Knights Group Holdings plc (KGH.L) Earnings Call Transcript & Summary

Good morning, everyone, and a happy new year to you all. Thank you for joining our half year results webinar today. I'm going to start with an overview of the period we're reporting [ 31st October ]. I'll then hand over to Kate, who's going to obviously go through the financial results. And then I want to then talk about the drivers for our continued accelerating growth. And then we'll pick up questions after that. So just to start with some of the overview. Just a reminder that we actually corporatized what is a traditional law firm partnership model that still exists today as being the model of law. We've changed from that [ kind of ] over a decade ago when we first acquired Knights in June 2012. And that's really been what created the platform almost 10 years ago. It's meant that we've been able to build a culture that has brought the business together. And we moved away from [ silo ] where there are teams or offices competing with each other. And it's a really important element of our culture. We focus on the culture every single day. And this allows us then to work together across different experience levels, across different offices to produce results, which have always focused on profit and cash. We've always focused on [ those ] 2 things. We've brought an investor focus to the business of law by separating the lawyers away from ownership and management. And that's what we did back in June '12. So our lawyers have always been able to concentrate on lawyering, or professionals concentrate on doing the professional services they do because we [indiscernible] as nonlawyers do. And the owners and managers invest in the business and run the business. And that's the real core essence of what -- of giving us the opportunity to do what we show in the results of today. So in this period, we've shown how we've been able to grow the revenues in what's been a challenging period, in and out of lockdowns and the disruption that we've been having over the last 18 months. And I think to grow the revenues in the way Kate's going to go through, I think, has been an excellent result, but always focusing on that profit and cash. And we've been able to bring the business together over the years and continue to then focus on the regions. And I think it's very interesting to see our regional opportunities, which I think will thrive even more now in what we've just experienced over the last almost 2 years with COVID. What I mean there is I think people now, and professionals, definitely are thinking about [ work-like ] homes, thinking of commute time, thinking of do they want to go into, say, the city of London. And I think the regions with clients [ too ] accessing professionals who have been working from home, I think, has made the whole thing a little bit more interesting and has brought a lot to be considered. And I think this will only help our regional strategy, both in the number of people that we can bring in to our business and also the clients that we connect for. The addressable market we have is GBP 3 billion if we include Scotland in it, and I'll talk, after Kate's come through the financial results, more about how we're going to accelerate our growth and take a bigger market share of this regional world that we're in. So if I just look at the next slide here of what we are today, we're now in 17 locations. We've got the mix of the business there. It's a very diverse mix of business, and it's very day-to-day supportive of regional clients. We're driving this business for growth but also very focused on regional clients who want to go to the best professional services business that's nearest to them. If you [ won't mind ] service of the regions this way is what we're really driving for with the corporate client base that we're working for. We've given some examples of the clients there on the slide. But it's local professionals working for local [indiscernible] businesses of all shapes and sizes. It's very diverse, and it's very resilient to the highs and lows of the economy. I don't think we've [ mind the wave ] that I think has been going on over the last couple of years, that certainly a city of London law and big law firms have been having a great time obviously of late. And we too benefit from some of that, but I don't think we see the big wave of that, but we don't see the big downturn on any economic cyclical downturn that's [ made ahead of it ]. We're very resilient, and we're very repetitive in the way we go about business. We always have been -- in fact, we always will be in this regional commercial environment that we operate in. Just showing the sort of track record, we were at GBP 35 million before we came to market in June '18. Our results for [ 2018 ]. And you can see that, I think, the stellar growth that we've continued from listing. I think listing has really worked. It's enabled us to scale the business. I think it's enabled us to grow and become recognized now with a national presence, a national brand. And I think listing has really given us that, and I think these results show it. But always focused on that profit margin and the cash generation as well as the resilience of our regional business model. So I'll hand it over to Kate to go through some financial results. Thanks, Kate.

