FW THORPE: FY 2024 Declares 22nd Consecutive Annual Dividend Increase After ‘Impressive’ Stock Procurement Improves Gross Margin To 49% While Subdued Outlook And Modest LTIP Targets Leave P/E At Lowest For 10 Years

18 February 2025
By Maynard Paton

FY 2024 results summary for FW Thorpe (TFW):

  • A 1% revenue decline was countered by a 9% profit advance, with H2 profit improving a remarkable 17% to help raise the ordinary dividend 5% and extend the run of annual payout advances to 22 years.
  • TFW’s gross margin improving to 49% through “impressive” stock procurement led to some welcome operating margins, including 20% for Thorlux, 23% for Lightronics/Famostar and 19% for Zemper’s H2, although profitability at the group’s Other subsidiaries remains poor.
  • Very satisfactory cash flow supported cash finishing £18m higher at £53m, which triggered the third special dividend in four years and almost certainly enhances the likelihood of further acquisition activity.  
  • The slimmed-down board with its M&A expertise may wish to consider the success of acquisition specialist Halma, which assesses its ‘capital allocation’ through return on total invested capital and includes the KPI as an LTIP measure.
  • The 15x P/E is the lowest rating for ten years, and seems more influenced by TFW’s subdued near-term prospects and modest LTIP targets rather than the group’s distinguished operating history and longer-term demand for energy-saving lighting. I continue to hold.

Contents

News links, share data and disclosure

  • Share price: 310p
  • Share count: 118,935,590
  • Market capitalisation: £369m

Why I own TFW

  • Develops professional lighting systems with a long-established reputation for high product quality, leading technical innovation, first-class service and sustainable manufacturing processes.
  • Management overseen by family non-execs who boast decades of board experience, steward a 43%/£158m shareholding and occasionally favour special payouts.
  • Conservative accounts display healthy operating margins, substantial cash reserves, impressive working-capital management and illustrious rising dividend.

Further reading: My TFW Buy report | All my TFW posts | TFW website

Results summary

Revenue, profit and dividend

  • A subdued H1 that anticipated an “improved situation at the year end“…

[H1 2024] “At the time of writing, the general order book and revenue for the Group as a whole are good. Within the Group, therefore, we look forward to an improved situation at the year end, providing there are no sudden changes to the economic outlook.” 

  • …had already suggested this FY might deliver a better H2.
  • After H1 adjusted operating profit slipped 2%, H2 adjusted operating profit remarkably gained 17% to £20.1m to set a new H2 record:
  • FY adjusted operating profit therefore advanced 9% to £32.4m to set a new FY record.
  • TFW’s adjusted operating profit excludes the amortisation of acquired intangibles and, for this FY, a £1.4m accounting gain to reflect the reduced earn-out provision for Zemper (see Zemper):
  • The adjusted profit improvement was not supported by higher revenue, but was instead driven by a higher margin through “impressive results” from TFW’s procurement team alongside a “targeted reduction of material spend” (see Financials: margin and employees).
  • FY revenue in fact dipped 1% to £176m after H2 revenue declined 2%:
  • TFW’s progress was complicated by SchahlLED, which was purchased during September 2022 and contributed for the full twelve months during this FY but for nine months during the comparable FY.
  • SchahLED experienced a difficult FY, with its revenue contribution £1.5m lower at £15.4m despite the extra three months of ownership (see Thorlux and SchahlLED).
  • The flat FY revenue performance was described by TFW as “consolidation“…

“Following a few years of significant organic and acquisitive growth, this year has been one of consolidation.” 

  • …and seemed to be caused by a lid being kept on product pricing:

“Generally, market selling price increases for luminaires have slowed…
…
“Competition is in a variety of forms, from private businesses to listed multinationals and from the information available, financial performance has been muted given that the last few years were supported by sales price increases.”
…
“Diversification of Group revenue sources… has delivered solid revenue and… resulted in a growth in operating profit despite selling price increases being limited this year, hampering the Group’s ability to offset cost pressures.“

  • Divisional performances were mixed. Thorlux and the Dutch operations enjoyed the bulk of the profit progress, while Zemper has still to show its full potential and the various Other subsidiaries continue to perform poorly:  
  • The final dividend was lifted 5% to match the H1 increase:
  • The ordinary FY dividend therefore enjoyed its 22nd consecutive annual advance and has not been cut since at least 1991:
  • This FY’s highlight was a special 2.5p per share dividend — the third extra payout in just four years — and somewhat of a surprise following the significant recent expenditure acquiring SchahlLED, Zemper and joint-venture Ratio Electric (see Financials: balance sheet and cash flow).

Thorlux and SchahlLED

  • Thorlux manufactures a wide range of professional lighting equipment — most notably the SmartScan system — and represents approximately 60% of the group:
  • The division has operated since 1936 and attracts customers through innovative products, manufacturing excellence, bespoke designs and high-quality service (point 4) that combine to provide buyers with “peace of mind” (point 7).
  • Thorlux’s lighting offers a “low total cost of ownership“, with modest maintenance requirements, extended working lifetimes and, increasingly, significant energy savings (point 7):
  • This FY’s case studies included a university building in London, within which Thorlux replaced “outdated fluorescent” lighting to generate an astonishing 94% energy saving:

“The Rhind Building houses several lecture rooms and meeting spaces that are in regular use by the university. However, the lighting system comprised outdated fluorescent technology and required updating… [T[he university sought to improve energy efficiency and reduce carbon output.
…
Thorlux retrofitted 1,260 luminaires in the Rhind Building, resulting in an energy saving of 94% compared with the old lighting system, with the potential saving of £194,498 of electricity each year.”

  • Emphasising Thorlux’s ‘green’ credentials, this FY’s annual report devoted 25 pages to TFW’s “sustainability journey“, which recapped the Light Line retrofit product boasting a 2.9 TM66 ‘circularity’ score, the purchase of another 195 acres of tree-planting land and the benefits of a new cardboard-box-making machine. 
  • Despite helping customers achieve up to 94% energy savings, this FY witnessed Thorlux’s revenue decline 2% to £99m after H2 revenue fell 3% to £53m:
  • But Thorlux’s FY adjusted operating profit commendably improved 11% to £20.0m after H2 adjusted operating profit climbed a remarkable 26% to £12.6m:
  • Thorlux’s performance is complicated by SchahlLED, which was acquired during the comparable FY and amalgamated into the division.
  • Thorlux started working with SchahlLED during 2019, after which the German lighting installer quickly became Thorlux’s largest customer:
  • SchahlLED’s customers tend to be large industrial companies. For example, a SchahlLED case study involving KraussMaffei reported an 85% reduction to energy costs through installing Thorlux lighting. The customer apparently enjoyed a “high return on investment with a payback period of less than 3 years“:
  • TFW purchased 80% of SchahlLED for €14.6m plus an “additional amount” based upon SchahlLED’s Ebitda during the comparable FY: 

[RNS 2022]  “FW Thorpe has paid an initial consideration of €14.6m (circa £12.8m) and could pay an additional amount to be determined by SchahlLED’s EBITDA performance in the year ending 30 June 2023.“

  • TFW has confirmed to me the “additional amount” came to €1.2m and was paid during this FY and disclosed within the cash flow statement under ‘payment of exit earn-out of a purchased subsidiary’ (£606k) and ‘payment of non-controlling interests’ (£452k).
  • This FY clarified the outstanding 20% SchahlLED earn-out, which is:
    • Estimated using a “forecast EBITDA assumption“;
    • Currently expected to be €6.3m, and:
    • Set to be paid from September 2025.

“Lumen (SchahlLED) non-controlling interests
The Group has the obligation to purchase the remaining shares of the Lumen business from September 2025. To calculate the expected repurchase value the Group has considered the recent and budgeted future performance of the Lumen business analysing forecasted EBITDA, revenue and costs upon which the obligation is based. This analysis is reviewed and updated each year and, if necessary, adjustments are made to ensure that the provision value reflects the best current estimate of settlement with movements recognised in the profit or loss. If the forecast EBITDA assumption were to increase by 5%, the resulting contingent consideration would increase by £267,000. “
…
“Included within other payables are commitment to purchase the remaining outstanding shares in Electrozemper S.A. of €6,000,000 (£5,087,000) (2023: €12,623,000 (£10,853,000)) and Lumen Intelligence Holding GmbH [SchahlLED] of €6,327,000 (£5,362,000) (2023: €7,508,000 (£6,455,000)”

  • SchahlLED’s FY revenue of £15.4m implied its H2 revenue dived 38% to £6.3m:
  • This FY blamed a difficult domestic economy for SchahlLED’s reduced performance:

“SchahlLED’s main market, Germany, is in recession, and therefore its operating profit has reduced slightly; nevertheless, the business is making a healthy contribution.
…
A new IT system was introduced and Thorlux Germany personnel integrated into SchahlLED, distracting effort for parts of the year.” 

  • This FY did not formally disclose SchahlLED’s profitability, but did indicate SchahlLED and Zemper combined to deliver a £4.8m adjusted FY operating profit:

“Both of our most recent acquisitions, Zemper and SchahlLED, made positive contributions of £4.8m (2023: £4.1m), before amortisation of acquisition, related intangible assets.” 

  • This FY also stated Zemper reported a £2.9m adjusted operating profit versus £2.8m for the comparable FY (see Zemper).
  • SchahlLED therefore seemed to earn a £1.9m profit (i.e. £4.8m less £2.9m) for this FY versus £1.3m (i.e. £4.1m less £2.8m) for the comparable FY. 
  • SchahlLED’s profit advancing from £1.3m to £1.9m contradicted other text from this FY that indicated a “slightly” lower subsidiary profit…

“SchahlLED’s main market, Germany, is in recession, and therefore its operating profit has reduced slightly; nevertheless, the business is making a healthy contribution.” 

  • …and also contradicted text from the comparable FY that had said SchahlLED’s profit was £2.3m (and not £1.3m):

[FY 2023] “In the year, SchahlLED added nine months of revenue to the consolidated figures of £16.9m and operating profit of £2.3m before acquisition adjustments.“

  • TFW has confirmed to me SchahlLED’s profit during the comparable FY had incurred “a couple of one-off adjustments, reducing results from circa £2.0m to £1.3m“. 
  • Excluding SchahlLED, FY Thorlux revenue appeared to drop 1% to £84m but gain 5% to £47m during H2:
  • Note that within the chart above, inter-company sales from Thorlux to SchahlLED are included within Thorlux’s revenue for FYs 2020, 2021 and 2022, but are excluded for FYs 2023 and 2024 following the SchahlLED purchase.
  • TFW has confirmed to me inter-company sales from Thorlux to SchahlLED were £4.2m during this FY. I calculate the figure for the comparable FY to be £4.1m, which may suggest SchahlLED’s lower revenue for this FY could be due to selling less non-Thorlux equipment.
  • Thorlux’s flat FY revenue but higher FY profit reflected a welcome margin improvement, which may have been supported by:
    • Now selling direct into Germany through SchahlLED, and/or;
    • Not incurring the same “one-off adjustments” that TFW told me SchahlLED had incurred during the comparable FY.
  • This FY showed Thorlux enjoying a 20% adjusted operating margin, with a super 24% reported for H2:
  • The 20% FY margin was the highest since FY 2018:
  • The initial €14.6m plus the additional €1.2m to acquire 80% of SchahlLED, alongside the remaining €6.5m 20% earn-out, gives a total €22.3m (£19.3m) cost for SchahlLED
  • SchahlLED therefore appears to have been acquired at 10x the subsidiary’s  £1.9m adjusted operating profit for this FY.

Lightronics and Famostar

  • TFW’s Dutch businesses — Lightronics and Famostar — represented 28% of group profit during this FY.
  • Lightronics manufactures mostly street lighting and was acquired during FY 2015 for an initial £8.3m that included a £1.9m debt repayment.
  • Famostar manufactures mostly emergency lighting and was acquired during FY 2018 for an initial £6.3m:
  • A £15m earn-out payment during FY 2022 took the total Dutch acquisition cost to £30m. 
  • Both Lightronics and Famostar appear to have performed well within TFW.
  • Aggregate Lightronics/Famostar revenue for this FY was £38m versus less than a combined £18m at the time of their purchases.
  • Aggregate Lightronics/Famostar adjusted operating profit for this FY was £8.8m versus a combined £2.3m at the time of their purchases:
  • FY Dutch profit of £8.8m from a total £30m Dutch investment now generates TFW a very satisfactory 29% pre-tax return.
  • TFW described this FY’s Dutch progress as “excellent“, with Lightronics being deemed the group’s “standout performer” following “growth in the wall and ceiling division“.
  • FY Dutch revenue increased 5% and lifted FY Dutch adjusted operating profit by 22% to set new records for both measures:

(Famostar acquired during H1 2018 but reported within Netherlands from H2 2019)

  • This FY’s Dutch adjusted operating margin was a healthy 23%, buoyed by a terrific 26% for H2:
  • TFW commendably widened its boardroom composition during October 2022 after appointing Frans Haafkens as the group’s “first recognised independent” non-executive (see Boardoom: composition):
  • During the 2024 AGM, Mr Haafkens made the following points about his time at TFW:
    • TFW’s board is “very easy” to work with;
    • He supports TFW’s philosophy of “buying good companies with good management and making them stronger through cooperation“;
    • Competitors in contrast buy businesses but instead can “destroy the organisation“;
    • He sold the Dutch businesses to TFW “too cheap“, which was “not very Dutch“;
    • The Dutch businesses have been a “really good investment” for TFW, due in part to the way the integration has been managed, and;
    • TFW has a “great model that you do not see very often, but it seems to work extremely well“.
  • The past few years have witnessed TFW’s main board slimmed down from nine directors to six, which may allow Mr Haafkens and his private-equity background to exert greater influence over the group’s direction (see Boardroom: acquisition strategy and KPIs).

Zemper

  • Encouraged by the success of the Lightronics and Famostar acquisitions, TFW purchased Spanish emergency-lighting specialist Zemper during October 2021:

[RNS 2021] “FW Thorpe has paid an initial consideration of €20.3m (circa £17.5m), plus an amount for certain balance sheet items. An additional €1.1m will be paid subject to EBITDA performance in 2022“

  • A further 13.5% was purchased for €6.1m during the comparable FY:

[H1 2023] “On 12 September 2022, the Group purchased a further 13.5% of the share capital of Electrozemper S.A. with a cash payment of £5.3m (€6.1m), as part of its commitment to acquire the remaining shares.“

  • Another 13.5% was then purchased for €5.0m during the preceding H1:

[H1 2024] “On 3 October 2023, the Group purchased a further 13.5% of the share capital of Electrozemper S.A. with a cash payment of £4.3m (€5.0m), as part of its commitment to acquire the remaining shares.“

  • Paying €1.1m less for 13.5% during H1 2024 versus H1 2023 does not suggest Zemper’s performance has lived up to expectations.
  • This FY clarified the remaining 10% Zemper earn-out, which is:
    • Now reduced from €7.6m to €6.0m;
    • Estimated using a “forecast EBITDA assumption“, and;
    • Set to be paid from September 2025:

“Zemper non-controlling interestsThe Group has the obligation to purchase the remaining shares of the Zemper business from September 2025. To calculate the expected repurchase value the Group has considered the recent and budgeted future performance of the Zemper business analysing forecasted EBITDA, revenue and costs upon which the obligation is based. This analysis is reviewed and updated each year and, if necessary, adjustments are made to ensure that the provision value reflects the best current estimate of settlement with movements recognised in the profit or loss. If the forecast EBITDA assumption were to increase by 5%, the resulting deferred consideration would increase by £258,000.
…
Included within other payables are commitment to purchase the remaining outstanding shares in Electrozemper S.A. of €6,000,000 (£5,087,000) (2023: €12,623,000 (£10,853,000))...” 

