Diales Group Plc (DIAL) Earnings Call Transcript & Summary

Good afternoon, and thank you to those of you joining us today to hear from Diales Group, who announced their interim results earlier this morning. If you haven't seen this already, you can find our research on our website detailing the latest forecast. But for now, we're going to run through the presentation. And then at the end, there'll be an opportunity for Q&A. [Operator Instructions] But for now, I will hand over to Mark Wheeler, CEO.

Good morning, and thank you for the introduction, Hannah. We are very pleased today to be able to present our interims to the market and to those attending today as part of this presentation. I will be running through the service offerings and our operational highlights for the period. Charlotte will take you through the financial and regional updates and our cash flow bridge. And then I'll come back with our summary and outlook, and we'll have time for some Q&A. So let's, without further ado, move forward to the first slide, which Hannah, hopefully, you can click through for me. Thank you very much. So our global split of business, which we've presented before shows Diales as experts and now as advisory top and bottom, where we dropped our Driver Group and Driver Trett branding across the world so that it will all be consolidated moving forward. And Project Services is the only part of the business, only part of the group still badged as Driver and sits at 21% of our revenue. We don't plan on presenting now that our rebranding in place and fully consolidated these figures like this in the future. And if you do the next click, Hannah, you'll see that we'll simply be presenting our split between Project Services and Diales overall. So just under 80% of our business is experts and expert advisory and the remaining 21% sits in Driver Project Services, which is only a U.K.-based business at this time. It does work with other parts of the group, but it's very much a stand-alone part of the business. And if we move to the next slide, there's more of a regional split against this. And you can see U.K. and Europe is the only place that has the project services business, everywhere else has the original branding at the moment. But if you click once more, Hannah, I think that brings us to the current picture where we are branded as Diales across the world, just with the percentage in the U.K. for Driver Project Services. And that's 100 percentage. It sits at 27% because, obviously, whilst the U.K. and Europe is our biggest business, Project Services is a higher proportion of it than it is of the whole on previous slides. So rebranding done and the old silos that we used to have in the business very much pushed away from us. If we go to the next slide, this just shows a picture of where we are quarter 1 to quarter 2. We had fairly quiet quarter 1 and quarter 2 is about 15% more in revenue for the Diales business. So sometimes this happens in our company that we have a quieter couple of months. Christmas and Easter are notorious for that, I have to say. And then when we move into Q2, we pick up a large proportion of H1's profit in that particular 3-month period. So that hopefully is a bit of background and explanation. Most of you, I think, have seen business and how it works before, but there are various nuances to it that I think sometimes are worth underlining. You've got the H2 revenue there, Project Services and Diales split as it was on the previous graphs. So if we go to the next slide, we can start to talk about the operational highlights for the business. Our transformation strategy for the group is continuing, and we've been putting things in place on a regular basis over the last couple of years working through those challenges to help deliver value for clients and shareholders. We got a profitable H1 with a particularly strong Q2, which we're starting to see feed into Q3. We have a Middle East business that we're particularly proud of having put a lot of work into, that used to be something of the Achilles heel for the group, but is now a substantial contributor of profit and work much more seamlessly with the U.K. business and businesses around the world. So our transformation strategy, those of you that saw it when presented over the last couple of years was about hub-and-spoke. The U.K. and Europe are very much the hub of our operations with different outposts across the world in areas that we think we can make a profit and also win work to bring back to the central part of the business. We have a second share buyback program of GBP 100,000 nearing completion. There's still a little way to go on that one, where about GBP 350,000 worth of shares bought back in the last 12 months. We have a couple of good new testifying experts that we've hired. And really the success of the next phase of the transformation strategy is about hiring some new people that can win some work, keep some other people busy and help build utilization and, with that, profitability. And as we go through month-on-month, the Board is continuing to constantly evaluate potential talent acquisition opportunities, that could be individual experts, it could be a team or perhaps a modest acquisition as well. But those things are very much constantly on our mind. If we go to the next slide, our CFO, Charlotte Parsons will now take you through the numbers.