Thanks, David. So on Slide 7, looking at the results for the year, just as a bit of a highlight. As we've talked about before, we've always grown this business. As David has mentioned, we've grown over the last 10 years since we did the first acquisition, we've grown it to concentrate on profitability and cash generation, and that's been complemented by good, strong growth as well. So really pleased with the results for the half year, again, delivering strong revenue growth of 29%, a strong increase in our PBT growth of 26%. And again, you can see that excellent cash conversion of 105% for the period. The way that we get such cash conversion is because we've got a continued focus on management of our lockup. And our lockup, which I'll talk about in a bit more detail a bit later on, but that's the amount of time essentially that it takes us to convert, the [ use ] of time being completed on the job to cash in the bank. And you can see that we've achieved 99 days over the period and which is made up of 33 debtor days and 66 WIP days. And I'll talk about that and how it's impacted by acquisitions further on. And that really strong cash conversion has helped us generate a net debt position at the period end of GBP 23.3 million which compared to the year-end position of GBP 21.1 million is an increase of just over GBP 2 million, both that's after we paid acquisition and consideration-related cost of GBP 7 million. So I'm really pleased with how we've ended up there. Over on to the next slide, we'll talk about a little bit of a breakdown of those financial results there. So as you can see, we've delivered revenue of GBP 59 million for the year. Of that, GBP 9.1 million came from acquisitions that were completed during FY '21. So the 4 acquisitions that we completed, that generated GBP 9.1 million worth of revenue during the period. Really pleased with how they've integrated [ that ] performance just slightly ahead of where we expected it to be for the first half year, showing how well they've integrated into the business in such a short period of time. So acquisition-wise, it's going really well. Organic growth, we've delivered organic growth of circa 9% in the half year, which represents around about GBP 4.4 million worth of revenue. Pleased with that organic growth. It was sort of -- as David has talked about, we've always generated [indiscernible] at our business in terms of profitability. So we have done a small amount of restructuring to sort of look at some nonprofitable revenue lines in there. And so still generating organic growth of 9% is good, and it's where we want to be. As to how we've generated that organic growth, it's essentially come from us looking at -- continually looking at our pricing. There's a rate increase that we put in as of the first of May. As we've talked about in the past, that takes a little while. But to confirm, it wasn't -- we don't change all of our pricing immediately. But during the latter half this half year, that's come through and expect to see that coming through further in the future. And also, more importantly, a continued focus on pricing. It's something we've always done, a recovery of our time. And it's something we've definitely been doing in earnest in this year, in the second half year definitely. So making sure that we cover more of the time that we spent on the job and there's less leakage in the job effectively. And that focus on price and less leakage has helped to generate an improvement in our gross margin. You can see there our gross margin has increased to 48% from 46% in the prior year. And that's essentially us keeping tight control of our cost and just getting more revenue out of slightly fewer [ periods ], not necessarily working harder, but making sure as I've talked about that there's less leakage and we're getting more of our time. So that's really good, really pleased with that improvement in gross margin that we've managed in this time. We then look at the other significant elements of [indiscernible] the operational staff cost. The operational staff cost have gone up slightly in the same period as last year with 11.4% this year compared to 10.5% last year. But that's reflecting the investment that we've done to give ourselves a sustainable base. You'll recall at the last -- during the second half of FY '21, we invested in client service direct, had some operational support staff the senior operational support staff, that's the full year effect of that cost coming through now you can see in the first half of this year that weren't there last year. So that investment is important to us to make sure that we've got that sustainable base. What we do see that we've got a good level of client service. Perhaps just we will continue to invest in that, but we see that starting to leverage as we grow the top line further. If we look at staff costs overall as a percentage of turnover, our staff costs overall have actually declined in the period compared to last year. They're at 63.4% this year compared to 64% last year, which is really good, really pleased with that. And I think that demonstrates hopefully a question that I'm sure many people will have as to how we're being impacted by salary inflation that you read about happening in London, in the city of London. We're managing that well, and we're not seeing any negative impact of that on the business. Looking at the other operational costs and an awful lot of those have stayed really in line with where we'd expect them to be with the level of revenue. The one point to pick up is the depreciation and finance cost relating to IFRS 16. That's in relation to property cost and for IFRS 16. Now those property leases are recognized through depreciation and finance costs. We did invest in property costs in our property portfolio during the latter half of the financial year to April '20 and a little bit during this financial year as well. We've invested in some really quality properties in Birmingham, [indiscernible], Nottingham, York. And you can see the cost of those coming through. We do see property as being a really important part of our business. So having a grade A good quality premises for people to come back into once we can actually get back into offices, we see it really as part of our working as one team, our collaborative culture for people to be in offices. And we did see during the period from -- to September through to early December, when people were more in offices that people were really enjoying being in offices and there's a real appetite to get into offices and work as a team again. So we see that as being important for our culture. And also, it's good to have good grade A quality places where we put people into. And we do have capacity in some of those core premises now in sort of the big cities in Birmingham. And most of our offices, we do have some spare capacity so that we will look to leverage those costs further in the future as we recruit into those offices and grow the revenue in those offices. Putting all of that together, we're pleased with how the PBT margin has come out for the half year. We're at 12.6% compared to 13% last year. But given that investment that we did in the operational support and the property during the second half of last year, pleased to report that margin. Just looking generally at sort of the margin and sort of where we expect it to get to for full year. You will recall or may not, but there is always a second half weighting in terms of revenue which generates the drops on our [indiscernible] PBT margin. Our revenue is always, and it was last year, and we expect it to be this year. Again, roughly 45-55 split and the reason being quite simply is during the first half of the year, it generally is hit hard by holidays. And our revenue is obviously a function of how much time people are working. And there's also client demand as well in terms of client year-end, for December, March and April, which fall in the second half of the year, which always means we have a slightly higher second half weighting in terms of revenue than we do in the first half year. We were hit, I think, even slightly harder in the half year to October '21 by holidays because everybody had an awful lot of accrued holiday at the end of April which, as I'm sure, happened across many industries. People talk quite a bit about holiday during July and August when they could actually get away. And so given that half weighting, very happy with the sort of 45-55 split of revenue post which would take us to where the consensus figures are for the year. And that then generates a higher PBT margin in the second half year. Our costs were obviously relatively stable across the year, but a bit -- with that split of revenue. Last year, we generated [ 21.8% ] of PBT margin in the second half of the year, and we're looking to do just over 22% in the second half this year, which would take us to our PBT margin of circa 18%, which is where consensus is at. So that's the reason why we're comfortable given our historic experience as to where we've [ adapted ] for the PBT margin for