Hercules Plc (HERC) Earnings Call Transcript & Summary

Good morning, and welcome to the Hercules plc Interim Results Investor Presentation. [Operator Instructions]. And I would now like to hand you over to CEO, Bruce Komas. Good morning to you.

Good morning, Alex. Thank you so much. 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 first half of the year. Once again, we achieved a record 6 months, and we are in line with market expectations. So we are very proud of that. In today's presentation, we'll talk about our performance over the last 6 months, and we will also share our future growth plans with you. Just to give you a brief introduction for our company, Hercules Plc is a technology-enabled labor supply company operating in the infrastructure sector. The next slide is about our achievements for the first half of the year. As I have mentioned before, we had a fantastic first 6 months for 2025. Our revenue, EBITDA, profit before tax and our earnings per share all increased comparison to first half of 2024, and we are trading in line with market expectations. I've got a slide about the numbers later on. So we will go through the numbers that we achieved on the next slide, I think. We have achieved these strong results through growth in our labor supply division. We have completed our second acquisition, a company called QTT, a training company called QTT. As you may be aware, the U.K. is facing a significant shortage of skilled workers with over 250,000 people required by 2027. And as you might remember, over a year ago, we launched our Hercules Academy to help upskill and cross-skill our workforce. So acquiring QTT will boost and strengthen our ability to do this at scale while also enabling us to train individuals outside our organization, potentially generating additional income for our Hercules Academy. Since establishing our Hercules Academy, we have started generating our first revenues while upskilling and cross-killing our workforce and we have trained over 1,500 people since we started the academy. 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 second half of 2025 financial year with strong trading and strong balance sheet, which Paul will talk about it later on. And last September, just to remind you guys that we raised GBP 8 million to invest in acquiring companies within the labor supply sector, enabling us to grow even further. Lastly, the third quarter of this financial year started really well. We have a strong pipeline of projects, and we are confident that we will have another record year of trading. The next slide is -- now I'll take you through the figures that present our financial performance for the first half of 2025. Our revenue is up 18% to GBP 54.6 million. Our adjusted EBITDA is also up 26% to GBP 2.6 million, and our EPS is up nearly 20% and our adjusted EBITDA is up 47%. So as you can see from these numbers, these are really record numbers have been achieved by us for the first half of the year. The next slide is about our business overview. At the bottom of this 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 to 86% of this turnover and this percentage is still growing. We believe that within 5 years' time, this percentage should be coming up to 95%. We have been supplying labor into U.K.'s highways, rail, nuclear, 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 with some staying with us over 18 years, and we continue to grow our client base every year. The next slide is yours, I think, Paul. Sorry, Paul, we can't hear you.

