appeared to worsen even more during the second half. We have plenty of different data points. We do need to watch the PMIs closely. The U.K. PMIs, as many of you will be aware, have kept falling. Similarly, the Island of Ireland wasn't looking good, though it begins to improve in the first quarter of this year, certainly. And as Russ mentioned, the Benelux kept sliding, in some cases worse than the U.K. U.K. manufacturing production is another data point. Again, we can begin to see it decelerating over the course of the year. We also pay attention to the British Fluid Power Association and its trends regarding what is happening in the market. Not just to understand growth in the market, but also what is happening in the hydraulics space and the pneumatic space. So every line, every graph points to that drop off. What matters, though, I think, is that the sales decline, when we examine it, is tightly concentrated in some manageable areas. And we believe that gives us high confidence of recovery, both in terms of -- that isn't business lost.

It's either a case of business being delayed or the market having an impact, but recovery will come. And when we examine it, 70% of the year-on-year sales decline on a like-for-like basis comes from 10 larger OEM customers. In fact, one of those customers trades across both Thorite and Flowtech had been trading across both in 2022, combined with GBP 8 million, in 2024 was GBP 2 million. Now that was down to their own industry feeling the market declined on 2 levels. One, there were still some destocking and some overlay from the COVID period. But equally, just the market decline in general just meant that there was lower demand. And we're now starting to see some green shoots and there's starting to be some more positive signs of recovery there as an example. As Russ alluded to, specific industry verticals were particularly weak, crushing and screening is a good example, but there are others. We did see some down trading within the agricultural sector at the start of the year. But I think what is important as a business is that we're also looking at the average order frequency. And what we did see was very consistent average order frequency. In fact, we had broadly the same number of orders coming through in terms of average order frequency.

Our fulfillment center saw roughly the same volume of picks in 2024 as it did in 2023. What's changed is that the average order value has come down. So customers are purchasing only the essentials, and they aren't going for those add-on items you'd typically expect when the market is somewhat stronger. Beyond that, we saw a substantial share of projects that had been committed to during 2024 get delayed. A portion of those were pushed back with no set date into 2025. And, as I mentioned, once we moved closer to the budget in the second half, we began noticing more anxiety and, in some cases, customers deferring that cash outlay even further. Our strong belief is that 95% of the revenue decline is market driven. That doesn't mean we can't grow absent a market recovery — I'll get to that when I discuss self-help levers — but our customer retention rate is very high, and that's something we're proud of. As Russ mentioned earlier, we've achieved solid market share gains. Our sales pipeline has improved. In both quantity and quality, that pipeline is materially stronger going into 2025 than it was going into 2024. And we now enjoy very, very clear visibility into the forward order book.

And once more, it's clear that this is materially stronger — 5.3% higher at the beginning of 2025 versus the beginning of 2024. So that progress pleases us. Moving to the following slide, I think we can probably move through it fairly quickly. One point I raised at the outset concerns the operational gains we've achieved. We view that mainly through growth and operating margin levers, but this really ties back to the 6 EBITDA growth engines that Russ mentioned earlier. I think we've addressed most of them around customer growth. The only additional one I'd highlight would be the catalogs we brought to market, which shipped in the summer — 53,000 catalog. So this is a catalog carrying roughly 50,000 products. And since 1/3 of our revenue comes from distributors and resellers, we offer it as a white label solution. We wrapped that catalog for them under delivery, and then we hold the stock on their behalf, and we apply their brand and labels to the boxes and ship to their customers. It's an interplay — an interlinked end-to-end solution. The prior catalog, launched around 2022, was not welcomed by our customers.

What we were doing was trying to unite several brands we'd bought. And we essentially disrupted the recipe that had been in place for more than 30 years. So we reset it. We brought it back to market, and I'm very pleased with how customers have responded and with the satisfaction levels around it. The next stage, as Russ mentioned, is that while we saw online traffic rise by 2% and a bit of an uptick from the work we did to improve the existing web platform, we know it simply isn't the experience our customers want or need, and we're very much looking forward to moving that forward over the coming months with a new platform, and then we can digitize the catalog offering while still continuing with a catalog-based offer. Russ, is there anything on commercial excellence that we need to call out?