the year as a whole. Going on to the next slide, just very briefly, this summarizes PBT bridge from mainly summarizing the points I've talked about before. The one point I will pick up on that is just the acquisition income, so the profits that has come from the acquisitions that we did in FY '21. You'll see that we've got -- estimated that's around about GBP 1 million, which is about an 11% PBT margin based on the GBP 9.1 million worth of revenue. That's about where we'd expect it to be this year. Those acquisitions came in right down last year or some of them actually some have come on to our systems until June, the [indiscernible] of those acquisitions came on to our system in June this year. And so all of those cost savings have now been made, with the initial restructuring which has been made, we've not had the full benefit of it for the full half year. And then the rest of the synergy savings that we expect to get from aligning all of our contracts and bringing everything together, we will make over the next 6 to 12 months, which will increase those margins from the circa 11% that we're making now to the 18% in line with the rest of the business. As a Board and a management team, the key focus for us has always been profitability and cash conversion. And this table here just summarizes really those key KPIs that we look at. The gross margin, you can see the pleasing trend in that. The red line shows the full year figures and the blue line is showing the half year trends over the past 3 years. So pleased with that improvement in gross margin. And underlying PBT again is in the sort of trajectory that we wanted to do and happy with where we expect it to be. And again, we've delivered very strong cash conversion. So 2 key focuses for the business and happy with where those KPIs are showing us. Over on to the next slide now, and I'll just pick up 3 salient points really on the balance sheet. If we compare the balance sheet at April '21 to the balance sheet at October '21, it's very similar. A couple of points just to pick up movements from October, plenty of things to discuss. The increase in right of use assets, those are reflecting the leases that we signed or new premises or leases that we've acquired as part of the acquisitions that we've done, they're now capitalized on the balance sheet. And that talks about the investment property that I talked to in relation to the property expense in the P&L. The next point there is net debt. You can see that net debt has increased from GBP 21 million to GBP 23 million just over, which is very pleasing in terms of our leverage. Our leverage there, if we're looking at the consensus EBITDA for the year, is 0.7x, really pleasing position for us to be in, at least with how that's come through. And that's despite having paid circa GBP 7 million in terms of acquisition costs. We did during the year expand our RCF facility to give us a GBP 60 million facility in total. So you can see that, that gives us over GBP 36 million worth of headroom going forward, which we will use to invest and run the business. I'll pick up on that a little later. The only other unusual point, just to pick up on the balance sheet there is the deferred tax. As you'll know the deferred tax rate has been increased to 25% as of April 23. That was substantially enacted in May 21. And therefore, we have to then now restate our deferred tax liability to reflect that increase in rate. And that's resulted in an increase of approximately GBP 1.5 million in the deferred tax liability in the balance sheet. So talking now about our working capital and how we manage that and how we generate our strong cash conversion. Just to go sort of back to sort of basics, our working capital we look at is being our debtor days plus our WIP days. And it's effectively the amount of time it takes or the unit of time we spent on [ a month ] to when we get the cash in the bank. We're generating now, you can see the trajectory at the half year points over the past 5 years and sort of we generally are 99 days as well within where we'd expect to be. We target for the business as a whole around 90 days, which would be 30 days -- debtor days and 60 WIP days. Generally, the position is always better at year-end than it is at half year. But pleased with where we are at half year. And the level that we're working at, 99 days at the half year is still considerably better than the industry, the average, which is around about 130 days. And just to give an example of what sort of other businesses are [indiscernible] we've put out on there on the right-hand side of the slide, the lockup in the acquisitions that we've done over the past couple of years. And you can see that are considerably higher than what we're operating at now and what we do with each of those acquisitions as we work with them to bring that lockup down closer in line with what our standard target is of circa 90 days. And you can see how we've achieved that. So take a little longer than others. It depends a little bit on the makeup of their work in progress and what they've got within their balance sheet. The debtors are quite easy to do because that's something that's been invoiced, and we can change that. Sometimes if we've got agreements set up with clients, that will mean we'll only build on completion. It takes a little while for those to unravel and so that you'll see differences in achievement. But if we go back to the acquisitions that we did almost 2 years ago now in terms of EGL and ERT, you can see they were 140 days when we acquired them. And they're at 87 days at the end of October. In terms of when we do look at working capital, just to be clear, we do exclude the acquisitions that we did in the prior year. So the acquisitions from [indiscernible] are excluded from that. But now we have included -- the acquisitions that we did in FY '20 are included within that 99 days. So they're actually average out now to around about 106 days. So they've had a slight negative impact on our lockup at the end of April. But you can see they're all coming down. And we'd expect those over the next 6 to 12 months to come down further in line with where we want to be. So continued focus on our working capital. It's something we've done for 10 years. We're really proud of where it is. And you can see that demonstrates what we do and generates our strong cash conversion. Over on to the next slide, our net debt which is really there, which is just picking up on picky elements that we've talked about. And as we've said in the past, pleased with where we've landed up, it's in line with where we expected to be from a Board and internal purposes, GBP 23.3 million after spending circa GBP 7 million on the deferred consideration and acquisition costs for the acquisitions that we've done. And now then just looking at our capital allocation, our approach for the business as a whole. As we've talked about, we are very cash generative. We've generated 105% during the period. We were always sort of looking to do sort of circa 70%, 80% plus and that's very good. That means we're a highly cash-generative business. And so there's an awful lot of business being generated from our core business as a whole. What we then do with that cash allocation and the RCF facility that we have available is we then will look to invest this in our growth. So invest organically. Every time we're growing organically, we're recruiting individuals. And that takes money to invest because those individuals come in, but they're not with us -- we pay their salaries from day 1, but they're not generating the revenue at the level we would expect from day 1. So each individual that comes in takes circa 6 to 9 months worth of investment in there. So -- but we've got plenty of cash available to do that. And then selective acquisitions. We're acquisitive. We'll do acquisitions and David will talk later on about sort of future prospects for acquisitions and sort of in terms of what capability we have to do those acquisitions. If I look at the facility that we have available and to take into account the consideration that is due on those that we're already committed to, and looking at the dividend policy which I'll touch on later, taking all that into account and then taking into account the basis that effectively, we generally pay around about 1x revenue for the businesses, paying 1/3 cash upfront. On the facilities that we have available to date without future cash generation, we've got availability to do acquisitions of circa GBP 50 million to GBP 60 million worth of revenue currently. So lots of fire power just to go forward and do acquisitions. And then the dividend there because of the headroom that we've got, the cash headroom we've got and because [indiscernible], we've reinstated the dividend policy about 20% of profit after tax, which is the rate that we've done it in the past. That equates to around about GBP 1.2 million worth of cash out. And that leaves us still with plenty of cash to go forward and invest in the growth, which David is going to talk about next. Over to you, David.

