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

- Link: https://www.directorstalkinterviews.com/react-groups-chairman-on-a-phenomenal-set-of-results-lonreat/4121141891
- Published: 2024-02-09T13:29:07+00:00
- Author: Amilia Stone

**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 Group 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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