Diales Group Plc (DIAL) Earnings Call Transcript & Summary

[Audio Gap] who announced their preliminary results yesterday. If you haven't seen it already, we have a research note up on our website with forecasts, so please do go and have a protected development docket U.K. But for today, we are here -- we're going to hear from the management team, who will take us through the presentation, and then there will be an opportunity for Q&A at the end. So without further ado, I will hand over to you, Mark.

All right, Hannah. Thank you for the introduction. I think if we go to the next slide, it will give an agenda of what we're planning to run through today. We'll start off talking about the service offerings that the business does. Many of you will be familiar with that but I know some people joining might not have seen that before. We'll talk about some operational highlights for the year. We'll take you through the financials for the overall business and regionally. Charlotte will review the cash flow and profit bridges and then we'll talk about our summary for the year outlook moving forward. Very happy to take Q&A at the end. I'm sure Hannah will marshal that very effectively for us. So one of the big things that we've achieved this year is rebranding our business globally. I'll talk about that more a little later. But we have now a private -- sorry, a project services business in the Northeast of the U.K., which is our only project services that remains with Driver branding, the only part of the business that stays that way. And you can see that roughly 50-50 is a split between Diales experts and Diales advisory, which are the brands that we're now using across the globe. That was our intention. I think in future, the red part of the donut will increase more as we focus more on expert work. The advisory work is still very much important to us. But as you'll see in the next slide, when we look at how this runs regionally, there's zero in most parts of the world. So we now look to operate project services in those regions. And you can see varying amounts of red as opposed to the -- I am talking about the color is [indiscernible] that we have indicating advisory work. So certainly, Middle East, we're trying to grow the expert work there. And Asia, it's already a chunk that we're trying to grow. And the business overall in the Americas, which I'm sure we'll talk about in a little more detail as we move forward has been primarily an expert business. So the business continues to move in the direction that we want it to go in and that we've been pushing it to go in to grow expert work. Overall, operational highlights this year show stable utilization with a marginal improvement, something that we're going to be working hard on moving forward. Our cost reduction program is now completed. And we've completed a number of areas in our transformation strategy as well. So brand consolidation, July 2024 is the first time that our business globally operates as one particular brand, which is now Diales across the world. And we've also implemented a hub-and-spoke model, which has us working with a lot more central control from U.K. and Europe across the world, whereas we used to have a less centralized business. So in terms of keeping our business where we want it to be and developing it in the right direction, we feel that's important to us. It's also cost effective as well. We have a share buyback program that we're implementing. The last tranche of that finished actually yesterday morning. So that was quite a useful thing that we've completed and the Board will consider what it's going to do moving forward from there. One aspect, just to mention in relation to the hub-and-spoke model is that it's part of us continuously reviewing our businesses around the world and our decision to retrench from our New York office is part of that ongoing review and a controlled process that we now have in place that will hopefully help us make sure that we're able to react quickly to any particular challenges that are arising around the world. Finally, at the bottom of the screen there, the last bullet point is that we've returned to market guidance for the next couple of years, which should be seen as an indication as to the confidence that we have in the performance of the business. Charlotte, would you like to do the financials?

