Diales Group Plc (DIAL.L) Earnings Call Transcript & Summary

Good afternoon, and thank you to those of you joining us today to hear from Diales Group who announced their preliminary results only earlier this morning. If you haven't seen, we have an updated research note on our website. So please do go and have a look at that. But the purpose of today is to hear from the management team as they talk us through their results. So as a reminder, please submit questions as we go through. But for now, I will hand over to Mark Wheeler, CEO.

Thank you, Hannah, and good afternoon to everybody. Thank you for joining us today and for sharing some time with us to go through our preliminary results for the year 2024, '25, which ended at the end of September. Today, I'll take you through the service offerings that we provide. I'll take you through some operational highlights, and then Charlotte will take us through some of the financials. And I'll summarize with the outlook for the business in the near short- and long-term future. So if we can move to the next slide, please, Hannah. Thank you. The donut diagram that those of you that have joined us before can see again here has changed very much in its presentation. We've now rebranded all of our businesses with the exception of our Project Services business up in the Northeast. So we are billing in our Diales brand all across the world with the exception of that one business unit, which we are keeping separate. Hopefully, there's an Internet connection badger there. Hopefully, you can still hear me. So we're keeping that business separate because it operates in quite a different way. If we can just move to the next slide. Some of you know us well, and there are some people on this list and some people I spoke to earlier today who are new potential investors in the business. So I thought I'd just highlight what it is that this firm actually does. And there are 2 main streams outside of Project Services. There's the Expert Stream and the Advisory Stream. I'd say we were currently 60% to 65% perhaps on expert, that emphasis having changed for us over the last few years. And we deliver on quantum delay in technical and project management as well. Globally as expert witnesses and also provide some mediator arbitrator and adjudicator appointments as well. Not many, but those are part of the offering. Our Advisory Services generally offered mainly to contractors and perhaps large project developers, those kind of organizations and include all of the services listed on the right, you'll often find that the staff in our business are working on both Advisory and Expert Services project at any one time. So a great deal of depth of expertise in our fairly narrow perhaps field, including, as I said, expert, which is mainly in those projects where there is a dispute and we've been appointed in the context of that dispute. Now can we -- you gave us a brief preview there, Hannah, of the next slide. So let's go to that one. This is a quarter-by-quarter breakdown of the year. We're normally very spiky in our performance in the year, but a couple more clicks, Hannah will bring in Q2, 3 and 4 and then the total. And you can see there that actually Q2 was the busiest one for us and where revenue is higher. And when revenue is higher with the same team and utilization is higher, those are the times when we can be at our most profitable period. If we move on to the very next slide, some operational highlights for the year. The second year of our integrated transformation strategy has been successfully completed. Our hub-and-spoke model is now a baked-in part of the business with the hub being in the U.K. Overall, utilization is stable. There are some fluctuations across the world, and we're looking to push that up, but that's an average rate across the whole group. So it's pretty stable there and a target to push on with. We've recently added a Fire Engineering department in London, which is already showing a value add. There's a good pipeline of work that we would not have otherwise had coming in there. And in fact, we've started our second assistant in that stream only this week. Our big focus is on staff retention and development, getting people trained and pushed on through the business and hiring some really great people. And we've got a good pipeline of strategic hires as well. We've certainly had some success in hiring good experts over the last couple of years, even though it's a challenging thing to do. We decided to exit the U.S. a few months ago, and I'm pleased to say that we managed to do that with minimum impact on the business. We managed to collect our cash and the like and transfer some of the commissions out of the business and complete others so that we are left pretty much unscathed by that particular adventure. Moving on to the next slide. I just wanted to show a preview here of a dashboard. And this is a pretty dull one because all the detail has been removed for GDPR and data reasons. But you can see that following a number of years of messing about with spreadsheets and eventually getting our own enterprise system in and Charlotte's team getting it working and making it effective for us. I'm delighted to say that management around the globe now has a dashboard that looks a bit like this and that allows them to see utilization for their team, the number of projects that's going on, average billing, total billing year-to-date. And that can be sorted into 15 different currencies and 23 different offices down to individual fee earners. So a lot of real-time data there available to business that simply hasn't existed before and a fantastic management tool for us to have. If we go to the next slide. We're into the financials, which is very much for Charlotte.