  • The remaining 10% earn-out reducing from €7.6m to €6.0m was reflected by the ‘changes in fair value of redemption liability in respect of acquisition of Zemper Group’ of £1.4m taken through the income statement:
  • In order to ‘balance’ the accounts, reductions to earn-outs are recognised as gains through the income statement while increases to earn-outs are recognised as losses through the income statement. 
  • I don’t know whether TFW’s estimated €6m to purchase the remaining 10% of Zemper is realistic. After all, €5m was paid to acquire an additional 13.5% during this FY.
  • This FY described Zemper’s progress as “solid“, with the division still representing approximately 10% of the group after FY revenue was unchanged at £19.4m and FY adjusted operating profit improved 3% to £2.9m:
  • Although Zemper’s H2 revenue slipped 2% to £10.4m, the division’s H2 adjusted operating profit climbed a commendable 21% to £1.9m.
  • The H2 profit advance reflected an H2 adjusted margin of 19% — much better than the 10% H1 adjusted margin and perhaps an indication Zemper’s return on sales can one day match that of Thorlux and the Dutch operations:
  • Perhaps Zemper’s work with other TFW subsidiaries helped its H2 margin. The comparable FY had suggested Zemper’s “synergy projects” might bear fruit during this FY:

[FY 2023] “Synergy projects continue, and the Zemper team has added some significant emergency lighting knowledge and technical expertise to the Group. Projects include in-sourcing of troublesome plastic components, standardisation of product offerings across multiple territories, and continual development of shared product ideas. These synergies take time to implement, but the Group expects to see some benefit later in the new financial year.”

  • This FY referred to Zemper collaborating with other group subsidiaries through the ‘Firefly‘ project: 

“Zemper continues to make good contributions and started the new financial year with a good order book, supported by its host of new products. It is also contributing to some Group collaboration projects where several companies have pooled know-how and developed new products with shared, and hence reduced, costs.

The Firefly project was a collaboration, led by Zemper in Spain, with engineers from all emergency lighting businesses in the Group.” 

  • Firefly is a “pivotal” emergency lighting system that includes “enhanced” lithium-battery technology and “more optical distribution variations to help eliminate or reduce risk to escapees“:
  • The comparable FY noted Zemper’s “state-of-the-art manufacturing equipment“:

[FY 2023] “Zemper’s facility in Spain is a credit to its founding family’s professionalism. The company is very self-sufficient, with ownership of all its intellectual property, and with its own laboratory test facilities and state-of-the-art manufacturing equipment.”

  • Board remarks at the 2024 AGM confirmed Zemper’s impressive facilities:

[AGM 2024] “When we bought Zemper, we were blown away by the technology that they have within their company — the software capabilities and the automation of manufacturing.

  • Attendees at the 2024 AGM were told Firefly manufacturing would be “moving out to Zemper in the Spring“.
  • Board remarks at the 2024 AGM revealed Zemper winning a project for Brussels Airport. Attendees were told:
    • The project involved “dynamic emergency lighting“;
    • Unlike a conventional emergency-exit sign pointing towards a fixed direction, such ‘dynamic’ lighting uses electronic screens that can be controlled to display the most suitable escape route, and;
    • These ‘dynamic’ signs could sell for up to €600 each versus €50-€100 for a conventional emergency-exit sign.
  • Certainly TFW’s outlay to purchase Zemper suggests a fair amount of successful projects and/or synergies are expected from the Spanish subsidiary.
  • To date TFW has paid €32.5m (€20.3m + €1.1m + €6.1m + €5.0m) for 90% of Zemper, and paying TFW’s estimated €6.0m for the remaining 10% would take the total Zemper purchase to €38.5m or approximately £35.6m. 
  • A £35.6m total purchase versus this FY’s group adjusted operating profit of £32m makes Zemper a very significant acquisition.
  • A £35.6m total purchase is 12x this FY’s £2.9m Zemper adjusted operating profit.
  • For perspective, the £30m paid for the Dutch subsidiaries is 3.4x their £8.8m adjusted operating profit for this FY.  
  • Despite this FY reporting the £1.4m earn-out reduction for Zemper, the Spanish operation has progressed during its three years within TFW.
  • At the time of purchase, Zemper’s Ebitda was €4.2m and was £4.6m or approximately €5.5m (+30%) during this FY.

Ratio Electric

  • Ratio Electric is headquartered within the Netherlands and develops electric-vehicle charging systems:
  • Electric-vehicle charging is a departure from TFW’s lighting expertise. At the time of the Ratio investment, TFW said:

[RNS 2021] “This is an exciting opportunity for the Group. FW Thorpe’s know-how in electrical engineering, manufacturing and lighting, combined with Ratio’s experience in electrical vehicle charging will allow the introduction of new products into the UK market as well as supporting growth in Ratio’s existing markets.

We see similarities in technology and engineering skills, giving the Group the opportunity to diversify into new areas of engineering with high growth potential.”

  • Ratio’s “high growth potential” seems only to have brought high costs.
  • TFW acquired 50% of Ratio during December 2021 for £5.8m, with a loan note issued for £0.9m “to help fund the development of [the] business”.
  • The comparable FY then revealed the loan note had increased to £1.3m, with a further £1.3m loan note issued to Ratio’s UK operation.
  • This FY revealed the loan note issued to Ratio’s UK operation had extended from £1.3m to £2.2m:

Ratio Holding B.V. and Ratio EV Limited
Pursuant to the investment in Ratio Holding B.V., the Group has issued loan notes of €1,500,000 (£1,272,000) (2023: €1,500,000 (£1,290,000)) to help fund the development of this business. With accrued interest, the balance at 30 June 2024 is €1,626,000 (£1,379,000) (2023: €1,566,000 (£1,347,000)). In addition, the Group has issued loan notes of £2,165,000 (2023: £1,250,000) to Ratio EV Limited, a wholly-owned subsidiary of Ratio Holding B.V., to help fund the development of its business. With accrued interest, the balance at 30 June 2024 is £2,245,000 (2023: £1,266,000).

  • Issuing extra loan notes is not encouraging, and sure enough Ratio recorded a £1.7m loss for this FY following a £1.0m loss for the comparable FY:

“In the year to 30 June 2024, the joint venture, Ratio Holdings B.V. generated a loss after tax of €1,987,000 (£1,706,000) (2023: €1,199,000 (£1,041,000)).

The Group has recognised its 50% share of loss of €993,000 (£853,000) (2023: €599,000 (£520,000)) in the Income Statement, plus changes in fair value of deferred consideration of €31,000 (£27,000). 

  • TFW’s 50% share of Ratio’s FY loss was £826k, which indicated the H2 loss was encouragingly reduced to £229k following the £597k loss for H1: 
  • This FY acknowledged Ratio had “struggled” and taken longer to establish than expected:

“The Group’s joint venture with Ratio Electric has struggled to make good contributions, but it has achieved significant growth in its Smart charger products, and it has established the Ratio UK company design and production facilities and product range. The io7, Ratio’s adaptation of the Thorlux Passway lighting bollard to integrate EV charging and lighting, has started to sell in much larger numbers, and even featured on the BBC’s One Show and a high profile electrical installers’YouTube channel. New projects and companies always seem to take longer to start and be harder to establish than one first believes.” 

  • This FY showed total loans to Ratio standing at £3.4m:
  • After registering the aforementioned FY £826k loss, TFW’s Ratio equity investment is carried presently at £4.7m:
  • Board remarks at the 2024 AGM gave further insight into Ratio. Attendees were told:
    • Due to “complaints” of TFW “having too much cash“, the board looked for activities beyond lighting but which had some synergies with the group’s expertise;
    • The logic was to combine TFW’s lighting technology with EV charging in order to “develop a big business“;
    • A lighting competitor coincidentally created an EV-charging business at the same time, and has performed much better, and;
    • Ratio has recently received a “breakthrough” order with a distribution company.

Other companies 

  • TFW’s Other companies consist of:
    • TRT Lighting, which supplies lighting for roads and tunnels, and earns revenue of approximately £9m;
    • Philip Payne, Solite and Portland, which between them supply emergency lighting, cleanroom lighting and shop lighting to earn combined revenue of approximately £11m, and;
    • A handful of overseas Thorlux offices.
  • This FY made clear the combined efforts of the Other companies were not satisfactory:

“The Board would like to see better contributions from all its smaller UK companies – especially, but not only, TRT Lighting. All these smaller companies have undergone changes to their subsidiary board structures in recent times, and improvements to, or diversification of, their product ranges where required. The Board looks forward to these changes enabling bigger contributions to Group profits from these businesses in the future.“

  • The largest Other subsidiary, TRT Lighting, suffered a poor FY with sales down 15% leading to losses:

“TRT Lighting was loss-making in the year, due to a revenue decline of 15%. A new sales director and a whole new sales team are in place with targets to increase new business into local authority regions, which is currently sporadic. TRT Lighting, as a UK designer and manufacturer of street lighting, should encourage all UK local authorities to buy its excellent locally made sustainable products. To assist, investment in products has continued, with further investment in marketing resources. The TRT board looks forward to the company’s improvement in performance, but is also cognisant of the time it will take to bed in new salespeople. Performance may get a little worse before it improves for the long term.” 

  • FY TRT Lighting revenue of £8.5m was within the £8.3m-£8.8m range reported between FYs 2015 and 2019.
  • Total FY Other revenue declined 2% to £19m while total FY Other adjusted operating profit slumped 37% to £0.7m: 

(Includes Famostar for FY 2018 and H1 2019)

  • H2 was particularly disappointing, showing Other adjusted profit down 50% to £0.4m.  
  • The sub-£1m FY adjusted profit leaves the Other subsidiaries as a sideshow to Thorlux, the Dutch businesses and Zemper.
  • I speculate Philip Payne, Solite, Portland and possibly TRT are kept on by TFW primarily because they supply products and services to the group’s larger operations:
  • Board remarks at the 2024 AGM provided some insight into the prospects of the Other companies. Attendees were told:
    • “We need them to step up their game“;
    • Management changes have been made to “stir them up“;
    • All have a £5m minimum revenue target [versus current revenue of £4m or less for Solite, Portland and Philip Payne];
    • “There’s nothing stopping them. We have the cash to invest, we have the market to go at. It’s just a case of them managing their situation more professionally.”;
    • Portland’s road-sign lighting could have potential for “tens of millions“, and;
    • The plan is to develop the Other companies, rather than sell or close them.

Financials: margin and employees

  • The aforementioned “impressive results” from TFW’s procurement team alongside the “targeted reduction of material spend” was reflected by TFW registering an FY 49% gross margin — the highest since at least FY 1996:
  • Within TFW’s cost of sales, the cost of inventories expensed during this FY declined a remarkable 18% to £60m — the equivalent of 34% of FY revenue and by far the lowest proportion since TFW began disclosing cost of inventories during FY 2010:
  • The lower cost of inventories could be maintained by Zemper manufacturing more components for wider group use:

“Zemper’s recent investment into injection moulding capacity has started to come to the fore in recent projects. Certain Group components, which would have been sourced externally, are now starting to be manufactured at Zemper, reducing both the cost and certain risk factors to the Group.” 

  • The higher gross margin was counterbalanced slightly by distribution costs and administration expenses climbing 10% to £53m:
  • Distribution costs and administration expenses absorbed 31% of revenue — equalling the record proportion set during FY 2021:
  • All the different costs left the group’s FY adjusted operating margin at 18.4% — the highest since FY 2015 (18.7%).
  • The group’s H2 adjusted operating margin was 21.5% — the highest for any H1 or H2 since H2 2012 (25.2%):
  • The improved margin was achieved despite total employee costs advancing 9% to £52m and absorbing 30% of revenue — the highest proportion since FY 2005 (31%):
  • TFW’s headcount increased by 18, and I am pleased 20 new recruits took on sales and distribution positions while eight people left administration roles:
  • Administration roles now represent 26% of the workforce versus 32% during FY 2019:
  • Despite the higher sales/distribution headcount, FY revenue per employee dropped £4k to £183k:
  • TFW has demonstrated impressive long-term employee management by matching higher staff costs with greater workforce productivity.
  • Between FY 2014 and this FY for example, the total cost per employee has increased 54% (to £54k) while revenue per employee has increased 53% (to £183k).
  • On the employee front, Thorlux has sustained its sales per head above a useful £200k…
  • …while revenue per employee at the other divisions has slid to £178k following the Zemper purchase:
  • At the time of purchase, Zemper operated with 120 people and reported revenue per employee of €169k or £145k.
  • In contrast, at their respective times of purchase:
    • Lightronics operated with 45 people and reported revenue per employee of €309k or £226k, and;
    • Famostar operated with 31 people and reported revenue per employee of €219k or £196k.

Financials: balance sheet and cash flow

  • This FY reiterated TFW’s policies to “maintain a strong capital basis” and “not utilise debt”:

“The Group’s policy has been to maintain a strong capital basis in order to maintain investor, customer, creditor and market confidence. This sustains future development of the business, safeguarding the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders.
…
The Group has a long-standing policy not to utilise debt within the business, providing a robust capital structure even within the toughest economic conditions. The Group’s significant cash resources allow such a position, but also require close management to ensure that sufficient returns are being generated from these resources.” 

