Gateley (Holdings) Plc (GTLY) Earnings Call Transcript & Summary

Hello, and welcome to presentation of Gateley Group's Interim Results for the 6 months ended 31st October 2023 and I'm Rod Waldie, the CEO of Gateley Group. And as usual, I'm joined by our CFO, our Chief Financial Officer, Neil Smith; and our acquisition of Director, Nick Smith. So let's go straight to the next slide, the overview slide . Before I get into the detail in this slide, the key points that we want to emphasize in this presentation for you to then look back on. Well, firstly, that our H1 '24 outturn is a further demonstration of our unbroken track record of growth, of which, of course, we are very proud. Also, we have a continuing commitment to invest in line with our stated strategy to differentiate via diversification and thereby enhance the group's resilience. These results demonstrate that our strategy is working for us in practice as in the announcement we made of the interim results, we will illustrate this with both statistics and insight to activity mix on each of our platforms. And our outlook, while our outlook remains sensibly cautious in relation to the near term, the rationale for which I'll summarize in the outlook slide at the end of today's presentation. So in overview, well, as always, I'm really importantly, I'm grateful to everyone in the group for their heart to deliver these results and for their ongoing commitment to delivering the best possible outcomes for our clients. For some of our teams, the more challenging market conditions that we reported at the end of the last financial year provided throughout the first of this year. And in truth, they continue to do so. Here, I'm referring mainly to our transactional teams. Like us, I'm sure that most people watching this presentation will recognize fairly stagnant transactional activity ongoing in most sectors in the market. Despite this, the transactional activity that we handled in the first half of the financial year combined with the ongoing good activity in those parts of the group that are countercyclical or economically agnostic in nature, resulted in revenue growth of 7.6% and at the half year points and underlying profit before tax growth of 4.6%. In addition, our balance sheet continues to strengthen with 11.7% growth in net assets which now stands in value at GBP 83.3 million annual. So our outturn is in a material part, the product of the resilience that we continue to build into both our legal and consultancy services. I've already mentioned that the macroeconomic backdrop presented and it does continue to present challenges for our transactional legal services teams. However, our contentious services continue to grow and accounted for 36.7% of the group's revenue in the first half of the financial year. Overall, delivered 2.4% growth in legal services revenue, of which was organic. Alongside this, our consultancy revenue grew by 24.1% to GBP 22.6 million, of which 12.1% is organic growth. Taken as a whole, consultancy revenue grew to 27.6% of the group's total half year revenue. This, I think, is a clear illustration of our strategy progression. Segmental reporting is by reference to our platforms, and you can see in this slide, in-period revenue growth on 2 of our 4 platforms. The relatively slight decline in revenue on our corporate platform can be attributed to the dominance of transactional legal service on that platform. Our people revenue, people platform revenue is essentially flat. And I'll give some platform-by-platform insight in a later slide. In the meantime, the split in this slide show the ongoing progress that we're making in developing and growing consultancy services on our business services, people and property platforms. The result of resilience is best illustrated on our property platform where we've seen like-for-like drop off in real estate transactional activity, which reflects market conditions, but nevertheless, overall revenue grew on that platform by 12.4%, significantly aided by further growth in consultancies services on that platform. Okay. So moving on to the next slide, please. As I said at the top of the presentation, whilst continuing macro uncertainty very much informs our near-term outlook, and of course, we remain cost-conscious. We do continue to invest in line with our strategy to differentiate via diversification whilst enhancing our resilience. Our platforms absolutely remain our vectors for growth. And our investment is increasingly informed by a broader understanding of opportunities in our chosen markets via the acquisitions that we've made to date. This slide gives some examples of in-period investment, which, in addition to ongoing investment in integrating already acquired businesses includes, well, firstly, the seeding bilateral hiring of 2 new legal services litigation teams dealing with class action claims and international arbitration. In both cases, this is specialist, complex work on long-term mandates. Our outlay here necessary includes related investment in IT systems and marketing. By its nature, this type of work has a longer-term return profile. And whilst in the meantime, there will be some cash and margin impact, the ultimate value of our credentials in this type of litigation is very much in line with our long-term ambitions. Meanwhile, in Consultancy Services in July 2023, we completed the acquisition of Richard Julian and Associates Limited. This