Yes. I've covered gross margin sufficiently, so let me just add a point about inventory—a like-for-like reduction of GBP 3 million plus in 2024. Some will ask: at what cost did that hit your availability and customer experience? The answer is yes, it did. But take Skelmersdale as an example. We removed 15% of its inventory, which was roughly GBP 15 million—so GBP 2 million. And while doing that, we materially improved availability. It moved from the low 80s to the high 90s to 97%, and that has been sustained. So we know what we're doing when it comes to cutting the right kind of stock in the right quantities. And some people ask what the customer experience is like—it's trending positively. We do hope it will trend even more positively when we launch the materially better website experience, of course. So yes, just a couple of builds there, Mike?

Alright, to wrap up on people, talent, and capability—since we've already covered several points across the other three areas. A key focus for us has been building a strongly aligned, unified culture across the business under the single Flowtech rebranding. Alongside that, we've been aligning the operating model of the business around the customer value proposition, so we can bring more of what we offer—our product, service, and manufacturing capability—to more of our customers and make it readily accessible. But with that, and with the restructuring and simplification of the operating model, we've needed to create a number of new roles and build new capabilities within the business. In some cases, that means the right people in the right roles. In other cases, it means powering up and bringing the right capability into the enterprise that we didn't previously have in place. I'm really proud of the work we've done here. That said, this is never an easy process to go through. And certainly, in the latter part of the year, we worked hard to address our cost base further through that restructuring.

However, 6% of our top leadership positions have changed hands across the organization. And while that may sound rather drastic, I think internally it has actually created stronger accountability. It's pushing us as a team to operate with far more unity as one Flowtech. And through the restructuring we've carried out, we've moved from roughly 10 cash-generating units to 3. So we're simplifying our operating processes as well. We're harmonizing and standardizing how we work — there's still plenty to do, with lots of self-help remaining there, but we've achieved very, very solid progress during the year. Moving to the next slide, Russ, you're going to give a brief summary of the Thorite acquisition and, of course, the Allswage acquisition.

Yes. I'm a bit mindful of the clock, but it would be remiss of me not to devote at least a couple of minutes to this, since I believe it matters — particularly as I think we touched on it briefly, and we genuinely expect similar chances will come our way at some stage down the line. Turning to Thorite: at the moment we bought it out of administration, our working assumption was that it was a business with roughly GBP 14 million in revenue. It was carrying a fairly ugly loss, with gross margin under pressure and an overhead structure that required reduction. So looking at what has since been delivered — we preserved and grew the top line during the first 18 weeks of ownership, the stretch running from the end of August through the end of '24, and revenue over that period came to GBP 4.8 million. Multiply that figure by 3, and the top line held. We achieved substantial gains in the quality of gross profit — an improvement of many hundreds of basis points in the GP — and we acted to take out more than GBP 1 million from the cost base. In short, we eliminated the drag created by the business's loss-making results, and we got it to profit within a couple of months of owning it.

The price we paid was really quite low. If you look at it through — some of you will have noticed a separately disclosed credit of GBP 2.3 million tied to negative goodwill, which means we paid less than we got, and the assets we acquired exceed what we paid. Just a bit of detail on that. We paid GBP 700,000 to secure title to inventory that's been fair valued at GBP 2.1 million. And we paid GBP 1.7 million to acquire the debtor book, which we were confident would deliver a recovery of in excess of GBP 2 million, and it did, it delivered GBP 2.2 million. So there was GBP 500,000 upside on the debtor book, 1.4 million upside on the stock book. And then when you take account of — we've had to value the 175-year-old brand, which we continue with Thorite to Flowtech companies, you can see there, and the customer list. That's how you get the negative goodwill of GBP 2.3 million. Brief shout-out to the Allswage acquisition, again, out of a distress this time out of liquidation. And spookily, you can almost divide Thorite number by 7 and get the Allswage deal.

