Hercules (LSE:HERC) — Investor Presentation

0:01 Good morning, and welcome to the HERCULES SITE Services PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll.

0:32 And I would now like to hand you over to CEO, Bruce Corkmus. Good morning to you. Good morning, Alex. Good morning. Good morning, everyone, for your and and thank you so much for your time meeting us today. As you might have already seen from our announcements this morning, we had a fantastic first six months. So just to summarize, our h one twenty twenty three year on year turnover increased by 85% to £37,000,000, and our year on year EBITDA increased by 83% to £1,100,000 compared to h one of twenty twenty two. In today's presentation, we'll talk about our performance over the last six months, and we will also share our future growth plans with you.

1:20 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.

1:36 Sorry. I can't move the slides to the next one. Okay. Thank you. Paul, if you can put to the board one. Sorry. I I I can't see the cursor. Sorry. Thank you, Paul. So this slide is about our board members. I'm Bruce Kirkma, CEO for HERCULES, and I am joined by our CFO, Paul Whitcroft.

1:56 As you can see from this slide, we got a very strong and well respected board with both exec and nonexec directors with great blend of experience in infrastructure, financials, and banking, sales, PLC, governance, and even starting and running an aim listed company. Together, we believe that we can grow HERCULES even further. Next slide, please, Paul. This slide is about our achievements over the last six months. Our turnover h one year on year increased by 85 percent, and we are trading in line with market expectations. Our growth was around 50% for the first two years in a row for the 2022 and 2021 for our year year ending results, and we are forecasting similar sort of growth for the year ending 2023.

2:50 We have seen growth across all of our divisions with regards to the labor supply arm. We established two new divisions, which are our white collar and our site security divisions. They're already bringing some income towards our turnover, and we believe that these two divisions will grow in the next few years. With regards to our suction excavators division, our fleet grew from 16 suction excavators to 30 suction excavators, and now we have one of the biggest fleet in The UK. We will start seeing increased turnover and profits coming in contributing for this year 2023 end of year results. We have been paying dividends since we have got HERCULES listed on the stock exchange, and dividends continue to be paid to our shareholders.

3:38 With regards to the last bullet point, as you might be aware, we are establishing our training academy in Nunnithon. As as you might be already aware, also, there's a a big skill shortage in The UK, and it is important for us to have a sustainable approach, which is finding local people for local projects, putting them to work, and upskilling and cross skilling them. We also wanna want to monetize this opportunity as well. Therefore, our training academy plays an important role in the sustainable approach. So our goal is to open our training academy early twenty twenty four.

4:13 With regards to the next slide, this is our business overview. This slide is about how HERCULES operates. As you can see at the top of this slide, 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 these blue chip infrastructure clients and complemented by our construction services division. Our labor supply department is a significant part of our business, which currently contributes around 80% of our turnover, and this number is still growing. As I mentioned before, we have added two divisions under our labor supply business, which are our white collar recruitment and our site security divisions.

4:59 Under the construction services division, we hire out our suction excavator services, and we also carry out civil projects under the same umbrella. As you can see at the bottom left, we also developed our apps. First one is our HERCULES recruitment app, helps us to recruit local people for local projects, and our t one team app helps us to onboard them efficiently in a paperless process. As you can see at the bottom right, we also developed a digital portal called see everything portal, which stands for skills education and employment. We have developed this product for our client on the HS to all the common station project, and we have already started licensing this out, bringing an income. As you can see, our digital arm differentiates us from our competitors and underpins the whole business.

5:48 Even though we are principally a labor supply company with these numerous services available, one of our 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. I think the next slide is yours, Paul. Paul, I think you are This is a a group statement for the the six months ending March 2023, and and it compares the same period in the previous financial year. The turnover did increase by 85%, which is very, very impressive. Similarly, did EBITDA. And it was the changes were across the piece in terms of all our all our three divisions.