TThank you, Mark. Revenue from continuing operations is stable at GBP 43 million year-on-year, but we have an increased gross profit increased 0.6% to GBP 11.6 million, up from GBP 11 million last year. And the gross profit margin also increased by 0.6% to 27% versus 25.6% last year. Underlying operating profit from continuing operations increased 17% to GBP 1.4 million, up from GBP 1.2 million and an increased net margin of 3.3%, up from 2.8%. Basic earnings per share increased to 1.7 from 0.8 and profit for the year from continuing operations increased 125% to GBP 0.9 million from GBP 0.4 million last year. Net cash is actually a reduction year-on-year to GBP 3 million from GBP 4.3 million. The main reasons for that were the dividend, which is GBP 800,000, tax payment of a similar amount of tax payments, share buyback, GBP 0.2 million and CapEx, GBP 0.2 million. Next slide, please, Hannah. Financial overview. So just some more detail on those numbers. There, you see the increased gross profit. Admin expense has gone up very slightly. That's in relation to cyber and we have to continue making that investment, and it will likely increase. But those admin expenses are still not nowhere near the GBP 11 million plus we had only a few short years ago, giving underlying profit of GBP 1.4 million. There aren't any nonrecurring costs this year, and that's something we're striving to continue with. A small amount there for share-based payment costs, GBP 0.1 million, giving operating profit GBP 1.3 slightly reduced tax charge of GBP 0.4 million, giving the profit of GBP 0.9 million. We still do -- we have some discontinued this year. That's the measurement business that we decided to close as well as some further costs in getting out of Oman and Kuwait, which does take time to extract itself from those regions. But we do have a retained profit there of GBP 0.7 million pre-dividend. Next slide, please, Hannah. Some metrics here. Gross profit margin up to 27%, utilization stable, EPS up, net cash per share, still a very good 5.8% and dividend yield based on yesterday's share price of 8.3. I'll take you through the regions. The first one, Hannah, if I may, is Europe and North America, so that's Canada, a stable revenue of [ 26 ]. But out of that, we've managed to create a higher profit of GBP 4.8 million, and that's a mixture of higher rates and fewer fee earners. Headcount there is down to 99 from 109 and utilization is slightly lower, but something we're constantly working on improving. This slide excludes DPS, which is shown on the next slide, have some very different margins, so we strip it out. Higher revenue of GBP 9.3 million, a slightly lower profit of GBP 0.7 million. Those of you who were on the presentation at the half year will remember that we have some external pressure on costs that we're eroding the margin, but pleased to report in H2, that's been corrected and very close back to where the profit would have been. On a higher headcount of 49 with a very similar and very high utilization of 94%, but that's business is with this comments. It's generally a high utilization there. Moving on to the Middle East on the next slide, had a very good year, revenue up and profit doubled from GBP 0.3 million to GBP 0.6 million with only 4 more headcount and utilization almost at our target of 80 where we'd like everybody to be. So a good slide and a good year in the Middle East. Moving on to APAC. We had a reduction in revenue there, GBP 1 million, but managed to remain almost breakeven, small segmental loss and a much lower headcount, lower utilization as a consequence of all of that. But it's very much Singapore, particularly rightsized now, removed some costs there and should be -- will be profitable for this year, and we still got some work to do in Australia. Next slide, please Hannah, just to take you through the cash flow bridge. So we started last year at GBP 4.3 million. The red column there is an increase in operating cash of GBP 1.9 million and then GBP 0.6 million on leases, GBP 700,000 on working capital, tax and dividend of both GBP 0.8 million, treasury and CapEx, GBP 0.2 million and then small gain on FX of GBP 0.1 million resulted in a closing cash balance of GBP 3 million. Next slide, please, Hannah. I'll hand you back to Mark for an update on the strategy.

