REACT Group PLC (REAT) Earnings Call Transcript & Summary

Good afternoon, and welcome to the REACT Group plc Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and they can be submitted at any time using the Q&A tab situated in the right-hand corner of your screen. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses when it's appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Shaun Doak. Good afternoon to you.

Thanks, Alex, and thank you for everyone that's joining us today. Alex, if we can just move to the first page? Thank you. So my name is Shaun Doak. I'm the group CEO. I was appointed CEO back in February of 2020. I'd joined the group earlier in March 2019 as Managing Director. I have a track record of growing businesses in the specialist cleaning facilities management and [indiscernible] service sectors, and I have a background in business management and sales and marketing. Over to you, Spencer.

As you would expect from a qualified accountant, the last 20 years of my career, I've been in or around on public company boards. I've also done a short stint [Technical Difficulty] finance. I joined the Board in February and am very pleased to be here.

And I'm Mark Braund, I'm the Chair. I've been involved with the company for 5 years, got involved when it was in a bit of trouble. And we brought together the management team of Shaun, who became CEO. And prior to Spencer, it was Andrea Pankhurst. And clearly, they put in the hard yards to get the company through its first 2 or 3 years. In the last couple of years, Shaun and Spencer have been the driving force behind where we are right now. That's me.

So interim accounts and performance, so some of you will be familiar with the story here. REACT, you would have seen us before as the management team present, perhaps followed the story of REACT, but for those who aren't familiar with the story, the background here is of a turnaround, a successful turnaround. And if you just look at the graphs of revenue and EBITDA, you will see that the last full 4 years have showed progressive growth. And really, the profile of the group now is of a group that's growing. It's got strong recurring revenues, strong margins. It's profitable and it generates cash. In terms of the interim results, where we are this -- for the half year ending March 2024 is a continuation of the momentum from last year. We had a record performance in the year to September '23. And we've seen that same momentum continue over to this year -- or this period. Diving into the detail, revenue is up 13% on the half year at GBP 10.6 million. We have -- over 85% of that revenue is recurring revenue. Gross profit growth is similar at 15% up on the prior period at GBP 2.9 million. Gross margin is in upper quartile for our sector and it's over 27% from our blended services across the group. The growth, which is up, it's up from last period. Adjusted EBITDA, we've got 35% growth at GBP 1.3 million. And aligned to that growth is our growth in free cash flow, again, up 35% at GBP 900,000 for the period, up from GBP 700,000 in the period from last year. As a management team, we do look at adjusted EBITDA and free cash flow. You would have heard us say this before, the relevance of which is, for adjusted EBITDA, we -- it's a profit measure that is before certain noncash items and certain one-off items, the profile of which does align closer to our free cash flow. Obviously, cash is a key metric for us as a management team and I guess for investors as well. So basic earnings per share, we were profitable in the period. We've got an earnings per share of 0.41p versus a loss this time last half year 0.41p. And earnings per share on an EBIT or adjusted EBITDA basis were over 6p, up from 4.5p this time last year. So what we've got here is, in summary, it's a solid, strong start to FY '24. Clearly, the momentum has carried over from what was a record year last year. And we've got a strong set of numbers.

