Hercules Plc (HERC) Earnings Call Transcript & Summary

Good morning, and welcome to the Hercules Site Services Plc Full Year Results Investor Presentation. [Operator Instructions] And I would now like to hand you over to CEO, Brusk Korkmaz. Good morning to you.

Good morning, Alex. Thank you. Good morning, everyone, and thank you so much for your time meeting us today. As you might have already seen from our announcement this morning, we had a fantastic year. So just to summarize, our year-on-year turnover increased by 28% to GBP 102 million. Our adjusted profit before tax increased by 43% to GBP 2.6 million, and our adjusted EPS increased also by 173% to GBP 3.47p compared to financial year ending 2023, which is an amazing achievement for us. In today's presentation, we will talk about our performance over the last financial year, and we will also share our future growth plans with you. So just to give you a brief introduction for our company, Hercules Site Services plc is a technology-enabled labor supply company operating in the infrastructure sector. The next slide is about our Board members. I'm Brusk Korkmaz. I'm the CEO for Hercules. And today, I am joined by our CFO, Paul Wheatcroft.

Hi, everybody.

Recently, we have got Martin Tedham joined our Board in September as a Non-Exec Director, and he has been a great addition to our team as well as being one of our main investors. As you can see from this slide, we have a very strong and well-respected Board with both exec and non-exec directors with great blend of experience in infrastructures, financials and banking, sales, PLC, governance and even starting and running an enlisted company. Together, we believe that we can grow Hercules even further. This slide is about our 2024 achievements. As I mentioned before, we had a fantastic 2024, and yet again, we exceeded the market expectations. Our revenue, EBITDA, profit before tax and our earnings per share all increased materially, which I'll talk about in detail on the next slide. We have achieved these strong results through growth in our labor supply and our Civil projects division. As you might remember that we have completed our first acquisition over a year ago, a company called Future Build Recruitment, adding white collar supply to our successful blue collar labor supply business. And this added around GBP 1.5 million of revenue to our overall turnover. We are also pleased that the cross-selling between the divisions and subsidiaries remained a key factor in 2024. About a year ago, we secured a 5-year contract with Balfour Beatty Rail for our rail labor supply division. And since then, we have added more clients onto our portfolio. As you might remember from one of our previous announcements that we have established our Hercules Construction Academy in January last year. And since then, we have started generating our first revenues while upskilling and cross-skilling our workforce, which is very important for us. As you are aware that there is a huge skill gap in the U.K., and we believe that by upskilling and cross-skilling our workforce we can meet the growing demand in the U.K. by supplying skilled workers for the key projects. We entered 2025 financial year with a strong balance sheet, which Paul will talk about in detail later on. Last September, we raised GBP 8 million to invest in acquiring companies within the labor supply sector, enabling us to grow even further. Lastly, the first quarter of the financial year started really well. We have a strong pipeline of projects, and we are confident that all of our divisions will continue to grow organically. This slide is about our record financial performance for 2024. I'm just going to go through some of the numbers with you. Our revenue increased by 28% to GBP 102 million from GBP 79.8 million. Our adjusted EBITDA grew 34% to GBP 4.7 million. Our adjusted PBT also increased by 43% to GBP 2.6 million. And our EPS, a huge growth, as you can see, 173% to GBP 3.47p. And as Paul is going to mention as well in detail that we have generated cash last year also GBP 7.5 million comparison to last year was GBP 3.3 million. So as you can see, good generation of cash as well. And we also paid dividends last year as well as the previous year of 1.72p per share. The next slide is about our business overview. At the bottom of the slide, you can see some of our blue-chip clients we work for in the infrastructure sector. As I mentioned before, we are mainly a labor supply company working for the blue-chip infrastructure companies and complemented by our Construction Services division. Our labor supply division is our core business, and it's a significant part of our company, which currently contributes 83% of our turnover, and this percentage is still growing. We have been supplying labor into U.K.'s highways, rail, nuclear energy, utilities, power and energy and other infrastructure projects. Under the Construction Services division, we carry out civil projects in the water industry, and we operate our Hercules Construction Academy. The biggest USP we have got is that we can supply all of these services by cross-selling opportunities to our clients under the same umbrella. Our cross-selling has built strong client loyalty for us and some of the clients that have been -- we have been working for over 17 years, and we are continuing to grow our client base every year. The next slide is our revenue growth. As you can see on this slide, we have a very strong growth history. I set up Hercules in 2008 from a family spare bedroom. And since then, we have been growing every year. You can also see from this slide that there are several milestones we have achieved over the last 17 years. Just to mention some of the significant milestones winning the HS2 labor supply framework in 2021 for the Birmingham section with Balfour Beatty and Vinci joint venture. At the beginning of February 2022, we listed Hercules on the AIM market, and this is a major milestone for us, and we are very excited about being on the AIM platform, and we believe that this will enable us to grow as we have ambitious plans for the next part of our journey. I previously mentioned that we completed our first acquisition over a year ago, a company called Future Build Recruitment. They're a great company, and they specialize in supplying white-collar personnel to the construction sites, making them great addition to our existing blue-collar labor supply division. As you can see from this slide that our revenue has been growing since we started in 2008, apart from the COVID year. So we have a very -- we have a great history of growth overachieving our targets. I just want to bring your attention to our compound annual growth rate, CAGR, for the last three years being 48%. So we are growing in the right direction. As you can see from the top right corner of this slide, some of the government's investment programs in rail, nuclear energy, renewable energy and water sectors, we are ideally positioned to grow even further over the next 10 years. I think next slides are yours, Paul.