is a surveying business with particular expertise in project management services to the affordable housing sector. I'm delighted to say that RJA is integrating really well. And it's performing in line with expectation and making immediate contribution and winning significant work. In Gateley Smithers Purslow, our same business whose largest service link is the provisioning of specialists events services to U.K. property insurance in relation to major loss [indiscernible] We've invested to increase capacity to meet growth in demand as environmental factors and events how claims on [ insurance ] So that's some indication of the types of investment that we've made in the period. Moving on to the next slide, please. Platform Insight. Well, the key purpose of this slide is to show some revenue splits between units and service lines on each of our platforms. I think the slide speaks for itself in this regard, but it's also a useful segue for me to pull from our RNS, some current platform insight. So working from left to right on the slide and dealing firstly with the property platform. This absolutely remains our largest and most material platform. As I mentioned earlier, it grew revenue by 12.4% during the first half of the financial year and that's against the backdrop of the challenging transactional market conditions in U.K. residential and commercial real estate. In legal services on this platform, the housebuilding sector remains our biggest segment. Despite market conditions, the team's market-leading credentials alight to the wide range of specialist services provided, delivered 8.2% revenue growth. This contrasts with the circa 24% contraction that we saw in commercial real estate revenue versus a much more active market in that space in the first half of 2023. However, upticks in counter cyclical legal services activity on this platform is best illustrated by the 33% revenue growth in [ contentious ] construction and 21% growth in revenue in our real estate dispute resolution team. You can absolutely see the impressive growth in consultancy revenue on this platform, of which over 25% was organic. Earlier, I referred to recent and ongoing investments deliberately in specialist services to more economically agnostic markets like the property insurance claims market which is a significant factor in the 39% revenue growth delivered by Gateley Smithers Purslow. Consultancy revenue now represents 40% of overall H1 revenue on the property platform. Moving on to the corporate platform. Well, this platform is absolutely dominated by legal services, and we anticipate that it always will be. Most of those legal services are looked upon transactional work. Therefore, as I've already said, in a stagnant transactional market, I was encouraged by relatively minor revenue contraction of just under 6% on this platform. Flipped sides to transactional activity include work in our restructuring team. It had a busy first half and increased revenue by over 40% on a like-for-like basis. Activity levels in restructuring and general outlook in that space remains strong, and this team is doing well. As is the related service line in our banking and legal services. Moving on to the Business Services platform. While revenue on this platform grew by just under 25%, 24.7%. In Legal Services, our commercial dispute resolution and regulatory teams have been, and I'm pleased to say remain busy. Complex international disputes work is on a much improving trajectory as the team developed credentials in geographies having been forced away from established mandates in Russia and neighboring countries. Here, we are particularly excited by the already mentioned investment that we've made in specialist class action and international arbitration teams from which we expect returns to feed in from financial year '25 and of course, onwards. In consultancy services, our patent and trademark attorney businesses are trading in line and they also have positive outlook. In period, we extended our expertise in this space with the hiring of experts in IP commercialization and valuation, and we are genuinely encouraged by further opportunities to add to our intellectual property advisory services, both in legal and consultancy terms. On our people platform, we saw a very slight revenue contraction. Revenue on that platform is essentially flat. In our legal services employment team, the no runoff from one of its largest clients, the BMA, is almost complete, and the team is utilizing its related expertise to begin to build its credentials in helping NHS trust with internal investigations, which is hoped to be a strong specialist work area forwards. Meanwhile, our legal services pensions team and our Pension trustee business and trust are performing well in delivering a combined revenue growth of about 50% on a like-for-like basis. Revenue contracted in our talent assessment and development and cultural change consultancies, T-three Andrew and Kiddy. However, this is anticipated to improve and in the meantime, those businesses are working closely with our employment legal services teams. For example, on joint opportunities flowing from changes legislation in relation to diversity and inclusion. There is real opportunity for both legal services and consultancy services in that space. Moving on to the next slide, please. And at this point, I hand over to Neil to pick up some of the financial fundamentals. So over to you.