Great. Thanks, Spencer. Alex, just move it there. Thank you. Okay. So we carry out specialist contract cleaning and soft FM services across the U.K. We are focused on markets with nondiscretionary requirements, typically complex demands and quite often over nationwide fulfillment criteria. As we continue to scale the business, we continue to establish an increasingly unique proposition in terms of our scale, our range of services across the group and, of course, our geographical delivery. We operate within a very fragmented market. As we've said before, it's very sizable. And we believe we've got a huge scope to continue that expansion, that double-digit organic expansion that we've had year-on-year. And our strategy is focused on building our business with [ class ]-leading performance. We have the aim of achieving a minimum GBP 5 million plus of free cash flow per year within the next 3 to 5 years. Now, within the group, we have 3 divisions. The first division that I'll concentrate on is the Core division, which is REACT specialist cleaning. So that was what we had when Mark and I got involved in the business. It predominantly looks after the emergency and decontamination side of the group. So typically, we can be required to be on-site within 4 to 6 hours. It could be anything from an unfortunate fatality on the rail, where we've got to be out very quickly, decontaminate it and get that train back into service, all the way through to some really specialist deep cleaning of some hospital sites, specifically within the M25 corridor. Second, we've got Fidelis. So that's our maiden acquisition completed some 3 years ago now. And that's our hygiene and maintenance work. So it's contracts, maintenance work, so typical commitments from the customers within this division, anything from 3 through to 7 years. We are very strong in the industry, the health care and also the education. And then the final component to the group or the final division is LaddersFree. That was our most recent acquisition completed 2 years ago now, commercial windows and [ planned ] cleans. They've very much got a who's who of customers ranging from well-known fast food chains all the way through to some prestigious retail customers. And typical commitments from those customers are anything from 12 months through to 36 months. Just moving on to the next slide, please, so looking at our customers, we work with very much a who's who of customers, from blue-chip customers through to large FM businesses here in the U.K. Clearly, we operate across a very diverse and resilient range of market sectors, as I said, where the requirements are typically nondiscretionary. We've got a very low customer concentration, some 1,200 customers across the group. 230 of them are material and our top 10 represents less than 43% of the revenue. So just a few little [indiscernible] that give you an idea of some of the sectors that we work with and some of the customers, so it is very much a who's who of customers. As we move on to the next slide, look at growth. So we've had very strong organic growth, double-digit again. This is the fifth year now that we've had that. It's been underpinned by some large deals and, obviously, a lot of smaller successes that, due to the size and scale of the business now, we've not been able to announce them. Now, I'm not going to walk you through every single one of them on the slide as we'll be here for a good 20 minutes, but I'm just going to tease out some notable wins. The first is that renewal of that material 3-year contracts with a large university in the Midlands. That's with UCB. We've almost doubled the scope and the size, giving us a GBP 1.3 million commitment from the customer per annum. And that really is working with the customer, understanding their concerns and how we can cross and upsell. So now we are doing some cladding cleans, [ glares ] and cleans through the LaddersFree business, and we're also doing some more reactive kind of work through REACT specialist cleaning as well as the Core business being delivered by Fidelis. The second one is that two large incremental special cleaning contracts both worth GBP 0.5 million per annum. One is with a large international FM business, looking after some work within the Ministry of Justice. And the other is working with a midsized U.K. FM business for a well-known prestigious sandwich and food outlet across the U.K. LaddersFree, we've continued with our success in winning new business. We've added 3 new nationwide customers to the mix, which has been brilliant. We picked up 2-year contracts worth GBP 0.5 million a year within over 700 locations nationwide. So that's covering internal clean of the windows, external, and some cladding and some [indiscernible] cleaning as well. We've also had some material [indiscernible] wins. We've had 3 significant multiyear specialist cleaning contracts worth GBP 0.5 million renewed in the health care sector with uplifts in scope and revenue, again, by cross-selling across the group. So in summary, we've had our growth underpinned by strong customer retention, contract wins and cross-selling success. And I'll hand you back to Spencer.

Transitioning to the next phase of growth, so LaddersFree, you're aware that we bought the business in 2022. It's [indiscernible] it takes -- looks after national window cleaning for us as a group, a great business, very profitable, generates cash. Financial metrics are very strong. What it needs is automation. Its back office is very manual. We're currently mid-project to build a platform that will enable that business to scale efficiently and effectively. It is a MVP, we're spending GBP 300,000, investing GBP 300,000 in this platform. It's going to be built in the Microsoft [ Azure ] tool set. And the software house that's helping us with this piece of work has done this before. Like I said, we're mid-project and at the current time table, we hope to be -- we plan to be in user acceptance testing in the summer. And following successful user acceptance testing, we will plan to go live later this year. The project, like I say, is just midway through and we are within budget and within the project time frame. So that's one example of investment into the business that we can grow. The immediate need is for LaddersFree, for its current service offering, but we have one eye on other group services and other services with a view of developing that model. There are other initiatives that we have underway. We're just about to complete the move to HSBC. So that's a single banking supplier and that will give us access to treasury management facilities. But also importantly, it will be a single relationship that can support the group going forward. HSBC have been very keen when it comes to this [indiscernible] for a very long time as a result of the group's recent history, and they're very supportive. We will also continue to look at the rationalization across the globe. Effectively, we've got 3 different divisions, and we'll be bringing those closer together. And we'll have some other discrete projects that we will look to develop for the group.