  • The “strong capital basis” was underlined by cash finishing this FY almost £18m higher at £53m. 
  • Financial liabilities — relating entirely to items acquired through Zemper or SchahlLED — meanwhile remained less than £3m:
  • The £53m cash included £19m sat within term accounts of at least three months:
  • Bank interest earned during this FY came to £585k, implying a rather low 1.3% interest rate on the average £44m balance:
  • Loans of £3.4m issued to Ratio generate interest at approximately 4%, other loans earn approximately 6% while dividends from the group’s £3.8m equity portfolio yield approximately 5%.
  • Cash of £53m is equivalent to 30% of this FY’s revenue, which is reassuringly high compared to most quoted companies but relatively low for TFW:
  • Cash of £53m is more than enough to cover the £10m or so TFW estimates will cover the final earn-outs for Zemper and SchahlLED… and leave enough for another sizeable acquisition (see Boardroom: acquisition strategy and KPIs).
  • Cash of £53m also justifies the aforementioned 2.5p per share special dividend, which will cost approximately £3m.
  • Board remarks at the 2024 AGM provided a little more insight into the payment of special dividends. Attendees were told:
    • There is no particular level of cash that triggers a special payment;
    • Special payments depend on “what else is going on“, not least acquisitions, and;
    • “We look at the cash position periodically and take a view on it.“
  • One balance sheet entry commendably reduced during this FY was stock, which declined from £33m to £29m to perhaps reflect the aforementioned “impressive results” from TFW’s procurement team:
  • Stock finished this FY equivalent to 16.5% of revenue — the lowest level since FY 2006 (15.8%).
  • Stock turn also dipped below 2x for the first time since FY 2020:
  • A stock turn of 2x implies the raw materials, purchased components and finished goods sit in the warehouse for an average six months before they are sold. 
  • Six months is not a short time for holding stock, but this FY did say “strategic stock levels of certain components” were “still carried for protection“.
  • TFW’s stock can become obsolete relatively quickly. This FY disclosed the expected amount of stock to be written down increased by £1.3m to £6.5m:

“The value of the inventory provision is £6,467,000 (2023: £5,122,000) for the Group and £3,737,000 (2023: £2,785,000) for the Company.“

  • Cash flow was very satisfactory during this FY, with adjusted earnings of £26m translating favourably into free cash of £34m.
  • Very welcome cash movements during this FY included:
    • A working-capital inflow of £7m, supported mostly by the reduction to stock levels, and;
    • Cash capex of £6.8m matching the £6.8m depreciation and amortisation charge (excluding IFRS 16 depreciation and acquisition-related amortisation):
  • FY free cash of £34m funded the aforementioned €1.2m (£1.1m) “additional amount” paid for SchahlLED, the aforementioned €5m (£4.3m) spent purchasing 13.5% of Zemper, the aforementioned £1m loaned to Ratio Electric, some £2m spent on additional tree-planting land and nearly £8m paid as dividends.
  • Cash flow on a five-year view appears very respectable:
  • Between FY 2020 and this FY, cash flow from operations totalled £158m and (impressively) required no additional working-capital investment, supported capex of £37m and incurred tax of £23m… 
  • …which allowed £59m to be spent on acquisitions and £40m to be paid as dividends…
  • …and left the cash position only £4m lighter.
  • TFW’s five-year £37m cash capex compares to the five-year £30m depreciation and amortisation expensed against earnings.
  • The £7m difference is due mostly to TFW purchasing freehold properties (£8m since FY 2020), the value of which ought to be maintained over time but incurs only a small depreciation expense every year. 
  • Underlining a conservative depreciation policy, TFW declares consistent ‘profit on disposal of property, plant and equipment’ entries:
  • In other words, property, plant and equipment is written down on the balance sheet to valuations below their eventual disposal proceeds.
  • TFW’s capex includes capitalised R&D, the amount for which carried on the balance sheet has increased by only £3m to £6m since FY 2020 and may have flattered adjusted operating profit in the meantime by a lowly 3%. Amortisation of such development expenditure is conducted over a prudent three years.
  • During the five years to this FY, Thorlux appeared the better cash flow generator versus the rest of the group.
  • I calculate Thorlux:
    • Generated greater operating cash flow (£87m versus £71m);
    • Enjoyed a more favourable working-capital movement (a £7m inflow versus a £7m outflow)
    • Paid less tax (£9m versus £14m);
    • Spent less on capex (£15m versus £21m), and;
    • Finished this FY with more cash (£38m versus £15m).
  • An insightful balance sheet entry is TFW’s warranty provision, which hints at very few technical product problems. Introduced through IFRS 15 during FY 2018, the sum set aside to replace faulty equipment remains at a steady 2% of revenue with regular “surplus released” entries:
  • The cash, Ratio investments and equity portfolio are complemented by freeholds, which are carried at £21m, and investment properties, which are mostly woodland for tree planting and carried at £4m.

Financials: pension scheme

  • TFW’s defined-benefit pension scheme is thankfully not too problematic.
  • This FY showed pension assets exceeding pension liabilities by £4m:
  • TFW’s scheme has reported scheme assets exceeding scheme liabilities every year since FY 2011.
  • The comparable FY showed annual benefits of £3.5m being paid from scheme assets that had been reduced to £31m:
  • With contributions of only £0.8m, the scheme had looked to require an ambitious 9% annual return to sustain benefits of £3.5m or risk its assets facing permanent erosion.
  • But this FY reported benefits paid of £2.0m from scheme assets that increased to £32m:
  • With contributions of £0.7m, the scheme now looks to require a more achievable 4% annual return to sustain benefits of £2.0m or risk its assets facing permanent erosion.
  • Mind you, the general trend for the scheme’s benefit payments is up while the general trend for the scheme’s contributions is down:
  • This FY’s cash at £53m and adjusted operating profit of £32m should be able to easily mitigate any adverse movements to the scheme’s assets and projected liabilities.
  • For some perspective on the long-term cost of defined-benefit pensions, TFW and its employees have contributed an aggregate £22m into their scheme between FYs 2007 and this FY…
  • …while the scheme’s assets have advanced by £18m during the same 17 years after aggregate investment gains of £23m were more than absorbed by aggregate benefits paid of £27m.
  • The scheme’s next triennial funding review will be calculated as at 30 June 2024. The resultant contribution recommendation will provide shareholders the best insight into the scheme’s financial requirements.

Boardroom: composition

  • TFW’s boardroom has experienced a number of changes during the last few years.
  • The aforementioned Frans Haafkens was appointed as the group’s “first recognised independent” non-executive during October 2022.
  • Three directors then retired during 2023 and 2024, which slimmed the main board down from nine directors to six:
  • TFW raised eyebrows last year when the roles of chief executive and group financial director were combined: 

[RNS 2024] “FW Thorpe Plc announces the following changes to the board structure, to become effective from 1 July 2024:

Mike Allcock will step down as Executive Chairman and Joint Chief Executive and take up the role of Non-Executive Chairman.

The position of Chief Executive will be assumed by Craig Muncaster whilst retaining the role of Group Financial Director.  Craig has been Joint Chief Executive since 2017 and Group Financial Director since 2010.“

  • I still can’t recall a quoted business the size of TFW — market cap of £369m, revenue of £176m and adjusted operating profit of £32m — deciding to amalgamate its two top executive positions.
  • TFW has always employed a somewhat unconventional board.
  • For example, few quoted businesses employ joint chief executives — yet TFW has employed the following joint chief executives since FY 2001:
    • Andrew Thorpe and Peter Mason to FY 2010, then;
    • Andrew Thorpe and Mike Allcock to FY 2017, and then;
    • Mike Allcock and Craig Muncaster to FY 2024. 
  • Mr Thorpe and Mr Allcock also served as executive chairmen — a corporate governance no-no — for many years.
  • Other board features that contravene corporate-governance best practice include the absence of a nomination committee, the absence of board ‘diversity’ and the absence of directors standing for AGM re-election every year.
  • Appointing Mr Muncaster to the combined role of chief executive and group finance director creates three worries.
  1. Mr Muncaster may become stretched with his extra executive responsibilities and certain tasks could be overlooked;
  2. Mr Muncaster obtains significant management power, which reduces the scope for different executive opinions at board level, and;
  3. Mr Muncaster has limited technical knowledge of TFW’s products. 
  • This FY said the slimmed-down main board was counterbalanced by “strengthening the subsidiary boards“:

“The Board’s head count has naturally decreased in recent years in favour of strengthening the subsidiary boards at the operating companies and promoting a focused group of managers from within that can support Group activities when called on.”

  • Board remarks during the 2024 AGM provided further explanation of the management changes. Attendees were told:
    • Group operations throughout the UK and Europe had become “quite difficult to manage“, due to their “intricate nature“, for the main board;
    • The subsidiary boards were therefore “strengthened” to become “self-managing entities“, and the main board now “just oversees them“;
    • Re-jigging the subsidiary boards was performed in part by “elevating some individuals to have more of a group role” especially on the innovation side;
    • The group’s finance function has been enhanced, including the new role of Thorlux finance director, and;
    • The chairman becoming a non-executive was “planned“.
  • Other board remarks at the 2024 AGM included:
    • “The board structure is pretty much the same as it was previously… the same people are around the table holding us to account.”;
    • “We don’t like to bring people in from outside. We like to develop from within.”, and;
    • “We’ll see how things develop as to whether we split the CEO role back to joint CEOs.”
  • The appointment of Mr Muncaster as chief executive/group finance director ultimately has the blessing of the two Thorpe non-executives, both of whom:
    • Have spent their careers at TFW;
    • Are now in their 70s, and;
    • Have (presumably) accrued plenty of knowledge about management recruitment during the last few decades.
  • I doubt the Thorpe non-executives would risk their combined 43%/£158m shareholding on a mis-judged chief executive appointment.
  • I continue to speculate the board re-jig signals a different approach to group strategy and ‘capital allocation‘. 
  • After all, Mr Muncaster (alongside Mr Haafkens) is deemed by this FY to have “Mergers & Acquisitions” expertise…
  • …and major boardroom decisions of the last ten years have included purchasing Lightronics, Famostar, Zemper and SchahlLED for what could be an aggregate £80m-plus.
  • I get the impression the earlier private-equity deals between Mr Muncaster and Mr Haafkens will now set the tone for TFW’s future expansion.
  • Mr Muncaster has overseen some very appealing group accounts since he joined TFW during FY 2010. Perhaps Mr Muncaster has helped impose greater financial discipline and workplace efficiency throughout the group.
  • Indeed, my primary observation from the 2024 AGM factory tour was nobody was talking or standing still:
  • Mr Muncaster is 51 years old, so time should be on his side to develop TFW for the long run.

Boardroom: acquisition strategy and KPIs

  • The purchases of Lightronics, Famostar, Zemper and SchahlLED for what could be an aggregate £80m-plus have dominated TFW’s ‘capital allocation‘ during the last ten years.
  • Board remarks at the 2024 AGM explained how the acquisition plan developed. Attendees were told:
    • The directors felt TFW was “bordered by the island of the UK” during the 2008/9 banking crash;
    • An “active decision” was then taken to reduce UK exposure by investing abroad;
    • The “good experience” with the Dutch businesses prompted further purchases in Spain and Germany, and;
    • The approach “de-risks” the group and seems to “have worked“. 
  • Board remarks at the 2024 AGM also described the acquisition checklist. Attendees were told:
    • Likely targets are lighting businesses that are stable, successful and not directly competing with other TFW operations;
    • Possible synergies, including integrations with SmartScan, are half-way down the checklist, and;
    • “We are not business turnaround specialists“.
  • This FY did not rule out the aforementioned £53m cash position funding another acquisition:

“Whilst there are no firm plans, the cash reserves give the Board the opportunity to consider further acquisitions if a suitable situation arises.“

  • My aforementioned sums indicate:
    • The £30m paid for the Dutch subsidiaries currently delivers an £8.8m adjusted operating profit — equivalent to a 29% pre-tax return;
    • The estimated £36m total purchase price for Zemper currently delivers a £2.9m adjusted operating profit — equivalent to an 8% pre-tax return, and;
    • The estimated £19m total purchase price for SchahlLED current delivers a £1.9m adjusted operating profit — equivalent to a 10% pre-tax return.
  • Board remarks during the 2024 AGM did not reveal any particular way of measuring the returns from the acquisitions. Attendees were told:
    • Acquisitions are bought for the long term and can contribute to the group through various synergies;
    • TFW’s philosophy is about “return on sales and not being busy fools“;
    • The board does ask “what dividends are we getting?” from the acquisitions, and;
    • There is no strict IRR calculation to measure an acquisition’s progress.
  • Perhaps the gold-standard acquisitive business on the stock market is Halma (HLMA).
  • ShareScope shows the specialist engineer delivering wonderful share-price gains…
(Source: ShareScope)
  • …as well as quite possibly the most consistent dividend record among quoted companies (45 years of 5%-plus increases):
(Source: ShareScope)
  • HLMA’s success is based upon:
    • Buying leading businesses in “global niche markets”, and;
    • Operating a “decentralised model” that allows managers to expand their subsidiaries with minimal head-office interference:

[HLMA FY 2024] “The third element is the benefits we derive from our decentralised model, where our leaders are entrepreneurs and empowered to grow in their specific market niches as if each business were their own. This leads to a highly agile, innovative and proactive culture, as our companies look to understand the issues our customers are facing and help to solve them with their application knowledge and innovative technologies. 

And finally, talent and culture are crucial. Our decentralised model requires that we have the very best people in our companies, operating in an entrepreneurial, high‐performing, yet collaborative and supportive culture.” 

  • I do wonder if TFW is shifting towards a “decentralised model“, given attendees at the 2024 AGM were told:
    • Group operations throughout the UK and Europe had become “quite difficult to manage“, due to their “intricate nature“, for the main board, and;
    • The subsidiary boards were therefore “strengthened” to become “self-managing entities“, and the main board now “just oversees them“.
  • HLMA has spent more than £2b on acquisitions during the last 30 years…
(Source: ShareScope)
  • …since when operating profit has rallied from £25m to £370m:
(Source: ShareScope)
  • HLMA utilises return on total invested capital (ROTIC) as one of its key performance indicators (KPIs):
  • ROTIC is calculated by dividing adjusted earnings by net assets with acquisition-related amortisation added back:
  • The calculation gives some indication as to the level of return HLMA has achieved through its reinvestment and acquisition spend.
  • Underlining ROTIC’s importance to HLMA, the measure determines 50% of management’s LTIP payout:
  • In contrast, this FY reiterated TFW’s KPIs do not evaluate the effectiveness of the group’s ‘capital allocation’:
  • Using HLMA’s ROTIC formula, I calculate for this FY:
    • TFW’s adjusted earnings were £26m;
    • TFW’s total invested capital (with acquisition-related amortisation added back) was an average £172m, and;
    • TFW’s ROTIC was therefore 15%.
  • A 15% ROTIC matches that of HLMA, and may even underplay TFW’s reinvestment ability given the £53m cash position appears to earn only 1% interest.
  • For further perspective, between FY 2014 and this FY, TFW has increased its earnings by £14m and increased its shareholder equity by £99m:
  • Retaining £99m within the group to advance earnings by £14m implies TFW has reinvested shareholders’ money at a useful 14%.

[LTIP Circular 2024] “The plan allows the vesting of Options to be subject to performance conditions. The vesting of these initial Options will be subject to the achievement of the following performance targets: 

Earnings per Share (“EPS”) 

The percentage of the Option that Vests pursuant to the EPS Performance Condition is 80%. 

The EPS Growth Target will be measured annually on the Performance Measurement Date over a period of 5 years. 

The EPS Growth Target will be CPI plus 2% each year.“

  • The other 20% of the LTIP is dependent on total shareholder return and ESG progress.
  • EPS can of course increase through acquisitions even if they are purchased at exorbitant prices, which is why class-act HLMA includes ROTIC within its LTIP to help ensure its acquisitions provide value for money.
  • Note that TFW’s LTIP uses statutory EPS rather than adjusted EPS as a performance condition. Statutory EPS includes acquired-intangible amortisation, which is not correlated to the acquisition’s underlying trading performance.
  • Maybe using statutory EPS is why TFW’s LTIP demands five-year EPS to advance at CPI + only 2% per annum, which at the moment equates to just 5%.
  • Targeting a 5% five-year EPS CAGR seems another feature of a ‘boilerplate‘ LTIP that does not really challenge management to deliver superior returns to all shareholders…
  • …especially when adjusted earnings delivered an approximate 10% CAGR during the five years to this FY.
  • At least the new LTIP scheme will award options equivalent to only 1.8% of the current share count.

Valuation

  • This FY supplied a “modest growth” outlook:

“All Group companies are charged with growth; as ever, this is their target. With so many companies in the Group, there will be inevitable ups and downs in various locations. All the larger companies are in good shape with stable and experienced leadership teams with good order books at the start of the new financial year. Costs are generally under control, although people cost pressures remain and the companies need to keep working hard to find efficiency improvements. 

The smaller companies have all struggled somewhat to get themselves back on a plan for growth in recent years. Changes have been made and each company has a plan to grow. 

The change in governments in various Group locations raises a few questions about the future, but the Group setup gives good resilience overall. 

Consolidated as a whole, the outlook is positive with modest growth expectations.”

  • November’s AGM then reinforced the subdued prospects:

[AGM 2024] “Since the beginning of the new financial year, orders and revenue are modestly ahead of the same period last year, with the usual ‘ebb and flow’ across the Group. The Board expects half‐year results to be marginally ahead of last year.

Thorlux has started the year positively, as has Zemper. The Dutch operations are struggling to replicate the fantastic performance of 2023/24 but are endeavouring to improve. TRT is demonstrating some positive signs of improvement with a renewed sales team and new product introductions but continues to trade below expectations.

The Group continues to target profitable growth utilising its broad sector and geographical coverage, supported by its comprehensive product portfolio.”

  • Applying the 25% standard UK tax rate to this FY’s £32m adjusted operating profit gives earnings of £24m or approximately 20p per share. 
  • The 310p shares therefore trade at 15x my earnings estimate, which is the lowest multiple for ten years:
(Source: ShareScope)
  • Note that patent box relief helped this FY register a 19% tax rate:
  • A 19% tax rate would convert this FY’s £32m adjusted operating profit into earnings of £26m, or 22p per share, to support a 14x multiple.
  • My calculations could be fine-tuned further for the £50m net cash and £10m aggregate forecast earn-out for Zemper and SchahlLED.
  • Indeed, subtract the £40m of ‘surplus capital’ from the £369m market cap, and the underlying business could be valued at 12-13x ‘operational earnings’.
  • Further tweaks could be applied to cater for:
    • The Ratio investment (£5m), loan notes (£4m) and losses (£1m);
    • The investment properties (£4m) and equity portfolio (£4m), and;
    • Potential operating improvements at Zemper and the Other subsidiaries…
  • …but such adjustments would probably confirm TFW’s recent valuation has become somewhat reasonable for the first time in many years.
(Source: ShareScope)
  • During my time as a shareholder, TFW has:
    • Evolved through acquisitions from a UK-centric business into a pan-European operator;
    • Lifted operating profit from £11m to an adjusted £32m;
    • Extended its run of consecutive dividend increases to 22 years and declared five special payouts, and;
    • Increased its market cap from approximately £94m to £369m.
  • Maybe those twelve-plus years of positive progress could mean the chances of buying at a 10x-or-less multiple have become much less likely.
  • I would venture today’s multiple may not entirely reflect TFW’s:
    • Long-time operational resilience, as demonstrated by those 22 years of consecutive dividend increases;
    • Appealing returns from acquisitions purchased on low multiples (e.g. Lightronics and Famostar);
    • Possible growth opportunities through Zemper synergies and cross-selling into different European territories, and;
    • Future orders supported by new product launches and ongoing concerns about elevated energy costs.
  • The bear case beyond general economic challenges include:
    • Zemper, SchahlLED and Ratio not performing quite as expected following significant purchase expenditure;
    • Mr Muncaster and Mr Haafkens undertaking ambitious acquisitions without adhering to a suitable KPI;
    • A slowing transition to energy-saving lighting;
    • Reduced public spending on schools, hospitals and other prominent TFW sectors;
    • The board’s desire to “promote from within“, which may preclude innovative thinking from outside of the group, and;
    • The LTIP’s CPI+2% EPS target implying moderate growth prospects.
  • As the board ponders how to employ the £53m cash position, the 310p shares trade at a level first achieved during late 2016…
(Source: ShareScope)
  • …while this FY’s 6.78p per share ordinary dividend supplies a modest 2.2% income. 

Maynard Paton

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3 thoughts on “FW THORPE: FY 2024 Declares 22nd Consecutive Annual Dividend Increase After ‘Impressive’ Stock Procurement Improves Gross Margin To 49% While Subdued Outlook And Modest LTIP Targets Leave P/E At Lowest For 10 Years”

  1. FW Thorpe (TFW)

    AGM attendance 21 November 2024

    Below are my notes from TFW’s 2024 AGM. All six directors were present, alongside 15+ attendees who were mostly employees or ex-employees. For what I could tell, only two private investors attended — my old friend Joseph and myself.

    I did get the impression the meeting is more of a social event for ex-employees to catch up with the board, rather than for outside shareholders to ask business questions :-)

    Credit to the board though, all the questions were answered very openly. After the meeting I realised none of the three Thorpe family directors actually spoke during the Q&A.

    During the Q&A, the names Max Thorpe and Kate Thorpe were mentioned as senior employees, so further Thorpe family members are seemingly on hand to keep the group in check.

    I last attended TFW’s AGM back in 2010 or 2011, and I was pleasantly surprised Anthony Thorpe remembered me from that event.

    The formal part of the meeting was quite ‘old school’, with the chairman calling on ‘Mr Muncaster’ or ‘Mr Thorpe’ to second each resolution and calling for a show of hands for each vote. The number of votes FOR and AGAINST quickly flashed up on a screen behind the board, and sadly I did not make note of the voting to see if any protest votes were lodged.

    No registrar attended the event, which meant no forms for voting!

    Following the resolutions, the chairman read out a trading statement that was published at the same time to the market:

    “Since the beginning of the new financial year, orders and revenue are modestly ahead of the same period last year, with the usual ‘ebb and flow’ across the Group. The Board expects half-year results to be marginally ahead of last year.

    Thorlux has started the year positively, as has Zemper. The Dutch operations are struggling to replicate the fantastic performance of 2023/24 but are endeavouring to improve. TRT is demonstrating some positive signs of improvement with a renewed sales team and new product introductions but continues to trade below expectations.

    The Group continues to target profitable growth utilising its broad sector and geographical coverage, supported by its comprehensive product portfolio.”

    I am always a little annoyed at companies publishing AGM statements to the market at the start of the meeting. Why not publish such statements at 7am on the day? That would give shareholders time to digest the statement and ask relevant questions should the statement contain unexpected news.

    Meeting lasted 45 mins I think as I peppered the board with questions :-) Then followed a factory tour, notes for which I did not make.

    (TFW: Either Mike Allcock (chairman) or Craig Muncaster (chief exec); FH: Frans Haafkens (non-exec); MP: Maynard Paton; Q: Another shareholder)

    ————–
    MP: The board has been reshaped in the last year or two and Mr Muncaster is now chief executive and finance director. Quite unusual to have one person undertake both those roles. What was the thinking behind merging the two roles?

    TFW: Took the decision to strengthen all the subsidiary boards. Trying to manage them from the main board was quite difficult.

    Subsidiary boards now strengthened so they are “self-managing entities“. Main board now just oversees them. Strengthened the financial operations. Now have a financial director at Thorlux.

    Don’t like to bring people in from outside. Like to develop from within. Have people within the group “independently responsible” for finance. 


    Will see how things develop. “Doesn’t mean it’s going to be the same forever“. Important to have the strength in the businesses. Pay a lot for auditors to “tear us to pieces every year“.

    Board structure is quite similar to how it was previously. Same people are around the table still holding us to account.

    Very good technical lighting people in the various businesses. Have elevated some to more of a group role versus being responsible for only a subsidiary.

    Now created group management structure below the main board. People are “waiting in the wings to step up“. Lot goes on one level beneath the board. Like to promote from within. A group innovation team is also in place.



    MP: Is the combined chief executive and finance director role a permanent position?

    TFW: Will see how things go. Open to reverting back to previous roles. We now have joint MDs for Thorlux.

    (MP note: Joint MDs for Thorlux perhaps now replace the joint chief-exec roles previously seen on the main board. Gives support to the notion the main board is now a high-level ‘capital allocator’ and no longer wishes to be involved in the deeper operations)

    MP: Strategic direction of the business? Was UK-focused, but then bought the European businesses. Is the strategy now becoming a pan-European lighting business through acquisitions? 


    
TFW: Back in 2008 banking crash “definite feeling we were bordered by the island of the UK“. Exposed to local political changes and recessions. Decided to reduce that exposure by investing abroad. Was an active decision.

    Good experience with the Netherlands. Taken further with Spain and Germany. “All about de-risking exposure to the UK economy“. If one company is down, another may be up.

    MP: How do you find the acquisitions, what do you look for and how do you decide what t to pay?

    

TFW: Got a list of ten objectives. Never meet them all. First is “we’re not business turnaround specialists“. Want stable management and stable performance and record of success. Must be in lighting and not in competition with other group companies.

    Pay between 6x and 10x Ebitda depending on strength of the business. Zemper has “tremendous machinery, tremendous in-house expertise” so commanded a price higher than a pure manufacturer.

    

MP: Do you buy companies on a stand-alone basis, or do you first work out the synergies to determine which would be a better fit?

    TFW: Would look for potential synergies but “it’s probably number four or five” on the list of ten objectives.

    Famostar good example. Had no controls, but then adopted SmartScan controls. Quarter of revenue now probably associated with SmartScan. Controls cost Famostar very little to redevelop. Would look at companies and consider if they could benefit from technology already in the group.

    MP: The Dutch businesses have done really well under your ownership. Do you have an IRR or return on capital measure? How do you judge how well they’ve done? 



    TFW: “This business is always focused around its operating performance each year, so it’s operating profit each year“.

    Our companies benefit from us having cash to invest. Stability of the group means decisions are made for the long term. We have patience and “more time do things properly” for the long term.



    (MP note: There was no board talk of IRRs etc, just of operating profit and dividends being received from subsidiaries. Operating profit at the Dutch businesses has improved notably since the associated acquisitions).

    MP: How do you view Zemper? Maybe it has not performed as well as you’d expected?

    

TFW: “When we bought Zemper, we were blown away by the technology that they had within the company — the software capabilities and the automation of manufacturing.”

    Recently won an order for Brussels Airport involving “dynamic emergency lighting“. Product uses an electronic screen and the arrow direction on the sign can be controlled remotely. Therefore people don’t head towards the danger when leaving the building.

    Could be the future of emergency lighting. Dynamic exit sign sells for 600 euros. Conventional exit sign sells for between 50-100 euros.

    Bought Zemper “because of the future“. Very skilled at manufacturing. Lot of products made by robots.

    “Everybody who’s been to the factory is blown away by the technology. Investment in that factory is tremendous, and we see that paying dividends in years to come.”

    Zemper factory is far more automated and advanced than the Thorlux factory.

    Thorlux is all about “bespoke manufacture and small-volume manufacture“. Thorlux catalogue has 500 pages. Completely different to Zemper.

    MP: What is the return on capital from the acquisitions? That should be a KPI. Not just sales or profit.

    TFW: “Whole philosophy of TFW is about return on sales and not being busy fools“. Trying to maximise as much profit as we can. Not putting in loads of capital to make the acquisitions work.

    Every year board asks what dividend are the acquisitions paying to repay the initial investment? “Do we want a strict IRR calculation on them? No.” All about growing our market and synergies.

    With SchahlLED, doing 20 million [revenue?] in Germany. But should be doing double that. It’s a growth market. But less in the way of capital investment. Acquiring SchahlLEd given a stronger position in “enormous” German market. See future growth at SchahlLED plus good margins.

    (MP note: Conversation now went back and forth about returns on capital, goodwill amortisation and adjusted profits. I have written in my blog post above how Halma judges its acquisition spend. Maybe TFW should do similar!)

    MP: Frans, you have been on the board now for two years. What are your thoughts on TFW in your two years?

    FH: “Tremendously enjoyed it because it’s very easy to work with the gentlemen around me.”

    

”Really support the philosophy that you buy good companies with good management and you try to make these companies stronger by cooperation… I think that’s pretty unique… And I’m really proud to be a part of that.”

    We sold the Dutch businesses too cheap. “That’s not very Dutch“.

    Buy 3m Ebitda which becomes 10m = a good investment “with any KPI“.

    “A great model that you don’t see very often”

    Q:You don’t put branding on your lights — why not?


    TFW: Try to brand all products. Created a smaller TL logo to put onto products. Might look “crass” to have large branding impacting look and feel of the product. Branding products for the general public won’t promote Thorlux. Lights are sold to engineers.

    Q: Dividend policy going forward? Is it regular, regular, regular then a special?

    TFW: “If it’s a special, it’s a special.” No change to the dividend policy from anything that we’ve done previously.

    MP: Is there a cash level or measure you judge that prompts consideration about paying a special dividend?

    TFW: No special number. Considered periodically. Depends what else is happening with acquisitions and so on.
    

    MP: What’s the future of the smaller companies, which seem to be struggling. They’re becoming a smaller and smaller part of the whole group with the acquisitions.

    TFW: “The smaller companies need to step up and make a bigger contribution.

    Significant management changes in the last 12-18 months. Some were retirements, but some were proactive changes to “stir them up a little bit“.

    “They all have a target of being a minimum of £5m revenue“.

    “We want them to grow well beyond that. There’s nothing stopping them. We have the cash to invest and we have the market to go at.”

    Portland has moved into road sign lighting — could be “ tens of millions of potential out there“.

    “Just a case of them managing their situation more professionally.”

    MP: Why not sell the smaller companies and redeploy the capital somewhere else?



    TFW: “Our instinctive reaction is to try to develop them to become bigger businesses and make sure they have a market sector to grow into.”

    MP: What’s the story at Ratio?

    TFW: Doing something outside of lighting for the very first time. But with some synergies with lighting. A competitor had the exact same idea at the same time, and has performed much better.

    Starting to see traction. “Just got our very first breakthrough order with a warehouse and the distribution company“. Did all the lighting in the warehouse and EV chargers for the car park.

    Reply

  2. FW Thorpe (TFW)

    Publication of 2024 annual report

    Here are some points of interest to accompany those noted in the blog post above:
    
——————————————————————————————————————


    1) WHO WE ARE, OUR PURPOSE, OUR VISION

    All the same text as last year.

    But the phrase “each company works autonomously“…

    “We specialise in designing and manufacturing professional lighting systems. We currently employ over 900 people and, although each company works autonomously, our skills and markets are complementary.”

    …does suggest a degree of decentralisation within the group.

    I continue to speculate whether TFW has ambitions to become the Halma of the commercial-lighting industry. This great speech from former Halma boss David Barber explains how Halma’s acquisition strategy — and allowing the subsidiaries to operate independently with minimal head office interference — worked wonders for shareholders.

    As my blog post above reports, attendees at the 2024 AGM were told the subsidiary boards were “strengthened” to become “self-managing entities“, and the main board now “just oversees them“… which seems a Halma-like approach.

    Then again, group subsidiaries do pool their resources as the Firefly project shows, as text elsewhere in this report discloses:

    “The Firefly project was a collaboration, led by Zemper in Spain, with engineers from all emergency lighting businesses in the Group”

    Also in this introductory section, a reminder about the desire to deliver the best long-term value:

    “Provide technically advanced lighting solutions that deliver long-term lowest cost of ownership.”

    And TFW’s green credentials…

    “Maintain a consistently respected and profitable organisation with an environmental conscience.”

    …are demonstrated by displaying emissions data KPIs alongside four financial measures.

    2) OUR INVESTMENT CASE

    The investment case remains:
    • ‘Product innovation’;
    • ‘Our focus on sustainability’;
    • ‘And strong financial performance…’. and;
    • ‘Means we are positioned for sustainable long-term growth’.

    The rest of the text is the same as last year, except for some revised highlights and CAGR information:

    “• Profitable growth at Thorlux and Lightronics, solid results elsewhere;
    • Orders improved again this year with strong performances at Thorlux and Lightronics;
    • Operations in Spain, France and Germany all made positive contributions;
    • Consistent revenue growth – Compound Annual Growth Rate, including acquisitions, across the last five years of 9.7%, ten years of 10.8% and 15 years of 8.3%.    ”

    3) DEMONSTRATING OUR COMPANY VALUES

    a) Retirement of Peter Mason

    A tribute to former FD/joint chief executive Peter Mason:

    “Apart from his obvious accounting skills, Peter immediately had an impact improving our systemisation, especially with the introduction of our first mainframe computer system – something very impressive for the era and mind-blowing for incumbent staff.”

    b) Celebrating the 40th work anniversary of Mike Allcock

    A tribute to chairman Mike Allcock:

    “Mike Allcock began his career with FW Thorpe Plc in 1984 as an apprentice at Thorlux Lighting. In less than 30 years, Mike had risen to become Joint Group CEO, and, a few years later, Chairman. This career progression is testament both to Mike’s exceptional talent and dedication and to how it was recognised and rewarded within the Group.”

    c) Our colleagues

    Revised text about the importance of the workforce:

    “Our employees are fundamental to our success; they design, develop, manufacture and sell our products, as well as provide the excellent customer service we deliver. In return, we invest in them with development and training, and we have a wellbeing policy. We also have an apprentice scheme, and we train and promote management from within the Group.”

    d) Our approach to sustainability

    Sadly this year’s report did not repeat last year’s sustainability timeline, which among other snippets confirmed TFW introduced its first energy-saving products in 1994.

    4) WHAT WE DO

    TFW’s “complete service offering” continues to consist of Design/development, Manufacturing and Services, but this year’s report carries some extra explanatory text:

    “We allocate resources and human capital to the continuous development of lighting products, ensuring we meet evolving market demands and requirements. 

We operate multiple manufacturing sites across the UK, and our factories in the Netherlands and Spain enable us to meet European demand. We continue to invest in our manufacturing facilities.

    Our services range from surveying, lighting design through to commissioning and after-sales service. We support our customers throughout the products’ lifecycle.”

    The rest of the text is unchanged and still has an emphasis on “high-quality” and “excellence“:

    “Focus on high-quality products and good leadership in technology”
    “Continue to grow the customer base for Group companies”
    
“Focus on manufacturing excellence”

    ”Continue to develop high-quality people”

    5) OUR BUSINESSES

    Revised text for SchahlLED suggests the German subsidiary may have altered its sales approach.

    The prior year referred to two sales offices:

    “The company is based in Unterschleißheim near Munich and has sales offices in Cologne and Weyhe close to Bremen.”

    But this year referred to “sales representatives across Germany“:

    “The company is based in Unterschleißheim near Munich and has sales representatives across Germany.”

    6) MARKETPLACE

    No great revelations here.

    A reference to “safety stock“, which I presume is to mitigate supply disruptions, and the “introduction of wood” as a material:

    “While the Group managed to reduce stock holding during the year, the Group continues to hold safety stock where required.”

    “Product development remains a key pillar to success, differentiating the Group from its competitors with innovative products and systems. This year included the introduction of wood as a sustainable material to form our products.”

    The cover of this annual report reflects the new wood material!

    No meaningful changes to the “market-specific drivers“, but within the “macroeconomic drivers“…

    …the following line from the prior year has been removed…

    “Resilience in the supply chain is being tested post-pandemic and with increased logistics costs”

    …while this following line has been introduced for this year:

    “Continual review of LED technology offerings to take advantage of the latest advances and ensure we are offering the best solutions to our customers”

    I am hopeful the removed line means the supply chain has proven resilient and the new line means new LED technologies could provide extra sales opportunities.

    This section also reveals the proportion of sales from emergency-lighting systems has improved from 36% to 38% while the proportion of sales from LED technology, energy-saving controls and related services has advanced from 96% to 97%.

    7) BUSINESS MODEL

    A reminder of TFW’s “peace of mind” business model:

    “Customers come to us for peace of mind. They want the correct technical solution, professional service, sustainability of products/services and the ability to support the customer during a product’s warrantable life and beyond.

    Our business model is focused on the needs of our customers and the marketplace, with a robust capital structure that underpins our ability to deliver sustainable growth, innovative products and excellent customer service.”

    No meaningful text changes here, although an extra line was added to describe the activities of TFW’s service range:

    “Our services range from site surveys, installation, commissioning through to monitoring the performance of products”

    Such service activities generated revenue of only £6m during the year, emphasising TFW does not have enormous income beyond the initial sale of the lighting equipment (£170m during the year!).

    Worth repeating TFW receives its orders through the following reasons/specifications: “renovations, new build, energy saving, compliance, technology adoption“.

    Note also TFW’s product features remain:

    “• Energy efficiency
    • Low maintenance
    • Rapid installation

    • Longevity of product
    • Low total cost of ownership    ”

    I always translate “Low total cost of ownership” to mean a higher up-front cost but low/no ongoing service expenses. Little ongoing service revenue could make revenue more unpredictable for shareholders, but TFW’s long-term record suggests customers are happy, which in turn makes it hard to argue against the model. Text elsewhere in the report says product warranties last between 5 and 10 years.

    8) OUR STRATEGY

    No changes to the overview text, and I still like how TFW places shareholders ahead of employees and customers (not every quoted company lists the three in the same order!):

    “The Group management team is passionate about developing the business for the benefit of the shareholders, employees and customers.”

    Important parts of the strategy include:

    “• FW Thorpe has been built on product innovation– design and product development is fundamental”
    “• The Group is product led. This enables us to maintain competitive advantage with market-leading products,”
    “• Control of the manufacturing processes is of utmost importance – key processes are kept in-house with targeted investment in new machinery as required.”
    “• Family principles and how we treat our people is fundamental to our success    .”

    Within the supplementary strategy text, a few tweaks:

    a) Focus on high quality products and good leadership in technology

    The prior year referred to marketing EV kit:

    “Electric vehicle charging and road safety products now to be marketed by a number of Group companies.”

    But this year now refers to selling EV kit:

    “Electric vehicle charging and road safety products now being sold in the UK.”

    b) Focus on manufacturing excellence

    A new line about a new paint plant:

”New paint plant at Solite targeted to reduce gas consumption and carbon emissions.”

    c) Continue to develop high quality people

    Re-emphasising the importance of employing “high-quality people“:

    “As one of our main sources of competitive advantage, it is imperative we continually develop and retain talent within the business.”

    Plus a new risk with non-UK staff:

    “Ability to sponsor non-UK staff and associated increased costs.”

    9) CIRCULARITY IN LIGHTING

    Two pages explaining the ‘circular economy’…

    “The key principles of the circular economy are to eliminate waste and pollution, circulate products and materials, and regenerate nature. Products and materials are kept in circulation for as long as possible through maintenance, reuse, refurbishment and remanufacture, then, once the end of life is reached, recycling and/or composting takes place, ensuring nothing is lost. The circular economy looks to move away from the ‘take–make–waste’ pattern, into a more sustainable and regenerative one.”

    … and TFW’s role within it (100,000 hours is equivalent to 11 years and 3 months):

    “Key circular principles such as product efficiency, longevity and maintainability have always been pillars of the design process, long before the topic of circularity became mainstream
    …
    Group companies ensure luminaires last as long as possible by using high quality parts, materials and manufacturing techniques. In most cases, luminaires are designed to last an impressive 100,000 hours.    ”

    TFW explains TM66:

    “The Chartered Institution of Building Services Engineers (CIBSE) and the Society of Light and Lighting (SLL) have written TM66, a document that provides guidance on how to assess the circularity of a luminaire, including a checklist and real-world examples of good practice. TM66 is an exacting framework that demands proof of the highest standards from lighting product designers and manufacturers.”

    And this is where using wood for lighting equipment comes in:

    “In April 2024, TRT made history with its new Oaken streetlight. Achieving an impressive score of 3.1, Oaken gained the highest verified score for any luminaire in the TM66 Assured scheme at the time. Oaken is a highly innovative luminaire made from recycled polycarbonate and aluminium, housed in an oak body”

    10) FIREFLY

    Two pages outlining the new Firefly product:

    “The Luciérnaga joint project (‘Firefly’ in Spanish) is the first collaboration to combine the knowledge, resources and experience from four Group companies: Thorlux Lighting (UK), Philip Payne (UK), Famostar (NL) and Zemper (ES).”

    The collaboration between subsidiaries brings the following advantages:

    “• Control of supply chain components and reduced reliance on third-party suppliers.
    
• Internal production of advanced and market-leading electronic components.
    
• Group development of emergency self-test and wireless communication software (SmartScan).
    
• Significant Group investment in new body moulds, tooling and optical distribution designs, for improved overall product performance.    ”

    An interesting line about the customer “fit-and-forget” viewpoint:

    “Customers today seek an emergency lighting system that provides a fit-and-forget solution and achieves compliance.”

    11) SETTING NEW STANDARDS IN SUSTAINABLE LIGHTING

    Two pages on using wood in light fitting:

    “The Group product innovation team has designed two groundbreaking products – ARDEN and Oaken – that mark a significant departure from conventional luminaire construction; for the first time, wood has been utilised as a primary material. This pioneering use of wood in luminaire construction underscores FW Thorpe’s commitment to innovation and sustainability.”

    All useful to know:

    “Wood has less embodied carbon (kgCO2e) and requires less embodied energy compared with aluminium castings.
    …
    European oak is an extremely durable hardwood that will achieve in excess of a 20-year life, which ensures its suitability for use in long-service luminaires.    ”

    I must admit I am not sure a local authority buying streetlights will be swayed enormously by a wooden casing versus a metal casing. I suspect the cost and lighting efficiency will be the purchasing priorities:

    But the product’s TM66 score is significant and this report does claim “TRT Lighting’s Oaken luminaire is a groundbreaking product that redefines outdoor lighting with its eco-friendly design and advanced technology.”

    12) WEST MIDLANDS TRAINS AND NETWORK RAIL

    These cases studies are always useful for shareholders as they give some perspective as to why customers choose TFW.

    This shows TFW can enjoy repeat business from happy customers:

    “Thorlux has worked closely with West Midlands Trains (WMT) and Network Rail for nearly a decade to modernise the lighting systems at 150 sites, including 145 stations. Additionally, Thorlux has supplied luminaires and control systems for the brand-new £56 million University Station in Birmingham.”

    The project necessitated substantial lighting expertise, as many sites presented unique” requirements…

    “The project required significant retrofitting and remanufacturing work – many stations have at least one unique retrofit requirement or ‘heritage’ element. Some of the oldest luminaires requiring modernisation had been in service for 50 years or more.”

    …and everything had to be retro-fitted on-site:

    “Above all, railway premises are safety-critical, requiring constant functional lighting. Removing a fitting for off-site inspection or refurbishment is impossible unless a temporary substitute provides identical performance – which is usually impractical. This restriction made on-site retrofitting a central part of the project.”

    Despite lighting levels increasing, energy/maintenance savings of £1m+ a year have been accrued:

    “Every upgraded WMT luminaire now uses either standard SmartScan or SmartScan Radar controls. Even with lighting levels increasing by 500% at certain stations to achieve industry standards compliance, WMT has reduced carbon emissions by 65%. With increased efficiency cutting lighting energy costs, plus reduced upkeep (planned, reactive and callout) and other factors, WMT calculates it will save over £1 million per year on its combined total energy and maintenance spend.”

    13) RHIND BUILDING, UNIVERSITY OF LONDON

    One of TFW’s competitive advantages is being able to supply bespoke lighting. From the 2024 AGM factory tour, I understand Thorlux is one of only three or maybe four UK lighting manufacturers that are able to support complex bespoke work.

    The Rhind Building is a good example:

    “Seeking a sustainable solution, the university wished to keep the existing multi-function chilled beams at the Rhind Building in place instead of replacing them with new fixtures. Thorlux provided tailored retrofits to replace the existing lamps and covers, re-engineering the existing chilled beam chassis.”

    The University has reduced running costs by £194k a year!

    “Thorlux retrofitted 1,260 luminaires in the Rhind Building, resulting in an energy saving of 94% compared with the old lighting system, with the potential saving of £194,498 of electricity each year.”

    Would be useful to know the payback period for this sort of installation. A few years ago TFW was referring to paybacks of 3 years, but I suppose a lot depends on energy pricing and how inefficient the previous lighting was.

    14) KEY PERFORMANCE INDICATORS

    The same six KPIs as last year, with C02 emissions (down 10% on a revised comparator to include SchahlLED) and renewable energy usage (up 12% on a revised comparator to presumably correct an error) being commendable ‘green’ measures. Renewable energy usage is up 13x since FY 2020.

    15) OPERATIONAL REVIEW

    A few snippets here:

    a) Overview

    Re-emphasising the aforementioned “safety” stock:

    “Stock has also been reduced; however, strategic stock levels of certain components are still carried for protection.”

    Wage inflation prompted in part by lifts to the minimum wage, the level of which TFW is proud to surpass:

    “The Group’s people costs have continued to rise, driven not only by inflationary pressures but also by consecutive significant increases in the minimum wage, which drove cost increases across all levels of the business. Within the Group, we continue to pride ourselves on paying above these minimum wage standards and rewarding success.”

    b) Thorlux

    I am probably behind the times, but I have never heard of vehicles fuelled by vegetable oil:

    “The business’s first HVO (hydrogenated vegetable oil) fuelled vehicle was added to the fleet, with potentially more to come this year. With over 54% of the Thorlux car fleet now electric, investments in alternative fuel vehicles are further reducing the emissions and carbon intensity of the business.”

    (When I visited TFW for the 2024 AGM, the huge majority of cars in the car park were not electric and a number of EV charging points were empty.)

    Outlook seemed reasonable in the circumstances:

    “The business will continue to build on its targeted sector and territory approach and aim for growth again in 2024/25, mindful that the headwinds of a change of government in the UK could impact short term demand, delaying replacement programmes in certain sectors.”

    c) Lightronics

    Cross-selling UK products into Europe could be a real money-spinner, but has yet to really take off at TFW despite the group acquiring its first overseas venture (Dutch subsidiary Lightronics) in 2015. But some positive omens for future cross-selling at Lightronics:

    “There has also been some successful cross-Group selling this year, with the Lightronics wall and ceiling team introducing certain Thorlux UK made products to its customers. Lightronics will take on a number of TRT developments to sell into the Netherlands in the coming year, such as the Oaken and TRT’s updated Aspect street light family.”

    Perhaps reflecting TFW’s autonomous management of subsidiaries, only now after 10 years of Lightronics ownership are “development synergies…starting to take shape“:

    “Product development synergies are starting to take shape – collaborations with TRT in particular, which shares similar customer bases, and also Thorlux from a SmartScan lighting controls perspective.”

    News of some welcome cost collaboration:

    “Investments at Lightronics centred around new product tooling following product developments this year; the business looks to share these costs with other Group companies by tooling common components when the opportunity arises.”

    FY 2025 might not be as such successful as this FY:

    “This year’s figures will be tough to beat; however, the business starts the new financial year with a reasonable order book and good pipeline. ”

    d) Famostar

    I think this €1m is the first actual disclosure of cross-selling revenue:

    “Thorlux’s product sales via Famostar increased marginally; orders exceeded €1m this year. At the time of writing, Famostar is on the cusp of winning a project over a three-year period in the education sector in the Netherlands.”

    (Thorlux earned revenue of £3.6m through other subsidiaries during the year.)

    Outlook seemed reasonable:
 “Growth is still on the agenda for Famostar,”

    e) Zemper

    An alternative to cross-selling benefits is cost-saving benefits. Zemper appears set to reduce some expenses across TFW:

    “Zemper is the most prolific and enthusiastic contributor to Group synergy projects which should result in significant savings in various Group companies over the next few years.”

    An outlook referring to “medium-term projections” suggests immediate progress might not be spectacular:

    “The challenge for Zemper remains: to achieve sustainable profitable growth as per its medium-term projections…”

    f) TRT

    Seems like radical action has taken place to revitalise TRT after some years in the doldrums:

    “The sales side of the business has been subject to a complete overhaul, with new sales leadership in place and new personnel covering territories across the UK to improve the depth of coverage.”

    Let’s hope the aforementioned wooden street light becomes a popular seller:

    “In terms of innovation, TRT is proud to have completed the development of its most sustainable street light, Oaken; this product was recognised by an independent testing house as the most sustainable light it had ever tested in the UK lighting industry. Oaken, a wooden street and amenity light, scored an impressive 3.1 in a TM66 sustainability rating in April 2024.”

    Outlook for “some optimism” does not suggest a bumper year head:

    “TRT’s solid operational base combined with a reinvigorated sales team and innovative product portfolio give cause for some optimism for 2024/25.”

    g) Solite

    A pioneer in new ovens:

    “Solite is also pioneering the use of new powder coating ovens which should result in an estimated 70% reduction in gas usage, supporting the Group’s net- zero ambitions.”

    Outlook is positive:

    “The order book remains healthy”

    h) Portland

    This subsidiary used to specialise in lighting for retailers, pubs etc, but as such income dwindled has now developed signs and other lighting for use on the roads:

    “Although revenue from the traditional sign lighting business remained low, the traffic division, whilst only just starting, accounted for over 20% of revenues this year, supporting the decision to invest in targeting this market.”

    Outlook seems encouraging:

    “Portland starts 2024/25 with a strong pipeline of opportunities for the traffic division spanning the next few years. The combination of traditional sign lighting and a new market opportunity with traffic products should enable Portland to deliver growth in the future.”

    i) Philip Payne

    From the associated pictures, “architectural emergency lighting” appears to be emergency lighting but designed a more aesthetic manner:

    “The Philip Payne business is now refocused on its traditional homegrown market of architectural emergency lighting…”

    Outlook somewhat vague:

    “This year has been one of consolidation, focusing on redefining routes to market and refreshing the product portfolio. Investment in product development, sales and marketing will take some time to come to fruition; however, next year should see those investments starting to deliver.”

    16) FINANCIAL REVIEW

    A useful line that reveals TFW’s ‘Other’ companies can be influenced by various overseas outposts:

    “The overall results for the other companies continues to be dampened by the results from our overseas sales offices in the UAE and Australia, although the latter did generate a small profit this year.”

    As per the blog post above, interest earned during the year was a rather low 1.3% on the average £44m cash position. The text did not really explain the low rate…

    “The Group’s cash is managed in accordance with the treasury policy. Cash is managed centrally on a daily basis to ensure that the Group has sufficient funds available to meet its needs and invest the remainder. The majority of cash is placed with approved counterparties either on overnight deposit or time deposit. There are a series of time deposits that are maturing on a rolling cycle in order to meet regular business payments, with a margin for larger regular and one-off payments as well as seasonal variation in cash requirements.”

    …and I presume the “sufficient funds available to meet [the group’s] needs” is significant and held in non-interest accounts. I would have thought a firm such as TFW would be really maximising its cash management, so more investigation is needed on this subject.

    The freeholds continue to offer some ‘hidden value’:

    “The directors are of the opinion that the market value of the freehold land and buildings is in excess of their net book value. While it is considered that the market value is significantly greater than the net book value for many of the Group’s properties as a result of being acquired between one and over 20 years ago, management considers that undertaking formal valuation exercises would be costly for limited value and, consequently, no formal exercise has been undertaken.”

    17) SECTION 172

    This text is unchanged from last year, but under ‘shareholders’ I see the bullet point “Trading updates at appropriate times” — I can’t recall TFW publishing a standalone trading update beyond its usual AGM statement!

    The bullet point “Investor meetings and presentations, including company visits” sounds as if TFW undertakes conventional City roadshows (although presentation slides are not published on the website).

    Pretty sure TFW is the only holding in my portfolio that engages with local politicians: “Engagement with local MPs and Chambers of Commerce”.

    18) SUSTAINABILITY

    This section is important to TFW; the group markets its products on their energy efficiency, and TFW’s operations ought to boast superb ‘green credentials’ to help champion environmental matters to customers.

    As such, the section ran to 28 pages including a mammoth 14 pages devoted to Climate-Related Financial Disclosures (CFDs).

    a) Progress this year

    The major ‘green’ development this year is having the 2040 net-zero target validated by the Science Based Targets initiative (SBTi):

    “In 2023, FW Thorpe Plc announced its ambitious target to achieve net-zero emissions by 2040 and set credible and robust science-based targets. The SBTi has validated that FW Thorpe Plc’s science-based greenhouse gas (GHG) emissions reduction targets conform to the SBTi Corporate Net-Zero Standard. The standard includes the guidance, criteria and recommendations companies need to set science-based net-zero targets consistent with limiting global temperature rise to 1.5°C. Overall net-zero target: FW Thorpe Plc commits to reach net-zero greenhouse gas emissions across the value chain by 2040.”

    b) Sustainability in action

    Contains the same four areas of focus as the previous year (Products, Operations, Business Model and People), but with the number of accompanying bullet points increased but the associated text sadly shortened for this year.

    The rejigged text offers mostly general topics, for example:

    “• Design principles– circularity focus, recycled renewable content, retrofit options
    • Product lifetimes – e.g. 100,000 hour’s operation
    • Energy efficiency

    • Smart technology

    • Health and well-being

    • Minimum certification against sustainability and circularity standards    ”

    This point suggests TFW operates at least one hydrogen-powered vehicle:

    “• Sales and engineering fleet – hybrids/EVs/hydrogen”

    Given TFW’s manufacturing/warehouse staff can’t WFH, I would like to think office-based staff keep WFH to a minimum:


    “• Ability for certain staff to work at home – reduced travel”

    This link reveals a third party takes on the “alternative financing“:

    “• Alternative financing models for customer projects”
    

    c) Products

    No major text changes to the intro, but a reminder about “guarantees” of product quality:

    “By utilising the latest high-quality LEDs, evaluated on criteria including colour rendering, luminous flux and thermal stability, the Group guarantees that its luminaires deliver exceptional luminous efficacy and extended operational lifetimes…”

    Promising text about Zemper’s EVO10:

    “The use of durable components, tested with thermal cameras to identify critical points, has extended the lifespan of all products in the EVO-10 range.
This includes the design and manufacture of LEDs guaranteed for 100,000 hours.
…
For batteries, Zemper conducted the largest study to date on LiFeP04 batteries for emergency lighting applications, in collaboration with experts from the IMDEA Institute.
…
Additionally, Zemper has created a proprietary charging system for LiFeP04 batteries that maximises energy efficiency and extends battery lifespan.”

    Promising text about Portland’s Hydra:

    “The Hydra represents a revolutionary approach to traffic sign lighting, featuring nine adaptable heads with components arranged in flexible combinations.
… 
Through ingenious optical engineering, type E2 road signs up to 750mm can be effectively illuminated using just 1W of power.”

    Promising text about Portland’s Crossafe-Retro:

    “The Crossafe Retro illuminated post converters are proving very popular…”

    The text below shows how ‘green thinking’ can improve financial performance. The “impressive” stock procurement referred to in the blog post above was in part due to efforts to reduce suppler-delivered waste:

    “As the Group continues to embed the principles of the circular economy, significant strides have been made in reducing packaging waste generated by its businesses. Over the past year, the Group has implemented enhanced planning processes that have enabled Group companies to better manage inventory, minimise excess stock and streamline deliveries. This has not only reduced the amount of supplier-delivered waste but has also eliminated the procurement of unnecessary items.”

    The 2024 AGM factory tour included a visit to Thorlux’s new box-making machine, which may be very close to already having paid for itself:

    “In November 2023, Thorlux Lighting installed a new box-making machine at its Redditch, UK, manufacturing facility.

    …
    Thorlux anticipates it will produce approximately half a million boxes on-site each year. Besides reducing waste and overstocking, the new equipment will increase efficiency and cost-effectiveness; Thorlux anticipates the machine will pay for itself in just two years, based on its previous carton spend for the year 2022.    ”

    d) Operations

    More on the stock-control benefits through waste reduction:

    “All Group companies are required to meet ambitious targets to reduce waste to landfill through the economical use of resources and recycling of materials. Through better planning, the Group has successfully managed inventory, minimised excess stock, streamlined deliveries and eliminated unnecessary purchases.”

    This seems incredible: “1.8 tonnes of [waste] powder” have been collected and reused in Thorlux’s powder-coating process in just four months:

    “This initiative has reused over 1.8 tonnes of powder in four months, coating nearly 38,000 components”

    e) Thorlux carbon offsetting project

    A reminder of the trees planted and the emissions they will offset:

    “Since 2009, FW Thorpe has been planting trees on its own land in Wales to offset Group emissions annually. The Group has planted 179,412 trees, effectively offsetting more than 44,385 tonnes of CO2e emissions over the next 100 years.”

    44,385 ‘offset’ tonnes over 100 years compares to 1,831 tonnes of Scope 1 and 2 emissions produced this year, so the trees will offset approximately only 24% of emissions at the current rate (444/1841).

    But TFW has acquired a further 195 acres of land to plant more trees to offset its emissions:

    “FW Thorpe has completed its woodland creation project in Devauden, Wales, and has purchased 195 acres of land in Herefordshire. This land holds significant potential for connecting existing woodlands to enhance biodiversity and landscape. Ecological surveys have been conducted on the new land, and community consultations have taken place, with planting activities scheduled to commence in spring 2025.”

    The extra land is to become a visitor attraction, and let’s hope the car park attracts only EVs:

    “The Group is committed to making Brook Farm a destination for community enjoyment. A network of shale paths will be established, allowing dog walkers and visitors easy access via a public right of way from the village or a car park at the entrance. Features such as signposts, waymarkers, noticeboards, benches and picnic areas will enhance the visitor experience.”

    19) CLIMATE-RELATED FINANCIAL DISCLOSURES (CFDs)

    This entire section has been rewritten for 2024.

    a) Introduction

    An explanation why the next 14 pages are important for shareholders:

    “F. W. Thorpe Public Limited Company (“FW Thorpe” or the “Group”), a
leading designer and manufacturer of professional lighting equipment with over 900 employees worldwide, recognises that long-term success is inextricably linked to environmental responsibility.”

    The subsidiary boards discuss CFDs every three months:

    “Climate change is a strategic imperative for FW Thorpe and is given dedicated attention at quarterly Board meetings of each Group company and annual sessions of the overall Board.
…
Sustainability and Climate Risk are standing agenda items at both the Group and subsidiary levels.”

    As per the prior year, TFW is still considering whether to form a formal ESG committee:

    “It is considering establishing a formal ESG committee to enhance its focus on sustainability and climate-related matters.“



    b) Risk management

    Lots of text here.

    In short, 19 climate-related risks and 5 climate-related opportunities were identified:

    “Guided by CFD recommendations and an expert sustainability consultancy, the risk identification process, which is conducted annually, identified nineteen climate-related risks and five opportunities at the Group level in 2024.”

    None of the individual 19 climate-related risks are material, but the general threat of climate change is deemed one of the group’s ‘principal’ risks:

    “Even though the assessment indicates that no single climate-related risk currently poses a material threat to the business, the Group recognises that the cumulative impact of climate change represents a significant principal risk, as it requires, and will require, ongoing attention and proactive management. The risk management process is designed to proactively identify and mitigate principal risks before they escalate to material levels.”

    Very little is revealed about what the 19 individual risks involve. I think only the text below discloses what some of the risks are:

    “Before the Group’s mitigation efforts, it identified six transition risks and five physical risks as material. These included increased regulation due to climate change, enhanced emissions reporting obligations, carbon pricing, heatwaves, flooding and wildfires.”

    In contrast, the text describing the climate-related opportunities is quite extensive. The 5 opportunities are:

    
”1. Products and services: Description: New low-emission product and service lines.
    
2. Energy Source: Description: Use and installation of low-emission energy technology.
    
3. Resource efficiency: Description: Use of energy-efficient technology.
    
4. Markets: Description: New emerging low- emission markets.
    
5. Resilience: Description: The business is well-adapted and positioned to deal with climate change.    ”

    The opportunities are all general in nature, but I am not surprised TFW gives them significant attention in light of the energy-saving characteristics of its products.

    c) Metrics and targets

    The text confirms TFW continues to aim for ‘net zero’ by 2040, with various intermediate emission targets also set for 2030. Progress seems very positive so far, with only sub-4% annual reductions required to meet all the emission goals:

    These charts are trending well:

    d) Streamlined Energy and Carbon Reporting (SECR)

    Although last year saw 51% of revenue earned from the UK, some 66%-plus of energy consumption and emissions occurred within TFW’s domestic market:

    TFW is the only company I know that prepares a “carbon balance sheet“:

    Emissions per revenue are down almost 50% since 2021. The following text explains the progress:

    “Scope 1 emissions have decreased by 7.1% since the 2021 baseline due to the installation of more efficient equipment and the transition from combustion to electric vehicles, while Scope 2 market-based emissions have decreased by 78.0% due to the installation of Solar PV by subsidiaries and the purchase of 100% renewable electricity contracts. As of 2024, 87.9% of all electricity utilised by the Group is derived from renewable sources. Scope 3 emissions overall have decreased by 34.1% from the baseline, driven predominantly by a 36.9% decrease in Category 11: Use of sold products emissions. This category, relating to the energy usage over the lifetime of all luminaires sold by the Group, is the Group’s largest source of emissions. The decrease is due to a mixture of selling increasingly more efficient products and the decarbonisation of electricity grids globally.”