Thank you, Rod. Good morning, everybody. Move on to the next slide, please. Rod's provided a great overview of how we're seeing the group's current and outlook performance at the moment. We continue to remain cautious as a result of predominantly the economic -- current economic environment. And our caution arises is due to the fact there appears to be no immediate stimulus to change market conditions at the moment. This is predominantly, as Rod indicated, seeing on transactional services, but maybe this will change through the impending general election, but who knows we just have to wait and see. All we can do is focus on our own performance, whatever the environment throws at us and do as we've always done at Gateley and invest sensibly for future growth. Our headline numbers from a financial perspective, continued to show healthy progression as inflation calms down and interest rates appear to have peaked in this environment. We continue to test and successfully demonstrate the resilience of the group and the work streams we have invested in. People won't see it yet, but the investment we have added this year and the class action work stream is and could potentially be the largest and most lucrative investment we've ever made. The possible returns from this will take a few years to start showing in our numbers, but we're excited about the possible outcomes. Litigation on this scale will certainly change the mix of work types performed by Gateley moving forward. But for now, I wanted to run through a few of the key movements on this first slide. We're pleased with the revenue growth. I'm not going into further detail on revenue, Rod's overview was a perfect scene setter of how each of our platforms have been performing. Our business sells time in the measurement of that time is through what we call activity levels or utilization. And you'll see on the chart that activity levels in H1 at 83% down on the above average 89% we saw last half year, but more in line with the 84% we saw 2 years ago in H1 '22. Our model typically operates at 85%. So you can see that whilst slightly down on H1 this year, it's not a million miles away from the normal performance level. On my next slide, I'll go through those activity levels in a bit more detail in terms of the position and timing of the year that we're seeing at the moment. Our underlying profit margin has dropped slightly due mainly to higher people cost in H1 as we've invested in new hires and look to support growth areas of the group, such as GSP as Rod mentioned. Our staff headcount numbers support this increase in cost. However, some of these new people are at the partner leader level and are based in our London office. So obviously, costs would necessarily be higher in those type of recruitments. I'm talking here about leaders of the class action international arbitrations teams predominantly. Overheads as a percentage of fees have increased by roughly 1% as H1 last year was still benefiting from the last 6 months of a previous energy deal. This H1, we are on a higher tariff and aside from Energy Technology and the new work stream investments we have made and continue to make have strategically increased our running costs. You'll recall from previous presentations, we installed a new finance system in June '22. This was inevitably going to increase costs but is necessary for ongoing integration. Our numbers also reflect the full half year cost symbiosis acquisition and the part year addition of RJA in this current period. I'm expecting more to come on margin. You'll recall we have increased our headline rates in each of the last 2 financial years, but we charge the clients and although cost increases are proving more difficult to pass on to clients in transactional service areas at the moment due to those areas becoming more competitive and there being less work, there is a much more scope, much bigger scope, sorry, in contentious work streams. In other words, the pivot service lines will and should assist margins going forward. Lock-up has moved out slightly with a small improvement in data days, offset by a greater increase from wet days due to this change in mix work types. Overall, lockup days are in line with what we've made successfully over many years now. However, there's a big opportunity for us to focus on here. We know we can improve this position despite the more difficult economic environment and expect to be able to demonstrate improvements in the future that will improve cash generation. And finally, on this first slide, we proposed to pay a 3.3p dividend on the half year results, a maintained level at this stage in the year that reflects our caution on H2. Next slide, please. So back to those activity trends, I want to talk to you about the impact in what we are seeing as a U-shaped pivot from transactional to contentious service areas. And how that's -- how the economic conditions are causing that to be more of a U rather than V-shaped. The current conditions result in client transactions slowing and taking longer to complete. Valuations on deals for clients are less certain. So decision-making is less certain and elongated. Main impact of this has been on our corporate and property platforms. But as also impacted legal services