This strategy table is something that some of you that have joined these calls before will recognize where we listed some of the objectives on the right-hand side. The ones that we've achieved over the last few months are listed on the left-hand side, we've procured a new CRM system as part of our ongoing investment in IT to run the business which is called Salesforce, probably one of the world's leading platforms for CRM. We're hoping that, that will help us maximize the impact and returns on our marketing and BD efforts across the world and be much more accessible to staff. It comes with an app as well as desktop access. So that should be a really positive thing. We said we were going to close the U.S. and return to profit in APAC. We managed to exit the U.S., as I said earlier, without any real damage to the business. And we also exited a few expensive people from APAC who weren't delivering what they said they could deliver. So we've rebased our costs in that region to get that back into profit. We hired some good work winners in the year. We hired a quantum expert. We've hired a fire expert in Mario. We have another delay expert joining us in the new year, who's bringing a team of assistance. We previously hired Tim in the Midlands, who's doing project management as an expert and some other services as well, who's starting to grow his team. So that's all great news, all going in the right direction. We're continually looking at acquisitions. I think we're mainly looking at talent acquisition at the moment in terms of bringing new people into the business. And that's been a focus for a while. But we're keeping continually under review what we're doing in that respect. If we go to the next slide. I set out a vision to the staff a little while ago, which is very much relevant as I see it. We aim to be the first choice provider of our services, our high-quality professional services globally. We want to be sought out by clients. To do that, we need to hire the best people in the sector and be the employer of choice for those experts in the market. We absolutely want to work on the biggest and most complex jobs in the world, and there are a number of examples of that, that I can provide. Giving great service to our clients is also important. And all of that will allow us to operate a consistently profitable business each year-on-year delivering higher margins, and we're certainly heading in that trajectory. If we go to the next slide. This is, I think, quite a useful one. This shows that over the last 4 years since we had some Middle East challenges that our nonrecurring operational costs and discontinued operations have dropped now close to 0. And I think if Hannah gives us one more click, you will also see on the same chart, maybe another one as well, Hannah, you might get both on the same note -- okay, well, we will stick with this one then. So the green one shows that whilst those discontinued and old operations being resolved have dropped away to almost nothing, that the last 4 years have been a continuous build on profit. That's the direction we've been going in and we'll continue to be going in to move forward. That shows the impact, I think, of the actions that we've taken in the business over this time. So if we move forward to the next slide, I think it's useful just to understand what our process is, where we can hire all the experts that we'd like to, and we're certainly in the market to continue trying that. We have a process that involves hiring people and nurturing and developing that talent through junior consultant -- consultant right the way through to a regional Managing Director. And our business is one that can show on track record with some people who've been here 20 years and in one instance, 30 years, who started off at consultant level and has worked through all those grades to be a testifying expert and a member of our Executive Board. So we can definitely demonstrate that we know how to produce homegrown talent as well as hiring in new talent. We go to the next slide for my summary, Middle East, fixed effectively with an increase in profitability in that region, structured around Dubai, Abu Dhabi, Qatar and KSA. Strong local management team there, much smaller business, not the world's easiest place to work. That's for sure. But we're in the best shape. We've been there for a very, very long time. Our cash position is good. We have no debt. We generally trade in the black, and we've returned GBP 1 million to shareholders this year, GBP 800,000 in dividend and GBP 0.2 million via our share buyback scheme. We're ending the year. I think balance today is probably 3.5, something of that issue. So we're a properly funded debt-free business. Aiming to boost our profits. That's the next thing. And we've got a stable cost base in the business with all the services we need. And from now on, new people that we bolt on to our business particularly those experts that are work winners and bring in others, we'll see more of that profit drop to the bottom line, which will help those margins push on and on from there. So our continued focus is on profitability, pushing the margins, staff retention, attraction, utilization and collecting the cash. And if we do all of those things effectively and continue to do them, then there's no reason why we shouldn't see our profits move on again over the next 12 months, a significant chunk. Hannah, that I think brings to the end of the presentation. Hopefully, there are some very easy questions to answer.

