REACT Group PLC announces its interim results for the six months ended 31 March 2018, Gill Leates, Chairman, gave the following review of this years’ results. During the six months ended 31 March 2018 market conditions have been difficult and the Company has also gone through a period of significant change. Following the acquisition of the specialist cleaning business from Autoclenz Limited in 2015, Autoclenz continued to provide financial and administrative support to the Company under a service agreement entered into at that time. This service agreement was terminated at the start of the current financial year and in November 2017 the Company moved into leased premises in Swadlincote. As a consequence the Company is investing in financial and other systems to improve the quality of its management information and to ensure its administration systems are scalable and will remain “fit for purpose” as the business grows. There have also been significant changes in the management of the business with the appointment of an Interim Head of Operations, with extensive general management experience, in April 2018. The finance team has also been strengthened with the appointment of a full time Group Financial Controller in April 2018, and although it is still early days, we are already seeing the benefits of this investment with improved debt collection and a number of operational efficiencies having been identified, since the half year end.
On the existing business the new management team is conducting a review of operations to identify cost savings and opportunities for growth in order to stem the losses and return the Company to profitability. As part of this review it became apparent that the asbestos side of the business was not making a contribution and, as a consequence, given the onerous compliance obligations for licence holders, and the risks associated with this type of business, the Board has taken the decision to contract out any future requirement for asbestos removal to specialist companies rather than dealing internally.
Going forward our sales effort will continue to target larger contracts which will generate a more predictable revenue stream, albeit at a lower margin than the 24 hour emergency and specialist cleaning part of the business. As previously reported, we have had some success with the award of two major hospital contracts, £200,000 in September 2017 and a further £206,000 in March 2018 as well as a contract for £225,000 with a major highways construction company for the decontamination and deep cleaning of amenity and picnic sites which was awarded in May 2018. The full benefits of these contracts will not come through until the second half of the current financial year.
Financial review
During the six months ended 31 March 2018 turnover amounted to £1.47m (six months ended 31 March 2017: £1.27m; year ended 30 September 2017: £2.64m), an increase of 16% over the comparative period for the prior year. This increase was due primarily to the new contract for the provision of janitorial services and other ad-hoc work to a major London hospital which was secured in September 2017. Gross margins have fallen due the change in mix between the higher margin 24 hour emergency and specialist cleaning part of the business and the provision of janitorial services, as well as price pressure generally in the industry as a whole.
Administrative costs amounted to £667,000 000 (six months ended 31 March 2017: £500,000; year ended 30 September 2017: £1,223,000) and include £91,000 (six months ended 31 March 2017: £nil, year ended 30 September 2017: £15,000) of non-recurring exceptional costs. The increase over the comparative period for the prior year is primarily due to costs associated with taking on the new premises and providing our own administrative support. The exceptional costs include a bad debt from a major FM company that has recently gone into receivership, recruitment fees and other employee related costs associated with the changes in the management of the business during the period under review.
After administration costs the operating loss from continuing operations amounted to £327,000 (six months ended 31 March 2017: £164,000, year ended 30 September 2017: £393,000). The cash balance at 31 March stood at £464,000 (30 September 2017: £631,000).
Board changes
As previously announced Chris Barnes will leave the Company on 30 June 2018. A search is currently underway to identify a new non-executive director with sales and marketing experience to strengthen the Board.
Brokers
On 30 June 2018 the service contract with Whitman Howard Limited will come to an end, by mutual agreement, and Peterhouse Capital Limited will continue as our sole broker. The Board believes that, given the Company’s current size and status, it only requires one broker at present. The Board would also like to thank the team at Whitman Howard for their help in recent years.
Outlook
A number of changes have taken place in the management and operations of the business since the end of the period under review which the Board believes will enable the Company to effectively implement a growth strategy going forward. As previously advised we will continue to focus our efforts on the core specialist cleaning business with a view to securing additional contracts with major FM companies and public sector organisations to improve the quality of our customer base and increase the level of recurring revenue. There are still a number of significant challenges facing the business but the Board is optimistic the changes being made will deliver value for shareholders in the future.
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