This is our group statement shows our continuing operations, i.e., it excludes the Suction Excavator business, which you'll have seen is now treated as a discontinued operation. So we had a 28% increase in revenue, as Brusk just pointed out, a 34% increase in adjusted EBITDA and an operating profit of -- increased by 36%. PBT, adjusted PBT was GBP 2.6 million, and that was a significant increase as well. You can see that there 46%. Profit after tax stabilized. The only difference there was we had a credit on deferred tax in 2023 that fell away. And in 2024, we actually have a charge of just shy of GBP 600,000, which is why you have that swing on the profit after tax. Nice summary down the bottom also shows you all operations, i.e., including the Suction Excavator business. So you see that we actually achieved GBP 107 million in turnover, including that, GBP 5.1 million adjusted EBITDA, adjusted PBT of GBP 1.3 and EPS of 3.5. So that's on a continuing basis. And it's a little bit confusing between all and continuing, but continuing is the key because that's what we're going to be from now on. Labor supply. Again, a very good increase in revenue here, and I've put operating profit adjusted because we made a one-off provision for possible issues with KPIs. So it's still a great result, but that's why you can see that we've -- that additional turnover has generated a significant amount of operating profit. We've got continued organic growth through execution of a strong project pipeline. And as happens every year and every time we do these presentations, we add more. We add more new clients. So we're now on the national framework for Costain. Hill Group preferred supplier list, and that came to us via the Future Build acquisition that Brusk was talking about a little bit earlier and Balfour Beatty Kilpatrick. We've now got circa 1,600 operatives across all sites, a significant increase from previous years. You'll probably be aware that we have a recruitment app. This is one of our major selling points compared to our competitors. We've now got nearly 16,000 people on that site. And that same figure this time last year was about 12,000, big increase. Since we've introduction of these apps, we've also got another app called Onboarding. And since then, 7,000 offices have completed onboarding via this app. And again, the comparator at the same time last year was 1,200. So significant increase. Finally, labor supply really relies on training because every 3 or 4 years, all operatives have to be retrained or upgraded. You can't just get trained and then it's for life. That's not the way. So it's very important that we keep this -- we do this training in a very, very efficient way. And to help us with that, you'll probably be aware that we opened our own construction academy in Nuneaton, which is close to most of the HS2 operations. We opened that in January, and that's to be used to -- rather than sending our people outside to be upskilled or cross-skilled, we send them to our own academy, but as well as that, we offer those services to our clients, other educational establishments. That's labor supply. You can see overall 32% revenue growth. Civil projects is mostly us operating on a fixed price basis in the water industry. You can see that we've got almost GBP 2 million added to the revenue and a nice increase in operating profit to go with it. So that's a revenue increase of 12.2%. The asset management program, AMP 7, has driven growth and AMP 8 actually starts in April 2025. These are 5-year programs. We did very well out of AMP 7. I think AMP 7 overall was GBP 51 billion and AMP 8 for the next 5 years is about GBP 104 billion. So we're expecting to do an awful lot more in that -- with civil projects in the forthcoming 5 years. So far this financial year, we've already got in the bank, so to speak, projects that we've won of GBP 7.5 million. So we're well on the way after 3 months to achieving at least the same revenue, if not more, in 2025. Again, we talked about new clients in labor supply. Well, here we are, we've got them again in civil projects, Anglian, Severn Trent, [ Trans ] Engineering and [indiscernible] Group. All these clients and our new clients altogether helped us to actually deliver 43 projects, completed projects in 2024. It's a significant amount of work delivered to our clients. Balance sheet. This is -- now looks slightly different because we have to treat the assets held for resale, i.e., the discontinued operations. We have to show a separate line for assets. You'll see there in the top section, 11.8 and in liabilities in the same way in the bottom section of 9.6. So other than that, you can -- what that basically shows you quite clearly is the change to support the decision to divest ourselves of the Suction Excavator business. You can see how much difference that makes to the asset funding debt comes down from GBP 11.4 million, including everything last year to just GBP 1 million. The lease liabilities also come down because there was an actual lease included in the Suction Excavator business. One of the other interesting things that's happened in the last year is we've become quite successful in the way that we operate our invoice discounting facility. For people who aren't familiar with how this works, we effectively get 90% of all invoices paid to us as soon as the invoice is raised and then we get the final 10% once the client pays. It basically means it accelerates cash generation. So really, even though it's shown as a liability, it's really a reduction in debtors but accounting standards say we treat it as debt. So that's where it is. But the key thing is, look, we've reduced it from GBP 10 million last year to GBP 7.3 million. We're just not using it so much even though our revenues increased, and that's pretty good news. Final one for me, cash flow. Operating cash flow, about the same, but significant working capital changes. So we've now generated GBP 7.5 million, as Brusk mentioned at the start of this presentation, GBP 7.5 million in 2024 compared to GBP 3.3 million in 2023. What have we spent that money on? Well, we spent GBP 1.2 million on the Future Build acquisition, a small amount of capital expenditure, net capital expenditure of GBP 200,000. And again, we've talked about the new equity raise that was completed in October. GBP 6 million of it came in, in September. The other GBP 2 million isn't shown here because it came in, in October. The other financing activities are where we've effectively utilized repayments on to the existing debt. And finally, I've shown a line for the discontinued operations. Here, you can see the impact that, that had. All in all, we've ended the year at GBP 6.7 million, an increase from GBP 5.1 million this time last year. Dividends, again, Brusk mentioned this earlier. So we paid our final dividend -- sorry, we're going to pay our final dividend in March of 2025. That's for the 2024 financial year. We already paid an interim dividend in August of last year. So this will make overall a 1.72p per share paid to shareholders for the second year. So that's me on cash. Brusk, I think back to you.