Can now, hopefully. Yes, sorry about that. So this is a business highlights. in particular, labor supply first, which is, as Brusk said, is nearly getting towards 90% of our business. So we've got a strong project pipeline, and that is driving and continuing to drive our organic growth. We've gained a number of new clients, in particular, the Costain United Utilities framework, which is a big step forward for the years ahead. We've now got about 1,600 operatives across all sites. The same point last year, we had about 1,200. Those of you who will have listened to what Brusk and I have said in the past will know that we have one of our main USPs is we have this fantastic recruitment app. We've now got 17,400 people have downloaded that app. Again, same point last year, that was 13,000. And that's all being added really, no particular marketing happening there. It's social media and it's word of mouth. So it's very popular. People are always looking for what their next role might be, and that's a great thing for them to use to help them find it. We've also got another app, which is called the One Team app, but it's effectively onboarding. So what happens here is that this eliminates paper. We used to send people up and down the country with sheets of paper to get people to fill out documents before we could actually get people started on the site. We now do that exclusively in the digital format. And we've now got 7,000 people have been onboarded so far in this wave. Same period last year, that was 1,200. So it just shows you how we are a very, very efficient digital-based company. Final point on labor supply. Labor supply operates only with a constant upskilling and cross-skilling because the training that everybody has always -- they always run out 3 to 4 years and they have to be retrained. We take that opportunity to upskill and cross-skill them, which is good for them. They can earn more money, and it's good for us because we can charge more money. And that training, as Brusk said earlier on, we've now done over 1,500 since we opened our own training academy. So better to do that ourselves rather than do it with other people, and that's why we own the academy. Civil projects. Again, those of you familiar with the industry will know that the AMP program, Asset Management Program is they come in 5-year chunks. AMP7 finished at the end of March and AMP8 has now started. Putting that into perspective, the 5 years' worth of money that was allocated to AMP7 was GBP 51 billion. it's now more than doubled in terms of what the amount of money that the water companies have to spend for the 5 years ahead. The usual -- every time there is this changeover from AMP, it's always a little bit slow for the industry to get itself moving, but we're now being asked to tender for significant amounts of work. So we think that's going to really sort of like pick up big time from between September and January, February time next year when it will really start to move. But despite that, they've actually obtained GBP 12 million worth of contracts already that will affect our financial year '25. And they've also gained a new client in Wessex Water. So this is our group statement. And you can see that we've got above the GBP 50 million amount in the half year for the first time. So that's 18% increase in turnover, a good increase in gross profit as well. Overheads, only really a minor increase in that, and we work hard to try and keep our overheads down. But as we grow and keep growing, there's always a need to do some changes, and that's normally in one direction. But I think we've controlled that quite well. So our adjusted EBITDA has increased by 26% to GBP 2.6 million. And our operating profit is now GBP 2.1 million, GBP 1.7 million profit or loss after tax, and that's a major increase on last year. Similar earnings per share, 2.11p. That puts us in a very good place for -- before the second half of the year comes around. We're on course to achieve market expectations, which is obviously something that everybody wants to know. We're in a good position, we believe, after the first 6 months and are looking forward to another successful second half of the year. In terms of balance sheet, the major change here is that we've divested ourselves of our such an excavator business. And that eliminated about GBP 9 million worth of debt. So -- the reason that we divested ourselves of that business was because it had 88% of the group's debt, but only 5% of the turnover. And it was not a situation that investors particularly liked. And it was stopping us from moving forward with further acquisitions in the labor supply space, which is what we're all about, and Bruce will fill you in a bit more on that in a few later slides. So we have reduced that debt, as I say, by about GBP 9 million, and that is a big change, and that's the major change in terms of the balance sheet. Cash flow-wise, we had a major benefit in 2024 because we managed to change the way the -- some of the larger clients were operating with cash. So we got a one-off boost there, which was not repeating. That's the working capital changes. Other than that, operating cash is flowing through nicely. We still did have 4 months of the SX business within these numbers, but that won't be in there in the second half of the year. We also gained net GBP 1.9 million from that sale of the Suction excavator business. And we also spent about GBP 1 million in new CapEx, which was mainly vehicles. So we ended the period with cash at GBP 9.8 million in the same point the previous year, it was GBP 1.7 million, and that reflects the gain in the cash from that sale of that business and the fundraise that we did September, October time, which netted us about GBP 7.5 million. Finally, a point about dividends. So the final dividend for the 2024 financial year was paid 1.12p per share was paid this last March, a couple of months ago. And we've already declared that we're going to pay an interim dividend for 2025 as we have done consistently since we did the IPO in August of 2025 of 0.06p. Brusk, back to you.

Thank you, Paul. This slide is about our current trading and our industry outlook. As I mentioned before, we had a fantastic first 6 months. Also strong momentum has continued across all divisions in the second half of this year. And we are pleased to -- we are confident that we are on track to deliver our results. We've got over 1,600 people employed by us, which is a record number. This means it's going in the right direction for our growth. Infrastructure remains really buoyant with GBP 750 billion investment earmarked across our main markets, which are nuclear, power and energy, rail, highways and the water sectors. As Paul mentioned, about AMP, the next AMP AMP8 is going to be really busy. The water sector has a committed investment of GBP 104 billion over the next 5 years, more than double the GBP 51 billion investment in the current AMP7. AMP7 just finished in April. So AMP8 is starting and it's going to start ramping up between September and January. And we have been working in the different AMP since AMP4. So that's 18.5 years ago when we started Hercules. We have been working in the water industry, and we are a specialist in that. So we believe that we are going to be twice as busy this year if you comparison to the AMP7, which is brilliant news for us. Network Rail CP7 investment plans representing GBP 4 billion 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 our profit also. This is exciting this part, as you might have already seen recently in the news that U.K. government committed to major infrastructure projects throughout 2025 and beyond, including initial investment of GBP 14.2 billion in the nuclear energy, such as Sizewell C Ipswich, along with numerous small modular reactors and carbon capture projects such as net zero Tide as well as major power and energy transmission and 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 further grow over the next 10 years. As you are aware that there's a skill shortage, as I mentioned previously, and huge investment opportunities in infrastructure coming up. So we believe that we are a strategic player in the infrastructure sector, supplying skilled workers, skilled operators and also providing training for our employees as well, which will make us even more special in the -- and more valuable as well in the infrastructure sector. The next slide is about our growth strategy. This is our final slide. As you can see from the slide, we have multiple growth opportunities for our future with regards to M&A activity, as I mentioned previously, that we acquired QTT training company. As you might remember that we have successfully raised around GBP 8 million in September last year. So currently, we are already talking to identified acquisition targets in the labor supply sector. With regards to our organic growth, we have been growing across all divisions through a strong pipeline of projects into financial year 2025. There are billions of pounds being invested in nuclear energy. As I mentioned before, initial investments of GBP 14.2 billion committed to Sizewell C nuclear energy project. We have already started supplying labor to this project, and we believe there are significant growth opportunities in the coming years. I think this project will be ramping up in this year, end of this year and huge push from 2026 onwards. Regarding the power and energy distribution and transmission projects, the U.K. government has committed to ensuring energy security across the country. Major power and energy transmission and distribution projects are starting in Scotland, England and Wales, and we are in a framework -- already a framework supplier for our blue-chip clients in these regions. So exciting times coming up within the power and energy distribution and transmission sector as well. So we want to maximize our opportunities there. 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. Thank you.