6:41 And, of course, overall, we're on course to to achieve market expectations, which is very, very important to us. The the the that's that's a a major thing that we want to achieve every year. What else has changed in the business? Well, Russ talked about suction excavators. We started the the six month period with 16, and we had initially four delivered up until January that were delayed from the previous year, which has took quite a bit of time really because of problems with with chassis on on in Europe. And we managed to get 10 more delivered on an on the newer order, which all came in time for the super deduction, which for those of you who were aware of it will be expire well, it has expired now at the end of March. So very important to to get them delivered in that space of time.

7:37 We we spent quite a bit of time getting ready for those to come, and you have to get the operatives ready. You have to get them all trained up. And that did put a little bit of cost into the first half year, and we won't get the revenues till the second half year. You can see that our depreciation has increased. And as of has have the finance costs, they're both both of those are related to the external financing of those suction excavators. You will see that those numbers will be slightly higher in the second half of the year because we've got this increase in the size of the fleet. So So moving on from this slide to we've got a slide for each of the three sections in the business. Labor supply.

8:27 So our turnover here grew actually a 110%. Now this is primarily the HS 2 Northern section, but by no means is it all of it. We're doing very well in that in in that on that project. We're one of six labor suppliers. And despite being one of six, we're actually supplying 25% of the blue collar workforce there. So we've got a very strong project pipeline, and this has helped with our organic growth, not just HS two. And as well as that, just to sort of bring that into perspective, we've got new clients all come along in the last six months, John Sist, Galliford Tri Highways, CHC Highways.

9:18 None of those we've we supply labor supply to before. So they're they're they're good large companies. That's a very, very good sign. We've now got around a thousand operatives across not just HS2, but other sites as well, which is a serious change if you go back a year a year ago, a major increase. So it's not we're obviously preparing for all the time for the next the next big project. Are we gonna be ready for that? A a recruitment app, the one that Bruce just referred to. That's now been downloaded by almost I think it's getting on for 10,000 people now.

10:05 And this is fantastic. This is part of our USP is that that they they can can log log on on to the app whenever it suits them, evenings, weekends, or whenever, and they can put their details up. We know where they are. We know what skills and qualifications they've got. And we can as as a role comes into us in their area with I. Something they'd be it'd be suitable for them to to do, we let them know. Works incredibly well. None of our competitors have this. This no doubt helps us to be somebody who can supply 25% of the blue collar workforce on the Northern Section of HS two. We've also got the one board the onboarding app, which basically helps us get people onto our systems, gets them started with the business very, very quickly in a digital way.

10:53 And since that's been introduced, nearly 1,500 people have used that and have have onboarded via that mechanism. Finally, we've got the training division that we talked about. Why are we doing this? Well, there's a skill shortage in The UK, not just Brexit, all sorts of issues here. And what we're trying to do is to upskill and cross skill our operatives through our training division. That training division is is already in place, but we're going to extend it to have an academy based in Dunedin, as Bruce said, which will we we hope to be opening early in 2024. That will be a new income stream because it won't just be for our own people.

11:39 It'll it'll be for other people as well. And this is very important to make sure that we can as the roles come up in in future years, we can have the people with the correct qualifications to be able to move things forward. Suction excavators. We've talked about these. This is a picture of the front of one of the cabs. So we've in in the scale of the the overall business, it's about 5% currently. And we don't expect it to get much more than that, perhaps up to 7% as the extra 10 vehicles start to generate income.

12:16 Very important with these extra vehicles that we gain new clients. And we've got quite an impressive list here that we've added in the last six months. The and some of these are on specific projects. But once you've worked with one project with somebody, they'll use you again. That's how that's how HERCULES has developed over the years. The Amy Highways contract is very, very important. We'll never work with them before, and that's a two or three year deal, to supply extra excavators exclusively. So good opportunities there to to to make this business into a a a very efficient business generating funds in in the years ahead. One interesting element is out of these 10 vehicles, I think it's two of them, have what's called triple fan technology, which effectively means you can suck further down with more power.