Thank you, Mark. And I'll take you through the financial overview. Revenue was maintained at GBP 21.6 million. The prior year there has been reclassified to exclude the discontinued operations in the U.S.A. That revenue resulted in a gross profit of GBP 5.7 million, slightly down on the prior year, and that's to do with direct cost pressures in one of the subsidiaries that I'll cover later under the regional. Reduction in admin expenses of GBP 300,000, giving an underlying profit before tax of GBP 700,000, a small share-based payment charge there from previously announced LTIPs, giving profit before tax of GBP 600,000, tax charge of GBP 200 million profit from continuing GBP 400 million, and then we still have some small charges coming through discontinued. Most of that is in the amount for close out what happened over the last 6 months with small amount also in Kuwait and Oman where we try and extract ourselves from those countries. Next slide, please, Hannah. Some key metrics. The gross profit margin there and looking at the headline figure, there is a reduction to 26.4% from 28.7%. But drilling into that further, it's the Driver Project Services business, the project management side of the business has had a fall in gross margin for the 6 months of 3.7%, and that's related to those direct cost pressures that I talked to about a little bit earlier. Utilization also on this headline number looks to be down. But when we split that on the quarter 1 and quarter 2, similar to the revenue slide that Mark held up before, quarter 1 utilization was 68.9%, but quarter 2 has jumped up to 74.2%, gives us a blended lower than last year, but actually it's heading very much in the right direction, about 74% figure for Q2. Earnings per share there at 1p down from 1.4p, net cash 2.4p. The lower cash balance at the end of March reflects the timing of the dividend payments, the share buyback program, tax and VAT payments and also an increase in trade receivables. We are expecting to receive the last of those shortly. We have received some since the year-end, and I'll talk a bit more about that on the cash bridge a little bit later. Cash balance at the end of May was GBP 2.5 million, and that's after a further GBP 400 million in dividends paid on the 10th of April. So that shows some recovery there. We also include the dividend yield there and the net cash per share. Next slide, please, Hannah, I'll take you through the regions briefly. The first one is EuAm, the revenue there GBP 12.5 million, down from GBP 13.2 million, but profit were covered a little bit, not down as much percentage to GBP 2 million and an increase in the headcount there. It's utilization at 69.8%, which is lower as a blended rate for the half year rather than split between the quarter as we did before. So that will come up hopefully by the end of the full year. Next slide, please Hannah. This is Driver Project Services. So starting with utilization at the bottom. It's always very high because this is the project management services business. Revenue has actually gone up. So you would expect to see an increase of profit, but this is where we have the market pressures on salary costs. And what we're doing now is when we renew and take on new opportunities, we are passing that cost increases on to the clients. And we're also doing a lot of work on the ratio of staff to sub-consultants to see if we can mitigate the increase in the cost base there. So that will be something that comes back around in H2. Middle East is the next slide. Very positive slide, increase in the revenue, a good strong increase in profit with only one additional person to the headcount and utilization at 79.1%, is getting where we want it to be for the consultancy and the others business of 80%. Next slide is APAC. Hasn't had a good half year. There's been lots of slippage in project, particularly in the planning department and then a couple of issues in Singapore that we've now -- actually with hires that we've dealt with. So revenue is down, a small profit on the same headcount with low utilization, but we're very much looking to that part of the world to come back into profitability during H2. The next slide is the cash flow bridge. Just to explain a bit more on that. We had an operating profit of GBP 0.9 million, profit after tax of GBP 0.3 million from the highlights before, depreciation and amortization of GBP 0.3 million, tax charge of GBP 0.2 million, and the share based payments of GBP 1 million. Lease payments were GBP 300,000. There's been a decrease in working capital of GBP 1.7 million. Most of that GBP 0.9 million is an increase in receivables, and there were 4, 5 larger debts that were expected to get in that quarter and happened. Since the end of March, we've received GBP 400,000 of the GBP 900,000 and we're expecting to get the remaining balance during June. The other reason for the working capital movement is, we've had a decrease in payables on VAT and tax, and that's because of the monthly payment allocation system that we're on now. It accelerated the payments on those. Tax payments of GBP 0.3 million, dividend of GBP 0.4 million and share based payments -- that's the buyback, sorry, share buyback of GBP 0.2 million in the period, giving the closing balance of GBP 2.4 million. The next slide is outlook, so I'll hand you back to Mark.