and our business services plan in the form of commercial due diligence, and our people platform where employment services that support the corporate transactions have been more subdued. The transactional areas of these platforms are currently larger than contentious areas. The flip side to this is that our consultancy services, together with our countercyclical legal services are showing significant increases in activity. Rod touched on a number of the percentages as you did this platform analysis. And when transactions slow, that change can happen quickly. The flip side of that is they can switch back on very quickly. So I think we're well placed with our transactional teams to benefit from future upticks in activity levels for them. The contentious service lines react very differently. They take much longer to get started and last much longer in duration but are often able to charge higher headline rates. Work in progress are unbuild time. The buildup of that takes longer. The results from that span multiple years. And then when they finish or wind down, they take much longer to see and wash through our numbers. So with that as a backdrop, I wanted to highlight our monthly utilization trends. The chart on the screen is chargeable hours versus budgeted chargeable hours as a percentage by month. Q1 was tough, you'll have read this in our RNS. But overall, at a similar level to last year, Q2 was slightly improved and encouraging. But Q3, not on the chart, obviously, it's post the results that we're reporting at this point thus far has been lower than we expected. And you'll see by the typical change in activity levels from January onwards in previous years, therefore, why we have released the cautionary note this time around. I'm not expecting the January and beyond highs of the yellow FY '23 line. There's currently not a stimulus in the economy at the moment. And as mentioned earlier, the interest landscape is much different to what it was last year. Yes, interest rates are probably a little more settled now, but that is not going to change my cautious view on activity in the run-up to our year-end. Against this activity backdrop, we've done all we can at the moment to move our charge-out rates up. Conversion of those rates into fees has not had a material effect at the moment but I am expecting this to work through in our higher weighted second half of the financial year and future years. Everyone is working very hard to achieve the best outcome we can this year. But considering all these factors, I'm sure you can see why I remain cautious on the short-term full year outcome. Next slide, please. Our balance sheet remains a big asset to us. It continues to grow as we invest further. We have a number of in-built strengths such as our conservative revenue recognition policy, our well-managed lockup and a low gearing. Whilst utilizing to expand again this year, we move into H2 '24 with significant headroom in our RCF or funding facility. We are currently GBP 14 million drawn on our GBP 30 million facility. And this facility is used primarily for acquisition financing. I'm not expecting huge changes in our balance sheet shape as we end the end of FY '24, but we'll shortly be recommencing discussions around our funding lines and their renewal in April 25. Alongside the RCF, we also have a litigation funding facility, which will be used with our new work streams. Next slide, please. Consultancy income growth. We've talked a lot about our strategy of building on our important legal service foundations by acquiring complementary consultancy services. On an already diversified legal business, we are diversifying further for acquisition into wider consultancy services. And whilst our property platform, which is a really good example of this, naturally continues to throw up interesting opportunities. You'll note from its 12.4% growth, what can happen when selecting the right acquisitions to complement the legal foundations already existing in that platform. Over the last 2 reporting periods, we've added patent attorney and trademark services to our group and more recently added our plan on services to support affordable housing through RJA associates. By the end of FY '25, I expect all of our businesses to be on our new financial system, therefore, adding further cross-selling and financial management. Next slide, please. Since IPO, our profit performance at both our half and full year stage imposts retains a good track record of consistent growth that investors can align themselves with. Whilst recruitment markets remain challenging, wage inflation is more subdued. And we continue to look at driving efficiencies through the centralization of processes and investment in IT that will help continue to main our track record of growth. We feel confident. We have more than enough property space to facilitate growth, and we are cautious in our investments, but at the same time, not afraid to back new revenue streams when the business case supports them as demonstrated so far in this presentation. I echo Rod's caution over the short term but remain confident on our medium-term performance and excited about our long-term opportunities. I'll hand over to Nick now, who is going to talk to you about the M&A landscape.

