Flowtech Fluidpower : Annual Report for the year ended 31 December 2020

Contents

Strategic Report

Governance

Highlights

Financial Highlights

Report Strategic

Roger McDowell

Non-Executive Chair

Introduction

My first annual report as Chairman is set against the background of the COVID-19 pandemic which has impacted all our personal lives and businesses in an unprecedented manner. Throughout this time, the Board has prioritised the health and safety of our employees above all else and I'm grateful to everyone who has continued to support the business and work so hard through this difficult period.

Review of Business & Strategy

My normal practice when assuming a new Chairman role would be to perform a full review, including site visits, to assess the relative strengths of the organisation. Notwithstanding the fact that movements were restricted between locations during the peak of the pandemic, I have visited the Group's principal sites, and as soon as practicably possible after the lockdown is relaxed I will seek to complete this process.

What has become clear is that Flowtech Fluidpower is a fundamentally good business, and there is significant opportunity for future growth. The staff are both skilled and enthusiastic, with considerable domain knowledge and good technical capability.

I have therefore sought to ensure the Executive team are well supported, as the strong market position and capabilities of the organisation are clear.

As part of the process of building on these strengths, during the latter part of 2020 we completed a full strategy review, to create focus and provide a framework for the future. The main elements of this thinking will be outlined in this report. However, emphasis will be on long-term growth in market share to exploit the clear market opportunities available to us, and further enhance profitability and cash generation. Of particular note is the commitment that the Group is making with its e-business capabilities, and the operational resources to support this initiative. I firmly believe that the investment now being made in this area will prove fruitful over the medium term, enhancing organic sales growth, and be a key differentiator between Flowtech and its competitors.

We will also have input and support from our Non-Executive Director Paul Gedman, who joined us in July, having held senior positions including as Divisional CEO at The Hut Group. Paul has extensive experience in the e-business arena and a wealth of practical knowledge in growing international businesses through leveraging data and digital capabilities.

In addition to commercial matters, we have established improved processes to our governance of health and safety at work, led by the Chief Executive, and enhanced the overall functioning of the various Board subcommittees, with a strong platform built.

Also included in this report is our first consolidated sustainability review, covering all aspects of how Group strategy impacts on our major stakeholders, and with a particular focus on our employees and our environmental footprint. This is clearly the start of a long journey, but it is the Board's intention to set targets for improvement in material areas, ensuring that we are all accountable for affecting positive change through the business.

Banking & Net Debt

It is pleasing to note that the Executive team has continued to manage the debt position carefully, obviating any need to raise new finance to strengthen the balance sheet. This careful management has been reflected in the fact that across the year net debt has reduced by £5.0m, from £16.6m to £11.6m, and the stability that comes from this will stand the business in good stead.

In addition, as a reflection of the faith that our bankers show in the Group, we have successfully renewed our facilities with Barclays for a further three year period to June 2023, without any material change in terms, and with appropriate 'carve out' in covenants to cover the demanding 2020 trading period.

However, in any distribution business, the right inventory is the key to success. Whilst sensible management of the supply chain and availability has to be undertaken, I firmly believe that they should never be at the expense of the upside that comes from being the sector's largest stock holder, particularly when we are seeing some extended lead times as the world's supply lines recover from the disruption of COVID-19. We are highly regarded by our key suppliers and considered a vital link in the supply chain.

Dividend

We recognise that dividends are important to shareholders. However, we believe it is prudent to assess the capital needs of both growing and investing in the business in considering the size and timing of any future distributions. The Board remain keen to reintroduce a final payment for the financial year 2021, and thereafter adopt a balanced approach to dividend policy.

Summary

In the short term, we continue to work hard to finalise the process of cost reduction. Whilst clearly the COVID-19 lockdown position has delayed some of this progress, notwithstanding it is pleasing to note that meaningful results have been achieved. Absolute focus remains on cash and cost management, and a key aspect of the approach will be to ensure that the Executive team, and the Management Board beneath them, remain action orientated, continuing the pace of change throughout 2021 and beyond.

With the relatively high operational gearing that the Group possesses, any significant increase in sales produces magnified growth at the bottom line, albeit naturally reversing some of the reductions seen in working capital. However, with the immediate concerns associated with COVID-19 hopefully now receding, albeit now with the difficulties of adapting to Brexit, the Board is cautiously optimistic that we should see a return to the sales levels seen in 2019 within the medium term.

Finally, I would like to pay thanks to my predecessor Malcolm Diamond, who has clearly supported the business well and provided wise guidance to help create the platform on which we can now move forward. In the handover process, Malcolm emphasised the passion and commitment of everyone he met within the Group, and my own interaction to date has confirmed that this enthusiasm remains in place.

Roger McDowell

Chairman

19 April 2021

"The Board is cautiously optimistic that we should see a return to the sales levels seen in 2019 within the medium term."

Roger McDowell

Chairman

Report Strategic

Governance

Statements Financial