Thanks, Charlotte. The group is looking at the marketplaces across the world that it operates in. And certainly, we see some increased demand coming down tracks from the policies in the U.S., particularly in respect of tariffs. I'm sure you can all imagine that if you're running significant construction projects and the prices of steel and aluminum change significantly then that can be an issue. And also technology will be an issue as well for a number of clients. We're constantly looking at improving utilization and profitability. We have a strong relationship and partnership with Lupa Technology who are effectively helping us with a global discovery platform used in disputes and complicated projects where there are often hundreds of thousands of documents and being able to navigate through them effectively is a really important part of that. So that's a good partnership that's helping us compete at the highest possible level in the international disputes market place. The next thing I think that's important to us is seeing real-time dashboard and management information from H2 onwards being rolled out, which will help management see things in real time rather than sometime after they've happened. This is a fine-tuning of the enterprise system that we fitted to the business about 3 years ago. We had some real challenges getting it installed and working. The first battle was to do that to make it work. The second thing was to consolidate that and improve the way it fed information into business. And now as each month goes by, we're working on improving the data that comes out of that system more and more on -- as each quarter goes by. So that information, I think, will be really helpful for us when it comes online quite soon. The U.K. and Europe continue to perform well, has been the case for some while now. And we also expect to make further gains in the Middle East business, which is a really solid business that we're absolutely very pleased to have seen grow and develop where it's been an area that's often quite challenging to do businesses. So that's been really, really positive for us. We've made some changes already to APAC and expect a profitable H2 from that business and also some further growth from our Korean initiative that we've been running for a couple of years now. There's a strong pipeline of work in the Kingdom of Saudi Arabia, which is what's helping the Middle East perform well. But also, Qatar is winning work across the world. It's not just in the Middle East. And many of these projects involve new U.K.-based experts working on those projects. So that's all about those silos coming down and a more team center approach to running those projects from our hub-and-spoke model. We continue to invest in the talent acquisition pipeline. That's something that we're very, very much focused in. We need to get some more experts in the business, some more work winners that will help drive utilization and every percentage point of utilization absolutely adds to profit. So those are things that we're particularly keen on seeing. And if we move to the next slide, by way of a summary, in terms of a strategic update overall, EuAm running very well as the central hub, lots of collaboration now with the offices abroad more so than there's ever been before in the business that we've had, transformation strategy is helping grow value for clients and shareholders. A lot more work left to do, but we made some really solid steps there. We have a strong cash position. We've just announced a dividend of GBP 0.4 million. We've returned GBP 1.1 million to shareholders so far this year by share buybacks, dividend payments. Cash sits currently at GBP 2.5 million. We've maintained profitable trading through the first period, expect the overall year to be in line with our expectations. And our Middle East is improving on a regular basis consistently to be a key part of the business again. We are currently focused on improving utilization and profitability, which is the same thing in our business. Part of that is acquiring new staff and new talent. Cash collections is also really quite an important thing for us as well. We've been great at that and we will continue to keep that as a focus. And we're also going to be back in profit in the Asia Pacific region as well for the second half. And I'm really looking forward to being able to report that to you closer to Christmas. And that actually concludes our presentation. Hannah, would you like to pick some questions?

Absolutely. Thank you. Does the reduction in cash impact further returns of cash to shareholders?

We don't currently have any plans to change our approach. We are managing our cash effectively from time to time. Every time we go through a dividend or a buyback discussion, we have a Board meeting and go through all of the necessary steps that you go through to make sure that that's the right thing to do for us at the time and that we can manage our business effectively in the black and so doing. So our approach won't change. We'll continue to do that effectively professionally and review each decision as a Board as and when it comes up.

What's behind the strong recovery in the Middle East? And do you think it's sustainable?

That's a really good question. I think we've got a much, much smaller team. I think 5 or 6 years ago, there's probably nearly 100 more people in the Middle East. So it's a much, much smaller team, much more focused. I think a lot of the work winning locally is done by Arab speaking staff. A lot of it is done on the ground in Saudi Arabia. And also we're selling our U.K. experts into those markets. So we believe that's a sustainable model. I'm confident there will be peaks and troughs, as there is, in our whole business moving forward. But we believe that's a much more stable environment than we've ever had in the past.

Added to the excellent commission management, [Technical Difficulty] I think it was in 2022, we had some issues with some fixed price contracts in that region, and that is now managed much more closely, and we had some profit on that.

Well, I think this leads naturally on, do you think you can replicate this success in the APAC region given the H1 results?

Yes. I think we've already taken costs out of the APAC that put us back into a profitable run rate with some members of staff just weren't working out effectively. So we've taken steps to get back in plan there. If we can continue that, we'll be profitable. One or 2 decent contract wins, perhaps 1 or 2 additional hires will be very much going in the direction in the least with the sort of assurance of better commission management in place across the world.

