Strategic growth through group synergy
Bryce Brooks, Chief Executive Officer
The Group has a clear vision of its growth strategy; to create a specialist fluid power organisation, focused on the delivery of class-leading service and support, which will allow us to grow by both organic and acquisitive means in a highly fragmented distributor marketplace. The fluid power market itself has a long history of 'GDP plus' growth, coupled with a focus on strong margins, and this backdrop allows the Group significant scope to build a profitable long-term proposition for the benefit of all its key Stakeholders. Our position as a leading distributor ensures that we can also maintain a majority of sales associated with maintenance, repair and overhaul (MRO) applications, and the consistency of return that this sector brings, in addition to supplying a broad base of industries engaged in the manufacture of capital equipment.
The acquisition of Balu Limited in March 2018, and the successful £10.6 million fundraising to support the transaction, signified the culmination of a four-year period of significant growth, and has given the Group 'critical mass' in our current home geographies of the United Kingdom, the Republic of Ireland and the Netherlands. Our next period of development will focus clearly on extracting the considerable synergy potential, with emphasis on the following:
- Cross-selling opportunities.
- Improved procurement terms from our major supplier partners.
- Optimisation of our operational cost base.
- Making efficient use of our considerable working capital base, and wherever possible making improvements.
We believe it is now essential, having significantly grown our capital base since 2014, that the Group looks to support its future M&A activity from free cash flow and therefore create an expected 'compounding' effect on investor return.
Our market is also characterised by a relatively narrow group of multinational manufacturers with a global operational infrastructure, supplying both direct to the ultimate end user, and through a highly fragmented distributor network. Our growth strategy targets the development of strong, long-term relationships with this supplier base, ensuring that we become a trusted partner and their distributor 'of choice'. It is pleasing to note that from a relatively low base in 2014, the Group is now making significant progress with many of these global manufacturers which brings further opportunity for profitable growth.
Since our first acquisition, the Group has created a distinct "Profit Centre" structure where each business leader acts in a semi-autonomous manner, backed by relatively light touch support from our central services function. This philosophy encourages the following:
- Decision making and operating responsibility at an appropriate level – Profit Centre Directors are the core of day-to-day decision making.
- Creates a focus on a 'Sales Driven Culture', with inventory management at a local level.
- The centralisation of support functions such as accounting and IT.
This model is then supported by an annual Profit Share Scheme which rewards those business units that achieve a return on average working capital employed of more than 20%. Following the implementation of this scheme in 2017, I am pleased to report that we now have an increasing number of Profit Centres that have achieved this benchmark in 2018. Our total accrual for profit share payments earned under the scheme in the year was £515,000 (2017: £217,000), which was paid at the end of March 2019. The Board firmly believes that a profit-sharing culture across the Group focused on a 'return on capital' metric at a local level, is one of the keys to developing a sustainable organisation that will reward investors over the long term, and the Executive team has a clear plan to assist all our other Profit Centres in achieving this target by the end of 2019.
This approach naturally supports an entrepreneurial culture across the Group and ensures that we remain focused on delivering customer service at its highest level, responsive to both immediate and strategic needs, and safeguards growth before any centrally sponsored initiatives need to enhance this. This strategy has also been very attractive to both business vendors and their management teams alike, as it most closely reflects the agility of the small or medium-sized business but with the support of a much larger umbrella organisation.
Year in review
The operational highlight of the year was the acquisition of Balu Ltd and its subsidiaries, Beaumanor Engineering and Derek Lane & Co in March 2018. Beaumanor was the largest direct competitor to our original Flowtechnology business, and while we retained a clear Profit Centre identity for the new operation, the potential for coordination of activities between these two, very similarly structured organisations is attractive, and it is pleasing to note that good progress has been made in the 12 months since the deal took place. The senior team in each business, and in particular the Profit Centre Directors (PCDs), Mark Cropper and Rob Woodley, have also added considerably to the strength of our management grade.