Thank you, Paul. This slide is about our current trading and our industry outlook. We had a fantastic start for this financial year also. Strong momentum has continued across all of our divisions into quarter 1 of the financial year ending 2025. Infrastructure remains buoyant with GBP 750 billion of investment earmarked across our main markets, and they are nuclear, energy, power and energy, rail, highways and the water sectors. The next AMP, which is AMP 8 in the water sector has a committed investment of GBP 104 billion over the next 5 years. So that is more than double the GBP 51 billion of investment in the current AMP 7. Network Rail's CP7 investment plans representing a GBP 44 billion of investment into the rail network is from last April 2024 over the next 5 years. In the rail sector, we are well positioned to maximize our revenue and profit. As you might have already seen recently in the news that U.K. government committed to major infrastructure projects throughout 2025 and beyond, including further investment in the nuclear energy, such as Sizewell C Ipswich and [indiscernible] along with a carbon capture project, which is called Net Zero Teesside as well as major power and energy distribution projects in various parts of the U.K. As you can see from the list of these investments, we are well positioned in the market to grow over the next 10 years. The next slide is about our growth strategy, and this is our final slide. As you can see from the slide that we have multiple growth opportunities for our future with regards to the M&A activity, as I mentioned previously that we have raised around GBP 8 million successfully in September. So currently, we are already talking to identify acquisition targets in the labor supply sector. We have been growing across all of our divisions through a strong pipeline of projects into the financial year of 2025. And there are billions of pounds being invested in nuclear energy with over GBP 11 billion committed to the Sizewell C nuclear energy project. We have already started supplying labor to this project, and we believe that there are significant growth opportunities in the coming years. Regarding the power and energy distribution projects, the U.K. government has committed to ensuring energy security across the country. Major power distribution projects are starting in Scotland and England and Wales. And we are already in a framework with our clients, blue-chip clients. So we are well positioned to maximize our revenue and profit over the next 10 years. This is the end of the slide, and thank you so much for listening to us today, and we really appreciate your feedback, and please feel free to ask any questions.

Perfect. Paul, thank you very much indeed for your. [Operator Instructions] I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. [Operator Instructions] And Paul, if I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you at the end.