Yes. Thanks, Mark. Financial summary. Revenue from operations increased 1% to almost GBP 43 million as opposed to GBP 42.6 million last year. The GBP 42.6 million last year does include U.S. revenue of GBP 1.9 million, but the GBP 42 million this year excludes those as they're discontinuing. So in actual fact, the increase in revenue was more on a like-for-like basis was 5.8%, 6%, something like that. Gross profit increased by 2% to GBP 11 million and the margin up 1% to 26.6%. We are targeting that to be 30% in the short to medium term if we can get there. Underlying operating profit from continuing operations before tax increased by 20% to GBP 1.2 million from the GBP 1 million last year, a margin of 2.8%. Similarly to the gross margin, we're seeking to increase that net margin further. We potentially like it to be double digits. We're not sure we are able to get that through pure organic growth, but we'll touch on that later through acquisitive growth. But on an organic basis, we're aiming to get to that 5% in the medium term at least. Basic earnings per share from continuing operations has increased to 0.8p from 0.2p, and profit before tax increased to GBP 0.9 million from GBP 0.4 million. We closed the year at GBP 4.3 million. For those who were joined us at the interims, you may recall that we talked about we closed our joint venture agreement with [ Colliers ] in Canada and Middle East that have been ongoing for some years as a reciprocal agreement over office space sharing and work referrals, and we paid that out during H1, which is -- as part of that reduction. We've also paid GBP 800,000 of dividends during the year and as of yesterday, GBP 250,000 on the share buyback. Next slide, please. Hannah a bit few more details here on the financial just -- we've been through some of them, but the admin expenses there, down to GBP 10.1 million from GBP 10.4 million. That's the final phasing of the cost reduction program we've been doing over the last few years. We will continue to review that, of course, I would like to see it sub GBP 10 million, so we'll keep working on that. We've got some nonrecurring costs there. Shown separately because they were last year, there were also severance costs to do with the restructure and the changes. So that's the last of those come through. A small amount there for the share-based payment charge, those relate to the LTIPs from 2021, I must speak because -- or '20, the 3 years was up last year. So they were the final exercises on those, giving an operating profit of GBP 0.9 million. We have a higher tax charge of GBP 0.5 million. And that's because within the group, we have profitable areas in higher tax jurisdictions such as Germany and Netherlands, so we have a higher tax charge. Giving a profit from continuing operations of GBP 0.4 million. We have realized a loss on discontinued of GBP 1 million. It's split further in the notes, but it's GBP 0.5 million of that was to do with America. GBP 300,000 of that was lost in the year. We had some staffing difficulties that we talked about earlier in the year, and Mark just covered. Then we also charged the central cost recharge of GBP 125 million to them because we did trade during the year, so it is right that they have a share of the central cost. That covers things such as PI, IT, business development and the PLC board, et cetera. We've accrued a very small amount of closure costs. We're not expecting it to be many more. Most of the costs have incurred and people are working out their notice there. So that's not expected to be that high. We have incurred another GBP 200 million and GBP 300 million in Oman and Kuwait closure costs. We weren't expecting these. They are to do with in Kuwait. The tax authorities only this year, started to review our tax returns in 2016. They were very behind. They still blamed COVID and the inspector that we were given for our accounts decided to disallow everything. So we're having a conversation through our legal advisers and tax advisers to get that down, and it's very costly to do that to extract yourself from these companies -- countries, sorry. And in Oman, a similar legal fees and trying to close out, but we're expecting that, that is the last of those, and we'll be able to fully remove ourselves from those businesses during the current year. Next slide, please. Hannah to some key metrics there. The gross profit going up, utilization stable, but that is a key focus for us to try and get that up. Earnings per share increased 0.8p. Net cash, I discussed GBP 4.3 million, cash per share, still a healthy 8.1p, and a steady dividend yield relates to the dividend. And so the share price at the time of 5.8. Take you through regions: Europe and Americas is on this first slide. This revenue here for 2023 is excluding U.S.A., the GBP 1.9 million that I mentioned before. So revenue for that region up GBP 600,000, a stable segmental profit, but we have had some areas such as Canada within there that we publicized that we had some staffing issues that have made a loss. So that's made that the same figure, but still a healthy margin there. Head count is slightly down. That's the America changes and cloud utilization. Next slide, please. For complete assisted project services, stand-alone business. It's had an increased revenue to GBP 9 million. Similar or same segmental profit of GBP 0.8 million. That is because that some of that increase in revenue is intercompany, and some of it is increased use of sub-consultants where we don't generate as higher margin, but that's driven by demand of clients. Head count very similar and an excellent utilization here at 95%, which is consistent for that business, which is why we showed separately these days. Next one is Middle East, very positive slide. The turnaround work here has been very successful. We've increased the revenue, GBP 600,000. Turnaround there in the profit of GBP 400,000 on a reduced head count to 17 with increased utilization. We've talked over the last few years that we don't intend to grow the head count very dramatically in this area. And this approach that we haven't -- it might by a couple of -- half a dozen maybe depending on the workload, but it's steady and stable and working very well as a region. It's a hub for the Middle East region and for the work coming out of KSA that is then passed out throughout the group. Next slide. Thank you, Hannah. Asia Pacific. We also had an increase in revenue here. Some of that has to do with in Singapore. We have some legacy sort of low-cost margin -- low rate fees that -- we're now -- they're finished and we're trying to get back to market rates. But we are still reporting a segmental loss. Main reasons for those are in Australia, we had some -- meet some competitive pricing in market because due to competitors pricing very keenly and also one of our service lines, there was a lack of work in H2, which is now hopefully coming back, but that did impact the figures. This is a priority for this year to along with the utilization to return this area to profits. Head count very stable, increased utilization. But hopefully, that can get a little bit more up during this current year. Next slide, please, Hannah. Cash flow, touched on it before, the movement from GBP 5.8 million to GBP 4.3 million, increase there in operating cash of GBP 900,000. Lease payments apart from people and insurance, we only really have leases cost. That's our lease payment there, small movement in working capital. tax paid, the GBP 800,000 dividend and some small amounts there. The foreign exchange at the end is where we have to reclassify all of the foreign currency bank accounts, giving a closing amount of GBP 4.3 million. Next slide, back to you, Mark, for an update on the vision.

