REACT Group Plc (LON:REAT) Chairman Mark Braund caught up with DirectorsTalk to discuss strong interim results, strategic acquisition of 24-hour Aquaflow, and the outlook for continued growth across its service lines.
Q1: Mark, first off, congratulations on a strong set of results this morning. Could you talk us through the highlights?
A1: The revenues are up 14% at £12.1 million, which is a little bit behind where we’d hoped they would be, but they are still representing a growth of 14%. Gross profit is up at £3.9 million; that’s a growth year on year of 35%, same period to same period and earnings before interest, tax, depreciation, and amortization, so EBITDA, on an adjusted basis is £1.43 million, that’s up 12%.
Now, to understand the numbers, you also need to understand that we made an acquisition during the period. It was a terrific acquisition of a strategic business called 24-hour Aquaflow, it’s a commercial drainage and plumbing business, it operates in London and the Southeast.
That complements the other businesses we have, which just remind everybody, three other businesses. We have a reactive business that has quite a bit of contracted work within it, which is specialist cleaning, that’s called REACT Specialist Cleaning. We have a soft FM services business that does regular cleaning, but of some fairly more specialised environments, such as industrials, health care and education, that’s called Fidelis. We also have one of the UK’s largest nationwide commercial window cleaning businesses called LaddersFree.
Now, within those four businesses, we’ve seen 24-hour Aquaflow really begin to accelerate as part of the group. The other three businesses have basically had some challenges in terms of market conditions. As we’ve signalled before, this is a business that’s had six years of growth, five of which we’ve had organic growth in the region of 20% every year, that, unfortunately, has not been the case over the last 12 months.
During that period, we’ve operated in very challenging market conditions. We had COVID, followed by Russia invading Ukraine, then followed by the cost-of-living allowance challenges and we’ve had issues in the Middle East. I guess the straw that bent the camel’s back, didn’t break it, was what’s happened as a result of the changes in government policy. Tand this is not a political statement, it’s just a fact that when we had a new government, there was a period of uncertainty, and that certainly affected a lot of our customers. Since then, on the 31st of October, we had a new budget announced, which applied increases to minimum and living wage and also to employers’ national insurance.
Now, as a business, we’re relatively well insulated from those sorts of challenges. We’re a living wage and above paying organisation but our customers have been impacted quite dramatically. As a result, we’ve seen a lot of action to try to remove cost and we’ve been working with our customers to try and help them with that process. I’m delighted to say that we’ve lost very, very, very few customers, our churn of customers is less than 2.5%, which is way below the market level and our churn of employees is way below market as well.
To do that, we’ve had to make some compromises, and we’ve compromised in areas such as frequencies of cleaning. Whilst you have to clean premises, you could clean them maybe every other day or maybe three or four times a week rather than five times a week. You can clean windows, rather than every week, you can maybe clean them once a fortnight or once a month, depending on your business.
We’ve been working with our customers to facilitate that and what that’s meant is, is that despite us continuing to grow a market share, add new customers, which we’ve continued to do, albeit it’s been a little bit more difficult than it has been of late, we have seen the business shrink over the period.
So, it’s a story of two halves.
It is strong, it’s resilient, and it’s robust, considering all the circumstances. We’ve grown, we’re cash generative, we’ve got great margins, and a large part of our business is recurring or repeat, 87% percent of it. But in the first half of this year, we’ve seen a bit of shrinkage in our business, despite the fact we’ve been winning market share and that’s been the situation over the last six months.
Q2: You mentioned that over 80% of your revenue now comes from recurring or repeat business. How does this level of revenue stability position REACT Group for sustainable growth moving forward?
A2: Well, clearly it provides a baseline. I do think that where we’ve been able to help our customers in terms of facilitating slightly lower frequencies, I think we’re through that challenge because that challenge started last year and it’s seen and worked its way through.
Something else I should add as well, and that is we had a couple of contracts that were paused, one of which has started to come back online, which is great. Obviously, when you have a high degree of your business that is recurring or repeat, then you know exactly what your overheads can be in order to sustain that level of business, and it gives you a great foundation on which to then grow and build the business. So, as we add new customers, we know that we’ve not got a lot of business falling out of the bottom so the old saying, you’ve got the taps on full, and the plug is at the bottom. Well, that’s not the case here. We’ve got the plug firmly and squarely in the bottom of the sink and the taps are on. They’ve been running a little bit slower than we’ve perhaps been used to but hopefully we can get them to speed up again, if that analogy makes sense.