Okay. Thanks, Kate. So there's 2 main drivers of the growth, and that's organic growth and the acquisition growth. I'm going to talk about also what we've done and what we're going to [ currently do ] to scale the operation to facilitate and manage the growth, particularly from a cultural integration perspective, which is absolutely crucial to building what we call a [ long distance ] community. So first of all, on looking to grow organically. We've got a very sticky client base. It's based upon long-standing relationships with our people, and it is very sticky. We look at this all the time just to see how we're trading with clients, and it's an incredibly sticky client base that we now feel that we've got much more breadth and depth and a much more national presence, that we are seeing some good early signs of then doing more for clients. So cross-selling and doing more for that client base. Clients like McDonald's, we're doing more for Hansen, Rolls-Royce. These are long-standing clients. And now we can start to grow organically. On the back of those larger clients, now we are a larger business. It's pretty obvious in some ways, but it needs then focus and letting the clients know what our capabilities are, so it can hopefully expand on that trusted relationship. If you look at winning new clients from scrap, perhaps the fastest way to do that is to recruit the people with the relationships. Again, in the regions, it's much more around clients, corporate clients having relationships with professionals and partners. And so the recruitments is important and will remain a priority to us every day. I think what's important to mention about recruitments, and it's very similar with acquisitions, is what's happening to the partnership model because I think it is now unraveling. And I think the next generation of people coming into the [ lead ] profession are not as positive about going to a bank and borrowing, say, GBP 250,000 to pay to a retiring partner. So the appetite for the next generation, say, the 35- to 40-year old partners, partners in their 40s, the appetite is diminished substantially over the last decade and I think will continue to diminish over the next decade. And therefore, the succession to partners is -- I'm going to get onto that in respect of acquiring businesses from those partnership groups. But also, they don't want to stay in that model so, therefore, we can hire them. And I would say still the biggest driver that pushes people to our model is that they don't have to take financial risk of borrowing GBP 250,000 to earn more income. We can pay them more income from our model. And then we've got other things like share options also incentivize and reward. And they don't have to borrow any money. And they like that. They like the fact they can earn and save more, but they don't have to borrow money. So it's a big push to this unique corporate model that's now coming up 10 years old. And they now identify and they're much more comfortable with it, now we've been around for a lot longer and definitely since listing they've become more aware of it. So a big push for us to be able to continue to recruit at the levels we have is that financial risk that they don't want to take and they don't have to take with us. We certainly have a fantastic time hiring. If you go back to last summer because we've got going quickly whilst COVID was still very low, we pushed the button on recruitments at the beginning of June last year. And we had a great opportunity to hire which we took advantage of because most of the firms were not hiring. That's changed, obviously. In the period we're reporting and currently today, it's a much more competitive environment to hone it. So I'm delighted that we're still carrying on the same level of hiring. And I think the biggest reason that we're able to carry on at the same level in this competitive environment is when it wasn't competitive over a year ago is because of the model and the uniqueness of it and the advantage it gives to people without having to take that financial risk. And this is really important to our organic growth. Another [indiscernible] is the pricing. But Kate's talked about how we continue to work hard every week now on pricing to bring the business together and to mitigate the leakage of our [ tides ] so that we capture it in revenues. But that recruitment of people remains a very important feature of the organic growth. Pricing, I've touched on. I'll move on from that because I think we've touched on that, but we can pick up on any questions there. Probably one question that I think we do get asked is was that a one-off pricing hike? No, it isn't. This is going to be continuing. We're simply going to look at pricing as we get to the year-end and from 1 May, where we'll definitely be -- we're getting ready now to look at that price increase, so we can implement it as quick as we can into the full year to get as much of the full year effect of that price increase as we can from 1 May coming up. Just one example of expanding the services that we're pretty excited about, and that's the debt advisory team that we've had. We've hired [indiscernible] Tony Dean. He's a senior banking professional. He came to us from Santander, HSBC in Santander, very well known in the Manchester community. Real senior hire for us. And he's brought a team with him working also with another senior banking lawyer that joined us a year ago, Jonathan Edwards. And the 2 of them have now already, I think, got a fabulous reputation, particularly in the Northwest. But we've already -- Tony has been across all our office network in the autumn period, he managed to cover in November, December most of our offices to really explain to people the relationship holders, what we can do. And that is basically help the corporates lift up their balance sheets and their leverage position and their debt facilities. Obviously, interest rates now [indiscernible]. Refinancing, therefore, is going to become more relevant. There's still COVID loans to be refinanced. So there's a big demand for this, we believe, from a client base, which is thousands of company clients that we can now hopefully leverage with this new debt advisory service. It's pretty unique when we put banking expertise with lawyer expertise. That's something new that started first November and has already got off to a really solid start actually in November, December with constructions coming in, which was ahead of our expectation. I'll move on to acquisitions. And again, I'll go back to the point about the partnership model and how that's changing with the appetite from the next-generation diminishing. And this means that the succession