13:13 And that is this facility is in demand with our clients. So we think that, again, that's going to be something we can offer to them now with increased premiums. Important always to to boost profitability wherever we can.

13:33 Civil projects. Civil projects are where we do fixed priced, contracts. We tender for them, and, it's mostly in the water and sewage sector. We had another very good year and a good half year, 30% increase in turnover. We've also got, so far, over 10,000,000 projects in contract for this financial year. We actually, delivered our result for the full year 2022. I think it was 12,000,000 turnover. We're well on the way to at least matching that, more likely, with, what, five months to go, beating it.

14:20 Again, similar new clients, Amy and, SGN Group, large companies, very, very important. This civil projects division is never likely to increase dramatically for one very good reason. We want to grow this very slowly by making sure we we stick to our policy of going for the low risk, highest margin projects and the ones that we've got experience of, delivering on successfully. We don't want to increase our risk profile of the company as a whole. So while labor supply will therefore become a bigger percentage of the overall business, just because of that will will grow so much, civil projects, there'll be small increases year on year, but nothing dramatic.

15:12 We could do an awful lot more, but we're not going to do in this area for those reasons. This is our balance sheet. So our assets are predominantly the suction excavators I've just been talking about. They cost about £500,000 each, so a significant value there in the balance sheet. They're all financed with 90% funding from conventional asset funders in the marketplace. Marketplace. Therefore,

15:42 we have matching liabilities in the bottom half of the balance sheet. I think it's about 13,000,000 is the overall debt on asset funding. The other liabilities are leases, leases for properties and premises that we utilize of about 6,000,000. And we also utilize an invoice discounting facility, which everybody in labor supply does as you pay people weekly and you invoice your clients monthly, and then you're on forty five odd day terms after that. So that's why we have the ID facility. The current assets at the top have increased mainly debtors. So as you would expect with a almost duplicate a 100% almost increase internally, but not quite, is gonna put a big increase in our debtor book too. So that's why that, the current assets, have increased in in that way.

16:44 Cash flow. We ended the, the six month period with £2,600,000 in the bank. At the same time last year, that was 1,600,000. We did do a fundraise in January, I think it was, of this year, just gone by, have about a netting 1.6. That has helped us, grow our cash, and put us in a a better position from a working capital perspective. And that and that's important. We're a working capital, hungry business.

17:21 Other than that, we've done very well to, to to manage cash, and are in a good position to, commence the second half of the year when we expect a lot more activity. This is because, we're a seasonal business for two, obvious reasons. One is the construction sector, tends to sleep a little bit during Christmas period and just after that. So, traditionally, that's always significantly lower. And in the second half of the year, it's a converse situation to consider because, of course, the weather's better. Or, hopefully, it will be. And, basically, all these projects, they need to get the people on the sites during those summer months just as Easter starts to get out of the way. They wanna get people on the sites to get as much done as possible before the, before the cold weather starts starts to bite.

18:16 So, that's historic. Not just us. That's the whole construction industry.

18:21 With us as well to make it even more likely to be a second half year success, we've got the 10 suction excavators that we didn't have any turnover from in the first half year that we'll have in the second half. And we've got a quite significant increase expected of labor supply requirements on the HS 2 Northern section in the second half of the year to, how we started the first half of the year.

18:49 Final point, on this. So, we paid our final dividend, for year ending 2022, in the last six months, same level, and we're expecting to, in fact, we proposed, an interim dividend dividend for 2023 to be, paid, in August of this year similar to how it was paid in August last year. Very important to us to pay dividends to, our shareholders, part of the contract that we have with them.

19:23 That's me on some financial numbers. Bruce, I'll I'll hand back to you now. Thank you, Paul. As you can see from this slide, we have multiple growth opportunities for our growth plans. First one is our, is our organic growth. We have been growing, across all divisions through a strong pipeline of projects into h two financial year '23 and '24. With regards to our training and training academy, as I mentioned before, we would like to upskill and cross skill our workforce. Also, we would like to monetize this opportunity. We started two new divisions in November for our white collar and cybersecurity divisions. They started bringing some income, and we believe that these two divisions will grow within the next few years also.