Thanks, Spencer. Just continuing on from where Spencer left there, we will continue to strengthen our management team, both functional and executive. We have recently promoted 2 individuals, Dave Rudge, who joined the business about 4.5 years ago. He initially was the operations manager on REACT Specialist Cleaning, got a wealth of knowledge in this space having worked for ISS, Attachie, Mitie and so on. He's now heading up the LaddersFree business as Divisional Director, working very well with the team, being very present with our customers, understanding the challenges and the opportunities out there with our customer base and is really driving that business forward. We've also got Chris Ryan doing a fantastic job over at Fidelis. He's been with the business now 26 months. He originally joined the Fidelis business as sales manager, but has, again, a wealth of knowledge within this space, having recently worked for BICS before he joined Fidelis. He now heads up that Fidelis business as Divisional Director and, again, doing a fantastic job, working very closely with customers and all stakeholders throughout the business, really driving that kind of control and measure, putting the right process and procedures in place to give us the headroom capacity to continue the growth trajectory of that business and, indeed, the group. We said we'd invest further into sales and marketing. We continue to unlock new opportunities for organic growth. We use an external fractional marketing company, a little bit of AI flown into the mix. So depending on how customers or potential customers interact with our socials or our e-mail campaigns, that triggers different sequences with the help of AI, and that feeds straight back into our CRM system, HubSpot. And I sit on and share in the group sales meetings that we have with the entire team and the divisional heads to make sure that we're looking at the right opportunities. We've gone after the higher margin work. We're not scared to pivot away from perhaps those sectors where the margins have been eroded. And we're always looking to push the business forward. Just on the investment side of sales and marketing, we've just brought Debbie Flynn into the business, again, a wealth of knowledge within the sector, having worked for SafeGroup for some years prior to joining REACT. Prior to that, she worked for Rentokil and Norland, so again, a wealth of experience. And she's working incredibly well [indiscernible] our group sales director who, again, worked for a who's who of [ Equens ], Norlands, you name it, and he's been really doing a fantastic job driving the right opportunities into the pipeline and improving our conversion rates with the help of marketing and the activities that are underpinning. And the final component on there is we've [ reinvented ] the M&A activity. And I'll pass it over to Mark because it's something that he's leading the charge on.

Thank you, Shaun. Can you turn the page, please, Alex? Thank you. Basically, within the last 6 or 7 weeks, we've started to relook at M&A as potential. And look, we've got a track record. We've done 2 amazing acquisitions that have totally transformed the company from being a GBP 4 million loss-making business with recurring revenue of less than 30% of the numbers that the team have talked you through today. We've taken on Fidelis, and we've more than doubled the revenue. That's through cross-selling and upselling and taking on new customers. And we're beginning to do the same with LaddersFree, albeit slightly compressed by the fact that we do need the technology to help us with the back office in order to cope with the same [indiscernible] to the same degree of growth but also deliver the same degree of quality. So we have a track record. And we are very disciplined in our approach. We see M&A as a pathway to accelerating growth in shareholder value. That's the reason we wish to do it, no other reason. And we will use a disciplined approach like we have done before, both in terms of selection and valuation. The objectives are fairly straightforward. We have a massive opportunity to consolidate in a very fragmented market. That's the specialist soft FM services market. And we believe that we're one of the leaders, if not the leader, and we want to establish that position as a -- from a reinforced point of view of being the leader in the space. M&A doesn't only add revenue and profit. We believe it represents a tremendous opportunity for us to create further organic growth. And we've demonstrated that with the acquisitions we've made so far. And we've told you the stories in the past of how we've cross-sold and upsold with customers specifically. And we can see us doing the same with anything else that we acquire. And we also see, as you've begun to see in the latest set of results, that we can begin to leverage our scale to drive more profit from smaller increments in terms of revenue growth. So that's the objectives. Overall, underpinning that is the fact that we want to accelerate our pathway to growth, so growth in shareholder value. In terms of criteria, what do we look for? Well, the first thing I think to say is that we're only looking for things that are relevant to the customers and the buyers that we work with today. We're not looking to go off-[ path ] and do something weird and wacky. We want to focus on the same customers because they trust the brand. They trust the team. And we believe that's the right way to compound and grow the company moving forward. Anything we look at will be accretive and earnings-enhancing in the first full year. And we do look -- we do spend quite a bit of time looking at cultural fit because we want to buy businesses that share the same values as us from the get-go. We want businesses that are focused on being the very best at what they do. And we also want a team of people that are excited to get up in the morning and go to work. So cultural fit is an important factor when we've looked at businesses in the past and will be going forward. The final bit is how we structure -- how we fund a deal. And the first thing to say is that every deal we've done so far, and I expect every deal we'll do in the future, will be structured. So we don't need all of the cash upfront. So structuring a deal is something we've done before. Spencer is an experienced person doing that as well. So structure is important to the funding process. We're also, as Spencer highlighted earlier, not only are we a cash-generated business, we're now moving to a period where all the cash we generate ends up in our bank account. This Friday, we'll be paying the last payment to Jason and Justin Korinek, who are the founders of LaddersFree. That goes out of the bank on Friday. And after that, every pound then goes into our bank account that we generate. Spencer has also highlighted the improvement we have now with an enthusiastic bank to help us support our growth objectives going forward. And obviously, we'll be looking at that. But I want to reassure people that we will not be looking to overleverage ourselves. To give you a measure, I don't think we'll be looking to go much above 1x earnings in terms of what we look for to generate in terms of debt. And then under -- only under the right circumstances would we look to equity. We want to see our equity or our share price higher than it is right now. We think, personally, that the share price is understating the value of the business. But in the right circumstances and for the right opportunity, we would add in a level of equity should it be required. But the other components are the ones that we would turn to first. So that's it in effect. It's on the agenda. Alongside the organic growth story that we've delivered and will continue to deliver is trying to find the right opportunity that will secure future growth in shareholder value going forward.