Thanks, Neil. Our stated objective at IPO in 2015 was to differentiate ourselves from the competition by becoming a broad-based professional services group. We were, of course, at IPO exclusively a legal services business, and our plan was to acquire and aggregate complementary businesses around our existing core markets and client base. We completed our first acquisition, Capitus, rebranded Gateley Capitus in April 2016. And since then, we've made a further 13 acquisitions, 2 of which expanded legal operations. We now operate our group around our 4 platforms with consultancy present in all 4. In July 2023, we acquired Richard Julian and Associates, the seventh acquisition onto our property platform. RJA continues to scale our quantity surveying and project management services offering by focusing on organizations in the affordable housing sector, a sector which we believe have cross-party commitment and support for the longer term. RJA adds further economically agnostic revenues and resilience to what is already our largest and most diverse platform. Consultancy revenues now represent 27.4% of overall group revenue, a position we've built steadily and deliberately over the 8 years since flotation. We are a professional services group with a long history of success and growth. As such, our strategy has always been to follow our clients as their businesses develop. And on one level, our IPO strategy didn't change that. It merely extended the scope of our ambition. In our M&A strategy, we've added service lines principally around existing client markets and around the business issues already in some way supported by existing operations. Acquisitions are derisked to that extent. But as consultancy businesses have integrated and continued to grow in our group, so those operations become core services around which we can also invest. And so the program moves on increasingly broadening our offering over time that with each acquisition a measured step derisked by and itself derisking existing operations. RJA is a good example of that, but so is symbiosis, which whilst adding life sciences as a new market was derisked our existing patent attorney businesses in Adamson Jones. Similarly, for example, on our property platform where T-three added cultural change to our existing leadership assessment and development operations. Our M&A is intended to be meaningful, but also gradual. And given that our group now supports clients around their business services, corporate, people and property needs, its opportunity is extremely wide. And our M&A pipeline so far in our 8-year journey is always interesting. But because of that breadth and because of the dynamics of individual professional services markets, it's not a one-size-fits-all solution. And so at any one time, we're considering and have considered deals of all shapes and sizes, from very tightly defined niche or bolt-on additions to scale up opportunities, all can be considered by us provided overall balance is maintained across the group. We remain committed to our objectives that we laid out in 2015, and that's because we believe our diversification has dual appeal and is working. It's progressive as it differentiates us and assist us in winning new clients and the bigger share of client spend. But it also adds resilience as we continually increase our number of target submarkets, each with their own economic drivers. You can see that perfectly illustrated we believe, in our H1 numbers, for example, on our property platform. In certain circles, property business is seen as principally economically positively correlated and yet whilst economic growth has been subdued in recent times. Our property business grew in period by 12.4%, directly as a result of our diversified property revenues. We take comfort from results to date, and we remain committed to our longer-term plans. Rod?

Thanks, Nick. Okay. So just moving on to a couple of slides around operational highlights before I get to summary and outlook. Let's go straight to the next slide. Responsible business. Well, responsible business, our responsible business strategy really matters to us here at Gateley. Why is that? Well, firstly, because it's very definitely a component of our purpose statement. You can see our purpose statement on this slide highlighted in yellow. In our purpose statement, we recognize that business is an important catalyst for change. And in our case, our strategy is developed to positively impact the well-being of our employees, but also to help us unlock potential in the communities in which we operate. Our actions very much remain benchmarked to those of the U.K.'s leveling up goals that we feel that we can help contribute towards achieving. These are goals that really matter and really matter to society in challenging times. Our responsible business strategy makes us a more purposeful and compelling organization to work for and to work with. And that's, therefore, enhancing culture and the client relationships. Ultimately, all of these factors should combine back to generate greater value over time, and that's our objective. Now in terms of progress and the current year ambitions, we released our third responsible business report in September last year. It is comprehensive. It's downloadable on our website. And it gives a clear insight into our progress since publishing our responsible business strategy in October 2021, including us achieving all 15 of the targets that we set for the 2022-2023 period. Other highlights in the report include setting the attainment of net zero emissions by 2040 with interim targets by 2030. We launched our volunteering policy to enable our colleagues to support causes that are important to each of them. They can choose which cause they want to support and we will give them up to 15 hours a year of Gateley time to commit to supporting their chosen cause. We also launched a new charity partnership with Alzheimer's Research