20:13 With our digital arm, we started monetizing our c portal by licensing this product out to HS2 all documentation, and we wanna push that product to more our other blue chip clients as well as other projects. With regards to our suction excavators, we would like to see the benefits from the expanded fleet, and our aim is to increase utilization and maximize efficiencies. As Paul said, the extra 10 suction excavators delivered in the second half year will contribute

20:46 towards the second half year's turnover and profit. With regards to our subsidiaries and partnership approach, this approach will help accelerate our labor supply growth into new geographies and into new sectors by partnering with ambitious managers. You guys already might know about a mighty PLC. They founded this approach, they grew fantastically. So we believe that this sort of approach will help us to grow our labor supply sector as we can replicate replicate this. We are already talking to few people and ambitious managers, and we would like to start one or two this this year. With regards to our m and a activity, we are already talking to identified acquisition targets in the labor supply sector.

21:36 So we can't, sorry, we can't tell any more than that, as you can appreciate, but we are talking to companies with synergies to help us to grow our turnover and profitability in the different sectors. Next slide is our last slide. These are about investment case. So why invest in HERCULES is there are over thousand companies listed in the stock exchange. We believe that we have a really good investment case and a fantastic story. I started HERCULES fifteen years ago, and we have been growing year by year. And that is one of the reason we came on the AI market to grow even further. So we as you can see from the first bullet point, we're gonna sustain track record of growth.

22:25 We also have a a per a positive performance across all divisions as we discussed previously. Strong momentum has continued into 2023, so the second half is going to be fantastic also. We also have got a significant cross selling capabilities. There's a huge market opportunity as there's a massive investment in the infrastructure sector over the next fifteen years, including the nuclear energy h s two regional development programs with highways, AMP periods, AMP and it is going to start soon within within couple of years merging with AMP seven. So there is a massive huge investments in the infrastructure sector. So we are well placed to gain this market share. And as you as you've seen my previous slide with regards to our growth opportunity, we've gotta define a strategy with multiple growth opportunities.

23:20 So this was our last slide. So thank you so much for listening to us. And any questions, we are happy to answer them. Thank you. That's great, Bruce, Paul. Thank you very much indeed for your presentation this morning. If I may bring your cameras back up now. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the top right corner of your screen. While the company take 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 Q and A can be accessed via your investor dashboard. Bruce, 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 and give responses where appropriate to do so, I'll pick up from you at the end. Thank you.

24:07 Thank you very much, Alex. So, yeah, just looking down the questions, two of them appear to be in a similar vein. So we'll that one together. What it what it is, it's questioning the share price and the change in the share price, which, of course, is a a very, very valid question. It's not a complicated answer, but, effectively, we went to market to raise some more money for working capital, which I think I mentioned in the presentation. And, the way the market is at the moment, and and you I'm sure you'll most of you will be aware of the way the market is at the moment. It's difficult to raise money. And the only way that we could, do that, and we were advised heavily that we had to give a 20% discount to the market price. At that time, the time we did that, we made that decision. The share price was about 50 p, 55 p, I think it was actually. And then after we'd made that decision and gone out to market with a 45p offering, 20% discount, our share price went up to over 70 p.

25:16 Beyond our control, that that's just what happened. Therefore, when we actually took the the funds from the from the fundraise, our share price went down to that 45p figure. So it was a a difficult thing. We we needed we needed the working capital, but the market was not great. If the market was better, we'd have been able to get it at a higher price. In relation to retail investors, again, it's a it's a very difficult thing in terms of advice. But But I I think think what we will do in future and, Bruce, please comment on this if you as well. We would like to think to any future fundraising. We we will be doing our to include all shareholders in that offering, and anybody who who wants to to take some more shares in the business will would have the opportunity to do so.