for equity partnership groups is diminishing. And so when they come to get that capital out, the capital account and current account, they're more worried about that today. And this is driving, I think, already some of those acquisitions we've made. We've done 15 since we listed. We did 4 before listing. So we've done 19 in total. Of those 15 in the last 3.5 years, there's been 2 or 3 of those that have been definitely fueled by this concern that the sellers, the equity partners had for who's going to take the business on after them. So I think that will continue over the next few years and over the next decade. I think that will definitely fuel M&A and push businesses towards [indiscernible] in the regions. The driver and the #1 priority for us with acquisitions is cultural fit. That leads us always to where we go next. And I'll go on to an example of the most recent one that I think is a fabulous example of cultural fit. But it's also an example of what I think is going to start to develop. It's early days with this. But this is law firms contacting us. And this business aren't just law based. And Teesside called us, and we didn't approach them. And we've seen this a little bit, and I think this is going to develop over the next year or 2 or 3 in the medium term. I think we'll see firms approach us for the succession issue I've mentioned. But here, it was also -- what's driven it equally, if not more, by the fact that this business had sort of reached a glass ceiling of GBP 4 million revenue in Teesside. And it saw great commercial opportunities for itself in Teesside. But he couldn't exploit them. And the nearest -- the freeport status was granted a year ago, almost in March last year. All the inward investment that's coming into the area, they wanted to have a piece of that. They wanted to be very much part of the action in Teesside. So quite a modest acquisition for us at GBP 4 million revenue. Not an obvious area, Teesside. But when you start to scratch them on the surface, you see that this has got a lot going on. And this is much more exciting, I think, the scale of it. Quite interesting the driver to it was so that, that partnership, which is predominantly quite young partners in their early 40s want to take their business and their careers to another level, and now they can do it with us. And the cultural fit is incredible. This acquisition already, they've only been part of our group for just over a month, and it feels like they're part of the family already. So we're really excited about that. But just an example of I think what could happen going forward with partnerships and law firms approaching us to -- knowing that the partnership model is outdated, knowing that they can't go any further and knowing that their careers [indiscernible] as they can get, and evolve with a group with the resources and support that we can give them. As I've mentioned, through the organic growth and through the acquisitive growth, it is vital that we have this group now that we've built over the period since we've listed. And were kind of the A class just directors. I'll just summarize at the bottom their role. Their #1 role is to lead the culture and integrate people into our culture. They generally have 2 or 3 offices each. And they are there as the cultural leader for those offices in those groups. They mentor the partners. They take responsibility for delivering the financial management results and the excellent cash generation which we've focused on for a decade now. And also to grow that business organically, leverage the client base, [indiscernible] the resource, the national resource in front of the larger client opportunities and to as well lead on the recruitment and occasionally find acquisition opportunities, too. So I work closely with this group. I talk to them most days. We have a meeting every week. And this is how we're managing to do this and mitigate dilution of culture. It's a big question I certainly had when we were sort of thinking of growing at this rate and we're coming to market, how are we going to keep the culture. And I think we've delivered a fantastic result and maintained our cultural integration. The culture of Knights is alive and well because this group are doing such a phenomenal job. So in summary, we -- what I think we've shown in this period that our recruitment has remained just as strong as it did a year ago, even though the market is much more competitive. Kate as well highlighted that we don't feel that salary pressure. There are elements of it. I'm not saying we're totally immune. I think, around the newly qualified level, I think we'll feel a little bit of pressure. But overall, and particularly, our partnership group, they're very happy. They like the model, they like the fact they haven't got financial risk or business responsibility. They like the fact they can get on with their client work and do what they enjoy best. And we've got a very happy ship, a very stable ship. And that will then attract more people, as I've mentioned, on the recruitment. We have got now a growing pipeline of opportunities. I think it's been stop/start on acquisitions for us in this last year or so because of lockdown in and out. I think it's still in a virtual lockdown of working from home. I hope now as we hopefully come there out of COVID and we get back into a stable working from office environment, I hope that will then put some more momentum into the pipeline of firms that we know, that some we like. We want to get to know them more and we want to carry on expanding our geographical footprint through acquisition for sure. I was pretty excited about when we did this in 2012. I could feel from my experiences of 16 years in the law until [ '04 ] that there was now an opportunity to really do things differently. And I think our model now is pretty clearly showing itself to be an attractive model that's going to be resilient and the model for the future for people to be part of. I was very excited when we came to market to really accelerate the growth. And I think we've shown what that's done, it's worked tremendously being listed. It's absolutely done everything and more that I could have hoped for. But if you ask me today in 2022, I'm even more excited than I was in '12 or '18 about our opportunities ahead. I think we've got the model. We've got the platform. It's working. It's very resilient, much what the economy has been. And I think we've got an amazing opportunity now to really make the regions our own in respect of commercial, legal and professional services for the corporate client base. So that's certainly how I feel about things today. So we'll end it there and take questions, if we may.

