React Group Regulatory News (REAT)

6 February 2024

REACT Group plc

("REACT", the "Group" or the "Company")

Final results for the year ended 30 September 2023

REACT (AIM: REAT.L), the leading specialist cleaning, hygiene, and decontamination company, is pleased to announce its audited final results for the year ended 30 September 2023.

Financial highlights

· Revenue increased by 43% to £19.6m (2022: £13.7m)

- 87% recurring revenue (2022: 83%)

- organic revenue growth of approximately 21% (on a like-for-like basis)

- Numerous multi-year contracts won via cross-selling across the Group

· Gross profit up 61% to £5.2m (2022: £3.3m)

· Gross profit margin up 300 basis points to 27% (2022: 24%)

· Adjusted EBITDA* up 133% to £2.3m (2022: £1.0m)

· Free cash flow £2.1m (2022: outflow £1.0m)

· Cash as at 30 September 2023 of £2.1m (30 September 2022: £1.5m)

Operational highlights

· Integration of LaddersFree completed

· Strengthened finance team with the addition of a Group Financial Controller, and post year end, with the appointment of a seasoned and experienced Chief Financial Officer, Spencer Dredge

Current trading and outlook

· Good momentum into FY24 following a strong first quarter reflecting significant growth opportunities for the Group and its essential services

· Investment in infrastructure to leverage efficiency-enhancing technology across the Group

*Adjusted EBITDA represents earnings before separately disclosed acquisition, impairment of intangibles, share-based payments and other restructuring costs (as well as before interest, tax, depreciation and amortisation). This is a non-IFRS measure.

Commenting on the results Shaun Doak, Chief Executive Officer of REACT, said:

"I am delighted to announce a strong performance from the REACT Group, marked by impressive organic growth and improved profitability and cash conversion. This success underscores the strength of our value proposition and customer acquisition strategy.

"Following the acquisitions of Fidelis in March 2021 and LaddersFree in May 2022, we have consistently achieved substantial organic growth. This achievement showcases our proficiency in integrating these offerings into our core services, unlocking potential across an expanded customer base. Our success is evident through effective cross-selling and upselling strategies, as well as our ability to attract new customers.

"Momentum from FY23 has continued into the new financial year, and despite the usual slow down across the festive period, the first few months of FY24 have delivered a record trading performance for the Group."

For more information:

About Us:

REACT Group plc is the UK's leading specialist and contract cleaning business and operates with three divisions: LaddersFree, one of the largest commercial window cleaning businesses in the UK; Fidelis Contract Services ("Fidelis"), a contract cleaning and facilities maintenance business; and REACT business, which primarily provides a solution to emergency and specialist cleaning situations, both through long-term framework agreements and on an ad-hoc basis.

Executive Chairman's Statement

For the year ended 30 September 2023

The Board is pleased to report that the Group has delivered significant growth in the period under review and continued to deliver material improvements in operational performance, profit contribution and cash conversion.

Details of the Group's performance are set out in reviews by the Chief Executive and the Chief Financial Officer.

For the year ended 30 September 2023 ("FY 23"), Adjusted EBITDA* was £2,272,000, up 133% on the prior year, (2022: £974,000), and sales revenue was £19,582,000, up 43% on the prior year (2022: £13,671,000).

The Group performance represents strong like-for-like organic growth of approximately 21%, assuming LaddersFree was owned throughout the comparative year. Importantly, this is the fourth successive year the Group has reported double-digit organic growth, delivering an average of approximately 24% 'organic' growth each year. This in turn has materially contributed to impressive improvements in gross profit and earnings over the same period.

The financial model of the Group has evolved from one of a project-orientated business with high margin but inconsistent and often unpredictable revenue flows, to one that now has greater predictability with more than 85% of its revenues contracted and recurring, alongside a balanced margin that remains above market average. To this, the Group has added a consistent ability to generate organic growth and with it, scale.

The evolution of the business is the result of a strong team working hard to outperform competition, delivering in each division a compelling proposition that results in high levels of customer satisfaction and long-term commercial relationships. The opportunity for the business, now that it has reached this size, is to invest in the next stage of growth and development; to combine the small group of growing businesses into one unified brand with a clear and precise proposition aimed at growing the business and enhancing its value even faster.

