Keystone Law Group plc

Good afternoon and welcome to the Keystone Law Group PLC annual results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted anytime by the Q&A tab situated in the right hand corner of your screen. Just 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'd like to submit the following poll. I'd now like to hand you over to James Knight, Founder and Chief Executive Officer. Good afternoon, sir.

Thank you very much and good afternoon. Thank you for joining us today on this presentation of the end of year results for the year finishing January 2023. The presentation that is before you has been prepared by us. I'll explain a little bit about Keystone itself before we move on. This is a firm that was started by myself and others in 2002. So we just had our 20th birthday. It is a fully regulated law firm, often described as a platform model. for reasons I'll explain shortly. Nowadays, we have over 500 high-quality, closely vetted solicitors and barristers that work on a very simple pay when paid basis, a performance-based remuneration structure, which is another way of saying that they receive a high percentage of fees for the work that they have done. The work that they do and which is invoiced through the firm. The lawyers themselves bring in 98% of the clients for themselves and for their new Keystone colleagues. And we use a central office. in the heart of London to support our lawyers, to provide all of the infrastructure and support that they need. And that is staffed by about 60 individuals and management, including myself. We use technology to drive efficiencies and to help with the remote working. Our lawyers are self-employed, they work from their own offices, whether that be at home or any other commercial premises, and are paid on a basis, paid when paid, paid when the clients pay their bills in doing this we give our lawyers all of the freedom and the flexibility and autonomy of being self-employed but all of the support and the infrastructure um and of being in a in a fully vetted a full-versed law firm. And it's an extremely effective way of giving people that freedom. It's a very happy place. The lawyers know each other extremely well. We do a great deal of events and networking events so that they do know each other well, so that they can work together, so that they will refer work from one person to another. 30% of the work that comes into Keystone is cross-referred by one lawyer to another or to a group of their colleagues. We grow the Keystone primarily through the recruitment of a high caliber of quality lawyers. We vet them, we interview them in much the same way as a conventional employer. And as I mentioned earlier, they bring in their work, their clients, mostly commercial work, some private client work, some family work, but predominantly our clients are small, medium-sized companies and individuals. We do have quite a number of famous names in terms of the blue chip clients, but SME is the predominant. We have an excellent ability to scale the business. We can grow very quickly subject to having the right lawyers there wishing to join us and us wishing to recruit them. We're not inhibited by cash flow considerations in the same way as many businesses because of the paid when paid nature of the business or inhibited by office space, as many conventional firms are. We have introduced in the last couple of years a pod concept which basically enables senior lawyers to employ junior lawyers and to further enhance their own profit making potential. The firm is profitable, has been profitable for a long time, way before IPO in 2017. It is cash generative. We maintain that it is a low risk, resilient business because of the business models. And we do have a very good track record, certainly since IPO. and and which has been an extremely good experience for us um we're seen by many uh observers as the potential of the convention the potential um model uh where a lot of conventional law firms are going to adapt towards this way of working or they will not adapt but the lawyers will be looking to adapt themselves conventional law firms will find it um pretty much impossible to adapt in this way, which is quite typical of new organisations on the block. The market that we operate in is extremely large, 10 billion pounds, and we at the current time turn over 75 million pounds. So we have a Plenty of way to go. Turning over the page to the results, highlights for the year that we have just undertaken. It was a good year for Keystone, revenue increased by 8.1%. Revenue per principal, those are our senior lawyers, increased by 4.1%. The adjusted profit before tax up 6.3%. Operating cash conversion is always good and strong at Keystone, 96.5%. And this particular year, we will be issuing a dividend of 16.1%. During the year, it was a very strong year for the legal profession as a whole. It was also a very competitive year for recruitment because so many law firms were so busy that there was a lot of demand for lawyers. we did extremely well during that period recruited 32 new principals which was more than just about any other law firm but of course we have quite an insatiable desire insatiable appetite for good quality lawyers and so we would have been happy to take on more but having said that in the circumstances We did very well. The junior lawyers, otherwise known as pod members, grew from 80 to 95. We finished up with 398 principals and the total fee earners at the end of the year was 507. And other reasons why the year just gone was a good year for us is that we were able to have a full year of networking and other sort of in-person events, which is something which is a very big part of Keystone, something that, of course, we weren't able to do for two or three years. during the COVID pandemic times. It's despite the fact our lawyers work from their own offices, despite the fact that they are self employed, they know each other extremely well, they collaborate extremely well. And one of the reasons they do that is because we make sure that there are a lot of events, seminars, non legal interest, sports, and general sort of activities that far more than you'd find in any conventional exercise and any conventional law firm. And it's really designed to make sure that people know each other well and they can work well together. We continue to invest in the central office team as we normally do. That team does grow. It doesn't go as fast or in line with the growth of lawyers, but of course it does develop and we invest in the IT systems constantly. Focusing now on the legal lawyer recruitment, number one driver of growth at Keystone. We report on various metrics, the applicants, offers made, offers accepted. You'll see that we made 79 offers during the year, two principals, 42 were accepted. Just like in a normal, employment scenario not we meet with lawyers if we like them if they like us if we like them we will make an offer if they like us they will accept it having said that they may well be looking at other alternatives they may welcome an interview with us interview with a couple of other conventional firms and then maybe decide to join us they may decide to stay where they are may decide to go in-house they may decide to go to another conventional firm hence the 42 accepted offers and 79 offers made as i mentioned earlier 32 new principals joined us we finished up with the net figure of 394 up to 398 so the net figure is only four now that um accounts for the the levers um which is a normal the rate of levers at 26 is a was a normal figure for us um percentage wise people retiring um people who have joined the firm and for one reason or another not made it work uh not everybody joins and is able to bring the clients that they thought and we thought they would be able to bring, but that's fine because it allows us to be entrepreneurial. It doesn't really impact upon the operations of the business. If we take on a lawyer that doesn't work out as a little bit of administration, but far better for us to take the risk of a lawyer, as long as they're the quality, as long as they or a good fit with the firm, and if they don't actually manage to bring in the business, well, so be it, and they will go off and do something else. So, although the net figure is only four, the 32 that we bring in, whilst not every single one will knock it out of the park, it is likely that it's a lot of a stronger new cohort than the ones who are retiring and have moved on. um as i mentioned earlier pod members grew from 80 to 95. i'll pass now back to our cfo ashley miller who'll take me through the financials uh yes so if we just talk through some quickly of the financial highlights so as we mentioned we grew the business the revenue by 8.1 to 75.3 million this year

