TIDMFLOW
RNS Number : 2745P
Flowgroup plc
16 November 2016
Flowgroup plc
("Flow" or the "Company" or the "Group")
Update
Flowgroup plc (AIM: FLOW), which provides a range of innovative
energy technologies, energy supply and energy services, announces
an update on its home energy, smart boiler and microCHP
businesses.
Flow Energy
Our Flow Energy business continues to perform well and in line
with management expectations. We have delivered greater than 150%
growth in customer fuel accounts this year and it is pleasing to
note that this part of the Group is achieving over GBP127million
revenue in annualised sales.
Consumers are facing price rises this winter as the energy
market is experiencing a significant rise in wholesales costs, with
electricity prices having risen by around 65% since August for this
winter period, accompanied by a 30% rise in winter gas prices since
the middle of the year. Our hedging strategy provides protection
against rising wholesale energy prices for both our customer base
and our business. We have also taken steps to protect our gas costs
against adverse weather conditions over this winter when demand is
most volatile, either as a result of cold or warm periods.
We believe that current market conditions favour more
established providers like Flow with more robust energy trading
strategies, systems and processes, and we believe we can continue
to grow this part of the business in 2017.
Smart boiler
Following the launch of the Flow Eco RF in September 2016, we
have been pursuing sales through our Flow Brand Ambassador (FBA)
network, via our energy customers and with social housing networks.
Whilst still at an early stage in the launch cycle, sales via our
FBA network have started satisfactorily and management will provide
further updates in due course.
The feedback from our FBAs on the quality of the product and the
benefit of our heating and home energy bundles has been
consistently positive. A test campaign to target our energy
customers for Flow Eco RF sales has produced positive results,
supporting our belief that our energy customer base has the
potential to be a sustainable channel to generate boiler sales. The
social housing market is producing significant opportunities where
we believe the Flow Eco RF can deliver benefits to both social and
private landlords, with substantial savings for large landlords due
to the increased efficiency and reliability of the product, as well
as the remote diagnostic capability, which reduces servicing costs.
We are in active discussions with a range of social housing
providers all with networks of thousands of homes.
MicroCHP update
DECC review
In May 2016, the then Department of Energy and Climate Change
(DECC), now part of the Department for Business, Energy and
Industrial Strategy (BEIS), published a consultation document (the
"Consultation") which included a review of support for the microCHP
Feed-in-Tariff (FiT), whereby the number of qualifying microCHP
units would be capped at a much lower level, thereby reducing the
support significantly.
Due to the implications of this Consultation, coupled with
increasing manufacturing costs due to the fall in the value of
Sterling against the Euro and US Dollar, in the Company's half year
report announced on 5 September, we stated that we had initiated a
strategic review of the microCHP business. We also announced that
we had slowed down the production of the Flow microCHP boiler and
reduced the level of sales and marketing activity to offset the
risks of carrying a large inventory of boilers that could be
potentially uneconomic to support in the UK.
We had expected clarity from Government in early Q4 2016 on the
scope of ongoing FiT support for microCHP. However, this has not
been forthcoming and indications from BEIS are that any revised
scheme will now not come into place until April 2017, which
suggests that the review is taking longer than expected and may not
report back this year. This continues to be a frustration, as our
manufacturing relationship with Jabil Inc. is good and our teams
continue to work closely together with Jabil's production facility
in Livingston, Scotland, which is fully operational and producing
Flow microCHP boilers.
During the Consultation and after it closed we made strong
representations to BEIS to promote the benefits to the UK of our
technology and had several meetings with them. BEIS also visited
Jabil's facility in Scotland to see Flow microCHP boilers being
made and the investment in production facilities. We have been
encouraged by the level of engagement by BEIS and remain optimistic
of a positive outcome to the Consultation. However, alongside
discussions with Jabil, the Board is considering the options for
microCHP should the conclusion to the Consultation be adverse or
further delayed. These include:
1. Continue reducing production while we await the BEIS
announcement and accelerating our plans to launch in Europe, where
the financial support offered favours microCHP
Due to the proposed reduction in the UK FiT, plus higher
production costs due to the weakness of Sterling, we are evaluating
a plan to support a reduction in boilers produced on a monthly
basis for the remainder of 2016 and into the majority of 2017.
This option prioritises the commercialisation and support of our
technology in Europe ahead of the UK, and Flow is engaged in active
discussions with French, Italian and German market players for the
distribution of our technology.
We would then re-focus on the UK market once the boiler
economics are more favourable following cost reduction at volume
manufacture. We will continue to explore the feasibility of this
approach, both in terms of manufacturing, distribution logistics
and financing.