That's Great. Brusk, Paul [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 your investor dashboard. And Brusk, Paul as you can see, we have received a number of questions throughout today's presentation. And if I may 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.

Sorry, the questions are not there.

The questions have disappeared for some reason. Sorry, I don't know why.

I think one of the questions from LMB, I can remember, I just read it.

While we try and get the questions back on the screen, so I can -- oh, here we go. Okay. I'll take the first one then. So this is from Alan B. And the question is, with everything going up, why does the dividend not go up in proportion? Right. So this is one of these interesting questions, and there's no right answer to this. But we started when we did the IPO 3 years ago, wanting to maintain a decent dividend. And I think that's currently a yield of about 3.6%. We always said that we would review that as the profitability of the business is built and how much cash is required for investments and for further growth. At this point in time, we've not changed that dividend. But one of the reasons for that, I think, was up till now was the issue with the suction excavator business that I talked about earlier on was that did take a fair amount of cash out of the business because the assets were so expensive to buy and pay the funding on. So I think it's a valid question and one that we will keep under review. And I think as future dividend declarations go, we will always see if it's -- if that's the right time to increase the dividend because we certainly wouldn't be thinking about reducing it. Okay. The next question, Brusk, probably one for you. It says, what drove the 30% labor supply growth? Was it new wins or work on existing projects like HS2? And how does this affect margins?

Thank you, Martin. This was Martin's question. So 30% labor supply growth is a combination of HS2 contribution as well as other projects that we are working on in the water as well as, as I mentioned, water is going to be busy. But AMP7 also finished really strong or finishing strong. We are still working on the current projects -- and there are power and energy projects that are coming up. As I mentioned, in Sizewell C, we started working on. And I believe when you look at the margins, it does feel like we are going to -- where there's a shortage of workers, as I mentioned, 250,000 people required by 2027, which is in 2 years' time, we will -- there will be -- when there's a demand, then that means that the margins potentially go up. So we are expecting them to go up over the next couple of years. And the contribution of the -- our focus will be mainly on the power and energy distribution projects as well as water and our current contracts that we have got. Yes, exciting times coming up with regards to the projects and the key infrastructure projects for the country.

Okay. So the next question is from. What is your actual net cash debt position as at end of half 1 2025? This is a relatively straightforward thing to answer. So our debt really consists of 2 things. It consists of some relatively small equipment finance type things, again, mainly vehicles, and that's about GBP 1 million. And our cash, as you can see from the presentation, was GBP 9.8 -- the only other debt we've got is the invoice discounting facility. So if you -- and that's about GBP 9 million. So if you took that into account, then effectively, our net cash stroke debt would be 0, which is better than it's ever been because we've had more debt than cash. But the reality of it is with the ID facility, the ID facility is an acceleration of getting money from the client. So even though legally, it's shown as debt, the reality of it is it's a reduction in receivables. So moving on from there. The next question is, how will QTT integrate with Hercules' existing business? Do you want to do that one, Brusk?

Yes, no problem. QTT, they are a great training company. They do contracts with Department of Education as well as they do train unemployed people and apprentices, which is perfect for us. We want to boost and bolster our training academy. As mentioned, it all comes to the amount of people required in the future to deliver these key infrastructure projects. And we need to keep upskilling and cross-skilling our workforce, and we also want to monetize this opportunity as well by selling training-related programs to our clients and other individuals as well to be able to work and be part of this exciting -- our growth plans as well as the U.K. infrastructure programs. There are also grants available as well that -- to train unemployed people as well as apprentices and such as CIDP, the construction industry training Board levies grants as well as apprenticeship grants and the local authorities. So huge crossovers between us and QTT. -- and they will be under Hercules umbrella. We'll be working together in the [indiscernible] property that we have got. We set up over 1.5 years ago, as you are aware, and we have been training 1,500 people ourselves when this number is going to go up. And we believe that there's a good chance that we can do over 2,500 people over the next year or so train and put them to work and keep upskilling and cross-selling our workforce so they get paid better wages, which will help us to kind of keep our -- retain our workforce. And having that, we believe we are going to grow our SaaS as well as the individuals on the ground.