Q3: You mentioned earlier Aquaflow, it seems to be a great strategic success. Can you just tell us more about the integration process and how it’s contributing to profitability and cross-selling?
A3: So, each of the acquisitions we’ve made, and we do them one at a time, each acquisition, we’ve looked for the normal characteristics. Is it profitable? Does it generate cash? Do the customers like the business that we’re acquiring? Is it accretive and is it earnings enhancing? All those normal tick box things that you then go and check through due diligence.
I think that a key critical success factor is cultural balance between what we’re acquiring and what we are and the cultural fit, and the whole team thinks that way. We’re pleased to say that each of the acquisitions we’ve made also think the same way. We want businesses where people are excited to get out of bed in the morning and go to work and do the job that they do and that they believe in wanting to be the best of what they do.
So, in acquiring 24-hour Aquaflow, we were convinced that we were acquiring a team of people and a team of founders and owners that we wanted to work with, and absolutely we do. From literally day one, that’s followed through, and we enjoy working together. They’re extremely professional at what they do, they do it very, very well, and therefore that fits very well within our organisation and vice versa.
What you’ve seen is, we call it cross-selling, but basically the enablement of business both ways. We have a customer set which includes FM customers that need the services that 24-hour Aquaflow provide and we’re making introductions. I’m delighted to say that three of those FM customers have engaged with 24-hour Aquaflow, including one that’s actually just signed a contract for 167 sites, which is great.
Likewise, they’ve done the same with us. We’ve been introduced to some of their customers where we can provide window cleaning or reactive services, specialist cleaning services. In fact, a number of the jobs that they do, especially on clear ups, they’ve brought REACT in to do that clear up with them.
So, the engagement has been very good. They’re great people. They’re bought in. They want to make their business the best possible and they think that by working now with the team at REACT, they can take it beyond where they got it themselves.
We see them as a key part of the overall team so we couldn’t wish for it to be any better.
Q4: Just looking ahead, you’ve highlighted a strong pipeline and positive markets momentum. What are the key sectors or services that you expect to fuel in the second half of the year?
A4: The pipeline has always remained strong, I should add that, and we have got an exceptionally strong sales and marketing team led by Shaun Doak. He’s in the field, he goes out and sells, and he’s got a great team of people that work in and around with him.
What’s been a challenge in the pipeline has been that I think for the last four or five months of last calendar year and the first three or four months of this calendar year, customers have been uneasy to make firm decisions on things, especially the larger the customer. Big customers, the sales cycle has been extended quite a long way out. In the small, medium sized customers, it’s been a bit freer. So, what we’re beginning to see is the grassroots of deals that have been in the sales pipeline for a while starting to close and that’s a good signal.
The pipelines are strong, they always have been, and they continue to be strong and strengthening.
Now, in terms of answering the question about where, it’s across the whole business, but I would say the strongest demand at the moment is coming in drainage. We see that we’ve got a proposition that once extended to other customers is extremely valued, we are seeing a pickup back in window cleaning again, and we’ve got a great business there. It covers the whole country and of course, we’re putting in technology now to digitise that business, which actually customers want, which is great.
The reactive business, which always is a bit up and down, it’s the original kernel of the business that we salvaged when we got involved and it’s a great business in terms of customers really value what we do. Of course, quite often it’s dependent on an issue or a crisis happening and that tends to go up and down, but we still see increased demand in that space as well.
So, yes, it is pretty much across the board. I would say that in public sector; it’s a bit more challenging. In some of the commercial markets we operate in and some of the big properties in the FM companies, where consolidation is still happening and at some pace, then I think the market is quite fluid.
I think this is the key for people to remember.
We are a small company, but quite big in our space. In fact, we’re very big in our space, I think but our space is huge. What that means is it’s very fragmented and there’s lots of people that can do bits of what we do but they can only do those bits in a specific geography or only in one skill set, one deliverable.
What we’re offering is a consolidated approach for these larger FM companies now so that rather than deal with tens or even a hundred subcontractors, they can deal with just one professional organisation like ourselves that have got the technology, have got the resources and the skill sets to deliver through one point of access. That’s what customers seem to be valuing and long may that be the case.