And we have a few questions submitted by Andrew Simms at Arden Partners. Can you put the organic growth of 9% in the context of the comparison in half 1 '21 where COVID affected the performance of the business?

Kate, do you want to answer that?

Yes, that's fine. I think sort of, if we look at where we are in terms of the half last year, we did do -- as I talked about, we did some restructuring in that period. And we sort of taken out sort of nonprofitable elements. But when we look at it, we're not always comparing like with like because we do acquisitions and those acquisitions come in from the first year. So comparing last year's organic growth to this is slightly different. We haven't done a 2-year comparable because we integrate businesses, the acquisitions that we did in FY '20, which are now within our organic growth but weren't last year. And we're not comparing apples with apples. But we're pleased with where we've ended up. I think last year, we were hit quite hard, but we did some restructuring in order to manage that and maintain our profitability, which we are pleased with. I'm pleased with how we came out. So we're building from a solid base this year. So we're pleased to generate that. And as we've talked about as well, our focus has been actually on profitability and making sure that we maintain that profitability. So although organic growth is important to us and it's something we strive for. And we strive for such a strong organic growth, that's not at the expense of us having profitable good quality revenue going forward.

Thank you, Kate. And Andrew goes on to ask a question which you've touched on anyway. Regarding the restructuring, can you provide a bit more color around the cultural misalignment? And following from this, as you grow and acquire, how do you view the management structure of the business and any need to adapt as you scale?