The Group will therefore implement a considered programme to invest in people, processes and systems; much of the immediate plans involve the development of talent already inside the business. To this end, the Company will phase in skills and experience aimed at covering any gaps.

There is a tremendous opportunity to develop a digital platform to support and scale the nationwide commercial window cleaning business and in doing so enhance the ability to cross-sell other relevant services bought by the same customers, and potentially delivered by the same membership resource. At the very least, this will enable the Group to improve operational efficiency and scale with robust systems. Better still, we will establish a platform on which our commercial IP can return significant value to shareholders.

Investment will be phased over the course of this current financial year and into the next, and whilst the Board anticipates that the benefits will be most evident in future years, we do expect to see some positive effect in the nearer term.

The contracted soft services facility management business has more than doubled in size since Fidelis was acquired in March 2021. The aim is to maintain growth in this sector as it provides robust long-term visibility of revenue and earnings and a solid base from which to cross-sell other Group services. The Company will continue to drive organic growth and where relevant, augment this with M&A activity. With markets challenged, there is an opportunity to be a consolidator, providing a great home for small quality 'bolt-on' businesses that share the Group's core values. The Company has a healthy pipeline of very early-stage opportunities to evaluate, however, many will not meet the Group's criteria. Those that do will be earnings enhancing and accretive.

To support the operational effectiveness of the business and its growth ambitions, the Group is in the process of moving its banking facilities to one consolidated relationship with HSBC.

The strategy for growth remains clear; the Group will continue to build a leading position across its business through fast-paced organic growth, margin enhancement, improvements in operational efficiency and, if quality opportunities present themselves, through strategic M&A.

Mark Braund

Chairman

6 February 2024

Chief Executive Officer's Report and Strategic Review

REACT Group has delivered a strong performance for the year ended 30 September 2023.

Since acquiring Fidelis (March 2021) and LaddersFree (May 2022), the Group has achieved impressive organic growth and has integrated these offerings into the core proposition to unlock the potential across the enlarged customer base, through successful cross-selling and /or upselling of services and through success in winning new customers.

Despite challenging market conditions, which have seen supply chain disruptions, inflation and some customers reduce the frequency of cleaning, the Group delivered like-for-like organic revenue growth of approximately 21%, assuming LaddersFree was owned throughout the comparative year.

The acquisitions of Fidelis and Laddersfree have provided a competitive advantage, bringing a more dependable and profitable business model with an established and impressive client base. Nearly all of Fidelis's and LaddersFree's revenue is recurring and contracted, providing a predictable and stable income stream as the Group continues to grow. With these acquisitions, particularly LaddersFree, the Group gains access to a broader customer base and established distribution channels. By leveraging their expertise and market insights, the Group has developed and delivered a more comprehensive suite of value-added services. This enhanced value proposition not only strengthens customer relationships but also drives increased customer satisfaction and improved margins.

REACT continues to drive growth through cross-selling, showcasing the Group's success in generating incremental revenue. Evidence of this is underscored by multiple contract awards, including material contract wins announced during the year, such as:

Plus the material post-period year-end announcement:

The Group's growth journey has been fuelled by a talented team. Key colleagues have been empowered and promoted to play a pivotal role in evolving and professionalising the business. Focus has been on customer value-enhancement measured not least by improvements in margin, which in a continually competitive and challenging market is not easy, but the team has achieved it again in the reporting period by improving gross margins to c.27% (2022: c.24%).

To keep up with our growing business and the inherent complexity, the finance team has been strengthened by adding a Group Financial Controller, Justin Fleming and in the post-reporting period, the Board has also appointed a seasoned and experienced Chief Financial Officer, Spencer Dredge.

A review has commenced to improve workflows and processes to enable the business to scale even more effectively. This focus has already supported the underlying improvements in conversion of gross profit to earnings and helped drive better cash conversion. This process is ongoing with the purpose of creating better efficiencies within the business.

Strategy

Whilst the business continues to pursue opportunities across all relevant sectors, the core strategy prioritises a robust financial model fuelled by recurring revenue from long-term contracts. This provides predictable income and support for sustainable growth.