Thorite operated 7 locations, while Allswage has 1 site based in West Brom. At the point of acquisition, Thorite brought in GBP 14 million of revenue, and Allswage generates roughly GBP 2 million. The consideration for Thorite came to GBP 350,000 on day 1. For Allswage, we paid GBP 50,000. That means Allswage came with a GBP 2 million revenue business attached. There's room to lift its margin. We're able to control its overheads. And our expectation is that this produces a positive contribution during 2025 and in the portion of the future past '25. So bargain purchases ties back to what I said earlier — we believe there will be more of these coming, which plays into how we think about that dividend payment as well.

Thanks, Russ. Moving along to the following slide. Once more, I’ll spend a moment on 2025 trading and the outlook. What you see here is an image from a significant ring main system design, build, and in-store project that we finished during the prior year for Jaguar Land Rover at their Gaydon test facility. That project delivered substantial benefits to them in sustainability terms and by lowering their total energy use. I think it also stands as evidence of the capability and technical expertise the group possesses when it comes to the larger projects we take on. With that said, let’s go to the next slide, please. I’d like to begin the 2025 overview by examining the sales growth levers we are concentrating on. This is very much a self-help story. So although we acknowledge that the market remains sluggish and, arguably, recent events have created a considerable level of uncertainty, we do recognise that we have appealing structural growth drivers that we have been establishing throughout 2024 and that we intend to make sure we capitalise on. We have divided that into 4 areas.

I believe we've covered the new digital platform sufficiently. One thing worth mentioning on that point: the white label opportunity—delivering a Software as a Service solution to a very, very wide range of distribution partners, who typically wouldn't necessarily possess the ability to construct the kind of web platform we're building. In our view, that represents a really important step toward helping the industry become more digitally savvy. At the same time, we're launching our own U.K. web platform, and all of it sits within the same underpin. That said, we do think it gives us opportunities, certainly in half 1, to get that up and running, tested, and working effectively. Subject to that, we will then look to roll that platform out into Thorite into Ireland, into Benelux, and also begin to ramp up the digital export capability, which will follow in the second half of the year. On products and service expansion, we've got some exciting new product range launches coming in 2024, including own brand expansion. This is an area we didn't really get our teeth into last year. With the Thorite acquisition, we've got the introduction of some new brands that we can roll out across the group.

So that gives us certain growth possibilities that we intend to capitalize on. Also, we've made it quite clear which high-growth verticals we're targeting—ones we think align really well with what we do. First, the indirect channel, as I said, via the Software as a Service digitization model, looking at ways to raise our share of wallet in that channel. But also sectors like aerospace and defense, where we're aware substantial inward investment is coming. We're already quite active in defense, and we do see a chance to take that capability and grow it further. Then there's waterways and flood defense—working with organizations such as the environmental agency here in the U.K., along with Flemish water. Considerable investment has been ring-fenced across the next 3 to 5 years to upgrade and enhance waterways, flood defenses, and infrastructure, much of which involves hydraulic content in moving assets. And then, broadly, infrastructure—new bridge projects or reclamation of existing assets—which we see as a major area where we can benefit.

Our capabilities in data centers have been expanding. Last year we landed a highly intriguing project, and we managed it through successfully. Yet what we can do as a company, once we combine the One Flowtech offering, begins to create a rather distinctive opening for us to take on a larger part in building the infrastructure for new data centers — and that clearly carries longevity, considering the investment going in there — and in the water transportation sector, whether by road, rail, air or shipping; transportation, we believe, falls squarely within our sweet spot, and we hold some core capabilities in that area. So it comes down to focus, focus, focus. On market recovery: a few weeks back, our line was to expect tough markets in half 1, with some recovery in half 2. That was surely the way we and the market viewed it. With recent events, I think the outlook stays uncertain, and we will simply have to ride through it as best we can until more clarity arrives. Moving to the next slide, we'll go into that a little further. To sum up, we keep making our own success.