2. Sale or exit of the microCHP business
In the event that the above approach is found not to be feasible
the Board would explore the sale of the microCHP business to a
third party. In the event that no sale is achieved, the remaining
option would be to exit our microCHP business. This would have a
material effect on Flowgroup both in terms of the strategic
direction of the Group and also the cost to exit this part of the
business.
We will continue to explore the options and report back to
shareholders when we are able to recommend a preferred option.
Update on Europe
As stated above, we have reduced production levels to a minimum
and, as a result, we have now built up an inventory of over 800
fully functional Flow microCHP boilers. In order to recoup
manufacturing costs, continue to learn from real-world
installations and continue to create case studies and generate
performance data, we will now increase our marketing to offer these
for sale both in the UK and Europe.
Whilst the uncertainty of the outcome of the Consultation and
the weakness of Sterling has created issues, support for the
technology in Europe remains very strong. Potential incentives vary
across Europe, with Italy understood to offer personal tax rebates,
while Germany provides grants and other tax incentives to support
deployment of the technology. The Board believes that consumer
demand is also potentially strong.
As announced previously, a large European utility has been
testing our Flow microCHP boiler. The first phase of these tests is
now complete and we are pleased to be in a positon to be able to
announce that the company we have been working with is Gaz réseau
distribution France (GRDF), the French gas distributor and a branch
of ENGIE, which employs 154,950 people worldwide, achieved revenues
of EUR69.9 billion in 2015, and which provides individuals, cities
and businesses with efficient and innovative solutions to take on
the challenges of energy's transition to a low-carbon economy.
We are delighted with the findings from GRDF's testing of the
performance of our technology. GRDF checked the performance of our
microCHP boiler as specified and analysed the technology to confirm
that it was relevant for the French market. For both these
objectives, our technology met GRDF's criteria. GRDF also noted
that we had a clear advantage on performance against competing
technologies when measured in time from switch-on to generation of
electricity, thereby giving an advantage in the heating market
where heating systems cycle throughout daily operation.
Additionally, a recent report by GRDF stated that some 80 per
cent of people surveyed across France are attracted by the idea of
microCHP. We believe that the European combination of financial
support and consumer demand could lead to significant adoption of
microCHP technology in Europe, as suggested by the previously
quoted Cogeneration Observatory and Dissemination Europe (CODE)
report in 2014 which indicated microCHP could take one third of the
European boiler market by 2030, a market with an installed base of
over 100 million.
Outlook
Whilst the previously announced reduction in microCHP production
has inevitably had a corresponding effect on our expectations for
turnover, it is pleasing to note that the Group's diverse model is
robust. With the rest of the business trading well and costs being
monitored closely, the Board expects the other key metrics of
EBITDA and cash for the financial year ending December 2016 to be
in line with market expectations.
Tony Stiff, Group Chief Executive Officer of Flowgroup plc,
commented: "The ongoing uncertainty around our microCHP business is
frustrating. However, we are taking positive steps to find a
solution that works for our business and for our shareholders.
While we do that, we are continuing to grow the business as a
whole, producing good results in our energy business and generating
the first sales of the Flow Eco RF boiler, both to new leads and to
existing energy customers. This element of our strategy is very
clear - to take advantage of a seismic shift in the energy market,
and a heating market that is ripe for disruption, to deliver a
successful company that spans both markets and generates
significant value for customers and shareholders.
"As discussed in our half Yearly report, while our microCHP
technology platform has significant potential value for our
business, and we will pursue every opportunity to realise that
value, we have built an organisation that can flourish without it,
should that be necessary, and believe that diversification remains
one of Flowgroup's fundamental strengths. That said, we remain
positive about the potential for microCHP. GRDF's testing of our
technology produced good results which confirmed our own data on
performance and which compared our technology favourably with that
of our competitors. It was pleasing to have such a large and
successful business as GRDF be supportive of our product,
particularly considering our potential focus on the European
market."
Flowgroup plc www.flowgroup.uk.com
Tony Stiff, Group Chief Executive Tel: +44 (0)20 3137
Officer 4525
Nigel Canham, Chief Financial
Officer
Cenkos Securities plc (NOMAD Tel: +44 (0)20 7397
and Broker) 8900
Stephen Keys (Corporate Finance)
Julian Morse (Sales)
Walbrook PR Ltd (Media Tel: +44 (0)20 7933 8780
Relations) or flowgroup@walbrookpr.com
Paul McManus Mob: +44 (0)7980 541
893
Nick Rome Mob: +44 (0)7748 325
236
This information is provided by RNS
The company news service from the London Stock Exchange
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