Yes. Some of you will have seen last year set out our vision for the next 4 years. For those of you that didn't and also by way of a reminder, these are the aims for the business to be the first choice provider of our services globally. We can, I think, claim that in some markets already, but plenty of work to do around the world to grow that reputation further. We also want to be the first choice for employees looking to join the business. And a lot of work that we do around reputation is with peers and staff and potential staff to make sure that our people, which are our only really big asset are both retained and hopefully, that we're having some decent people join us as well. We already work on some of the biggest and most complex disputes in the world, and we already delivered great client service, but we need to make sure that we're doing that consistently and not lose sight of the essential nature of that. And we are also looking to drive our margin up over the next few years so that we're renowned also for delivering as a business, and that's a strong focus for us. The next slide shows an update on where we are so far. We've completed our rebrand. Originally, we intended to rebrand outside of the Middle East, but the staff and some clients in the Middle East were actually very keen to see us as one unified global whole. And so we decided to do that globally in the end and delivered on that towards the end of July this year. The adoption of the hub-and-spoke model I mentioned earlier, is also a tick in the box as a job done. And there are a few orange circles that you see below, which are works in progress. So we've recently done some internal promotions designed at reinvigorating the executive team. That's a work in progress. I'd say we were halfway through that. We're also probably about 20% to 30% through reviewing the detail of our BD and marketing spend, always a difficult thing to relate ROI back to marketing spend, but something that we're doing as a process at the moment to make sure we're as efficient as possible with that spend, getting bang for our bucks. Across down there talks about overseas offices working with us as affiliates or scaling back from offices. Essentially, the operation in New York is the decision that we've taken to step back from and to retrench from this year. So that's an ongoing process but the rest of our world remains operationally profitable at this time, as you've seen from the presentation that Charlotte's already covered in the last few slides. And we're also in the process of hiring some new experts and some new work winners into the business. We have a couple of great hires that have already started, a pipeline of 4 or 5 in train at the moment. And we're intending to get to -- I would have thought we could probably get to 7 or 8 of those hires over the next 12 months, which will be very useful for us. So that summarizes where we are overall in terms of progress on our strategy. Summary for the year and outlook. Reset in the Middle East has returned us to a consistent profitability there, which is helpful, less offices, hubs in Dubai, Abu Dhabi, Qatar and KSA. No longer in Oman or Kuwait. During the year, our strong cash position was maintained, ending at GBP 4.3 million. And we also returned well over GBP 1 million in both dividend and share buybacks this year as well, which is pretty creditable performance for the size and type of business that we are. Our underlying operations are all profitable, and we started to move our margins up a bit, which we'll be doing a lot more work on in the future. And our current focus is continuing to look at staff retention, utilization, cash collection, keeping the cost down and acquiring the talent that we need to take the business forward. And I think you can all take our return to market guidance as a signal of that growing confidence that we have in the business.