Thanks, Mark. Just on to the summary and outlook, slide [indiscernible], please. So as Mark just said, we've had a record performance in H1. The momentum continues into the full year. We've got a track record of double-digit organic growth in what is a highly fragmented market, 85% recurring revenue. When Mark and I walked into this business some 5 years ago, that was around about 32% reocurring revenue, loss [ mix ] on revenue just over GBP 3 million. Now we're at just GBP 20 million and above and translate into strong EBITDA, high margins, strong cash conversion. And ultimately, we believe we're well positioned to achieve our 3- to 5-year goal of that GBP 5 million plus of free cash flow per annum. Thank you.

That's great. Mark, Shaun, Spencer, thank you very much indeed for your presentation. [Operator Instructions] While the company takes a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published G&A, can be accessed via your Investor dashboard. Mark, Shaun, and Spencer, as you can see, we have received a number of questions. And Mark, if I may now hand back to you to chair the Q&A, [ relay ] the questions where appropriate to do so, and I'll pick up from you at the end.

Thank you, Alex. Okay. So I'm going to [indiscernible] if that's all right. Hopefully, you can see them written on the right-hand side of the screen for us as well. The first one is from Alex C. The strategy includes a shift away from lower-margin opportunities towards higher-margin segments. Can you elaborate on which specific segments or services are being targeted for higher margins? Shaun?

Yes. Thanks, Mark. Great question, Alex. Okay. So yes, we have rather shifted away from some of the lower-margin opportunities. Can you elaborate on which segments or services are being targeted? It really is job-specific, if I'm honest, Alex. We always look at is there a specialist element to the specification and what that entails, if it's kind of a traditional kind of [ tender room ]. Conversely, it's usually borne out of discussions by being present with our customers and understanding the challenges. So it's usually something that they're struggling with, whether or not they've had [ poor ] service provision in the past or, it's an entirely new [ piece of worth ]. So we always look at crafting a detailed specification around that so that it gives our customers the best bang for their buck, but also where we can eke out high margins. In terms of what we're going after on the Fidelis business, I think I touched on it earlier on in the presentation. We're very strong in health care, education, the industry. LaddersFree, right, is very much a who's who of customers. So we're not focused on just one sector. It is very much broad-brush, and that continues to be a focus of the sales team. And REACT, if you know the story, it's the kind of the thin-edge, sort of running to the sharp end of the spear. We can do react to any cleaning need across the U.K. It could be an existing customer. It could be a new customer. We can be on-site within 4 hours. And that often allows us to land and expand. And due to the nature of that work, reacting within 4 hours is often higher-margin. But also, there's bigger opportunities in that space where sometimes we'll give margin away to allow us to cross-sell and land a more material piece of work.

I think it's also true, Shaun, to perhaps highlight the fact that you won't see us going after huge, huge contracts because they are a race to the bottom in terms of price. We are very much a specialist business, so we want to focus on the specialisms within different sectors. So predominantly, you'll see us, although we do have very large customers, we'll be doing discrete pieces of work for them, hopefully, at scale across multiple locations. That's where we really do come into our own. You won't see us necessarily doing the work for one large building in one city because that -- there are plenty of competitors that can cope with that. What competitors can't cope with is delivering the multiple services that we deliver across the U.K. anywhere at the same level of standard and for the right price. So that, I think, is where we're strongest. Different segments for different products, there are a couple of segments that maybe we've started to soften our focus on. And we don't want to be too -- because some of this is a bit commercially sensitive. But I guess one example would probably be the judiciary, isn't it, Shaun?

Yes, prime example, yes.

Yes, so that would be one area. But yes, so unfortunately, we're not going to have a crisp answer for you, it's this segment, that segment and the other segment. It's more a horizontal view, but of some very key customer markets. I think the key thing is where there are nondiscretionary services, in other words, the work is not done, the customer is unlikely to be able to use their premises, or if they do use it, it's likely to give them a bad reputation. So it's nondiscretionary. And where it's valued, the quality and speed with which we can operate is valued by the customer. That's really where our high-margin opportunities are. And the market for that is massive.

Yes. And I think just on the back of that as well, Mark, it's probably a good point to say that we're not scared to move or pivot away from the customers that we've worked with for a few years if margins have been eroded, because, at the end of the day, this business is about shareholder value. And we also need to work with customers who value our proposition [Technical Difficulty] customers and there's plenty of work, as you said, out there where customers will value our proposition, and that's where we'll get the higher margin.

Yes. Second question for you, Spencer. Can you elaborate? It's from Dexter B. Can you elaborate on why the tax payment this half is considerably lower to H1 prior year?

