Keystone Law Group plc

Good afternoon, ladies and gentlemen. Welcome to the Keystone Law Group PLC four-year results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. You can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Please simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the call itself. However, the company can review all questions submitted today and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and I'm sure the company would be most grateful for your participation. I'd now like to hand over to Ashley Miller, Finance Director, and James Knight, Founder and CEO. Good afternoon to you both.

Thank you very much and welcome to everybody. Welcome to Keystone's results for the full year ending 31st of January 2025. I'd like to, before going into a little bit of a summary of the results, I'd like to just recap on what Keystone is about, the fundamentals of who we are and what we do, just in case there are those unfamiliar with the firm and the model. The firm is a regulated law firm. It is a firm that we commenced, we launched in 2002, designed to do commercial law in a very different way. And that is what it does. Despite the fact that the product is conventional legal services, we do so in a way that is fundamentally different to the conventional firm. Our lawyers work remotely from their own offices, although possibly from the central London Keystone offices, should they wish to do so. They are technically self-employed, but very much part of Keystone. They earn a performance-based remuneration, a percentage of their fees, as much as 75% of fees if they bring in the work and undertake that work. And in so doing, they have all of the freedom and flexibility of self-employment, but they also benefit from the infrastructure of what is now a sizable economy. uk-based law firm by infrastructure i mean the compliance the finance the marketing the i.t everything that they need and particularly each other that is the one of the fundamental um benefits of keystone our lawyers benefit from the flexibility the freedom the infrastructure and also each other the our lawyers know each other extremely well They cross-refer work to each other. They collaborate together. They actually operate far more cohesively than the conventional law firm. And that is something that we work extremely hard on making sure that they can work together, that they do know each other. We grow the firm by recruiting good quality lawyers with clients for themselves and their new Keystone colleagues. It's an extremely effective way. And much like the conventional law firm, about 95% of work that is introduced into the firm is brought in by the senior lawyers. Despite the fact that Keystone now has an extremely strong brand in the conventional market space, law work is brought in by the senior lawyers. We are a relatively fast-moving, fast-growing firm. This is the first year that we will turn over £100 million. The market we operate in is worth approximately £12 billion. The legal market in the UK is the second largest in the world. £12 billion represents the mid-market sector, which is fantastic. almost entirely addressable by Keystone and the Keystone model. I would like to now focus on a little bit about the year just gone. I'm pleased to report that it was another strong year for Keystone with revenue growing by 11.1% and adjusted PBT up 12.8%. We have always got a good operating cash conversion, and we are debt-free. We maintain a good buffer in the bank accounts, even once we have paid interim dividend earlier this year of 6.2% to 6.2 pence. The final ordinary dividend, we were paying 14 pence. and a special dividend of 15 pence per share. I'm pleased to say that recruitment remained strong during the period, and I'd like to look at that over the page. Recruitment is an extremely important part of the Keystone growth story. As I mentioned, it is the number one way that we grow the firm. It is... it is a process that is undertaken in some ways like the conventional law firm we interview we assess very closely we scrutinize um the lawyers we're looking for people that have worked at the top law firms We're looking for people who have good clients to bring. And we're looking for people who have a good cultural personality fit with Keystone, who we are, what we are alike. We do have a culture. We have a personality, as many businesses do. At Keystone, it's very defined, and we are very keen to welcome new people who will add value. to the firm by undertaking work that had been brought in by their colleagues and bringing in their own work themselves. In terms of the figures, this year we have taken on an extra 50 new partners. Principals is another word we use for them. They're pod members. They're pod owners, I should say, principals. They will also be free to hire their own junior lawyers. These are called pod members. These are individuals that we also hire. interview as well and assess to make sure that the quality and the caliber of the lawyers and the pod members remains very high. Total fee earner numbers at Keystone finished the year at 576. That's including the principals, about 15 lawyers who are employed by central office, and the over 100 pod members. Aspiring to excellence, our next slide. We are no longer the only dispersed platform model law firm out there. We invented the concept, we ran with it without any emulators, copiers, et cetera, for quite a number of years, which was great because we managed to find our feet. There are now a number of other firms starting up, quite a number. Now, we say this is a fantastic thing. This is a great thing because the contention that the conventional partnership model is now moving across to the platform model makes sense when there are others. We're not able to move a whole profession by ourselves. No one company is. The important thing here is that we remain the market leader. We are the market leader. We're the oldest, the biggest, the best, but the strongest brand. That is where you want to be. If you're moving a market, you need there to be others, but you need to be out front. So one of the ways that we... this is by just really focusing on excellence, focusing on the excellence of the lawyers that we recruit, focusing on the excellence of everything that we do, driving the community, understanding lawyers' needs, onboarding them efficiently, making sure that every person touch that our clients have with Keystone is one of quality. Last year, we renovated our offices to bring them up to a a really top standard that is not just a high standard, but also one that reflects our own personality. Very good looking aesthetics, very good efficiencies, services, logistics, technology. We continue to upgrade the firm. We continue to improve. I like to think that we're improving quicker than we are growing. We are anything but complacent. We are really moving forward. We are improving, building, and questioning. I think it's very important. We're now 22 years old, 23 years old. You need to question, have you been doing something for that amount of time? I And it's been working, but is that still the right way to do it? Times, cultures, rules move on during that time. So it's very important to be, well, not complacent and very important to keep self-analyzing, checking whether we are doing the right thing, whether we should, again, it's not just enough to be innovative and say, well, we're an innovative law firm. You've got to completely innovate yourself. along the way as you go. As I mentioned earlier, the community of Keystone, that is really what makes us such a strong force. We realised early on in the process that being a disparate network of remote individuals is not the way forward. The power is in not just in numbers but is in community uh not just because it helps with the referral of work but just because it helps with people's performance happiness this is what the majority not all our lawyers want they want to feel part of something they want to feel part of something successful they want to be able to feel part of of of a community that supports them that that they can have fun with, whether that's skiing holidays or riding holidays or golf holidays, things that people organize individually and collectively, I mean, but we will support it, even though individual lawyers may arrange it. It's not something that we pay for everything, but we will contribute. The effect of all of this is a community of lawyers that are really incredibly happy. The number one sort of regret in some ways from lawyers after they've been with us for a while is that they didn't do it earlier. Over 30% of work is cross-referred. That is a net product of people knowing and trusting each other. It is also something that helps with our growth and becomes cyclical because they are very happy to recommend their colleagues, ex-colleagues, friends, associates to join the firm themselves. I'll pass over to Ashley now, who will take you through some of the financial highlights of the last 12 months.