Thank you very much. Helpful walk through the presentation. So we shall take some questions. What did the rebrand from Driver to Diales cost? And was it a one-off?

It was a one-off. And I think the important thing to bear in mind is we already had the Diales brand, and we've already been using it for 10 years. So we did a light refresh within -- with the staff that we have in our internal marketing department. And we probably spent somewhere between GBP 20,000 and GBP 30,000 [indiscernible] some signs and some printing and some bits and pieces, but we already have a lot of collateral based on that brand. And in fact, moving forward, we expect a saving certainly probably, I would say, significantly in excess of that because, of course, we're now producing branding and websites and collateral, et cetera, just for the Diales brand, not for the Driver track one as well.

Okay. How significant do you feel the newest offices in the smaller regions, i.e., Saudi and South Korea can be over the medium term? And do you expect the current political situation in South Korea to impact the business significantly beyond the short term?

Great question, which is -- so let me break that down. So the first thing is that around the world, there are certain hotspots for construction. Korean contractors working across the world is one for us that I'll come back to because it's in the question twice effectively -- in part 2 of the question. South America generally is a market where we see some big arbitration, so we want to be there. And we also, of course, see some very large and impressive projects being undertaken in the Kingdom of Saudi Arabia, which is a place where I think much of the world's construction talent has at least some degree of focus. So we need to be represented in those areas. They'll help positively impact the business moving forward over the next few years. And we'll keep reviewing the marketplaces around the world and add and subtract from those positions as and when we need to. Yesterday, I think I was surprised -- as surprised as anyone to see the developments in South Korea. The first step we, of course, took was to make sure that all our staff were safe and well and didn't need any particular support. And I'm pleased to say they were all quite happy and quite unaffected by what we saw on the television yesterday. My reading of that political situation and I say this is someone who has an office there and who regularly reads the BBC website, but not as an expert in Korean politics is that what we -- my current reading of that situation is what we have seen so far is a momentous storm in a tea cup and that life is continuing perfectly normally in South Korea and perhaps that we might see some changes politically in the domestic landscape there. But I think that's a very stable economy and our clients are working on projects with 5-year durations all over the world. I'm sure they'd like to see a return to value of the Wang. And I have no doubt that, that will happen in due course. But I don't see any issues for us that arise from that at this time.

Okay. A comprehensive answer. And sticking with office openings, are there potentially any further due in China or Japan?

Well, we do work with Chinese clients. And if we decided to do that, it would be more likely some form of local representation in Beijing to have face-to-face contact with them because we are unlikely to work on Chinese projects in China. But where Chinese clients travel across the world, they often need our support. So we don't have any current plans for that. But in the future, as that market expands or contracts, we'll respond to it to take advantage of whatever opportunities might arise.

Okay. And one more on the theme of offices. You suggested 3 office closures in New York, Oman and Kuwait. When should the process be completed? And are those businesses currently loss-making?

Well, Oman and Kuwait have been closed effectively for more than a year. Unfortunately, what we are learning is that exiting businesses in the Middle East like that is not quite as simple as filling in some forms and posting an envelope and sort of saying goodbye. So there are a number of challenges around that. New York is in -- so those have been closed for a while. And what we're seeing is administrative costs. New York is in the process of winding down over the next few months and is currently profitable.

Thank you. A couple for you, Charlotte. The tax rate was much higher in the year just reported as explained. Will the tax rate be higher moving forward?

We're expecting a tax rate of around 38% going forward. The reason for the increase over the last few years is we've -- now we've returned to profit. We've utilized the tax losses brought forward.

Okay. Are there any bad debts associated with the clients moving into administration?