Yes, absolutely, Mark. It's a timing issue. We -- clearly, we had a corporation tax liability at the year-end of just over GBP 0.25 million, GBP 262,000. As we finalize the tax returns and finalize those pieces of work, we will then be paying tax. So yes, it's going to happen in the second half year.

Thank you. The next question is from [ Johnson C. ] While things look good compared to H1 '23, they seem less rosy in comparison to H2 '23. Perhaps unfairly, it might look as though most of the growth being seen now looks to have been done last year and now coming through. Do we expect double-digit growth for H2 '24 versus H2 '23? Or will the growth rate decrease below 10% for the full year? So I want to give some guidance in terms of how we can answer that. We cannot answer the last part of that. We're not going to give you a forecast on H2. I'm afraid that just wouldn't be appropriate. But it is a good question. And I think that this is partly for you, Shaun, and partly for you, Spencer. I think one of the things we need to perhaps make sure people understand is, when we win new contracts, some of them can be mobilized really quickly, but some of them do take time. And therefore, there's a lag between us winning stuff and us actually deploying it.

Yes, [indiscernible] some contracts can mobilize within 2 to 4 weeks, but some have a longer period. That could be 3 months. It depends if [ the Tube ] is involved. It depends if there's an incumbent and they're trying to navigate that. So obviously, we want to start as quick as we can, but that's not how the world works, unfortunately.

Anything to add to that, Spencer?

Only to the extent that the pipeline is strong. Obviously, there's no promises there, but we've got a strong pipeline, strongest it's ever been. And the business is trading nicely. But yes, it's difficult to give a forecast.

Yes.

Thank you. Okay. The next question is from [ Neil B. ] Is there any danger of losing key people after the final deferred acquisition payments are made later this year? Shaun?

Yes, I'll take that one, actually. So the founders, Jason and Justin, Mark mentioned them earlier, of LaddersFree, they've been in a part-time consultancy agreement or role since we acquired the business. They have agreed that they will be on hand, as and when we need them, moving forward. The relationship is fantastic, both -- I think I said it before [indiscernible] stand-up guys, built a fantastic business. I had a conversation with them a few weeks ago, and they basically said they couldn't have asked for a better acquisition, the way that we've treated the team, the way that we've pushed the business forward and put in the right technology. So there's a lot of knowledge in their head, but we've now gone through that handover period. And Dave, as I said, is doing a great job at leading that business. But should he need Justin's comments or help, they're just a phone call away. So.

Yes, indeed, Well answered. And I think the other key thing is, as you know, we do have capabilities spread quite well across the business. And Justin and Jason, in terms of their full-time involvement, pretty much stepped back into that consultative role fairly quickly as soon as we got Dave in place.

Yes.

So yes, I think that's the answer. Thank you. A question from [Neil B.], are there any new sectors that you are targeting? And this will be to the organic side.

New sectors, gosh, not off the top of my head, no. I mean, there's always incremental growth by adding on additional services, but we are very much focused on where we get our biggest bang for our buck. We are constantly reviewing their costs. And like I said earlier on in the presentation, we've got depth in our team, where we've got -- if should we want to pivot or go after an incremental factor, we can do that. But I think we need to stay true to what we know we can do and what we're good at doing and not to be distracted by that.

Absolutely, perfect. Okay. The next question is from [ Freddie A. ] For the 3 contracts announced on the 4th of April that were renewed and/or extended with a potential value of GBP 1.3 million annually, can you break down that GBP 1.3 million as to what are continuation revenues and what are incrementally new revenues? So Shaun, 2 of those worth GBP 1 million a year were absolutely brand new to us, weren't they?

Yes, there were. So one was in addition to a [ call it ] vendor agreement that we got with the Ministry of Justice. And another one was, I think I mentioned it earlier in the presentation, for a prestigious food outlet. So yes, completely new.

And then the other one, the GBP 800,000 over 3 years, that was a renewal, but uplifted, wasn't it?

Yes, a renewal that got an uplift, but I can't remember off the top of my head what the uplift equated to.

I think it was about 30%, from memory.

Yes, I think so, Mark.

So I hope that answers your question, [ Freddie ]. [ Neil B. ], how are you maintaining the quality of your service?

A number of ways really. Again, by -- so this is how we operate. So we -- like I said, we don't [ have people in tender rooms ]. We get incremental work and we get new contracts simply by being present with our customers. So we understand the challenge of boots on the ground. We have a very inclusive environment where everyone has a voice within the business, even operatives at ground level. So there's those conversations going on between them and divisional heads. And as I said, we have multiple management calls throughout the month, and I chair 3 or 4 meetings every single week. We carry out the audits. The whole business uses the same auditing system to ensure that standards are being maintained. That automatically goes back to the client. We also have a client review meeting to capture any issues before they become a major issue, which is very rare, and just by employing the right people, I guess, and having the right culture. No one has them [indiscernible] being right. I certainly know Mark doesn't, nor does Spencer. And it's about listening to the enlarged team. Everyone has their strengths and everyone has their weaknesses and that's why we have a great team.