Momentum on revenue and EBITDA has clearly picked up in Q4 2024. Q1 trading is definitely tracking in line with management expectations. That gives us a good degree of confidence, no matter what market dynamics are happening around us. We've got the scale, and we now have the stable, scalable platform in place that we put in during 2024. Our focus is on building that order book and speeding up that sales pipeline, which is far stronger than it was a year ago, and we're definitely seeing some good wins already coming through with major projects and some of the engineering solutions that we're involved in. And we have the benefit of the new e-commerce platform, and while we aren't expecting it to give us an immediate injection, we do believe that it's going to be a very, very important long-term growth play. A quick word on Trump's tariff. Our direct impact on the buy side is very limited, in terms of what we purchase from America and what we ship to America, but it's something to watch out for. Still, we don't see a material impact there. We're working very hard with our suppliers in Europe and ultimately in Asia to make sure we just understand any implications.

But again, we feel we're pretty well protected. Our operations span a very, very wide and varied range of market segments. We aren't materially exposed, for instance, to areas such as automotive — there may be some impact. But I think from our standpoint, we view that as both an opportunity and an impact. So we can look at it either way. But the reality is we don't really know. But we sit here as a more dominated U.K. business — 70% of our revenue today is in the U.K. We have an eye on growing into Europe. And we do believe that whatever comes our way, we've got enough self-help to be able to remain confident that we can deliver improved performance this year. So we're steadfast. We're determined and we're confident in our plan. And I think that's the message we really want to leave you with. We have a good plan, we're sticking to it, and we're going to continue to build that through 2025 into 2026 and beyond. So Russ, I think that leaves us then to move to the next slide, which is into questions. I'm conscious we don't have a huge amount of time, but perhaps we can pick up a few, and then we can follow up offline.

We're nearing the hour point, but you could say our timing worked out well, since it appears we have just 1 question, Mike. That question concerns our Benelux business. It refers to the performance decline. And when did the new management team come in, and what improvements have they delivered? So I believe it was Francisco, roughly 12 months ago, and he has added some strong supporting management. We're starting to see signs of better gross margins. Francisco arrives with a strong track record; he has worked with far, far larger businesses. And the reason we hired him is that we have ambitious plans for growing the business in the Benelux and beyond. We are starting to see market conditions get better. Right now, the PMI in the Benelux is materially outpacing the PMI in the U.K. So Mike, you probably want to add to what I've just said.

Yeah, it's worth pointing out that change isn't easy. We had 2 businesses running inside the Benelux, 2 separate brands with no connectivity at all. And in fact, engagement between those businesses was very limited. Over the course of the 6 months of last year going into — in the half 2. We brought those businesses together. We've rebranded under One Flowtech. We have begun integrating the data and the systems. We've moved inventory into Deventer, which sits on the east side, not too far from the German border actually, which is a fulfillment center. So we started looking at how we can harmonize the businesses into one. We've recently then just completed the move or we're in the process of completing the move of 2 locations in Rotterdam into 1 location. And we believe that we're setting the business up now for real success for the future. So for us, I think it's more market related. We have made more investment to make sure that we rightsize the business for the future. We don't want to stay as a GBP 10 million business. The market opportunity should be very confidently to double that and if not go beyond.

And that can happen organically, but it can also come inorganically. And I think that's definitely something we're keeping our eye on — how do we grow our business, both within the Benelux and also further into Europe, in good order as we move forward for the future. Okay. So look, if there are no further questions, we very much thank everyone for taking the time to join us here today and to listen to the journey that we're on. It's fair to say that we do see plenty of opportunities for Flowtech. I do think that the last year and arguably the last 18 months has been very difficult from an external market point of view. But I'll come back to what I said at the beginning. We've made a significant set of changes to transition the business through 2024. We have continued to deliver strong underlying performance, adding some new businesses in a very smart way. And we've entered 2025 in a far stronger position than we were entering 2024. We will keep an eye on what happens with the market. But ultimately, this is very much from my side coming in 2 years ago, this is a medium-term transformation, as Russ said earlier, in order for us to be able to really start to generate accretive earnings.

We really do need to see that top line moving. As far as we're concerned, our first milestone is getting this business above GBP 150 million and definitely beginning to improve how much EBITDA it generates. That's what we're focused on. So thanks, everyone, and we look forward to updating you again around September or October.

Thanks.