It sounds like you require a stronger second half to meet market expectations. Is there a history of second half waiting in the business to support this?

Generally, H2 is usually stronger, but we're about 50%. So given we had a quiet Q1, that was support some of this.

I think also that the most difficult month for us is always Christmas, December, where lots of people take a couple of weeks out effectively. It's a traditional thing in the structure. And Easter can also be a bit painful. So as long as there are no Christmases or Easters in H2, I think that we can be sure of doing reasonably well.

I think we can guarantee that much, not much more. Charlotte, do you expect receivable days to continue falling over the short term? Or will they remain at a similar level going forward?

They're normalized. We've just got 3, 4 or 5 larger debts that skewed it. I was saying in an earlier presentation, one of them is for an overseas government. It's a couple of hundred thousand. Things like that will always be in our business, and they skew the debtor days massively because -- I think this is Kazakhstan. It takes a long time to get through all the red tape and all the payments. So there will always be some, but hopefully, that will normalize a bit more once we collect these slow ones in.

Okay. And are there any debtor days longer than over 100 days currently?

Yes, they are, but a few and far between, and we know exactly which products they are and the reason why and accepted that for whatever reason. And some of the insurance clients as well as list is still actually [Technical Difficulty]. And so we've built through that as disbursement. We make sure we get our quarters right, so that our invoices go in. And so that can take longer. But I mean, it's a one-off hit really because once you're in the cycle and you still get money quarterly, than it works.

Helpful. Do you expect South Korea to generate a similar level of business as Saudi?

It's a really good question, actually. I think probably, yes, but I don't think you'll see in future figures, the revenue sitting in APAC because the larger projects in -- that we're looking to win through contacts in Seoul are not for projects being done in Korea. It's set. We're looking at dealing with the major Korean entities not right outside of that area. So some of the big wins so far we have, for example, been in the Middle East. There are others in Asia Pacific and others in Europe and in one case in South America, there are opportunities. So I think the short answer is yes, across the business globally. But I wouldn't like anyone to have the impression that APAC will certainly become the Middle East overnight just due to that initiative because, as I say, we tend to deal with the revenue where it lies across the business. And Korea is very much a BD focused initiative for us.

Okay, I should have asked this earlier to you, Charlotte, with cash. But given the longer payment terms in the region, will a return to growing sales in the Middle East mean an overall rise in receivables?

No. The slow debt actually in our Middle East debt, they are elsewhere within the group, linked to this excellent commission management, we now have with the new management team out there that may always include upfront payment and scheduled payments throughout the project and a better payment time and this will work. So I don't think that would impact.

Several other professional service providers are adding surcharges on rising costs. Is this a route you intend going down?

The route, we've modeled down. And I don't think within H1, there will be any actual money in our accounts that reflect it because we've been putting it into our billing system. And we've been putting it into our procedures and invoices for new projects just over a month now. So H2 will see surcharges on invoices in accordance with market custom among some of our competitors. What I would say is that some clients accept those and some don't. So it's going to be -- there's going to be an implementation period where we get those that's put into place. But certainly, from now onwards for new commissions, the starting point is that there is a surcharge on invoice for that work. It's part of how we're mitigating rising costs.

Thank you. We've got a couple of questions here around the goal to grow your experts by a further 20. So first of all, you've got GBP 2.5 million of cash currently. What would that buy you in your goal to add these experts?

Well, we can only buy what's there. Inevitably, that's going to be a fairly modest team. You can probably get 5 or perhaps 10 people added on as a bolt-on to the business for that. Inevitably, of course, that's going to be spread over a period of 2 or 3 years for the lock-in. So certainly, there's more than enough cash to do that if we wanted to. If we can map with that kind of opportunity, I think Charlotte will be sitting down drafting paper and asking the Board to consider not just the acquisition, but the way in which it was going to be funded to make sure that suited us at the time, and give us the opportunity to do the other things we're trying to continue to do as well. So that's an option. But I have to say those opportunities are not coming up every other day. We have to seek them out. We are actively doing that. We looked at 2 or 3 over the last 18 months. It's probably more likely that most of our growth will come from key hires and team moves. But we absolutely will, if the right little opportunity comes along to put something on, I'd be very keen on going for it.

Okay. Well, following on then, what proportion of these fee earners will be outside of the U.K.? And in an ideal world, which disciplines?