Thank you very much. Yes, we've got some questions. Interesting. So the first 2 questions are both from Gary B. I'll take the first one, shall I Brusk. So the question from Gary B is -- first one anyway, is how resilient is your business model to potential inflationary pressures or sustained high interest rates in financial year 2025? Okay. This is a fairly straightforward one for us to answer. So the debt that we have is all at fixed interest rates apart from the invoice discounting facility, which is based on a margin over base rates. That is really on that invoice discounting facility, which, as I said in the presentation, we've been using less of. So it's not a high risk to us and the like and nobody really expects interest rates to shoot up dramatically in the next year. So I don't think there is any risk to that at all. In terms of general inflationary pressures, obviously, you've got the change coming with the National Insurance in April of this year. But we normally renegotiate our recharge levels to clients at least once a year. And this will be part of another negotiation because that will be passed on to clients. We've not had -- in the prior year, inflation has not been at the same levels as everybody knows. So that has not been so much of a problem as it was, say, in 2022 or part of 2023. Whatever, where you've got inflationary issues that push up wage rates, that is always effectively passed on to clients. So we're not at risk there at all really. In terms of civil projects, where we buy materials, we always quote prices on fixed price jobs where we've got materials. We make sure we get fixed prices on materials, and we only quote to the client prices that cover that period of time. So if they don't do it until later, we would give them a new quote to cover any likely or possible material price increases. So yes, it's a good question, but not one of any major concern to us. The second one, this is also from Gary B as I state. So the question is, can you also shed a little more light on your acquisition pipeline? What he says what care? I think it means what type of companies or what sort of companies are you looking for? Brusk, do you want to take that one?

Yes, sure. No problem. Great question again, and it's very important for us. We have raised, as I mentioned, around GBP 8 million from our new investors. And our intention is to grow organically as well as acquiring other companies in the labor supply business. Infrastructure is very fragmented and lots of projects coming up, lots of pipeline of work coming up in the U.K. And we believe that looking at potentially acquiring companies in the labor supply sector, which can add value to us would be preferable. So we are already talking with some of the targets in order for us to be able to acquire them and grow altogether. Yes, very, very ambitious plans that we have got. And in 2025, our intention is to get 1 or 2 over the line. And yes, it's going well so far with the discussions.

Thanks, Brusk. Okay. The next question is from Richard L. How has the diversification of the client base in the rail sector contribute to revenue stability and growth potential? Brusk, do you want to take that one?

Yes, sure. So with regards to the rail opportunities, we only established our rail arm over a year ago. It's going really well for us. It's already turning over about GBP 1 million for us. And we started with Balfour Beatty, but we have got another couple of clients joining our client list. So it's going right in the right direction, but that could be in the future, some opportunities for us to be able to acquire other companies to be able to grow. We are maximizing our opportunities at the moment, and we established our compliance team within the rail as well as our operations team. So yes, it's going really, really well, actually. So we should have another record year for us for our Rail division to perform in 2025 also.

Yes. It's probably worth adding, as Richard mentioned in his question, contributed to revenue stability. Well, our revenue -- as Brusk said, it's -- we've only achieved GBP 1 million out of what our total of GBP 107 million in 2024. So it doesn't really have any major impact on our revenue stability. And I think that's what you meant by the question, Richard. But anyway, and Brusk has covered off the growth potential point. The next question is from Christian W. How do you see the labor demand from homebuilding companies picking up during -- it's put the last month, but I think during the next few months, I suspect, is what the question is aimed at. But Brusk, do you want to take that one?

Yes. Sure. Great question again. We work mainly in the infrastructure business. And we don't supply any labor in the housing industry. And we are aware that housing at the moment is a bit quiet and it will sort of pick up in the next few years. But our attention is to make sure at the moment that we keep up with the demand in the infrastructure sector, which is going to be huge -- which is already huge, as you can see from our organic growth numbers that we are maximizing it, but there are going to be even further opportunities. So we want to make sure that we are concentrating, we are focusing on delivering the amount of work coming up in the infrastructure sector. So yes, really exciting few years coming up for us.