I'll give you the easy ones [ to figure with ], how's that. Well, you've just finished off there with your comments on reducing churn. So the question is, just as you are looking to poach the staff of other consultancies, how do you incentivize key staff to retain them longer term? And what initiatives have you put in place to reduce this churn?

Anonymous attendee asks so many good questions. I would say that we -- there are 2 different strands to this. Firstly, we're the only non-private equity. We're the only listed business of our type that we compete with. And our culture is a bit different. So people can come here and have their careers developed and boosted. Whilst everybody wants to earn enough money, people also want to be respected, valued, listened to and part of a positive culture. So we're doing all of that stuff that actually sounds quite soft, it's really difficult to do. We're doing all of that stuff alongside introducing new schemes for LTIPs and bonuses that will lock in key people. And those sort of schemes will be taking place over the next few months and will sit alongside our positive culture building process. And at the end of the day, if we treat people properly, why would they want to leave?

Okay. Thank you. What has happened to fee rates? Are they tracking inflation as a minimum?

We've had a good increase. Looking at the U.K. in particular, over the last 12 months to September, we had an increase of 9% on rates. We're pleased with that. We've increased them every October. [ Proceeds ] that go out from mid-July have the new rate in because we wouldn't change it on an existing contract. It's only on new work, but we try and bring that in so that it's permanent with the start of the new year.

Okay. A couple more follow-on questions sort of on hiring. You say your reputation in the market is improving. Is this shortening time line for hires or simply broadening the pool?

Think that's an interesting question. I think we've invested in having an in-house recruitment team that's pretty good. We rarely use external recruiters these days. So our people know what we want. And also, I think in terms of getting key hires, important hires to join the business, I get access to them more quickly, and they can see from the very top of the business, what it's like to work in the business. So I think our process has improved. I also think we've had some hires that have joined us that have perhaps given us pretty positive reviews when asked by others what it's like. So I think that's probably a pretty good indicator of how we've improved that process. We are looking slightly wider than we used to because we've got our technical offering that we've been growing over the last few years. So we're looking at those kind of experts as well. But I think it's all about the effort that you put into it, the focus that you put into it, having the recruitment team coming up with the right people. Sometimes some of our help -- I'm sorry, some of our competitors sometimes do help us in the PE space by putting ridiculously high targets on their staff that they don't like. And we have seen people come to us and say, we don't like that culture. And they come in 2 types. The first type is the really good practitioner who just wants to do the best they can and is a great person. And the type that's actually failed in another business and doesn't want to be tested as in any way robustly. And our job, of course, is to know the difference between them. So far, so good.

That's a good news story. And continuing on the recruitment team, it says you spent considerable time recruiting the new fire team. Are there other sectors that would be an equally good fit? And if so, how long do you think it will take to recruit them?

Well, there are a number of sectors that we're looking at quite closely. I think in the 2 difficult pile at the moment is forensic accounting, although that remains an ultimate aim for us. In the marine sector, offshore, we do a lot of offshore wind, for example, we do some oil terminals. There's areas there, particularly for welding experts, for example. So there are some wider specialisms that we're looking at. And we constantly churn people. I'd say we probably get through 6 or 7 applications a month, and we're probably making 3 to 4 expert hires a year and probably a dozen perhaps assistant level people that we'll look to develop. And that's a statistic that goes up and down from time to time. But it's just it's a sharp focus because now we've got our business sort of square on all for us, we need to scale it.

Well, then let's scaling, lovely segue. Thank you, Mark. M&A, you've talked to lots of inappropriate opportunities. What is the ideal target in terms of potentially market segment and size?

Okay. An ideal acquisition for us probably sits between not less than 5 people, not more than 20, not someone who is in their mid-70s and wants to take a big pile of money off us before running away to never be seen again. And people that have a similar culture to bolt into our business. We're looking for the opportunities of a bigger, more global business that we can plug in and who are insanely profitable, but don't actually want too much money for their business. Those are the criteria that we're looking at, which might explain Hannah, why we've been looking for a while. But there are a lot of people out there that are offering something that just isn't realistic. And you've got to search through a lot of chaff to find a good opportunity. I think we found 3 good opportunities over the last 2 years. None of them has come to fruition for a number of reasons. But equally out of some of those, we've also picked up some new hires. So when the right one comes along, we'll close it down, and it will definitely be something that's value at day 1.