U.K. alongside our existing charity partnerships. And we further enhanced our partnership with anniversary support to SportsAid and to UA92, which is a university Academy in Manchester, focused on students from diverse backgrounds. It's a great organization to be associated with. Maintaining momentum is really important and we're certain that we can continue to enhance our community impact and make more meaningful progress in relation to those of the leveling up goals that relate to our plant. Okay. So moving on to the next slide, please. Just a handful of people highlights. And I mentioned earlier that whilst we remain cost-conscious, we do continue to make deliberate and targeted investments in both capacity and in new expertise. And of course, that means in people. In period, this resulted in total group headcount increasing to just under 1,500 people, of which fewer head count is now over 1,000. A like-for-like increase of 3.5% at the fee earner level. Our career development programs resulted in us making 126 promotions across the group at the beginning of the last half year period. And really encouragingly, approximately 70% of our staff are now either share or option holders in Gateley. A number of people saw historic share-based awards mature during the first half of this financial year, which was really good to see. It's a very important part of our overall strategy. and very much in line with creating wider equity participation from our staff linked to the growth of our business. Relative to the additional professional service model, it also provides us with a different way of incentivizing our people which is helpful, I think, in an environment where it will be a mistake to assume that payer pressure has evaporated in professional services. It's eased, but it remains a characteristic in the market. Meaning that it's essential that we return to a bonus culture in this financial year, particularly important for us to do that and something that we are absolutely committed to this financial year. Our internal network groups continue to develop and thrive. In period, we launched 2 new networks, Influence and Ignite. Both of these are developed to help colleagues build connectors and foster collaboration between teams and across platforms, very much part of familiarization and then gendering better cross-sell opportunities on the platform. As we reported last September Colin Jones has joined our Holdings Board and just quickly become a valuable member of the Holdings Board team. This October, this coming October, our Chairman, Nigel Payne, will necessarily retire because his tenure will time out. Nigel has been with us since IPO in 2015, and it continues to be an excellent chairman. That made our search for successor difficult, but we're delighted to be able to say that David Wilton will join our Holdings Board at the beginning of February as a nonexecutive chair elect. We've released a more detailed announcement about David very recently, which is accessible on our Investor page. So moving on now to the final slide, summary and outlook. Really just a few brief points a summation of course, of what I've said and a reminder of a couple of the points I made at the beginning of the presentation. So in summary, as this slide reminds us, our H1, we saw a further demonstration of our unbroken track record of growth and we're pleased to be able to maintain the proposed value of our interim dividend at 3.3p. Importantly, we continue to invest organically in people and in industry. And I've outlined alongside Nick and Neil, where some of that investment has been made in the period down to the end of October last year. Aided by our strong balance sheet and through both hiring and business acquisition, we continue to invest in our strategy to enhance resilience and differentiate our business via targeted diversification. And this is working for us in practice. Consultancy revenue in H1 '24 increased to almost GBP 23 million being just over 27% of total group revenue in the period. That's from a standing start in 2015 when we have no consultancy revenue in group. There will be a lag in return from some of the investments that we've outlined today. However, investments of the type that we outlined today are an important component in us realizing our long-term ambitions. In the meantime, we do maintain a cautious outlook and Neil emphasize that when he was talking to us earlier. And that's really because, at the moment, macro uncertainty looks like being the dominant characteristic in the near term. This is definitely reflected in the trends that we're seeing in parts of our business as clients continue to assess options and priorities. It's most evident in our transactional services teams where the stagnant environment has lasted longer than anticipated, and we're seeing fewer transactions typically with longer time lines and less certainty of completion, added to which market forces mean more competition between advisers and greater fee pressure. And as I mentioned earlier, in that context, the corporate platform performance is really strong. That goes on that platform performed well in H1. And I'm very grateful to them for doing their very best to maximize revenue in a very difficult market. Our offset, of course, in our growing consultancy revenue and in the continuing strengthening of activity in other teams that are more countercyclical or economically agnostic in nature. But with mandates typically taking slightly longer to convert to fees, as Neil mentioned. So overall, market conditions remain challenging and our immediate outlook is, therefore, necessarily cautious. However, our medium- to long-term outlook is optimistic, and our operational focus now for the remainder of this financial year, remains firmly on maximizing all revenue opportunities down to the end of April. So thank you all for giving us a bit of time today, and I hope you found that informative and helpful.