Further investment will be undertaken to facilitate the next stage of development, to consolidate from a small group of growing businesses into a unified brand with a clear and precise proposition aimed at growing the business and its value even faster. The Group will therefore implement a considered programme of investment in people, processes and systems; much of our immediate plans involve the development of talent already inside the business. To affect this, the Company will phase-in skills and experience aimed at covering any gaps.

As highlighted in the Chairman's statement, there is a tremendous opportunity to develop a digital platform to support and scale the Group's nationwide commercial window cleaning business and in doing so open a channel to sell other relevant services bought by the same customers, and potentially delivered by the same membership resource. This will enable the Group to improve operational efficiency and scale with robust systems, creating a platform approach to develop its commercial IP and with it grow an increasingly attractive enterprise value. Simultaneously, the Company will continue to invest further in sales and marketing to unlock the huge potential of its target market. By leveraging the right tools and strategies, it will increase the opportunity to engage with prospective clients and drive market expansion.

Key Performance Indicators (KPIs)

Financial: The key financial indicators are as follows:

By emphasising the right KPIs, the Board fosters behaviours that drive value and ensures clear visibility into Group performance across all levels. Well-defined KPIs are crucial for motivating behaviours aligned with strategic goals and monitoring Group performance.

The Group thrives in three core areas:

1. Contract Maintenance: providing scheduled cleaning services across various sectors, including healthcare, education, retail, industrial, and public transport.

2. Contract Reactive: as the on-call heroes, we tackle emergencies 24/7/365 under formal contracts or framework agreements.

3. Ad hoc: where REACT provides a solution to one-off situations outside a framework agreement, such as for fly tipping, void clearance, and decontaminations

To conclude, and on behalf of the Board, we wish to thank our customers, colleagues and our members for their openness and willingness to engage and as a result help us to deliver a compelling solution to many of our customers challenges. Within this, a heartfelt thanks to all my colleagues across the Group, your dedication, tireless efforts, and unwavering tenacity are the bedrock of our success - "thank you!" I am incredibly excited to continue this journey with you in 2024 and beyond.

Outlook

Momentum from FY23 has continued into the new financial year, and despite the usual slow down across the festive period, the first few months of FY24 have delivered a record trading performance for the Group.

Through improvements to our value proposition and strategic market access initiatives, exciting new growth opportunities have been unlocked, expanding the Group's reach across diverse markets up and down the country.

Despite the challenging environment and the focus required to invest in upscaling the infrastructure of the business, the Board remains cautiously optimistic of another strong performance in this new financial year.

Shaun D Doak

Chief Executive Officer

6 February 2024

Chief Financial Officer's Report

Revenue and profitability

Revenue for year ended 30 September 2023 was £19,582,000, 43% up on the prior year (2022: £13,671,000). The current year figures include a full 12 months' results from LaddersFree (2022: 5 months). Taking into account the performance of LaddersFree for a full prior year period, this represents like-for-like organic growth of approximately 21%.

These revenues generated a gross profit contribution of £5,239,000, up 61% on the prior year (2022: £3,257,000). On a like-for-like full 12-month basis, gross profit increased by 19%.

Group overheads of £4,988,000 (2022; £3,768,000) increased during the year as a result of including LaddersFree throughout the year, whilst the prior year recorded overheads for only 5-months. Group overheads increased by 22% on a comparable basis, adjusting for LaddersFree on a full year basis in the prior year.

The strong trading performance has resulted in an Adjusted EBITDA of £2,272,000, up 133% on the prior year (2022: £974,000). Adjusted EBITDA is a non-IFRS measure and means operating profit before interest, tax, depreciation and amortisation and excludes separately disclosed acquisition and other costs along with share based-payments. The directors believe that Adjusted EBITDA and adjusted measures of earnings per share provide shareholders with a meaningful representation of the underlying earnings arising from the Group's core business.

Reconciliation of Profit before Tax to Adjusted EBITDA

Earnings per share

The basic profit per share from continuing operations 0.005p (FY22: loss per share 0.098p). The adjusted EBITDA per share which excludes the after-tax impact of exceptional items, share-based payments and the amortisation of intangible assets recognised on acquisition was 0.21p (FY22: earnings per share 0.13p).