Okay. I'm sorry, I should have said that was from Gary. Thanks, Gary. So another one from Mustafa. Any comment on why receivables tends to be high in this business? What are your payment terms? Well, they're not high actually. They're pretty good. In fact, they're the best debtor days figures that we've ever had. So our debtor days are somewhere between 30 and 40, which is really, really good in our industry. And given that most payment terms are end of month following, that fits in very well. But obvious point, if our turnover keeps going up, then our receivables are going to go up, too, and that's obviously driving that. Okay. Right. The next one is from Christopher. Christoph says, you mentioned -- this is Brusk and my favorite subject. This is a good one. You mentioned in previous presentations that you were targeting GBP 500 million turnover a medium to longer term. I believe you launched the Project 500. Well, we call it Road to 500, but yes, you're not far off. Is this still a realistic target? And what are the time frames? Brusk, I'm sure you'll love to answer that one.

Yes, this is my favorite question, actually. Thank you, Christopher. Yes. So when you look at our sort of past, we are not only a 3 years old company just ended up -- started with -- on the stock exchange. We have got a history of 18 years in supplying of labor in the infrastructure projects, and we have been growing every year. And now being listed on the stock exchange 3.5 years ago and having achieved all of these mild, huge milestones and huge projects coming up as well and investment programs coming up in the infrastructure projects. We believe that by organically and especially acquiring the right labor supply companies in different sectors, we could achieve GBP 500 million in 5 years. We call it growth to GBP 500 million. And with GBP 25 million minimum EBITDA, that's our target. And how -- so we are already GBP 100 million over GBP 100 million company, how this will be sort of breaking -- we've got a plan -- strategic plan that another GBP 100 million over the 5 years will come organically, and we'll be acquiring GBP 300 million worth of labor supply companies mainly operating in the infrastructure sector. As you might be aware, there could be labor supply market is very fragmented and huge opportunities coming up in the power and energy. So we'll be sort of going into that direction. as well as different parts of the country as well as Scotland is a good one, huge opportunities there with regards to power and energy and power and distribution and transmission projects and the water sector is quite buoyant in Scotland. So we'll be sort of moving into that area. So we believe that this is -- this target is achievable, very ambitious, but we have been always ambitious as a company, and we want to deliver it. And if we even get to GBP 300 million, GBP 400 million, we'll be still happy, but our target is GBP 500 million in 5 years.

Thanks, Brusk. In fact, there's one more question from Christopher as well. He says there's no mention of figures around QTT acquisition, e.g. cost of acquisition. Could you add some color, please? Yes. I mean this is not a big acquisition. This is -- we bought this for a nominal amount. We bought the assets and the contracts and et cetera, and we did contract changes for the employees. So not much in the way of acquisition cost, to be honest. This is more about an opportunity for us to move the academy forward at a far greater rate than we might have done otherwise. It's a great opportunity, and that's why we've done it. One more question from Simon. Only a tiny proportion of shares are in public hands. Would it help stop market liquidity if this could be increased? I'll take this one, Brusk, if you like. Yes, of course, it would. Yes, of course, it would. It's one of those things that's actually easier said than done. I think it's fair to say we have a lot of conversations with people in the city and with brokers about this. But it's quite difficult to achieve. But any time we get the opportunity to offer more shares into the market where it might be the retail sort of shareholders might be able to take part, we would intend to do it whenever we get the opportunity. But it's not an easy thing to achieve. If it was, we'd have done it by now.

But Paul, we do have a plan of potentially within the next raise potentially, if it happens in the future, we will be including the retail investors also.

Absolutely.

Which will give us a really good opportunity. If there is a big acquisition coming up, say, within a year's time, then we will be definitely including the retail investors. And that was a really good question from Simon. And this will help our liquidity. This will help our share price as well. And we do believe that we are undervalued. I think, average of the analysts is 75, 80. Am I right, Paul, something like that? We'll get there. We get there somehow, but we just need to keep delivering. And one of the things that we are going to be concentrating on give more liquidity into the retail investors.

Okay. I think that's all the questions I've got. Thank you very much for everybody to bring those questions forward.

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

Yes. Thank you so much, Alex. We are very excited. Currently, we have always been excited, but even more now with the huge investment programs just announced recently. And we believe that we are going to be -- it's going to help our growth over the next few years. And we are excited to build U.K.'s infrastructure that are sometimes failing and sometimes that are not enough in the country. So we want to be part of this exciting program and keep growing. 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 plc, we would like to thank you for attending today's presentation, and good morning to you all.