Brilliant. The next one for you, Spencer, from George S. How much is the final payment this Friday to LaddersFree founders?

You're on mute.

GBP 890,000.

Perfect. Thank you very much. DSO was still around 80 days. How much scope for improving do you see to improving working capital efficiency? That's from Dexter B.

Yes. Absolutely. Sometimes it depends on specific projects for specific reasons, but we're very focused on that. I know [indiscernible] are very important to us. So we manage [indiscernible] carefully. And yes.

I think there's something else to be added here and that is, when you look at our DSO, it's not really an accurate [ perception ] of our uses of cash in the sense that, in all of the LaddersFree business, no cash goes out the door for the work until we've got cash in. So whilst the actual invoice itself may take time to pay, we'll not actually incur any costs other than the operational, head office overhead, which is relatively small by comparison to the overall revenue and margin. So that's one element. We also have a factor of that within the Fidelis business where there is a proportion of the revenue that is paid by the customer either at the same time as we pay the cleaning staff or just before. So again, that DSO component, whilst we're not taking our eye off the ball, it's not quite as -- it's not quite telling the full story of cash within the business.

And I'd add to that, Mark, that sometimes we bill in advance. And clearly, that has an impact and a relevance to the DSO calculation.

Yes. I think a final comment is that the bigger the customer, the bigger the project, the longer they sometimes take to pay you. So there are 1 or 2 out there that are notorious at this, but we have to manage through those.

Yes, certain projects are more complex than others, but it's the nature of the beast as well.

Great. Can you give a feel for the rates of top line growth in H1 for Fidelis and LaddersFree? At the moment, I'm not sure we're in a position to show that. Sorry. Apparently, I'm having a few network problems, so apologies if I keep coming in and out. Sorry. What was I going to say? So I'm going to turn my camera off actually. That might help things. So yes, I'm not sure whether you want to comment about it, either of you, but actually broken down at the divisional level, I'm not sure that that's either, A, helpful or, B, something that we want to get into detail on because we are very much focusing in looking at our business by the segments we do the segmental analysis on. And there is a sense that there will be revenue that belongs in one of the other divisions that may be reported in another division because it's a cross-sale.

Yes.

[indiscernible] I'm not sure, I think it's going to confuse matters if we go down effectively that old divisional level, which we're no longer really running the business by.

Yes. I'll leave that, Mark. I mean, we don't really look at it on a divisional level either, as we said just now. So -- and there's cross-charges because of the way that revenue is allocated when we secure business [ versus ] cross-sell.

Okay. Good. Next would be what is behind the margin reduction in Contract Reactive?

Quite simply, it's the mix of jobs that are coming in at the moment. And some of the Contract Reactive across the group is at slightly lower margins than what it perhaps would have been when we looked at the business in isolation with REACT Specialist Cleaning. It's as simple as that really. But it is -- the Contract Reactive is kind of in the hands of the gods, so to speak, in terms of what's called off by the customer. We have the line of sight in what generally the revenue looks like on a month-to-month basis, but we don't have any control of what jobs are called in. Some of them are slightly higher-margin than others.

Okay. Great. Thank you. You touched on AI during the presentation. How much and where do you see further opportunity in your categories? Well, the further opportunity, I think there's a significant degree. But do you want to cover that at all, Spencer?

Yes, absolutely. I mean we're certainly building a platform within LaddersFree that will have some components that will come in on that. I think, Shaun, you've got some AI in some of your sales models to drive new business. And we're continuing to challenge ourselves whereas is relevant in the group. And it may well factor in the back-office rationalization as well.

Yes. Yes, I think in terms of future uses, a number of different things, but I think it's predominantly in terms of a couple of key things. One is making our operations slicker quicker, faster, better in terms of the whole workflow processes. I think, in terms of pricing, it will come into being a helpful tool. And also I think, in terms of reporting, what we're seeing is a desire, not a demand because I think we're creating the demand for reporting to our customers because it's just not been available before, where we're actually reporting on the work we've done and the status of their whatever it is we're cleaning. Let's say it's windows or high-level or guttering, whatever. We're able to give them a reporting visibility that they otherwise wouldn't have had across their estate. And AI will help us deliver some of those things, but that's a little bit further down the line once we get over the sort of minimum viable product that we're focused on right now.

Yes. [ David S. ], it is excellent having such high levels of annual recurring revenue. But when you gain new contracts, do they sign for a minimum term or a whole year? And what percentage do not renew?