Intangible assets and goodwill

The Group has intangible assets of £9,483,000 (2022: £9,889,000) comprising of Goodwill £5,446,000 (2022: £4,209,000) and intangible assets £4,037,000 (2022: £5,680,000). Goodwill has been tested for impairment and management believe the current carrying value of goodwill is supported by the current financial projections, prior year write down £567,000. An amortisation charge of £1,643,000 (2022: £743,000) was recorded against intangible assets; these intangible assets acquired through business combinations are amortised over four years. 

Cash flow

Cash and cash equivalents increased in the year by £661,000 (2022: outflow £2,190,000). As a result of positive operating cash flows in the year, offset by outflows from financing activities and investment activities, cash and cash equivalents and overdrafts at the year-end were £1,640,000 (2022: £979,000) which resulted from cash and cash equivalents including cash held at bank £2,120,000 (2022: £1,525,000) less the invoice discount balance of £480,000 (2022: £546,000).

Operating cash inflows in the year £,2,444,000 (2022: outflow £773,000) resulted from trading, favourable movement in working capital £527,000 (2022: outflow £1,780,000) off-set by depreciation and amortisation charges £1,809,000 (2022: £921,000) and after paying corporate taxes of £226,000 (2022: £80,000).

The net cash outflow from financing activities £360,000 (2022: inflow £6,997,000) resulted from the repayment of the term loan £181,000 (2022: inflow £902,000) and interest payments £203,000 (2022: £56,000) and a cash from a share issue £24,000 following an exercise of employee share options (2022: £6,500,000). The prior year included cash raised to fund the acquisition of LaddersFree.

Cash outflows from investing activities £1,423,000 (2022: £8,414,000) mainly resulted from deferred consideration payments made in the year £1,309,000 (2022: £7,776,000) and investments made in fixed assets during the year £119,000 (2022: £115,000). Deferred consideration payments made during the year were against acquisitions made in previous years, Fidelis £262,000 and LaddersFree £1,047,000.

Based on current financial projections, the Group has sufficient available cash resources to support its current plans, which includes settlement of the deferred consideration payments £1,969,000 in the year to September 2024 and other planned capital expenditure. The Group is currently engaged with a third-party software solution provider to design, build and deploy a new operating system for LaddersFree. Once operational, the investment will be recorded as a fixed asset and amortised over a three-year period.

The Group has plans underway to move its banking arrangements to a single platform provider, this should be completed by May 2024. This arrangement will be a replacement of existing banking arrangements and will include an invoice discount facility and the term loan on a comparable basis. This arrangement will provide greater day-to-day operational efficiency.

Taxation

The Group has reported a small profit which is after a credit for tax £2,000 (2022: charge of £134,000). At the balance sheet date, the Group has a deferred tax asset of £123,000 (2022: £244,000), and deferred tax liability associated with the intangible asset recognised on acquisition £908,000 (2022: £Nil). Available historical losses and management fees available to the Group for tax purposes, that can be off-set against future taxable profits are approximately £500,000 (2022: £2,100,000).

Statement of financial position

The Group's balance sheet has strengthened with net assets at the year-end of £8,495,000 (2022: £8,339,000). The Group's balance sheet includes liabilities for deferred consideration balances for the LaddersFree acquisition of £1,680,000 and Fidelis £77,000, both of which will be fully settled in the year ahead. In addition, the Group's balance sheet has a five-year term loan with an outstanding balance of £826,000 at the year-end.

The loan was drawn down in May 2022, therefore the loan has 3.75 years of the five-year term to run under the current loan arrangements.

Andrea Pankhurst

Chief Financial Officer

6 February 2024

Consolidated Statement of Comprehensive Income

For the year ended 30 September 2023

The notes form part of these financial statements

Consolidated Statement of Financial Position

As at 30 September 2023

Consolidated Statement of Changes in Equity

For the year ended 30 September 2023

Share capital is the amount subscribed for shares at nominal value. Share premium represents amounts subscribed for share capital in excess of nominal value.

Share premium represents the amount subscribed for shares in excess of the nominal value, net of any directly attributable issue costs.