Okay. Have the priorities on use of cash changed? Or are dividends and share buybacks central to your goals moving forward?

I don't think our priorities on the use of cash have changed. I think if an ideal acquisition comes along, then it makes sense to use cash if we've got cash at the time to do that rather than get into borrowing. We don't have any borrowings as a business whatsoever. If we start to get the GBP 4 million to GBP 5 million in cash, and we don't have an acquisition that we, in the foreseeable future, might want to execute, then we'll find a way of returning it to shareholders through one of the -- one or other of those means. We've returned GBP 1 million to shareholders over the last 12 months.

Well, okay. Dividend, 2 questions. Essentially, I think asking the same thing, which is, obviously, it's now modestly covered by EPS. At what level of cover would you consider increasing it?

Increasing the dividend.

Yes.

Good question. I think it should be a percentage of profit in the year. So when our margin starts to climb into the 2s, 3s and 4s, I think unless there is an acquisition in the offering that increases the value of the proposition, then the Board would look to consider changing the dividend policy or possibly making a special dividend, doing more buybacks. It's very, very difficult to find a way of returning cash to shareholders that everybody likes. There are big fans of dividends and big fans of buybacks. Different people have different tax arrangements that gives them different preferences. So we tend to try and please all of the people all the time by doing a mix. And I think we'll keep that closely under review. Not a bad problem to have, though, working out how best to give money back to your holders.

Definitely not. And I'm sure if that insanely profitable M&A opportunity comes along, then that too will look like an insanely good deal. No presentation is complete without a question on AI. Do you see this as a threat or an opportunity?

Well, Mark and Charlotte are not actually on this call at all. They're on a holiday on a beach somewhere. And this presentation is brought to you by our AI personas Hannah -- personas. We generally see it as more of a risk at the moment than opportunity. Every time you look through the legal press, you see somebody getting into terrible trouble for using AI that's produced a silly answer that's not been checked. And for lawyers, these are career ending issues. So for us, we use AI for research only. We partner with a company called Lupa Technologies on discovery platform software. So if you've got a project that comes in and there are 400,000 documents on that project, very hard to read them, an AI-based tool that helps sort those documents and help you find what you want in a very incredibly quick way. So we use it actively for research. We do not use it for drafting reports. The AI into -- so it needs to be the real thing.

A great answer from your avatar there, Mark. Thank you. Last question. Once a new team is on board, how long does it typically take before they're productive?

Good question.

It depends on the team. The seniority of the person.

It does. So I think in 2 categories, if you hire a really senior testifying expert, the minute they come through the door, they're going to bring work with them because if they've done the first and second reports, they're the only ones who can testify. So the work follows the expert. So those sort of people come in and are up and running straight away and huffing and puffing about getting the right support and the right team around them. So that's brilliant. Equally, we also hire people who've been in businesses where there's something of a glass ceiling with senior people that are invested, have equity or whatever. And there aren't really the opportunities for them to progress into sort of world-leading expert Tier 1 status. And those people who are very bright and capable of that, we like to bring into the business and give them the opportunity to develop. And usually, it takes 2 or 3 months for them to get up and running. And then it takes 1 to 2 years to develop them into the leaders that they're capable of being within the business. But actually, sometimes those people are, in a way, better hires than someone who comes through the door at a very high cost and you've got a bigger risk on. So there's a mix, sometimes 2 to 3 months and then a couple of years to realize their potential. Sometimes they'll walk through the door day 1 with a load of work and be very welcomed with warm open arms into the business.

Well, that's it for the questions. So just leaves me to thank our audience for attending and both of you for presenting in real life. And we look forward to catching up with you both in another 6 months' time.

Brilliant. Thanks, Hannah. Thanks, everybody, for joining. We appreciate it.