Potentially, yes, but we're working very hard with the administrator to try and recover some of those. So we have a provision in at the moment, but we are hoping to be able to reverse that in the current year as part of the overall expected loss calculation.

Okay. And the accounts include losses from discontinued operations, which we covered USA [indiscernible] great. What further such exceptional amounts do you expect in the current year?

Hopefully, none. We feel that we've come to the end of a very long road of trying to close both Oman and Kuwait, the tax inspector that I mentioned before, disallowing all of the -- any cost paid offshore were disallowed and that isn't right because they were directly related to the onshore revenue and so you should match like with like. So if it were to be that we were -- we failed all of those, all of our appeals failed, there would be another further tax charge. We've accrued what we believe to be true with some legal costs. But we have -- they've ruled on 1 year. So what I've done is I've done the provision on the same basis for the other 5 years. So I'm hopeful that that's fairly correct and not expect -- none of that we're expecting anyway.

Okay. As you retain staff, what's the level of turnover and headcount currently? And how does this compare to previous years?

I think that's probably one for me. We probably -- I would say we have quite low churn generally. Perhaps in the year, we might have had 4 to 5 regretted leavers in a 12-month period on overall headcount in excess of 200. And that generally is about what we might expect. We did have an exception 2.5 years ago in the Middle East, where we had an issue with a competitor paying large amounts of our staff to go and work for them, and it was a little bit difficult and challenging, and some of you might remember that, which was a sort of group exodus of about 25 people. So that was certainly a year that was a massive exception for us. But generally, we have quite low churn, certainly less than 5% in most years. And I think we do that in a number of ways. Firstly, we have to pay people reasonably to the market. That's an obvious thing, but it can be a challenge in a market funded by lots of private equity competitors. And secondly, we have to create the environment that they want to work in an environment where they feel that their careers are going to be developed. And around 45% of our testifying experts have been developed from consultants into experts within the business. So that's something that we've done a lot of work on. And we do all kinds of other things to retain staff. We have a system of benefits called Perkbox. They have health cover, and we go out of our way to try and look after them. And that's a sort of word-of-mouth thing that goes around, not something all of them can expect in the PE environment that's the alternative. And given that all 25 people that left us in the Middle East 2.5 years ago to join the competitor have now left, and they've actually closed all of their Middle East offices because they couldn't make any money out of it. I think those people that are in touch -- at least 3 of them have tried to rejoin us in that process. So I think that sort of experience that's been quite negative for those people is something for others to learn from, and I'm pleased to say that they seem to have done so.

Okay. So on the flip side of that, if staff levels and staff utilization are key to revenue generation, what are your hiring plans?

Well, we have a current -- we have a new plan for that effectively and a new process for that in that we -- in certain sectors, and I'd rather not say which they are, but sectors in which we're really keen on hiring, we have had some research done on those sectors by a member of staff that's done a very thorough job on identified 20 businesses that we should be looking at more closely. And we've then within that, identified 4 or 5 potential acquisition targets. These are quite modest talent acquisition of small businesses. And the other 15 are businesses in which we've identified some key individuals that we'd really like to join us. which our in-house recruiter is focusing on. So it's a very organized planned process of hiring that we're currently engaged upon. And it's absolutely not easy, but we're making some progress.

Yes, we have answered the last question here, Mark, but it's one about capital allocation and obviously, high levels of cash. Is it M&A? It sounds like there might be a little bit in the pipeline. Is it special dividends, further share buybacks?

We said we would be returning some cash to shareholders. We've returned over GBP 1 million this year through dividends and one buyback. The next time the Board meets, it will discuss the success of the last buyback program and consider what its next steps might be. And in addition to that, I'd be disappointed if we didn't see some kind of acquisition at some level in the next few months. So I guess the quick answer is all of the above.

Watch the space. Good. Well, listen, thank you both very much for your time, to our audience for attending, and we'll look forward to further updates in another 6 months' time.

Absolutely. Look forward to. Thanks, Hannah.

Thanks all. Bye-bye.

Goodbye.