Merger relief reserve arises from the 100% acquisition of REACT SC Holdings Limited and REACT Specialist Cleaning Limited in August 2015 whereby the excess of the fair value of the issued ordinary share capital issued over the nominal value of these shares is transferred to this reserve in accordance with section 612 of the Companies Act 2006.

Accumulated deficit represents the cumulative losses of the Group attributable to the owners of the company.

Reverse acquisition reserve is the effect on equity of the reverse acquisition of REACT Specialist Cleaning Limited.

The capital redemption reserve represents the value of deferred shares cancelled as a result of a share buyback.

The share-based payments reserve represents the cumulative expense in relation to the fair value of share options and warrants granted.

Consolidated Statement of Cash Flows

For the year ended 30 September 2023

Notes to the Consolidated Statement of Cash Flows

For the year ended 30 September 2023

1. Reconciliation of profit for the year to cash outflow from operations

2. Cash and cash equivalents and overdrafts

Notes to the Financial Statements

For the year ended 30 September 2023`

1. General Information

Basis of preparation of financial statements

While the financial information included in this annual financial results announcement has been prepared in accordance with the recognition and measurement principles of International Accounting Standards in conformity of the requirements of the Companies Act 2008, this announcement does not contain sufficient information to comply therewith.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 September 2023 or 2023 but is derived from those accounts. Statutory accounts for the year ended 30 September 2022 have been delivered to the Registrar of Companies and those for the year ended 30 September 2023 will be delivered following the Company's annual general meeting.

The auditors have reported on those accounts; their reports were unqualified and did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports.

Their reports for the year end 30 September 2023 and 30 September 2022 did not contain statements under s498 (2) or (3) of the Companies Act 2006.

The consolidated financial statements are drawn up in sterling. The functional currency of REACT Group plc.

The level of rounding for the financial statements is the nearest thousand pounds.

Changes in accounting policies

These financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 for periods beginning on or after 1 October 2021 with no new standards adopted in these financial statements.

Prior year adjustment

In the prior year, the invoice discounting balance of £546,000 was presented within cash at bank and in hand. The directors have now determined that this figure is better presented within trade and other payables and have therefore restated the comparative financial information accordingly. Total assets previously reported are therefore increased by £546,000. This adjustment has no impact on previously reported comprehensive income.

2. Segmental Reporting

In the opinion of the Directors, the Group has one class of business, being that of specialist cleaning and decontamination services, including both contracted commercial cleaning and specialist emergency decontamination work. Although the Group operates in only one geographic segment, which is the UK, it has also analysed the sources of its business into the segments of Contract Maintenance, Contract Reactive or Ad Hoc work.

3. Earnings per Share (basic and adjusted)

The calculations of earnings per share (basic and adjusted) are based on the net profit and adjusted profit respectively and the ordinary shares in issue during the year. The adjusted profit represents the EBITDA for the year. For diluted earnings per share, the weighted average number of shares is adjusted to assume conversion of all dilutive potential ordinary shares.

4. Intangible assets

The goodwill relates to intangible assets that do not qualify for separate recognition on the acquisition of LaddersFree during the prior year and previously, Fidelis and the REACT specialist cleaning services business.

The Group assesses at each reporting date whether there is an indication that an asset may be impaired, by considering the net present value of discounted cash flow forecasts. Goodwill has been allocated for impairment testing purposes to the individual businesses acquired which are also the cash?generating units ("CGU") identified. The recoverable amount of a CGU is determined based on value in use calculations using cash flow projections based on financial budgets approved by the Directors. The projections are based on the assumption that the company can realise projected sales. A prudent approach has been applied with no residual value being factored into these calculations. If the projected sales do not materialise there is a risk that the total value of the intangible assets shown above would be impaired. A pre-tax discount rate of 15% per annum has been applied to the cashflow projections, taking into consideration the expected rate of return and various risks relating to the CGU.

The key assumptions used in the estimation of the revised value of Purchased Goodwill are set out below. The values assigned to the key assumptions represent management's assessment of future revenues and cash flows of the CGU. The most recent financial results and forecast approved by management for the next five years were used and a nil terminal growth rate thereafter. The projected results were discounted at a rate which is a prudent evaluation of the time value of money and the risks specific to the CGU.

Key assumptions used: