Dillistone Group Plc (DSG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Dillistone Group Plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. I would now like to hand you over to CEO, Gareth Hawkins. Good afternoon to you.

Hello. Thanks, Alex, and good afternoon, everyone. Thanks for joining us for today's Dillistone Group Interim Results Call. As Alex said, I'm Gareth Hawkins. I became Group Chief Executive just over 2 weeks ago. And with me today are Ian Mackin, our Group Finance Director; and Paul Mather, who alongside being Group Chief Operating Officer, has recently become Managing Director of the Ikiru People Operating Company. So these results we're presenting today cover the 6 months to 30th of June, and Ian and Paul are going to take you through them properly. But I suspect that many of you have joined to hear what's coming next. So I'll start with being candid from the outset. This is a company in transition from a small software business that has worked hard to improve its balance sheet to becoming a group that intends to acquire, own and compound great businesses for the long-term. So here is the agenda for today, fairly standard fare. Ian is going to take you through the financial review. Paul is then going to cover progress in Ikiru People, which is our current operating company and what he and his team are doing to sharpen it. And I'll then come back to set out the new strategy, which, by the way, is still subject to shareholder approval at our forthcoming general meeting, and then we'll go over the next steps. We're going to leave time for questions. So please, in the normal way, do submit them through the platform as we go. A little bit of context, obviously, the disclaimer first. Please ensure that you're aware of it. I'm sure you've seen it many times before. So coming into this role, I found it helpful to frame the preceding half year in 4 milestones. Firstly, funding. In February, DSG raised GBP 1.5 million of equity, which was GBP 1.375 million net fees. And that was at a premium to the prevailing share price and brought in with it P&R Investment Management as a strategic investor, which this capital allowed us to repay the CBILS loan in full and clear the overdraft. And for a company of our size, that reset was quite key because now we enter the next phase without any legacy senior debt hanging over us. So second milestone is FileFinder. That's a legacy product reaching end of life. Clients are now migrating to Talentis, and that migration process is well underway and should be largely complete before January '27. Now running 2 platforms in parallel is expensive and the infrastructure and support costs of FileFinder becoming unsustainable. So retiring it should help deliver significant annualized cost savings, and Paul will say more on that topic shortly. Thirdly, leadership. Well, here I am, joined on the 28th of September, leading on the new strategy, as I'll go on to shortly. Paul, in parallel being promoted to run Ikiru People, and that's a deliberate division of labor with Paul focusing on the operating company and myself focusing on group strategy, acquisitions, capital allocation and growing out the group. And finally, fourth, evolution. Pivotal to that evolution is our general meeting and shareholders will be asked to approve this new strategy that I'll go on to talk about and convert outstanding loans into shares as per our recent RNS and circulars. So I'll return to all these topics towards the end. But in summary, DSG is funded, reshaped and refocused and now preparing to embark on a serial acquisition model. And so this is Ian's last presentation of results with us as he's leaving the firm at the end of this week, but I would humbly like to thank him for his steady hand through a demanding period, I'm sure. He's now going to walk us through these H1 numbers. So Ian, over to you, sir.

Okay. Thank you, Gareth. Just a quick run-through of some of the headline numbers. So revenues fallen in the period by about 15% to GBP 1.854 million, but the recurring revenues remained around 90% of that total. As a consequence of the revenue fall, adjusted EBITDA has fallen to GBP 0.215 million with just an 11.6% margin as the revenue dropped on a largely unchanged cost base. We'll go through that margin story soon. The equity raise, however, did move us from an overdraft to a positive cash position of GBP 0.436 million at the half year, and net assets have risen over GBP 700,000 to stand at just over GBP 4 million. Next slide. So a bit more of a closer look at the revenue. The group revenue has fallen by GBP 0.319 million. However, a large proportion of that reduction has come from discontinued or soon to be discontinued products. Of that drop, 61% of the whole drop is related to the FileFinder product, which we're in the process of discontinuing and 17% is due to an old legacy contingent product called VDQ, which was withdrawn through H2 in 2025. If we look a bit at the segment and sector split, recurring revenue has fallen 15%, in line with the overall total fall, but as I say, still represents 90% of the total. Executive Search, where FileFinder sits has fallen 23%. It should be noted at this point that the recruitment market still remains very tough with over 3 years of decline in the U.K., which is our major base of operations. Next slide. So as I say, a bit more on the margin. This slide illustrates the progress we did make during the previous 5 years over doubling the adjusted EBITDA margin between '21 and '25. We made a conscious decision to end of life a major product due to its decline in revenue profile and its high cost base. Coupled with the product discontinued in H2 2025, 2026 was always going to be a transitional year due to that. Consequently, the adjusted margin -- EBITDA margin has fallen. However, we expect this to be a low point for the half yearly margin with it increasing during H2 and recovering towards previous levels during 2027 with a target of again reaching the 25% level through the end of '27 when FileFinder end-of-life benefits are fully realized. Next slide. Due to all of those factors, the income statement shows the impact of the transition we're in. The gross profit, adjusted EBITDA, adjusted operating losses and adjusted loss before tax were all affected by the GBP 300,000 drop in revenue, falling straight through to those lines. It should be mentioned, adjusted figures ignore the impact of acquisition intangibles and reorganization costs. Consequently, the gross profit was down GBP 311,000 at GBP 1.638 million, with the adjusted loss before tax down GBP 345,000 at a loss of GBP 0.338 million. Because of the equity issue, the weighted average number of shares through the half year rose to 30.8 million, leaving the adjusted EPS at a minus 0.86p against a positive 0.15p in H1 2025. We should stress we do expect the first half -- the second half to be stronger than the first with nonrecurring revenue particularly appreciably up on H1. Next slide. Net assets increased almost GBP 1 million from the year-end position to just over GBP 4 million. This is obviously heavily influenced by the net GBP 1.375 million proceeds from the February equity raise. During H1, the remaining CBIL loan principal of GBP 0.15 million was repaid in full and the year-end overdraft of GBP 0.211 million was cleared. The loans at half year totaled GBP 0.82 million. However, GBP 25,000 of that was repayable on demand and has been repaid during September. The remaining GBP 0.795 million is what is proposed to conversion into equity at the general meeting, and this would clear all the long-term loan balances and save around GBP 73,000 a year in interest. So finally for me, cash flow. The equity raise has turned an overdraft position into a positive cash balance. Net cash from operating activities, however, was an outflow of GBP 0.109 million compared with an inflow of GBP 0.528 million during 2025 H1. This reflects the lower revenue base and working capital movements. Investing activities is almost entirely the capitalization of development to secure the future products. And that was at GBP 0.395 million, slightly down on the previous year total. Financing brought in a GBP 1.15 million net, driven obviously by the net equity raise of GBP 1.375 million, less the CBIL repayment, finance cost and lease payments less the net change in cash for the half year sit at GBP 0.646 million, leaving the cash of GBP 0.436 million at half year. Now let me hand you over to Paul, who will take you through the Ikiru specific slides.

Thank you, Ian, and thank you for that. So welcome, everyone. Some of you have probably seen this slide before, but I'm aware we've probably got some new people into this forum here. So what I thought I'd do is just quickly start off by giving a run-through of who we are and what it is actually Ikiru People do. So Ikiru People's business was formed back in 2019 by amalgamating 4 existing opcos together to form Ikiru. And we have clients on 6 continents and across 50 countries. And broadly, what we tend to do is split the business into 2 sectors, that of Executive Search and that of contingent recruitment. So for us, contingency is basically everything other than Executive Search. So perm, contract, interim and temp recruitment. Over on the Exec Search side, as we've already spoken, FileFinder is a product that's been around for a very long time. It has contributed a great deal towards the revenue lines over the years. It was churning and it carries quite a high cost base. And as you've probably been aware, if you've been following our story over the years, we're putting a lot of effort into our next-generation platform product that we call Talentis. This year, Talentis got to the point where we were confident that it was a suitable home for a lot of our FileFinder clients. And so this is the year that we've chosen to make the move and end of life the FileFinder product, which is due to end at the end of this year. Also in the Executive Search side of the business, we have a product called GatedTalent. This is a platform service really for executives looking to source services such as resume rewriting and LinkedIn profile optimization, those sorts of things. On the contingent side of the business, the kind of flagship really is our Infinity product. It's a core CRM -- it's aimed at those agencies that do a little bit of everything, so a little bit of perm contract and especially ship-based temps. And holding all that together is a product that we call mid-office, which shows exactly what it says on the tin. It not only connects to front office recruitment CRM systems, not only Infinity, but also competitive products as well, collects the placement information from those, generates time sheets, catches time information, works out the payroll, the accounts, the billings, things like commissions, all that sort of thing and then exports that information out to the client's own incumbent payroll and accounts system. So very much the kind of glue that holds everything together. And finally, on the contingent side, we have a product called ISV, that's designed for online skills testing and also training. And it's a product that's used by some of the leading U.K. recruitment agencies. So one of the main kind of core objectives for our business this year is this FileFinder, Talentis migration. We announced the end-of-life FileFinder back in March '26. And in late May, we began pushing those migrations through in earnest. And in the intervening time, what we were doing was kind of tooling the business up to be able to run these migrations through in bulk. And I'm pleased to say that that's kind of where we are and how we're able to process migrations quickly and efficiently through the business. And what that means is we've been able to actually see some of those cost savings coming through from rationalizing the platform of FileFinder coming into half 2 this year. And certainly, by January 2027, the migration will be substantially complete and then the product will be withdrawn. When we get to that point, we'll be able to recognize significant savings, which, as we've quoted is a six-figure number. But what's encouraging for me is that of those clients that are migrating across at the moment, the vast majority of them 75% are actually choosing to sign multiyear contracts with us. So this gives us confidence not only in our revenue lines in the future, but obviously speaks to the testament of the strength of the product as it is now that clients are willing to take the risk and sign multiyear contracts upfront. So in terms of our outlook, what are we looking at for this year and kind of the remainder of half 2? Well, we mentioned the FileFinder migration. That's obviously the key that's taking a lot of our resources to deliver. But in conjunction with that, we've also seen a stronger-than-anticipated order book for our Infinity products. And what that's meant is as we enter in half 2, actually, our delivery pipeline is the strongest it's been for a considerable time. We've got a lot of orders that are due to be delivered. And that means we should see a stronger second half, contributing not only to ARR, but also nonrecurring revenue is there as well, which will certainly play a part. Now core for us, the kind of primary overarching objective, not only to get the kind of FileFinder migration done, but it's to get back to this EBITDA margin of 25% plus. Now the way we're going to go about this is, as Ian kind of alluded to earlier, our market is hard. The recruitment sector is in a difficult place. It's had over 40 months of kind of consecutive downturn. So our plan to get back to the 25% EBITDA margin isn't reliant on the market recovery. It's entirely reliant on levers that are under our control. And that gives us the confidence to know that we're going to get to this kind of position in this target. So the way we're going about this is we are kind of maintaining our customer focus and our -- we are very, very proud of our service levels. We've got spectacular Trustpilot reviews. But because we've been kind of as Ian alluded to earlier, this FileFinder migration is something we've known about for a long time. We've obviously been aware of the downturn in the markets. So we've been able to start tooling business up and gearing the business up for a kind of process of continuing improvement and basically streamlining the business, making it more efficient in everything that we do. And included in that is the use of things like AI and tools. So it won't be a conversation about recruitment without sort of talking about AI. And kind of where we are in the moment with AI in our sector is a very interesting challenge right now. To kind of give you a kind of idea of where things sit. Maybe if you turn the clock back 5 years ago, a recruiter might put a job advert out there, they might get 30 to 50 applicants coming into that -- now they're getting at least 10x that number. And the reason for that is that it's a lot easier for applicants to apply now. They're all using AI to do it. They're all tailoring their CVs and their resumes and applications for the job specs at hand. And that makes it very much harder for the recruitment agencies to handle this volume load, not only from the point of view of the sheer volume, but also the fact that they're very, very similar in applications because they've all been done by AI. So our clients now face with the problem that they're being squeezed hard on their margins, they're needing to cut costs, make improvements themselves internally. They've got this increased volume. So what they need is to turn to AI as well to help them manage that process through. And that's one of the things we've been spending a lot of time this year kind of looking at and providing solutions that utilize AI to help our customers with this conundrum. And it's something we're kind of doing across the product range as well. Internally, our use of AI has increased dramatically over the course of this year. We've become a lot more efficient in some of the tasks and activities we do, and that's clearly measurable and will play a part in how we get to that 25% EBITDA. So with that, I will hand over to Gareth to talk a bit more about the future strategy. Thank you, Gareth.

Thanks, Paul. Great progress. So before I turn to that strategy, I just want to close off the Ikiru piece around how it fits as the first step of our strategy and just confirm that it's in no way an encumbrance to our new strategy. It has valuable recurring revenue, long-standing client relationships -- and so our ambition for it is really clear with the adjusted EBITDA margin target of 25%. Paul spoke there of the levers that are within our control, and I have full confidence that his team will get there through invoking a set of internal disciplines, commercial focus, cost control and some productivity measures, net revenue per head, those sort of disciplines. A business that runs that way will generate cash. That cash is the starting point for everything I'm about to describe. And we mustn't forget the fact that Ikiru People has an over 40-year legacy of sourcing and empowering great talent. So we have no current intention to divest of that. So a brief word about me, why the Board has asked me to lead this new strategy and why I'm genuinely excited to do so. Well, until a few years ago, I was running and leading a specialist industrial manufacturing and services business called Weldability. And we exited to Indutrade, the Swedish serial acquirer, whose culture, structure and ethos was quite a privilege to work within. I stayed on, ran that business inside Indutrade and led some further acquisitions there. And so I've seen this model from all sides of the table. We did a lot of M&A within the company prior to exiting. And so I've been the operator, I've been also the owner deciding who to sell to. And then I have been an acquirer within the decentralized entrepreneurial group, one that cultivates talent. And so I found that experience really helpful. I think it will be helpful in this strategy, but so will how the DSG Board has been reshaped around this strategy in this year. Matthias and Aakash from P&R joining in February, now NED's on the Board, have brought a disciplined perspective on capital allocation, which is fundamental to our new compounding strategy. A quick word on Jason. Jason Starr, who obviously has led the company through a challenging period and has a very long tenure with the business. I'm very pleased to say that he remains on the Board as Non-Executive Director, delighted that we can retain his 30-plus years of knowledge with the Ikiru People. Julie Pomeroy and our long-serving Chair, Giles Fearnley, complete our current Board. And on finance, as mentioned earlier, Ian sadly departs, but we are currently in the process with interviews underway for an interim CFO, and we expect to be able to make an announcement in the coming weeks. So the new strategy is what you're all here for. Let's distill it down into one sentence. Dillistone intends to become a serial acquirer and long-term owner of cash-generative, profitable B2B businesses beyond software. What that means in practice is that we will acquire all of or majority stakes in profitable, enduring reputable companies. We will own them decentrally. The people who built them, the management teams will continue to keep them running. And we will insert a group discipline on reporting, financial control, governance, continuous improvement and capital allocation. And we will invest the cash that these businesses generate into further acquisitions so that the group compounds over time. Now none of this is particularly novel. It is here at Ikiru because it's a change of strategy. But -- that's rather the point, the proven model that is already evident in the Nordics with companies like Indutrade, Addtech, Lifco, where they've compounded shareholder value over decades doing exactly this. And closer to home, we have in the U.K., Judges Scientific, Halma, Diploma, probably the best known examples, but also Avingtrans, SDI, Amcomri, discoverIE. They're all showing different flavors and versions of the same discipline. And we study them closely. Our job is to apply their lessons at our scale. And at our scale, we believe the pool of good businesses is deep and valuations are rational. So why is Dillistone best placed to do this? Well, 3 reasons. Our AIM quotation gives us access to capital through debt and equity, which makes us a viable credible buyer with a longer sighted mindset. Now to a founder or a retiring seller, a listed permanent owner is a very different proposition from a PE fund who are working under the pressures of a 5-year exit horizon. And secondly, the leadership and the Board are now built for the job. And thirdly, by looking beyond one sector, we are diversifying, reducing our risk and materially widening the number of suitable targets. But it's important to clarify at this point that we have no intention of becoming an investing company under AIM rules. We will be an operating group of aligned companies. We will own controlling stakes and we will actively govern them and consolidate their results. So this slide is our flywheel, if you like, the economic engine of the compounding that we intend. And we describe this simply as acquire, improve, compound. In practice, we acquire cash-generative companies at sensible valuations improve them, not by imposing a central operating model, but by supporting management with a value creation playbook and a focus on financial discipline, operational improvement and good governance, whilst preserving what is their entrepreneurial autonomy [indiscernible] that their customers understand and keep coming back to them for. We call this freedom within a framework, and that framework is tight on capital and reporting and accountability, but it is that freedom, which governs how that business best serves its customers. Good businesses run well and convert profit into cash. And growing diversified cash flows will create debt capacity that we can use sensible, serviceable leverage alongside equity and reserves to fund these transactions. And so we'll reinvest that cash that comes from those operating businesses into further acquisitions with the result being a larger, more diversified group with rising EBITDA and greater earnings resilience. So thinking as capital allocators, our North Star should be the return on the tangible capital that we deploy and our ability to keep reinvesting at those returns year after year. So what are we looking for? The headline is right here on the slide, the financial characteristics of the businesses in the lens will determine their suitability for acquisition, not specifically the sector or segment that they find themselves in. We want businesses that operate with a high degree of trust and autonomy, a clear competitive advantage, a solid reputation and durable cash flows with preferably low capital intensity and strong cash conversion and ideally, with significant recurring or reoccurring revenue available at a reasonable valuation. And those owners who own them now are seeking succession or a long-term home for the business to continue to grow within. So quite specific, but deliberately broad in its net that we are casting. What this does mean, though, is we want no turnarounds, no loss-making businesses. And of course, we won't be straying into mining, petrochem, property, crypto, those kind of spaces. So our focus at this moment is principally in the U.K., while we perfect this model internally, and we may explore selective opportunities in Europe in the medium term. As we say here, our ideal focus areas are broadly support services that are nondiscretionary if possible and contractual or periodic, light manufacturing with repeat custom and a particular specialty within those businesses. And then suppliers of specialist niche components into what are high-margin sectors. So it gives us something to work with, but we remain alert to opportunities. This slide just brings those target characteristics together. I'll draw out just one here. You can read the rest, high autonomy. We seek to buy businesses with management teams that are able to run independently. If a business needs us to come in and run it, it probably isn't the right business for us. We want them to be able to benefit from being part of the group that come with an existing modus operandi and the skills to continue to execute on that. Just to bring these broad sectors to life a bit, here are the kinds of example segments that we might be looking at. We believe that there are businesses in these spaces that exist in material number and of the type of size and demographic and vintage, if you like, that we'd be looking for. And so just to pull out a few, testing inspection calibration, we've got training and certification. We have precision manufacturing, industrial automation and control. And there on the specialist components, obviously, we've got some medical optical. We've got aero and space, marine and defense adjacent type businesses, you can imagine why. So -- what do they already have in common, though? Well, they're all often owner founded, typically of a vintage with owners approaching retirement age, sometimes with no obvious internal successor. Their customers, though tend to value the reliability of these businesses over the price of their products and service. And their products and services are sometimes specified, regulated, embedded into their customers. So they -- the cost of switching can be high. And many of these businesses are probably of the sort of materiality and scale that they probably sit just below the radar of the larger serial acquirers and mid-market private equity firms because they require operational expertise. And that keeps the valuation sensible. We're going to be disciplined about that. They're not the sort of businesses that you go into if you haven't got an understanding of the space and of the way these businesses are typically run. But this is a market that I know. It's where I built my own career and spent 20 years cutting my teeth. So I'm excited to get into some of these and see what we can bring into the group. So capital allocation is obviously where serial acquirers succeed or fail. We're going to be very disciplined, as I mentioned, in our search for suitable target companies. We're going to align incentives where appropriate through deferred and contingent consideration or retained equity. And fundamentally, we're going to aim to pay sensible multiples even in what is an increasingly competitive market, but we plan to win on our certainty, the clarity we give to the sellers, the permanence in our mindset and the culture that we wish to cultivate. In the first 180 days after each deal completes, we're going to come alongside these businesses, these management teams. Our focus is going to be on partnering with each of them to reinforce their financial discipline, their reporting, their controls, but also to help install a growth driving continuous improvement mindset, looking at ways just as we are now with the Ikiru People of how we can help these businesses to improve their fundamentals. As was mentioned in the circular, it's important to note that the strategy is not without its risks. Our process is designed to mitigate as many of these as possible, but they are real risks. Please read them here on the slide. We do take them very seriously. Fundamentally, though, with such an abundance of companies within scope, and within the demographic and macroeconomic motivators for the owners to exit that exist today. And with the incredible tools, as Paul mentioned earlier, some of them are at our disposal to drive value creation through digital transformation. I'm highly optimistic about the opportunities that lie ahead of us. And so in order to go and seize the day, as you know and as has been mentioned throughout this presentation, we are asking our shareholders to approve the conversion of outstanding convertible loan notes to equity. And so subject to shareholder approval, GBP 794,750 of loan principal intends to be converted into new ordinary shares at 14p. And that's covering 3 instruments as defined here. The notes from 2017 and 2024 and the 2025 loan. Now these carry interest of between 8.15% and 10.85%, as you can see laid out. But the 14p is the conversion price already set for the 2024 notes, and this has been now applied fairly consistent, fairly and consistently across all 3 principal sums. The effect being around 5.7 million new shares, around 13.8% dilution. And in return, we removed roughly GBP 73,000 of annual interest and simplify the balance sheet ahead of the acquisition program. Now because the holders include current and former directors, this is a related party transaction. And so the independent directors have consulted Zeus as our nominated adviser and consider the terms fair and reasonable so far as shareholders are concerned. As independent of that process, I'd like to just add here that I'm heartened by the positive signal that those loan note holders have conveyed by choosing to move to equity over debt. their choice of a long-term alignment with us over a fixed coupon really gives me confidence. So thank you, which brings me to the general meeting, which is taking place at 11:00 a.m. on Monday, the 26th of October at Howard Kennedy, 1 London Bridge. There are the 6 resolutions that we've laid out here, fundamentally adopting the new strategy, approving the loan conversion, moving to electronic communications, et cetera. The Board is recommending resolutions 1, 3 and 4, and the directors intend to vote their shares around 21% of the company in favor of those. Resolutions 2, 5 and 6 relate to the conversion are recommended by the Independent Directors. Please do vote. Proxies must be received by 11:00 a.m. on Thursday, the 22nd, and we'll announce the results on the day. And if passed, we expect the conversion shares to be admitted to AIM at around 8:00 a.m. on the 27th of October. So thank you for that. I just want to close on how I'll be judging my progress and how I'd like us as a group to be judged over time. Our ambition is for Dillistone to be a responsible permanent home for excellent businesses, a home for owners who want their life's work to become part of a great British group and to enjoy a bright future long after they step back. Done well, that will be good for those businesses. It will be good for their people. It will be good for the economy, frankly. And through compounding, it will be good for our shareholders. So very excited about the road ahead. Thank you so much for all your support thus far.