Outside of this, with the Group achieving sales above £100 million for the first time, we have a very clear 'scale' within our home marketplaces, and with a gross margin overall back at c. 35% (2018: 34.8%, 2017: 33.9%).
In late 2018 the Executive Management team was enhanced to create a focused three-man structure of CEO, Russell Cash as Chief Financial Officer, and Nick Fossey as Chief Operating Officer. I believe that this structure provides the most effective method of coordinating our activities across the Group. As well as day-to-day leadership and guidance, the Executive team is responsible for chairmanship in steering groups covering working capital control, operational cost optimisation and IT strategy. Beneath this we have now instigated an effective series of regular conferences for our PCDs, covering essential areas of common interest such as sales coordination, procurement initiatives, and leadership training. This process culminates in an Annual Forecast presentation by each PCD to the main plc Board in January of each year, where individual target setting, both on a commercial and financial level, are debated and established. In addition to this, below PCD level, we have also created annual conferences covering our wider resources in both sales and technical manpower.
Following the retirement of Sean Fennon, there were clearly challenges to face in transitioning the senior management team into a position well placed to exploit the obvious growth potential that the Group possesses. As part of this transition we are at an advanced stage of developing an amended organisational structure that will move from the previous Flowtechnology, Process and PMC structure into a two-division format based around 'Components' and 'Services'. The key reason for this change is to ensure that we provide the most appropriate structure for the business to extract synergy, both in cost and working capital. As a natural by-product we can then provide investors with a clear picture of the Group's activities, split between our core 'distribution' activities – the Components division (which accounts for c. 87% of turnover), with the balance in added value activities in engineering services and the manufacture of hydraulic power packs and associated components – the Services division.
At PCD level, Ian Simpson who joined us with the acquisition of Indequip in 2016, after a near doubling of turnover in the intervening period, with commensurate bottom line effect, has now expanded his role to include coverage for the sister business within the Flowtechnology division in the Benelux. In addition, Jon Burke, having previously held a number of finance roles within the Group, stepped up to the position of PCD in charge of the services division of Primary Fluid Power. Both these promotions illustrate how the expansion of the Group via acquisitive and organic means is giving exceptional managers the opportunity to grow their careers within our organisation.
We are always acutely aware that our progress is achieved with the continued commitment and effort of all our employees, and with our profit-sharing scheme we are confident in our ability to retain and attract the best staff the industry can offer. The passion and commitment shown by the many staff members employed across the Group, particularly through periods of change, has been exemplary. On behalf of the Executive Management team, and the plc Board, I would like to thank everyone for their efforts, and the continued support that has been shown in 2019.
The Board firmly believes that a profit-sharing culture across the Group, focused on a 'return on capital' metric at a local level, is one of the keys to developing a sustainable organisation that will reward investors over the long term.
Chief Executive Officer
29 April 2019
Improving our solutions to customers through group synergy
Our first Group sales conference
Members of every Profit Centre engaged with some inspiring training and enjoyed our first awards evening.
The event was run in January 2019 and attended by over 50 of our sales teams.
Added value to our business and customers by:
- Helping understand the synergy and strengths across the Group, maximising cross-selling opportunities.
- Rewarding our sales teams for their dedication.
- Group training initiatives to allow our team to grow and flourish.
- Attendance by major global suppliers which further enhanced these strong supplier relationships.
Biannual meeting of Group technical team
Over 30 team members across the Group attended events in Gloucester and Skelmersdale last year. Our first Group technical meeting was held on 4 July 2018, and saw over 40 of our technical team come together to share their ideas and experience, with a view to improving the solutions we provide for customers. As part of this programme, a new internal online technical portal was launched, enabling open discussion and a library of technical knowledge.
Key strengths of the team:
- Wide range of skills from product sourcing experts and hose assemblers to fabrication welders and application engineers.
- Collaborative team with a desire to find simple solutions to complex problems.
- Over 1,000 years combined fluid power experience who understand customers' problems and how to solve them.