26:10 Yeah. No. Thank you, Paul. Also, just to add as well, we with regards to the needing for working capital, when we went to the market, when we got when when we IPO ed the the the company over one and a half years ago, the market conditions were were not great either. Only 11, I think, companies managed to get into onto the AIM market, And we couldn't raise the amount that we wanted in the first place. So that we were going that was going to be a second sort of a raise anyway because, as Paul said before, we pay our guys and yours on-site weekly, and and we don't see the the the the money from the clients up to sixty days. So we really in order to grow HERCULES, we have done the we had to do this, you know, for for for the HERCULES business for to operate and grow. And and therefore, you can see 808085% growth in this six months.

27:06 And and and and the second six month is going to be be good, we believe, also. So so we we have done the best for for for for for the business. As Paul said, we have sorted that out now, our working capital, because of our growth. So so so going forward, we believe that the the the the share price should reflect the the the performance in the company. Okay. So another question. With with the government focused on issues around water infrastructure, visibility do we have on on our customers' projects in this regard? Well, I suppose this is mostly AMP seven, Bruce, isn't it? Yeah. Which is very visible in terms of our clients. Do you wanna just cover that one? Yeah. Sure. M seven is so beginning of the m seven, there was COVID. Obviously, that that delayed already.

28:04 And with regards to Michael's question as well, which is a very good question, there's extra ten ten billion pounds committed to stop sewage going into the seas as well. So we already started we are talking to our blue chip clients. We are very strategic partner of delivering water wastewater and clean water treatment works. They call it non infrastructure work for the Thames Water Area and Lean Water Area, Southern Water Area, and 7th Trent Water Area. And they are talking to us. We have got a clear visibility of work. And and, yeah, we we will be really busy within the next, I think, next seven years because AMP seven and AMP eight AMP eight are going to merge because of COVID as well as well as the amount of work to be done. So, yeah, we we we believe that we are very, very well placed in the market for that.

29:03 Okay. So we've got one more question. I think I can take them this one. What's opportunity with licensing licensing fees and what further investment is needed in your digital offering? So our digital offerings really relate to the, at the moment, the the c portal as Bruce that was explaining the skills education and employment portal. We've developed that specifically for the Old Oak Common Station, and that's how we got funding for it. And and that's where it's currently licensed. We can license this to a number of other sites in a similar way, and that's what we intend to to try and achieve in the next year or so. And that's all within the same sector, the same industry.

29:49 This This this software, though, has the opportunity to be utilized in in other in other industries completely. It could be used with local councils. They all have the same requirement something like this, and there is nothing else out there in the marketplace. So a number of discussions are ongoing, and we hope to bring those to fruition as soon as possible. This is never going to this is not a a a core business element to us, It's complementary. And we're you we're doing it because, you know, we work in the construction industry. We know the problems, so we're reasonably well placed to be able to come up with some of the solutions. So So we're not going to be a software company, but we have got some offerings here that we can raise income on, and we can also utilize internally to help us be more efficient and save money wherever possible.

30:46 That's it. I don't think we've got any more questions. Paul, that's correct. And thank you, Prosci. I believe you have addressed all the questions from investors today. And, of course, the company will review all questions submitted today, and we'll publish those responses on the investor me company platform. But before redirecting investors to provide you with their feedback, which one is particularly important to the company? Bruce, could I please ask you for a few closing comments? Thank you. Yeah. Sure. Thank you so much for meeting us today. And we believe that we got a really good future, especially within the infrastructure industry, and there is a massive skill shortage. So we are really well placed in the market. And and and we believe that we are going to grow within, know, keep keep growing with with the next few years. And, also, we believe that the share price is going to reflect that. So thank you so much for for listening to us.

31:37 Bruce, 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 a feedback and 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. That concludes today's meeting, and good morning to you all. Thank you. Cheers.