Okay. We've now got a question from David S. With significant projects exceeding GBP 1 million in value, what operational or financial challenges do you face in scaling further? I'll take this one then, Brusk. So we've been dealing with significant projects joining our [ sheer ] pipeline for almost 5 years now. So we've had to -- and we knew all this was coming. We knew full well that there was going to be significant growth. And we had to build our internal infrastructure, whether it be people, whether it be systems, procedures. We've had to build that to get ourselves to be able to deal with all this growth and continued growth. So we understand what those challenges are. We need to operate like a large company, not like a small company, which is what we were 5 years ago. And of course, we will evolve with our growth. But in terms of labor supply, labor supply is very scalable. You effectively -- you're delivering people to the client sites, you're paying them and you're getting your margin. And all we have to make sure that we have an infrastructure behind it that will actually deal with that. Most of that infrastructure has been done. And you'll probably notice if you look at our accounts that the growth in administrative expenses has been little or nothing in the last year, and that's indicative of how much we've built that, and it's now that any increases have tailed off a little bit. That will always -- we will always need to increase that level because over time, you see opportunities, whether it be commercially or other forms of opportunities that we will want to take to make sure we can generate as much profit for shareholders as we can. So sometimes you make an overhead investment knowing that you're going to get something back, say, in the following year. And there will be areas like that to do. So operationally, I think we've got -- we're well trained at how we scale up with labor supply. We've been very careful with civil projects not to build that business too high too quickly. So again, I think we're -- I don't think we've got any operational challenges there. We've been doing it a long time. And financially, we've got the invoice discounting facility, which I mentioned earlier on. We're at the moment, using less than half of the facility we have. So we've got considerable scope for further work there. And we've also got the opportunity to go back and increase that if the increase in business accelerates materially. I suppose the other thing to worth pointing out, we clearly have done the fundraise recently, and that's been very significant. And that doesn't mean to say that we will use all of that on possible acquisitions. I suspect some of it we will keep to help us navigate normal working capital changes over the year or couple of years ahead. Okay. Thank you, David. The next one is -- we've got 2 questions from Christopher H. One for you, one for me, by looks a bit. Brusk, I'll let you have the first one. That is, what's the biggest opportunity to grow the company?

There are a few opportunities. Organic growth is one of them as we'll be growing. The amount of work that we have secured and coming up is a great one. So we'll be growing profitably over the next, we believe, 10 years. And also the other huge opportunity for us to be able to acquire companies which are going to add value -- added value to us and for us to be able to grow altogether to maximize the opportunities in the U.K. infrastructure markets. We already have got some plans with regards to the acquisition opportunities in the labor supply market. We have got a bit of a list and targeting certain companies, certain areas, and that list is really, really good and powerful. And we believe that we are going to be, as I mentioned before, getting 1 or 2 acquisitions over the line in this year. And we want to keep repeating that every year and grow together really. Thank you.

Okay. So one more question from Christopher H. Do you intend to grow dividends in line with profit? Or does M&A take priority over this recash distribution? Well, I think the first thing to say is that we've obviously increased the number of shares that we have in the business, from it was about 62 million at the start of 2024. It now starts 2025 with 80 million shares. So straight away, at the same level of dividend of 1.72p per year that we've achieved in the last few years, that's going to make -- that's a bigger payment for the company to make. But we see our shareholders as loyal, that's very, very important and the bedrock of supporting us through this growth. So our strategy is very clearly to continue with dividends at least at the same rate and depending on how much profitability moves along in the next few years, possibly increase that further, but that's not for this year. Do we have any plans to not do dividends and make M&A a priority? No, we don't have that plan. We're not going to suddenly stop paying dividends and say we want to put that into other acquisitions. We've raised money, as you can see, for acquisitions without needing to do that, and we believe we can raise more for other acquisitions when required. That's why we joined the end market, and that's why we build relationships with investors, like some of the guys that joined us recently. They're great people to know. One of them, Martin Tedham has, in fact, joined our Board as a Nonexecutive Director. So hopefully, that answers that question. And by the looks of it, that's the last of the questions. Thank you.

That's great, Paul, Brusk. Thank you for addressing all those questions from investors today. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. But before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Brusk, could I please ask you for a few closing comments?

Yes, sure. Thank you, Alex. As I mentioned previously, there are huge opportunities in the U.K. infrastructure market, and we are well placed being on the AIM market and also being a framework supplier to our blue-chip clients. We are ready to even grow further. Just to remind everyone, just only 10 years ago, we were a GBP 7 million turnover company just 10 years ago. And now we are over GBP 100 million turnover being on the London Stock Exchange listed on the stock exchange as well as being one of the strategic suppliers for our clients, now we believe that I personally want to see Hercules becoming a GBP 400 million, GBP 500 million turnover company over the next 5 years by acquiring other companies as well as growing organically. Thank you.

Fantastic. Brusk, Paul, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Hercules Site Services plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.