REACT Group’s Chairman on a ‘phenomenal set of results’ (LON:REAT)

REACT Group plc (LON:REAT) Chairman Mark Braund caught up with DirectorsTalk for an exclusive interview to discuss financial highlights, strong level of recurring revenue, multiple contract wins through cross-selling, achieving organic growth, improved profitability & cash conversion, and what investors can expect in the coming months.

Q1: Mark, you released final results for the year ended 30th September 2023, could you just talk us through the financial highlights?

A1: I will start, if I may, by suggesting that there’s three takeaways.

One is a phenomenal set of results against the backdrop of fairly tough economic challenges in the market so terrific results for the year. But I think it’s really important that people understand that this is not a flash in the pan. The company, the team, led by Shaun Doak, the CEO, has delivered this kind of performance every year for the last four years.

I think the other point to mention is the profile of the company now is completely different to what it was four years ago, and I’ll cover those points when I just reel off a few of the numbers here, if I may.

Revenue just shy of £20 million, that’s up year on year by 43%. Now, we did have part of an acquisition that gave us some benefit in growth there, but our organic like-for-like growth was 21%. As I mentioned earlier, this is not a new phenomenon, actually, our four-year average compound annual growth rate is nearly 60%, and our average organic growth over the last four years, on average, we’ve delivered 24%.

So, very strong performance, but consistent with what the team have been able to achieve in the last four years.

The final point to make about revenue is that we’ve gone from four years ago having a business that was less than 30% of our revenue was recurring to now, this year just reported, is 87%. So, 87% of our revenue was contracted, a lot of that long-term, and is recurring.

Generated 27% gross profit margins, that’s the upper quartile for our sector, it’s actually up 300 basis points on previous year when we did 24%. Year on year growth of gross profit is just over 60%, and the four-year average compound annual growth rate for gross profit is 56%. So, again, a trend rather than just a one-off.

All that’s converted into earnings. We converted 43% of our gross profit into EBITDA and delivered £2.3 million of EBITDA, that’s 133% up on the prior year. Our three-year average, rather than our four-year, is 104% of growth in EBITDA, and I say three years because in the very first year we were here, it was a loss and you can’t work out a CAGR or a Compound Annual Growth Rate from a loss, but you can see that the trend is exactly the same.

The final bit is, it’s all very well having profit, but what are you doing about converting that into cash? Well, we had very strong cash conversion, we’re a very cash-generative business. £2.1 million of free cash flow, that’s against outflows last year of £1 million, and our EBITDA generated an adjusted EPS of 0.21 pence per share, that’s double what we did last year.

So, in the round, that’s the performance, you can see that we’ve delivered consistently over the last four years, and then you look at the profile of the company.

It’s a company that’s turning 43% of its GP into profit, about 12% of its revenue into profit, 87% of its revenue is recurring therefore, we’ve got good long visibility over our revenues and income, and we’re generating cash.

More than 92% of our in-year EBITDA has been turned into cash in the year so it is a phenomenal story and it’s a team effort. The team itself has done a phenomenal job.

Q2: Now, you mentioned a strong level of recurring revenue, how has the business model changed?

A2: So, it’s changed because of focus in terms of sales, operational performance, and also in terms of the M&A we’ve done.

We’ve acquired two businesses over the last four years. The first one was Fidelis, which was a specialist contract cleaning business, cleaning largely in education and healthcare and industrial sectors, but had long-term contracts. Contracts were between three and seven years, about 90%/95% of its revenues were recurring and when we acquired it two and a bit nearly three years ago, March ‘21, its revenues were about £4.8 million.

The revenues in the year we’ve just come through, the revenues have increased to £12 million, just over, and that’s been as a result of two things.

One is we have a very strong sales and marketing engine that we continue to scale, that’s led by Shaun and his team. He’s got a Group Sales Director now, Sam Hayward, who’s exceptionally strong as well, and we’ve grown that revenue in two ways. One is through winning new customers, taking that proposition to the market and saying, look, , is this something you want? And we’re getting customers say yes.

The second thing, which I think is really important, is cross-selling. We have cross-sold the services from REACT into customers that want to buy those services that are sat in Fidelis and vice versa.

We’ve done the same more recently with the acquisition of LaddersFree, which we did in May 22, and that, too, has been growing quite healthily, we’re about 30% larger than we were when we started. LaddersFree is 100 percent recurring revenue, it’s all contracted commercial window cleaning.

That’s been how we’ve changed it,  through making some acquisitions of product offerings that our customers want to buy, that’s helped the shift quite substantially but then making sure that’s been the focus of our sales effort. In fact, if we look at the segmental analysis, we break our segments down into recurring revenue, which is contract maintenance and contract reactive, and into ad hoc, which is your project work.

Well, contract maintenance grew the fastest of all of them, it grew by 61% last year and that’s as a result of us focusing ourselves and ourselves energies on that part of the market.

So that’s what’s contributed to us moving from four years ago, 30% just under recurring revenues, and now 87%, which is a bit of a peak. We think it’s going to be between 80% and 90% on an ongoing basis.

Q3: It is great to see multiple contract wins awarded through cross-selling. Could you just expand on that a little and tell us what it means for the group?

A3: The thing is, we only announce material deals, as you’d expect, but that isn’t the only deals we do. In fact, to be honest with you, the large material deals are not absolutely our priority, our priority is the mainstream mid-sized customers, because that’s where there’s good, healthy margins, profit, and we can expand the quickest.

So, the big deals are really just a reflection of how good the product offerings are and the fact that we’ve got an offering that is able to scale both down and up.

A couple of examples that demonstrate what I’ve been talking about is the one at the beginning of last year was the multi-year award for one of the large coffee restaurant houses nationwide. Well-known name, I won’t mention them, but 350 stores, and we took a small window cleaning customer, because we were only cleaning for them in one small region and have given them a proposition that allows them to do a twice yearly deep clean of their front of house and outside the shop.

So it’s window cleaning, facial cleaning, and a deep clean of the inside, so customers come in to what is and will be a clean environment and feel safe in terms of food hygiene. That was one from a LaddersFree that was spending £20,000 a year on a small amount of window cleaning, is now spending £800,000 a year with us as a company, and there’s more opportunities with that customer to come.

The other example I’ll give is the one that was announced just a month or so ago, so post-period announcement. It was a three-year contract extension, so not a new win, an extension, but it’s important because it’s a big Midlands-based university that was spending £600,000 a year with Fidelis to do the basic contract cleaning of the property.

We’ve expanded it to £1.3 million a year, so more than double, and won a new three-year term. That’s been because we’ve been cross-selling other services the customer wants to buy and would otherwise have to go to multiple service providers to buy it, but we’ve managed to convince them, quite rightly, that there’s a better proposition for ourselves, so that’s been one.

So there’s just two examples, and there are others, but the key thing to recognise is that’s not the only thing that’s driving growth. What really drives growth is the underlying business, which we don’t report in every win of because there’s so many of them, and they’re small.

Q4: You mentioned in the financial highlights the organic growth and improved profitability and cash conversion, how was that achieved?

A4: Really through focus. We have a great management team, and we’re now growing it, but Shaun, from the very start, came in, Shaun’s got a strong sales track record, he came in as MD to begin with, and we rapidly moved him into the CEO role.

He has been doing a lot of the sales work himself to begin with, and then as we’ve scaled, we’ve brought in others. Sam Heywood, now his Group Sales Director, he’s taken over the mantle, Shaun still does more than his fair share of sales enablement work but Sam now runs the sales team, and we’ve been growing that steadily, modestly, but still steadily, and we invest well in strong marketing techniques.

That’s what’s driven the focus on recurring revenue, it’s what’s driven the focus on margin, we sell for value. I’m a firm believer that you don’t get margin unless you’re adding value, and customers will only recognise value with margin if they believe they’re getting it. So, we’ve had to work on the value of our proposition, and we’ve had to make sure we deliver it and maintain a good, strong customer base as a result but that’s the way that part’s been driven.

To the operational team and finance, we have in a number of our business relationships with customers, a situation where we make sure we’re getting paid either before we have to pay the workforce to do the work or at the same time, and that allows us to collect about 70% of our cash in a timely fashion.

We have one or two of our larger customers where we’re on more traditional terms, and we can wait maybe 60 days for cash, but all in all, the blend is extremely strong and extremely positive and generates cash within the year.

So, it’s all about the team being very smart, working very hard, and now scaling that team, bringing in other management.

We’ve just strengthened our financial management team as has been announced, we brought in a Group Financial Controller called Justin Fleming about six months ago. He’s made a big impact.

Andrea Pankhurst has moved yesterday from CFO to a functional director role in finance, she’s going to remain Company Secretary, but she’s going to work part-time. It suits her to change her work-life balance, having put four tremendously hard years into this business, and we thank her very much for that, but she’s staying with the business, which is important, she brings a lot of value.

And we’ve hired Spencer Dredge as the new CFO, who was appointed this morning, we signalled that in December. Spencer’s been in the business for the last four or five months, helping us work out how we’re going to digitise going forward and consolidate some of our processes to make ourselves more efficient. He’s a seasoned CFO, and I’ve actually worked with him before, I worked with him at RedstoneConnect when I was CEO there.

So, we’ve got the makings of a good team being built, and that will maintain that progress.

Q5: You’ve stated a positive outlook for the business following first quarter, again, delivering record performance for the group, what can investors expect from REACT Group in the coming months?

A5: Well, more of the same, I would suggest.

Obviously, we’ve made the statement we’ve made, which is a positive one. First quarter for us is October, November, December, and December can be a challenge because of the time people take out, but our emergency service was being quite healthily used so first quarter was another record quarter. Record first quarter and record quarter overall, I think.

So, momentum has continued into the new year, and we feel that January has gone well as well, and we’re now into February so things seem to be going in the same direction.

I’d like to think more of the same and nothing more complicated than that. We’ll be working hard to deliver another component of the trend going forward for year five.

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