The gross profit margin of 26% was slightly down on last year, which was 26.4%. And the reason for that was very much that there was a slightly greater concentration of the work being delivered through our pods, as opposed to the use of some of our central office lawyers on whom we gain an enhanced margin. The adjusted PBT was up 6.3% to 9.2 million. And that was against an underlying adjusted PBT last year of 8.7. The underlying adjusted, the margin of 12.3% compares to an adjusted underlying of 12.5% last year. And the cash conversion of 96.5% remained very strong. The business is consistently strong operating cash conversion of over 90% due to the pay when paid model. That left us with £9.2 million of net cash. And the EPS in the period was 24.2p. And we'll pay out a total of 16.1 pence by way of a dividend, which is the 5.2 pence interim and a 10.9 pence, which we'll be proposing at the AGM. That's over the last five years since we came to market. We'll bring the total amount of dividend paid out to shareholders of just shy of 25 million or just over 79 pence per share. Just give a bit more colour around some of the income statements. So as I said, the revenue grew 8.1%, which was driven by an increase in the revenue per principal, which increased to 190,000, which was up 4.1% from 182,500 last year, whilst the average number of principals increased by 3.8%. I've touched on and explained why it's the gross profit margin movement. In terms of the staff costs, the increase of 9.2% is comprised of two elements, which is a reduction of costs in respect of national insurance contribution on LTIPs, which decreased from 236,000 to 75,000. And that's just a function really of the valuation of the potential LTIPs, which are linked to the share price, obviously. Other than that, there was an increase of 14.2% in staff costs. which was again driven by our continued investment in the people we need in the central office team to support and deliver those high quality services to our lawyers. And the average increased from 53 to 59. On the other admin costs, the last year as in 2022 benefited from about 0.4 of cost savings due to some overhang of COVID restrictions which were in place last year or COVID impact. They were predominantly due to the inability of us to run face-to-face networking events last year and also due to the way that professional indemnity insurance is priced. So professional indemnity insurance is priced off your previous year's revenue. And because the revenue in 21 was adversely affected by COVID, the price of the PI in 22 was also lower. So the combined impact of that was about 0.4, which is why we refer to the underlying profit last year of 8.7. as opposed to the 9.1 adjusted PBT. The other remaining driver of the increased cost base there was the full year impact of software costs, where we rolled out new software to enhance the IT security during 2022, and we impacted the full year run rate this year. So as a result of those points, we had an underlying an adjusted PBT of 12.3% in the year versus an adjusted underlying prior year of 12.5. So the majority of the movement in the margin was really the switch in the gross profit margin mix and then some savings in the overhead base. The balance sheet of the company is exceedingly clean, so to emphasise the fact we are a debt-free business and we have very much a strong cash position with £9.2 million. The alignment of interest that the lawyers have in terms of the pay when paid really focuses the mind in terms of debtors and consequently, we have very low debtor days at 36 versus 32 last year. Again, within the payables, it's important because we pay our lawyers once we've been paid, within the trade debt as an accrued income, there is a corresponding liability to our lawyers to the tune of 75% of that in the payables. In terms of leases and the right of use assets, we have leases on the two floors of our central office building in Chancery Lane, which is a small footprint for a firm of our size due to the way we operate. And those leases run through until April next year. And the intangible asset on the balance sheet is a function of the way that Root Capital, so Root Capital is a private equity business, which invested in Keystone in 2014. They used a very standard PE structure, which created goodwill on the balance sheet. And that's really what the intangible is. So it has no, is no reflection or impact or function of the business. It was just structuring at that point in time, which is why the amortization gets added back when they calculated the adjusted PBT. The cash flow, as we've said, was exceedingly strong. The business model fundamentally is cash generative and as a result of which we have a very strong cash conversion. Once we move further down the balance sheet, you'll see we're exceedingly capital light business. So our capex is typically sub £100,000. And again, that's been the case this year. In terms of movements on the corporation tax this year, the increase in corporation tax payments is just a factor of the way that we pay corporation tax, which is by quarterly installments, which means half of the corporation tax for a tax year is payable in the following financial year, which means that the reduced costs, the reduced profits or the lower profits in 2021 fed through into the cash flow in 22. And therefore, we see that step up this year as the profits from 22 stepped up. terms of the dividend payment the increase in cash flow there is a reflection of the payment of not only our normal dividends our ordinary dividends last year but also the special dividend which we declared at the end of last year the 10 pence special dividends which flowed through thank you ashley