Okay. So it depends on the definition but that would be typically contract maintenance for us, contract maintenance work. I think I said it earlier on in the presentation. If we're looking at the window cleaning retaining from 12 months to 36 months commitment from the customer, if we're looking at the contract maintenance, which is the [ hygiene ], which is typically the Fidelis model, then it's usually anything from 3 to 5 years with the option of plus 2. And obviously, there's a little bit of churn, but the churn really has been designed from us to move away from lower-margin work. And at the end of the day, if we look at Fidelis in isolation, we've doubled the revenue since we completed the acquisition. So -- and we've improved the margin mix. So we're obviously doing the right thing and that feeds, hand-in-glove, back to the operational gearing and also the sales and marketing activity. So I hope that answers that question. I don't have the exact metrics on what the percentage is on the churn, but it's much lower than the industry standard. That's for sure.

Yes, I was going to say, we know it's very low, very low. But what I would also say is one of the things that Spencer and his team now bring to us is much greater management information. We were very much bootstrapped over the first 3 to 4 years of our existence. We now have the luxury of some management information. We want more -- and developing some models around that sort of churn component. And I think specifically where the company will actually look very, very, very good is on NRR. So I think we want to -- we do want to measure that consistently across the group because I think, if you look at the rate at which we retain business, renew business and also upsell and cross-sell, I think our NRR ratio is going to be in excess of 100% and some [indiscernible] I think. But we'll see. We're just not there yet in terms of having the resources to throw at providing an accurate and consistent measure reliable on that yet, but we will be. Okay. [ Dexter B. ], how evolved is your pipeline of potential acquisition targets? I guess that's one for me. It's -- we've had a look at a load in the last 6 weeks, just IMs, and they're very easy and quick to spot what we don't want. So sort of 90% of it has ended up going in the junk file. And we've got a small handful, I mean a really small handful, that we're sort of starting to look at a bit more seriously. So it's not that well evolved, but that's not to say there isn't a potential opportunity set within the pipeline we have that we couldn't move very, very quickly on. We just need to go through the gears. We've engaged with 1 or 2. We've got under the covers, and it's about getting to a point where we feel confident that what we think we see is actually what is there. So not [Technical Difficulty] enough that we are starting to see opportunities that are looking very interesting. Hopefully, that answers that question. Dexter has asked another one. Any thoughts on the potential impact of a Labor government? Great question.

Being from the Northeast, no comment. No, just joking. No, I mean, I think we touched on this on previous presentations. Contracts have uplift baked into them. So if there are any changes to living wages or inflationary costs, that they're all baked in anyway. Do I see it being a negative or a positive? Not really. I don't think it will impact the cleaning set much, if at all, if I'm honest. So no, I don't -- I think the only -- I think the only chapter at the moment is that they would like to take rail nationalized again. But we don't do as much in that sector as we once did simply because margins have been rolling, coming out of COVID. That's an industry that is -- poses challenges at the moment. So I don't think it will have an impact, but obviously, we'll keep a close eye on it.

Good. Okay. And, oh, I ask a couple more here. How do nationwide companies find out about you and invite you to tender? How much competition is there? And what percentage do you think you win?

Okay. So they find out -- so we're on all of the portals. So if there's a piece of work that they want us to tender, then that will come in that way. But as I said earlier on in the meeting, it's not really our area of focus. If something comes through and we think it's in our sweet spot, then of course we'll go for it. I think, when we analyze that, for the broad part, I think we are within about 2 and 3. And how much competition is there? Iin terms of competition, it varies. We do analyze, as I said earlier on, that we'll not go for anything where we think it's going to be single-digit margins and there's going to be 20 people going for it. We just won't -- we think we can focus our time and attention on something else. But generally, nationwide companies find out about us because we go hunting for it. And I think that's where we're different to the big boys. We work with the big boys. The Big 5 are our customers, but we go hunting. And we go hunting by, if it's an existing customer, then we've got a relationship there and we'll go hunting for incremental work or cross-sell. And if it's a new piece of work, then, again, we'll be knocking down the door, utilizing our sales and marketing approach, as simple as that.

I mean there are situations in there, Shaun, that we actually have a lot of nationwide customers today that don't use us nationwide for all of our products.

That's true.

So the white space in our existing customers is actually huge.

You are correct.

We've got several great examples of where we've won, and we use those to reference ourselves to the others.

That's true.

So we're not without opportunity. I think your point earlier on is we do [Technical Difficulty] opportunities. So we are being most competitive [Technical Difficulty] and that's where we focus.

Exactly.

[Technical Difficulty] in the past, companies [Technical Difficulty] 3 or 4 years ago go after things where actually they're not really going to win. So...

[indiscernible]

...we don't bother.

Yes. Indeed, I think the bottom line or the keyword here, Mark, is sophistication. We're a lot more sophisticated now than we were certainly 2 years ago, in fact, you could even argue a year ago. Bringing in Spencer and Justin and the promotions of Chris and Dave and Sam, we're just in a much better and more professional and sophisticated position than we were 6 to 12 months ago. So we're always reviewing. The control measures are there. We know what we need to look at. We know what margin we need to be hitting, and we know what the right opportunity looks like.