I think the most will be in the U.K. and Europe. But I think we're probably worried into that. I don't see us actively growing those overseas businesses by much, up to 1 or 2 organic people sort of bolting on. I think we probably have in terms of quantum and forensic delay analysis, a very strong team as it is. And we would like to grow that by 1 or 2 experts over the next year or 2. But we will also be looking to grow our technical team. Fire engineering is an important part of that. We might do somebody in acoustics, some of it fits together. We recently hired probably the world's most renowned tunneling experts -- sorry, bridges expert, tunneling expert is another job that I am having conversation. One, they're very similar things overall under. But our world renowned bridge experts recently joined us has already picked up a very significant commission. We're delighted to have him on board. So we're not looking in a narrow niche, but we're looking at things that bolt on and are complementary to our core.

Okay. Helpful. I mean, given your hub-and-spoke model with the Middle East doing so well, will you reopen offices in the region or is that ship sales?

I wouldn't say never again because I think that would be wrong. I think opportunities will rise and fall. For example, makes absolute sense for us to be in Saudi Arabia. That's quite successful for us. And what I don't think we would do again, and this is something we've done in the past is, visited in a part of the world as part of a big dispute. And so we used that as an opportunity to plan and flag there and trying to grow our business. So we're much more strategic in our planning and our approach there. And if we do we have any further offices or remote operations, they're likely to be quite small and reporting in our spokes than our hub.

Understood. I know you've changed broker recently, so it might help to answer the question. Do you remain fully committed to your public market listing?

I'm not sure. It's possibly anything other than fully committed to our public listing. Yes, we have changed our broker and our Nom Ad, and we're delighted to be working, I'm sure who have provided with this very generously appointed Boardroom today to talk to you from. So I don't see any changes immediately on the horizon to our status.

Thank you. You highlighted an increase in costs within Project Services. Are those recoverable?

Not at the moment. So it was market forces increased labor costs, both for sub-consultants and for our employees. This excludes the NI increase, which is on top of. And while we're in this middle period of -- we can't yet quite pass those on to our clients because we are in contract with them. When we get new clients on that, we passed on and when we renegotiate with our existing clients, that'll be passed on. So it's a temporary additional cost. We're also looking at the split of usage that I mentioned before about use between subconsultants and employees because subconsultants could be turned off when you don't need them. That cost isn't a standard cost.

Okay. Thanks. You touched on there by using your cash to potentially acquire more teams. But is a review at Board level more broadly that you can use that money to reduce the lumpiness and the volatility by entering different verticals?

Well, that is a route that has been tried in the past. And what that led to is adding on a number of businesses that were much lower margin in places in the world where it wasn't possible to have payment upfront. So we spent a long time doing quantity surveying project management businesses. So large-scale commodity businesses like that are not things that we would see as ourselves getting into. I think there are other, I believe, you described as verticals, and that we could be entering. We could, for example, be easily be in for us accounting as part of an investigation-type business. A lot of forensic people as technicians in construction. And where did all the money go is inevitably often part of that. So there are things like that, that we proposed on. But I don't see us buying or starting some kind of large commodity business that's going to make 5%, soak up a lot of cash, takes a while to get paid. And what it will do is it will create a baseline for anyone. These kinds of still exist in core business. So I think our focus should be on managing them rather than trying to mass them.

We don't want to just buy additional revenue that makes top line look great, but actually risks the bottom line. We're trying to make sure that there's some margin protection and increase in the margin on.

Really helpful. You talked about the implementation of your real-time management systems that gives you a better view on utilization. Do you have any view on what that will mean in a percentage increase points term?

Yes, probably 1% or 2% would be...

I think what it's going to do is it's going to enable people to be much more quick and understanding when things are finishing and dwindling and reallocating people who are awesome. The other thing it's going to do is, it's going to enable us to, I hope, redeploy down time in a way that it adds some value to the business, even if it's not directly in variant terms. So in other words, that we have other resources related to BD, for example, or other administrative tasks that can be used to improve the business things like case studies. Absolutely, we've got a list of things to do between jobs, and we need to be able to be on top of what they're doing daily to need to make that happen. It's going to be really difficult to draw a line between that side of things and an increase in productivity. But inevitably, it's a tool that will increase productivity to some degree. So whatever it is, we should be doing.

Lovely. Well, I think we shall leave it there for today. So thank you both for joining us and to our audience for their questions, and we'll look forward to having another update in 6 months' time.

Thanks, Hannah.

Thanks, Hannah. Thanks everybody for joining.