So it's been a strong performance for us this year, delivering results in line with our recently upgraded market expectations, with revenue up 11.1% to 97.7 million, adjusted PBIT up 11.8% to 11.6 million, and adjusted PBT up 12.8 to 12.7 million, which represents a margin of 13%. We've referred to the strong operating cash conversion in the business, which was 94.5% this year, And this really reflects the high calibre of the earnings that we generate with £11.5 million of operating cash generated in this way. That left a closing cash of £9.7 million. We had adjusted EPS of 30.4 pence, which was up 10.9 pence. And the reason for that being a slightly slower increase than the headline PBT is the full year impact of the increase in corporation tax last financial year, which came into effect mid-year. On the dividends front, we'll pay between the interim and the final ordinary dividends of 20.2 pence in total and a special of 15p. And that means that overall, the total value of dividends returned to shareholders since IPO is over £45 million. Just moving some of the more detail on the income statement. So the revenue growth of 11.5% has been driven by a combination of the growth in the lawyer numbers, which were up 6.9% on average, and the increase in revenue per principal, which increased 4% to 220,000 or just over 220.3%. In terms of the gross profit margin, we retained a gross profit margin largely in line with last year, marginally up at 26.1%. And then in the cost base, the staff cost in the period increased 15.1%, which represented the continued investment we've made in headcount. We've referred to the calibre and the quality of the services we need to deliver to our lawyers in order to attract and retain those. And so investment in our people is also essential. And that increased our average headcounts by six, which is 9.5% from 63 to 69. We've also continued to see a period last year where wage inflation was slightly higher than it has been historically, albeit it's come off its major peak. And to compete for the talent we need, we continue to have to pay competitive wages as well. In terms of the other admin base, we've seen an increase there driven with the largest factors being the investment in RIT, with the project last year migrating from a private cloud environment to the public cloud, as well as an implementation of a SIEM solution, which is providing the business with enhanced security oversight. That represented an increase of 0.2, whilst professional indemnity insurance also increased by 0.2. That's priced against revenue, so therefore the growth in revenue drives that. as well as us taking an increased level of cover from 50 million, increasing it to 60 million this financial year. With the adjusted PBITS margin, I've already referred increasing by that 0.1%, essentially driven by the increase at GM gross margin level. Finance income, we've continued to benefit from the higher interest rates during the period with the step down only starting very much at the end of the year. And so the adjusted PBT rising 12.8%. The balance sheet of this business is exceedingly clean and simple. We are a cash positive business, which is debt free. We have very strong working capital positions, and that really reflects the alignment of interests of our lawyers with ourselves. Them being on a pay when paid basis really does focus the mind. So the debtor days were 34, which was in line with last year at 34 again. Because the lawyers are on a pay when paid basis, there's a corresponding liability to them for all of the trade debtors and accrued income, which equates to approximately 75% being the pay away we have. Our fixed assets, excuse me, the fixed assets represent really the increase we saw last year in terms of the movement of the leases, where we re-signed our leases, taking effect from the start of this financial year. And the intangibles on the balance sheet represent the structure of a PE investment, which happened in 2014. So it's nothing to do with the observation of the business. On the cash flow, the model is fundamentally cash generative, and that's demonstrated, as I've said, by the cash generating from operations and the operating cash conversions. This year, just a few points to highlight differentials year on year. In terms of corporation tax this year, Keystone was classified this year as super large, that's with reference to the profit level, the benefit of which is entirely for HMRC. As a result of that change, we have to pay all of our profits in year, tax on profits in year, as opposed to previously, it was half in the year and half following the year. that meant there was an additional outflow this year of approximately 1.5 million as we had to pay six quarters worth of corporation tax in essence. In terms of the capex, we've referred already to the fit out of the Chancery Lane offices which we did and that generated an additional spend of circa 0.7 and consequently the one-off bounce on capex this year. The lease payments in the period were slightly lower than normal as we had rent-free periods in the new leases we signed. And the dividends, again, this financial year appear lower to last year because at the interim stage last year, we paid a special dividend as well, impacting on cash flow.