    20) PEOPLE

    I may have seen this “six sigma” in action during my 2024 AGM factory tour:

    “Lean Six Sigma
    Several Thorlux employees have passed the Green Belt Lean Six Sigma training course. Lean Six Sigma is a method that relies on a collaborative team effort to improve performance by systematically removing waste and reducing defects or mistakes. Over a dozen lean manufacturing apprenticeships are currently in progress, and the company is also exploring Yellow and Black Belt Lean Six Sigma training.    ”

    The factory tour showed lots of SQDCP workstations:

    I can’t remember what SQDCP stands for exactly (Service, Quality, Delivery, Components, People?), but the system appeared embedded across the factory floor.

    21) PRINCIPAL RISKS AND UNCERTAINTIES

    The risks have been re-ordered this year by high, medium and low.

    High risks remain ‘adverse economic conditions’, ‘business continuity’ and ‘price changes’.

    Medium risks remain ‘changes in government legislation or policy’, ‘impact of [Ukraine] conflict on domestic and global economies’, ‘competitive environment’, ‘sustainability and climate-related risk’, ‘cyber security’ and ‘exit from EU’.

    Low risks remain ‘credit risk’ and ‘movement in currency exchange’.

    All the risk descriptions and mitigations are unchanged from 2023.

    22) BOARD OF DIRECTORS

    As per the blog post above, the board now consists of six directors with Mike Allcock now serving as non-exec chairman and Craig Muncaster now acting as chief executive and finance director. All the bios and expertise/responsibilities are unchanged.

    Of the four non-execs, only Frans Haafkens is deemed independent — although he has sold businesses to TFW and I suspect has more of an active involvement with possible M&A deals than a standard non-exec would.

    23) CORPORATE GOVERNANCE

    a) QCA code

    This year’s text reflects a re-jig of the QCA code:

    “In November 2023 the QCA published an updated version of the QCA Code.

    The 2023 QCA Code retains the ten principles from the 2018 version, however, it also includes updates to reflect certain areas of growing importance for shareholders, such as climate change, remuneration of directors and employees as well as the need for diversity and independence at Board level.

    Whilst the 2023 QCA Code will apply to financial years starting after 1 April 2024, the Company has decided to adopt these principles where practical now, which includes the formation of an audit and risk committee.”

    Eight of the ten QCA principles are unchanged, while this principle…



    “Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities”

    …and this principle…

    “Maintain governance structures and processes that are fit for purpose and support good decision making by the Board”

    …are now amalgamated into:

    “Maintain appropriate governance structures and ensure that, individually and collectively, directors have the necessary up-to-date experience, skills and capabilities“.

    That makes room for this new principle:

    “Establish a remuneration policy which is supportive of long-term value creation and the company’s purpose, strategy and culture”

    TFW is partially compliant on the new principal and the two others below as per the prior year:

    “
• Establish and maintain the Board as a well-functioning, balanced team led by the Chair
    

• Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement    ”

    These new lines for 2024 explain the partial compliances:

    “
• Partial compliance is due to level of independent directors and diversity on the board.
    
• Partial compliance is due to no formal evaluation process and that directors are not re-elected every year
* Partial compliance is due to level of independent directors on the remuneration committee.    ”

    An interesting development — the directors used to stand for re-election to the board every three years, but now that timescale has reduced to two years:

    “In addition, the directors retire by rotation every two years giving shareholders the opportunity to ensure that the Board is aligned with their interests.”

    Best practice of course is standing for re-election every year. Note that shareholders could not vote against Craig Muncaster (because of his new dual role of chief executive and finance director) at the 2024 AGM due to him not standing for re-election.

    More text on the partial compliance:

    “The Board considers that the Company applies the principles of best practice with the exception of the matters listed below:
    
• The Board does not have a nominations committee as per principle 8.

    • There is no formal evaluation process of Board performance as per principle 8.    ”

    TFW’s partial corp-gov compliance is not troubling for me given how the boardroom set-up has delivered such an illustrious dividend record.

    b) Audit & Risk Committee

    A new section for 2024 following the formation of this committee. Mr Haafkens and Mr Allcock are the committee members.

    The text seems standard enough. Tasks include:

    “• Review the Group’s financial statements and preliminary results announcements…
    • Review the content of the Annual Report and Accounts…
    • Monitor and review the Group’s internal control and risk management systems…    ”

    And one more task:

    “• Consider the external auditor’s audit plan, scope and coverage of audit work, independence, and agree the audit fee.”

    The audit fee increased by 44%(!):

    “During the financial year, the Group external auditor’s fees were £538,000 (2023: £374,000).”

    Note that this new committee had not formally met before this annual report was published:

    “The Audit and Risk Committee was established in 2024, but has yet to formally meet separately to Group Board meetings”

    24) DIRECTORS REPORT

    Among the substantial shareholders, the Estate of C M Brangwin has been listed since 2021. The holding consists of 7.27 million shares (6%) and is worth almost £22m at 300p a share. I don’t know why these shares have yet to be distributed to the estate beneficiaries.

    25) REMUNERATION REPORT

    a) Annual bonus

    A reworded bonus calculation. Previously:

    “The bonus is made up of two elements. The first element relates to the operating profit of the business unit for which the director has specific performance responsibilities. The second element relates to the operating profit of the Group as a whole.”

    And now:

    “The bonus is derived from the operating profit of the Group and the specific responsibilities of the executive director. The bonuses are paid in September and relate to the period ending on 30 June in the same year.”

    Otherwise no commentary changes to what remains a very terse remuneration report.

    b) Directors’ emoluments

    Basic pay for executives Mike Allcock (then exec chairman and joint-CEO), 
Craig Muncaster (then FD and joint-CEO) and James Thorpe (Thorlux business development) increased by c5%:

    Bonuses were chunky and once again exceeded the basic pay of all three executives. But I can live with such bonuses as the price to pay for TFW growing profit at an underlying c9% (as it did during the year). The aforementioned bonus calculation remains suitably vague!

    Pension “compensation” is excluded from the table above:

    “During the financial year the Company paid pension compensation to M Allcock of £194,901 (2023: £180,953), C Muncaster £54,359 (2023: £51,770 ) to J E Thorpe £33,317 (2023: £23,150).”

    Messrs Muncaster and Thorpe have pension contributions equivalent to a hefty 17% of their respective salaries.

    c) CEO pay ratio

    TFW is my only share to publish this ratio:

    The ratios edging higher in the first table suggest CEO pay is outpacing the pay/bonuses of the wider workforce.

    The CEO’s pay and bonus climbed 9.6% to £690k, but the 25th percentile total pay is up 10.3%, so the lowest-paid 25% are keeping up with the CEO’s pay/bonus inflation. Note that median total pay is up only 5.7% and the 75th percentile total pay was actually down 3.3%.

    d) Options

    Board options amount to 400,000 and relate to the authority granted during April 2024 to issue up to 2.1m options to the group’s workforce, and 1.925m options were awarded during May 2024.

    The main vesting target is to increase EPS by CPI +2%, which does not appear outrageously ambitious. Minor vesting targets are based on total shareholder return and ESG progress. Dilution is 1.6%, with almost 1.6m shares already held in treasury to be used to satisfy the option vesting.

    26) INDEPENDENT AUDITORS’ REPORT

    a) Scope and materiality

    Full-scope audits covering 72% of profit is not high and I presume TRT gets a full once-over by PwC while larger subsidiary Zemper does not is down purely to location:

    “An audit was conducted of the complete financial information of the three reporting units: Thorlux Lighting (the Company, located in the UK), Lightronics Participaties B.V. (located in the Netherlands), and TRT Lighting Limited (located in the UK) . The audit work performed at these three reporting units (2023: three reporting units), together with specified procedures performed on Electrozemper S.A. (located in Spain), Famostar BV (located in Netherlands) and SchahlLED Lighting GmbH (located in Germany) and additional procedures performed on centralised functions at the Group level, including audit procedures over the consolidation, gave us the audit evidence we needed for our opinion on the Group financial statements as a whole. This provided coverage of 72% (2023: 70%) of profit before tax from the full scope audits.”

    Still, TFW’s accounts have always appeared pristine and conservative, so I am not too perturbed.

    Overall materiality was kept at the standard 5% of pre-tax profit (£1.494m).

    b) Key audit matters

    Just two key audit matters this year:



    “• Defined Benefit Pension Obligation valuation – Liability assumptions (group and parent)
    • Valuation of the future consideration payable for Electrozemper S.A. and Lumen Intelligence Holding GmbH due to estimation in forecasts (group)    ”

    The third key matter from 2023 — “Valuation of intangible assets acquired in the acquisition of Lumen Intelligence Holding GmbH” — has been dropped as it was applicable only for the acquisition year in question.

    The accounting for both key matters was deemed appropriate by PwC.

    Note the text confirms the outstanding earn-outs:

    “At the year end 2024, there is 10% remaining [of Zemper] to purchase with a liability in the financial statements of €6.0m (£5.1m)
    …
    There is also a commitment to acquire the remaining shares in Lumen, which is also subject to future performance conditions. The liability in relation to SchahlLED is €6.3m (£5.3m)    ”

    After skimming PwC’s report, I am not sure what extra work was undertaken to justify the aforementioned 44% increase to audit fees!

    27) ACCOUNTING POLICIES

    A few minor additions and changes.

    a) New text confirming earn-out obligations:

    “Where the Group has an obligation to pay outstanding consideration in a business combination, a liability is recognised equal to the calculated future fair value as at the date of the statement of financial position.”

    b) A reminder about how profits that accrue to minorities are accounted for:

    “The Group does not recognise non-controlling interests in an acquired entity when there is a commitment and obligation to acquire the non-controlling interests of the acquired entity. The acquired entity is consolidated as if it is wholly owned by the Group since acquisition. Any profits attributable to non-controlling interests, if any, are treated as a finance expense of the Group.”

    c) Amortisation of intangible ‘customer relationships’ was 10%-20%, but has changed to 10%-33%, suggesting such items may now be written down in shorter timescales.

    d) Further information about the remaining earn-out obligations:

    “The Group has the obligation to purchase the remaining shares of the Zemper business from September 2025. If the forecast EBITDA assumption were to increase by 5%, the resulting deferred consideration would increase by £258,000.”

    “The Group has the obligation to purchase the remaining shares of the Lumen business from September 2025. If the forecast EBITDA assumption were to increase by 5%, the resulting contingent consideration would increase by £267,000.”

    The Zemper earn-out should be £258k/5% = £5.16m while the Lumen (SchahlLED) earn-out should be £267k/5% = £5.34m. And sure enough, the sums correlate with text elsewhere within the report:

    “Included within other payables are commitment to purchase the remaining outstanding shares in Electrozemper S.A. of €6,000,000 (£5,087,000) (2023: €12,623,000 (£10,853,000)) and Lumen Intelligence Holding GmbH of €6,327,000 (£5,362,000) (2023: €7,508,000 (£6,455,000).”

    e) Capital risk management

    This text has not changed, but is worth repeating

    “The Group’s policy has been to maintain a strong capital basis in order to maintain investor, customer, creditor and market confidence. This sustains future development of the business, safeguarding the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders.

    The Group has a long-standing policy not to utilise debt within the business, providing a robust capital structure even within the toughest economic conditions. The Group’s significant cash resources allow such a position, but also require close management to ensure that sufficient returns are being generated from these resources. The Group’s policy with regard to the cash resources is to ensure they generate sufficient returns, whether by investment in business activities, such as plant and equipment, or assessing suitable opportunities to grow the business, or the physical investment of these funds to ensure appropriate returns to investors.

    The Group is able to maintain its current capital structure because there are no externally imposed capital requirements, and there were no changes in the Group’s approach to capital management during the year.”

    28) SEGMENTAL ANALYSIS

    a) Geography

    The UK still supports 51% of revenue. Maybe during the next few years, TFW’s overseas operations will generate the majority of sales:

    Or maybe the UK will retain more than 50% if Germany remains in the doldrums. I can’t believe I did not mention the 19% revenue drop in Germany within the blog post above! As management’s commentary noted, Germany has been a difficult market. German revenue is predominantly (or even entirely) generated through SchahlLED.

    b) Revenue type

    Service revenue declined 29%:

    Service revenue comprises “surveying, project management, installation and commissioning” and German service revenue (presumably all generated via SchahlLED) dived 50% in that difficult market.

    SchahlLED is a (Thorlux) lighting installer, not a lighting manufacturer, which explains its greater dependence on service income versus the rest of the group (10% of revenue versus 3%).

    29) OPERATING EXPENSES

    a) Cost of inventories

    By far the most interesting figure here is the cost of inventories at £60m:

    £60m is the equivalent of 34% of FY revenue and by some way the lowest proportion since TFW began disclosing cost of inventories during 2010.

    The lower cost of inventories meant the FY gross margin reached a record 48.6%, and above the 44%-47% range generally witnessed since 2010.

    Assuming cost of inventories are expensed entirely within cost of sales, other cost of sales items were 17.3% of revenue — matching the proportion of 2022 and the highest since at least 2010. Other costs of sales items have been as low as 12.1% (2018) of revenue. Maybe one year TFW can achieve record low proportions for both cost of inventories and other cost of sales!

    b) Auditor expenses

    As noted earlier, PwC lifted its total audit fee by 44%.


    For perspective, total audit fees were £179k for FY 2019 and have tripled since! At least the £538k audit fees represent only 0.3% of revenue.

    30) EMPLOYEES

    The blog post above covers my employee analysis in some detail:

    Only points I would add are social-security costs as a percentage of wages and salaries were almost 13% for the third consecutive year, versus 10.2%-11.9% between 2010 and 2021. I suspect future figures will show the proportion exceeding 13% :-(

    ‘Other pension costs’ reflect TFW’s contributions to employee pensions and have consistently added c5% to paid wages and salaries — much lower than the executives’ 17%!

    In fact, the small-print shows only £1.662m of the £2.032m ‘other pension costs’ actually representing pension contributions…

    “Other pension costs include contributions to pension schemes and other employer’s pension related charges comprising life assurance of £112,000 (2023: £99,000), pension administration and professional charges of £180,000 (2023: £116,000) and private pension schemes amounting to £5,000 (2023: £5,000). Contributions to the defined contribution section amounted to £211,000 (2023: £229,000) and contributions to other schemes administered independently of the FW Thorpe pension schemes amounted to £1,451,000 (2023: £1,262,000). ”

    …which reduces TFW’s effective contribution rate to 3.7% for this FY.