Got it. Got it. The last question is from Dexter B. Are you seeing any signs of distress in the market, primarily for the subscale operators?

Okay. Well, I don't know what he means by subscale operators.

So the small guys in the market.

No, not at all. I'm not seeing any real signs of distress, if I'm perfectly honest. We've seen some sectors that, 3 or 4 years ago, were much higher-margin than they are now. But no, not really, you know, as well. I'm not...

We see a lot of people trying to retire or want to move out for work-life balance reasons, but really distressed. There are no sort of distressed sales out there for us to look at and pull over. I apologize, by the way, guys. There were a couple of other quick questions. Let me just go through them. [ Neil B. ], why did the ad hoc division fall in H1? Is there any recovery expected in H2? Margins have remained below contract maintenance. Is there any scope for recovering the premium margin? Can I just...

Yes.

Again, we don't want to forecast in our response.

Right.

What I will say is one phenomenon we've seen is that ad hoc gets us into a customer because we're dealing with an emergency situation very, very well. And therefore, ad hoc customers can become and sometimes, in fact, more often than not, become established, contracted business.

Yes.

So you will see this natural ebb away from. We have to continually add more in because, by its very nature, it's just based on individual projects. Would you add anything to that answer?

No, not really, Mark, I think, other than I can think of 3 examples really, 3 or 4 examples that started last year as ad hoc, basically, work which now fall into the contract mix. So very much focused on our strategy of land and expand, getting the sharp end of the spear, as I said earlier on in the presentation, that ad hoc basin. The guys are very, very good at converting them into contracted pieces of work. And don't forget, the [Technical Difficulty] are paid on margin as well as they're paid on GP. So we're not paying them on revenue. So there's always that focus on the [indiscernible] contractor piece and also the high-margin work.

And what's your view on the margin in ad hoc?

It's a question [indiscernible] question. So it depends on the mix again. Sometimes, we get a piece of our top work where we know it could lead to a much bigger piece of work very, very early on in that kind of relationship period, whereas, conversely, it can go the other way. It could be a small piece of work, which is a GBP 3,000, GBP 4,000 job, a person on-site within 4 hours. But we know that we're perhaps only doing it because the income [indiscernible] down, and then we'll go back and we'll revisit it as part of our strategy for the sales market, and we'll keep sending those messages until the incumbent becomes us. So it is cost-for-cost smart. It's difficult to answer that one.

I think there's another feature here, Shaun, that you and I have discussed in the past. And that is that when there's a small, single piece of work, margin can be very high.

Yes.

But with a much larger piece of work, the margins are compressed, A, because it's a bigger piece of work, and B, because we do have to pull in some subcontractors, trusted partners that we've worked with before. That does compress our margin. But we want to do the work because we want to deliver the service and turn it into something else. So it's a complicated answer to a simple question, but there are a number of moving parts here.

Yes.

And at the end of the day, the ad hoc business is very much our pointy end of the spear as opposed to our -- what we're relying on for margin and profit.

Yes, exactly.

Okay. James C. asks, what potential does the company see for further cross-selling opportunities with existing customers? Again, sorry to paraphrase, but it's big. It's very big. We have a lot of customers. We do a lot with a few of them, in fact, many of them, but we see there being a huge amount of white space.

I think, just on the back of that as well, Mark, it's a good point to just pause and say that a lot of companies promise and say that they'll either cross-sell or upsell where they can, but very, very few do it, whereas we have already got material contracts as a result of customer upselling.

Yes. Absolutely. And then the final question, the genuinely final question now is from [ Neil B. ] How advanced are any potential acquisitions? Signal's had a targeted 26% uplift to earnings from acquisitions in their target price. And again, I answered that earlier by saying we're at the start of a process and there's nothing that we have today that we can say is through the final stage of qualification. We are still qualifying, but there's some promise in there.

Yes.

Great. Mark, Shaun, Spencer, as always, thank you for addressing all those questions from investors today. And of course, the company can review all questions submitted today, and will publish those responses on Investors on the company platform. But before we direct investors to provide you with their feedback, which I know is particularly important to the company, Shaun, can I please ask you for a few closing comments?

Yes. Thanks, Alex. Look, I think we're in a very exciting time here for shareholders and everyone involved in the business. We came into this business 5 years ago, less than 35% recurring revenue on a business that was turning over just a little bit more than GBP 3 million and loss-making. Fast-forward 5 years on, this is the fifth year of double-digit growth, 35% earnings growth from a 15% uplift in revenue. I just think it's an exciting time for everyone involved, and thank you for joining us today.

Fantastic. Shaun, Mark Spencer, 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 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 REACT Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.

Thank you.