I think when we talk about restructuring now, we're talking about sort of certain elements, pockets -- small pockets of revenue which are not very profitable or don't fit the sort of model of what we're doing for quality commercial work with quality corporate clients. So we come across those from time to time, we always have. In this period, we've dealt with those. We could have got organic growth to be in the sort of low teens. I'm absolutely sure we've not dealt with those pockets. We've been much more focused on the quality of the revenue. And as far as how do we deal with the management on acquisition, if that's where the questions are aiming, then it's pretty straightforward. We -- the partnerships through groups that we talked to and acquired want to in the main get back to what they look for [ investments ] client and they want to get away from things like money laundering and compliance and IT and HR issues and cash flow and all the things of business which they don't really enjoy. So the majority of the partnership wants to get back to just doing client work without the interruption of having to deal with all the admin and those things that we do for them. Occasionally, or quite often, this is a single partner, managing partner that may retire as part of the sale process because they don't want to go back to client work and feeling -- or that's not what they were doing. So if there's a restructure, it's the managing partner retired and all the other partners then carry on with what they're doing without the interruption of having all those partnership meetings. All the owners carry on. We know there's going to be churning of the owner group. It always is on an acquisition. It's a disruptive thing, and we always plan for that kind of up to 20% of revenue churn in part of the acquisition model. And then the back office gets restructured. But the restructuring Kate is talking about there from an organic growth perspective and revenue perspective was around nonprofitable, call it poorer quality elements of revenue, which we have sometimes, and we don't have all the times. That depends on the acquisition and what's in the mix.

I'm going to move on to Robert Plant from Panmure.

When we spoke last, David, you seemed a bit more relaxed about remote working. You said perhaps up to 40% remote working. What was your experience for the brief time that people are back in the office? And what do you think will happen post the return to work?

So yes, we had a return to work on first October. We sort of tried a soft return first September. Sort of that [indiscernible], really from first October, said at least 60% of our staff in offices is what we asked for. I think we didn't get that straight away. It took a bit of time through October, November. I think as we were going into November, I think there was momentum building towards that 60% level. We see this, and we know what's going on. And we weren't going to sort of -- it's a sensitive area at the moment. I'm sure we'll see that. But people have got sort of different views. So we saw momentum growing in October, November. And obviously, with Omicron, it soon got halt. I think going forward, I think it's too early to, I think, come up with hybrid rules is how I see it. I don't think we need to try and come up with a formula. I think it's been too stop/start. It's been too changing. And I think 2022 hopefully, if things settle down as they start -- they're starting to look like they're well and we do have a return to normality without any more homeworking being sort of guided by the governments and the waves of any more viruses and infections doesn't come, and we can then start to get to a stable period, I think we'll need the year, probably 6, 9, maybe even 12 months, to, I think, settle down into seeing where people feel they're at. My hope is that, in the main, people want to be in the offices. And we started to see a very early sign of that in November. I think our people are gaining such a lot from being with their teams. And I think working from home is highly efficient when we do what we're doing today and all are working from home. I don't think it has those efficiencies if 60%, or maybe more in these times, summer, ends, [indiscernible] at home, I don't -- I think you lose the efficiency. So I think if you're all in, you got efficiency and if you're all home, you got efficiency, how is it going to work? And I think in the main, I think it will end up working out but we will see 20%, 25% more room in our offices because there's more flexibility and agility because people have got used to do what we're doing today and working from home, talking to a screen. So I think there will be a day or 2 that people want to be at home to take traveling out or to be able to do things efficiently at home. But I hope that 3 or 4 days of the time, people are in just so that the experience levels can work together and we can work for clients together and cross-sell to clients together. And I think the opposite has provided the right type of environment for the team culture that's so important for us. So I think we've got to wait and see through 2022 to really know the answer in '23.

And we'll go to Steve Woolf from Numis.

Just one for me. In terms of the investments you're looking at going forward, you've launched, obviously, the debt advisory sort of service. You've obviously now built up the tax advisory service. Are there any other parts of the legal services market that you think you would benefit from to further expand your service offerings to clients and build that revenue?

Yes. I think we do have a very broad spread of real estate work. As you've seen, it's 37.5% of revenue across many things, [ query ] management, lots of property management services work that's very repetitive, vary day to day, but has surveyor in it. I think it's obvious that we could get in early to that cycle and leverage that relationship with property investors and property owners. But I'm talking to the scale of the sort of [ Hansens ] and other large institutional investment portfolio where I think working with a surveyor team would be very relevant to agree things like rents and rent reviews and valuations. We've always had accountants doing the -- some of the corporate valuation with HMRC on share option schemes, et cetera, which has always been -- we've had that for the last 10 years as we built that. I think in the property and real estate world, I think coming with surveyor is the equivalent of [ commerce ] where you can do the commercial valuation work that would be a really neat extension and get us into the cycle early with clients [indiscernible] as well as doing more and stickier. So surveyor, which I think you can take that to cost management as well the [indiscernible] surveyor type of area where cost management and project management. We've had some very prominent loops, the cost management, project management businesses, small businesses. So I think there will be, in time, acquisitions that may be sort of get us off the ground with something that is very close to our core. I think the trick to the professional services -- I prefer to call that one non-law. I think that's quite [ compass ] of law, to be a lawyer of non-law. I think this law legal and other professional services, I think the trick there is to work from our core. So surveyor does that. I think cost management does that. Tax and accountants doing tax has done that with the corporate and houses tax of a client, we do it for private clients. And I think banking has done that with -- it's a natural extension. So I think it's really important we don't get too carried away and that we absolutely work from our core, and it's a small step sideways rather than a leap with a gap in it. But that would be this sort of area. I think corporate finance to lead advisory -- we do debt advisory now. I think we could expand that to lead advisory to work with clients on buying and selling and again, their own valuations and their own strategies for acquiring all [ tracks ], that would be another extension from debt advisory, which I think we'll see how we feel about as we get debt advisory evolved over the next 12 months.