    (more follows in the comment below!)

    Reply

    • FW Thorpe (TFW)

      Publication of 2024 annual report (continued)

      Here are more points of interest to accompany those noted in the blog post above:

      ——————————————————————————————————

      31) NET FINANCE EXPENSE

      This note lists the income from TFW’s range of assets:

      As noted in the blog post above, interest of £585k was equivalent to only 1.3% interest on the £44m average year-end cash position:

      I expect a company such as TFW to be earning a greater rate during FY 2025.

      Also noted as per the blog post above, loans of £3.4m issued to Ratio generate interest at approximately 4%, other loans earned approximately 6% while dividends from the group’s £3.8m equity portfolio yielded approximately 5%. Dividend income of £182k was the lowest since 2016 (£179k).

      Net rental income doubled this year to £207k, the highest since 2019 (£224k), and is generated by investment properties and it seems by also sub-letting surplus space within operational properties. The investment properties generated net rent of £50k, leaving £157k presumably from operational properties.

      Interest payable of £60k does not seem onerous given the collection of small financial liabilities accompanying Zemper and SchahlLED averaged about £2.7m during the year (i.e. c2% interest).

      Non-controlling interests of £474k represent the profits earned by the minority investors in Zemper (from 23.5% to 10% ownership during the year) and SchahlLED (unchanged 20% ownership).

      Not quite sure how that £474k is calculated, given Zemper reported a £2.0m operating profit (excluding acquisition adjustments), and a 16.75% average Zemper minority stake during the FY gives £333k… which leaves only £141k for the 20% SchahlLED investor that implies SchahlLED reported an FY £705k profit. My notes in the blog post above say SchahlLED reported an FY £1.9m profit. All very complicated, and I will be pleased when these earn-outs have been paid and the minority profits have stopped!

      32) INCOME TAX EXPENSE

      I am not a tax expert and often gloss over finer taxation details. But this note reveals some interesting tax snippets. I noted in the blog post above TFW’s patent-box relief:

      TFW first recorded patent-box relief during 2018, since when such relief has totalled £7.5m — a useful saving on tax.

      This line underpins the group’s conservative accounting:

      “Adjustments in respect of prior years relate to refunds received for prudent assumptions on additional investment allowances and patent box relief in the tax calculations.”

      Adjustments for prior years have reduced TFW’s tax charge every year since 2015, and those adjustments add up to a £4.2m reversal of earlier “prudent assumptions“.

      33) PROPERTY PLANT AND EQUIPMENT

      Freehold property has a £21m carrying value:

      I note freeholds with a historic cost of £891k were transferred to investment properties, which may not completely explain why net rental income doubled during the year. But the transfer does show TFW may sometimes retain surplus properties for rental purposes rather than always sell them.

      34) INTANGIBLE ASSETS

      Development costs and software are the major ‘internal’ intangible expenses (as opposed to ‘external’ acquired intangibles):

      The carrying value of these two intangibles has increased from £4.9m to £6.4m during the last five years, and the £1.5m difference being diverted to the balance sheet rather than being expensed through the income statement is very small beer versus aggregate annual profits of £123m during the same time.

      TFW’s fishing rights on the River Wye — surely a unique intangible among quoted companies — remain at £182k.

      This accompanying text provides a useful recap on how all the goodwill was created:

      “Amortisation of £5,846,000 (2023: £4,454,000) is included in the administrative expenses. Included in goodwill are amounts of £285,000 (2023: £285,000) arising from the acquisition of Solite Europe Limited in 2009, £2,618,000 (2023: £2,618,000) arising from the acquisition of Portland Lighting Limited in 2011, €7,784,000 (£6,598,000) (2023: €7,784,000 (£6,692,000)) arising from the acquisition of FW Thorpe Nederland B.V. in 2015, AU$nil (£nil) (2023: AU$478,000 (£252,000)) arising from the acquisition of Thorlux Australasia Pty Ltd in 2016, €5,057,000 (£4,287,000) (2023: €5,057,000 (£4,348,000)) arising from the acquisition of Famostar Emergency Lighting B.V. in December 2017, €21,273,000 (£18,031,000) (2023: €21,273,000 (£18,289,000)) arising from the acquisition of Electrozemper S.A. in October 2021 and €16,616,000 (£14,083,000) (2023: €16,616,000 (£14,286,000) arising from the acquisition of Lumen Intelligence Holding GmbH in September 2022. This goodwill is not amortised and test for impairment annually.”

      The only change concerns TFW’s Australian venture, where goodwill has been written down to zero:

      “For Thorlux Australasia Pty Ltd, due to lack of cash flows it fails to generate EBITDA or sufficient cash flow projections to recover its goodwill. Therefore goodwill impairment of AU$478,000 (£249,000) (2023: AU$nil (£nil)) relating to the operation of Thorlux Australasia Pty Ltd was charged to the consolidated income statement in the current year. The cost and accumulated impairment of the goodwill for Thorlux Australasia Pty Ltd is derecognised as it is fully impaired.”

      I think in that first bit of goodwill text, the last line should read “This goodwill is not amortised and is tested for impairment annually.”

      A change for the goodwill impairment testing for SchahlLED, whereby it joins Portland in a five-year DCF:

      “For Portland Lighting Limited and Lumen Intelligence Holding GmbH, the value in use has been determined using cash flow projections covering a five year period with a terminal value all discounted at a rate of 11.0%.”

      The discount rate used last year was 10.9% but is now 11.0%. Impairments for Portland and SchahlLED would occur if their predicted cash flows were at least 20% lower:

      “Alternatively, the discounted cash flows would need to be reduced by 24.8% (Group) and 19.8% (Company: Investments in subsidiaries) for Portland Lighting Limited, and 20.4% (Group) and 41.7% (Company: financial assets at amortised cost) for Lumen Intelligence Holding GmbH.”

      All the other goodwill is tested on 6x Ebitda…

      “A multiple based on a six times EBITDA, that we consider a reasonable multiple for the sector, is used in these computations, except for Zemper CGUs where an EBITDA multiple of ten has been used in accordance with the agreement upon which the contingent consideration is based.”

      …aside from Zemper (10x).

      Note that goodwill headroom at the Dutch companies is now £27m versus £37m last year while goodwill headroom at Zemper is now just £5m versus £25m last year:

      “At expected levels of EBITDA we consider that our goodwill is fully recoverable with headroom on the Lightronics and Famostar CGUs of £27.0m in the Group and £25.2m in the Company.

      For Zemper CGUs, our assessment considers business performance and likely net realisable value, which must be assessed as part of settlement of non-controlling interest rights. At expected levels of EBITDA we consider that our goodwill is fully recoverable with headroom on the Zemper CGUs of £5.4m in the Group and £2.9m in the Company.”

      Would be disappointing for TFW if Zemper’s goodwill headroom reduced further and eventually had to be impaired slightly.

      35) INVESTMENT PROPERTIES

      £2.2m was spent buying a new investment property during the year:

      Pretty sure the purchase was the aforementioned 195 acres of extra woodland with the car park.

      The net rental income from these properties is £50k, so I have presumed the aforementioned £207k net rental income in the main P&L is also supported by rents from operational properties.

      Ah, new for 2024 is Ratio EV becoming a tenant of an investment property:

      “Investment properties of £3,029,000 (2023: £1,296,000) are freehold land and therefore not depreciated; the property element includes accumulated depreciation of £583,000 (2023: £298,000) which relates to the properties occupied by Mackwell Electronics Limited and Ratio EV Limited. This investment properties have been independently valued and have market values that are not materially higher than their costs.”

      36) FINANCIAL ASSETS AT AMORTISED COST

      These assets are loan notes issued by TFW to various ventures and investments, and they finished the year with a £3.6m carrying value:

      Certainly not the easiest accounting note to understand.

      The second table above splits the loans into £3.437m current and £186k non-current.

      I think the £3.437m is Ratio based on loans without accrued interest (£1.272m + £2.165m) = £3.437m:

      “Pursuant to the investment in Ratio Holding B.V., the Group has issued loan notes of €1,500,000 (£1,272,000) (2023: €1,500,000 (£1,290,000)) to help fund the development of this business. With accrued interest, the balance at 30 June 2024 is €1,626,000 (£1,379,000) (2023: €1,566,000 (£1,347,000)). 

In addition, the Group has issued loan notes of £2,165,000 (2023: £1,250,000) to Ratio EV Limited, a wholly-owned subsidiary of Ratio Holding B.V., to help fund the development of its business. With accrued interest, the balance at 30 June 2024 is £2,245,000 (2023: £1,266,000).”

      The £186k seems to be these term deposits:

      “During the current year, the Group has placed two term deposits with insurance feature with a bank amounted to €220,000 equating to £186,000 (2023: €nil (£nil)) at end of year exchange rate.”

      Plus the small-print includes this text about a small and troubled Spanish investment:

      “In the year ended 30 June 2021 loan notes of €869,000 (£746,000) were provided to Luxintec S.L., an investment in the Company is held under financial assets at fair value through other comprehensive income, with ordinary interest payable at 1.5% fixed rate payable quarterly. This loan is secured against the Company assets. 
This debt investment is considered to have a risk of default despite the collateral that is held as security, and therefore the impairment provision is determined as 12 months expected credit losses. As at the date of these financial statements,
a impairment of €869,000 (£737,000) (2023: €589,000 (£506,000)) was recorded. 
At the date of the financial statements, the loan notes balance was €nil (2023: €281,000) equating to £nil (2023: £240,000) at the end of year exchange rate.”

      This Spanish investment was written down from £240k to zero during this FY. I can’t work out exactly how this £240k write-off then translates into a £288k ‘fair value adjustment’ within the accounts…

      …although the £48k difference does equal the £48k of interest accrued by the Ratio loans during the FY. But that £48k should increase the loan value, not decrease it! One day I will get to the bottom of this note!!!


      37) EQUITY ACCOUNTED INVESTMENTS AND JOINT ARRANGEMENTS

      This is essentially the Ratio joint-venture investment and is in the books at £4.7m. As per my blog post above, TFW’s 50% share of Ratio equated to a £826k (£853k less £27k) loss:

      38) FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

      Essentially a collection of UK equities with a £3.737m carrying value plus a £20k unlisted Spanish equity investment.

      I vaguely remember credible bulletin-board talk years ago from an AGM where the board said the UK equities were blue-chip high yielders. The portfolio’s value has bobbed around the £3m-4m mark since 2014:

      39) INVENTORIES

      Nothing much to add following my blog post above, but year-end stock of £29m is equivalent to 16.5% of revenue — the lowest level since 2006 (15.8%):

      TFW’s stock provision is relatively high at £6.5m:

      “The value of the inventory provision is £6,467,000 (2023: £5,122,000) for the Group and £3,737,000 (2023: £2,785,000) for the Company.”

      Gives the impression the historic cost of the £29m stock was £35.5m, which suggests 18% (£6.5m) has since been written down. Within Thorlux (parent company), the historic stock cost was seemingly £16.8m and the £3.7m provision equates to an apparent 22% write-down.

      40) TRADE AND OTHER RECEIVABLES

      Nothing obviously amiss here:

      Year-end trade receivables represented 17.9% of revenue — towards the lower (i.e most favourable) end of the somewhat wide 16.3%-24.7% range witnessed since 2013.

      Receivables past due but not written down decreased to £1.3m — to represent 4.2% of trade receivables — the lowest (i.e. most favourable) level since 2012 (3.1%).

      The net bad-debt figure charged to the P&L was only £59k.

      The small-print revealed some chunky expected losses within two small overseas outposts:

      “Included in the Company’s amounts owed by subsidiaries are provisions for expected credit losses for Thorlux Lighting L.L.C. of £650,000 (2023: £515,000) and Thorlux Australasia PTY Limited of £1,909,000 (2023: £930,000), based on an expected credit loss of 100% and 98.5% respectively.”

      41) TRADE AND OTHER PAYABLES

      Nothing obviously amiss here as well:

      Makes more sense to compare trade payables against cost of sales rather than revenue, and year-end trade payables equivalent to 15% of cost of sales matches that of the prior year and is within the 14%-21% range of the previous ten years.

      The ‘Other payables’ are mostly investment obligations related to Zemper (£5.087m), SchahlLED (£5.362m) and Ratio (£820k):

      “Included within other payables are commitment to purchase the remaining outstanding shares in Electrozemper S.A. of €6,000,000 (£5,087,000) (2023: €12,623,000 (£10,853,000)) and Lumen Intelligence Holding GmbH of €6,327,000 (£5,362,000) (2023: €7,508,000 (£6,455,000)… Other payables also includes €969,000 (£820,000) (2023: €1,000,000 (£860,000) deferred consideration for the investment in Ratio Holding B.V. which is within current liabilities. ”

      42) FINANCIAL LIABILITIES

      The following financial liabilities all relate to Zemper and SchahlLED:

      Consists of a mix of loans from the original subsidiary shareholders, loans on properties, Covid loans and factoring loans. Year-end average of c£2.7m incurred interest of just £60k.

      43) PENSION SCHEME

      Nothing to add to the blog post above!

      44) PROVISIONS FOR LIABILITIES AND CHARGES

      As per the blog post above, a consistent warranty provision at c2% of revenue:

      Warranties last between 5 and 10 years:

      “The usual warranty period provided by Group companies is between 5 and 10 years, dependent on market requirements, and the provision for warranty is based on expected claims over the remaining warranty period”

      45) SHARE-BASED PAYMENT CHARGE

      A reminder of the new executive options scheme that pays out if pre-tax EPS beats CPI+2%:

      “In the current year, a new Executive Share Ownership Plan (ESOP 2024 Scheme) established by the Group was granted on 30 May 2024 after approval at a General Meeting held on 18 April 2024. The plan allows for the vesting of options subject to achievement of performance targets, being annual growth of pre-tax Earnings per Share in excess of CPI plus 2% each year, be ranked above the median of the comparator group for total shareholder return and made appropriate progress towards the Group’s carbon reduction target, based on the position at 30 June 2023. The options vest in stages up to a maximum of five years.”

      Option charge for the year was £152k. 1.945m options are now in issue:

      Versus 118.936m shares issued and 1.644m shares in treasury = possible 1.6% option dilution.

      46) RELATED PARTY TRANSACTIONS

      An interesting snippet — transactions between Thorlux (parent company) and the rest of the group:

      Dividends paid to Thorlux changed this year. Philip Payne’s dividend increased £100k to £250k, Solite’s dividend increased £200k to £500k while Portland’s dividend decreased £250k to £150k.

      Notable other moves were purchased goods from TRT Lighting, down £736k to £1.123m, and goods sold to Thorlux Lighting Limited (Irish venture), up £776k to £6.594m.

      Goods sold to SchahlLED increased £160k to £4.214m, which defied the aforementioned 19% reduction to German revenue.

      47) GROUP COMPANIES

      A helpful table listing TFW’s subsidiaries:

      Table can be useful for double-checking the proportions of Zemper and SchahlLED (and any further acquisitions) that are owned by TFW.

      Also useful for spotting new ventures — for example, Ratio Denmark!

      Maynard

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