We'll go to Sam Dindol from Stifel.

Three questions from me. Firstly, how many senior hires were there in the first half and what you said for the full year? Because I think there were 29 new partners there last year. Second, on the price inflation, how much of the sort of list price rise you normally get through? And did that totally offset inflation in wages you're seeing? And then finally, just on Steve's question in terms of buy or build for market professional services. Do you think the focus going forward will be on -- primarily on the legal acquisitions? Or do you think you could do -- for the corporate finance, you think that will be an organic build out first just to get used to it and then acquire. Sort of any thoughts around that would be great.

Yes. So Sam, in terms of wage inflation, price inflation, we will sort of -- annually we'll do an increase in our rates, a review of our rates what we commercially think we should put them at, and that always starts at the first of May. Now some of our -- an awful lot of our fees are on fixed rates. And so that takes a while for those fixed rates to be amended to come through to reflect those pay, those rate increases. And also, there's a delay in actually sort of that coming through into the system. So for example, if we increase our rates first of May, that will only be affecting new matters that are starting then, so there will be some existing matters which are running off and they will stay at the old rates generally for a while unless we contact each client to change it. So there's always a delay in it coming through. So you don't properly see those changing rates coming through probably for 3 months in terms of where we're charging for hours in time. In terms of fixed fees, that's probably taken a bit longer. That's probably taken 6 to 12 months in terms of people getting there prior to that. And that's what David has talked about when he's talked about what we're doing on pricing. We're doing an awful lot at the moment, making sure people are quoting the correct prices to reflect the rates that we're charging. So we expect to get that to come through but it doesn't all come through straight away. It takes time for us to train the [indiscernible] and give them the confidence to create the correct prices that are reflected in those increase in rates.

Okay. Thanks, Kate. The first question is about number of hires. It's first identical in the 2 half years, I think we were just over 20 in each case for senior hires in the summer of '22. So it's the same number. That's why we're delighted in a much more competitive environment. And then there -- we're slightly bigger. We're a bigger business over more sites, too. So there's that to take into account, so that's not like for like. But delighted to do it in this market, that we maintain that momentum. And we'd expect -- hope for something similar going forward in those sort of senior hires that we concentrate on. We have a recruitment director that focuses all -- virtually all of his energy with now a slightly expanded team around him dedicated to hiring partners and senior associates. We've got a really good process, I think, where we do a good job on sort of following the process through. Your third question around expanding professional services. Is it sort of dipping the toe in the water through taking somebody in that acquisition? I think it's a sensible question, and I think the right approach often maybe to just dip our toe and take on that type of professional to understand the world. And we've done that actually with surveyor. We have 1 surveyor in the business that joined us there 1.5 years ago. It was actually being quite taken up with our own business and was worked internally more than externally, but it's certainly giving us a flavor of that external world of surveyor. And it's an example of the question you've asked. So I think we'd like to dip our toe. We'll be -- we won't race with other professional services. But if we did bump into a cultural fit in an organization that was other professional services that was close to our core, the cultural fit was exceptionally strong just as we see with law firms like Teesside, then that might be an exception to the rule I've just said. So I think we'd approach it to try and organically do it first and then get a bit more ambitious through acquisition unless we saw something that was compelling from a cultural perspective.

We'll go to Tom Brookhouse at Investec.

Just a few from my side. Kate, after the rate card increases that you spoke to earlier in the presentation, just thinking back to when you presented last year, you suggested that your rates are about 20% lower versus sort of comparable top 50 peers. Just wanted to understand sort of post this increase, are you now in line with average levels would you say? Or is there sort of still more to come here? And then just picking up on those 20 hires that you just spoke to, David, is that a gross or a net number? If it's gross, could you possibly provide a net number? And then finally, on the low employee churn that you've mentioned on Slide 16, how does that compare to historic levels? Is it still sort of low single digit?

Talking about the sort of rates, Tom. In fact, I mean, we still think we've got some place to go. Effectively, it's very difficult for us to give a direct comparative. Everybody sits in the market and it's basically what the commercial business would pay. If you compare us to what sort of that [ magic circle ] paying, we're an awful lot cheaper than them. If you compare us to where a high street firm is, we're more expensive than them. If you compare us toward the top 50 firms, which is the most comparable thing that we can do, we still got some headroom in there to do that. And the biggest challenge for us is making -- is getting our firms to be confident enough to charge those months and pay as if -- we don't get kickback from clients when we're quoting for this. It's a cultural thing. It's bringing people on the journey with us, which you can't do all in one go, so we're sort of doing it in steps as we always will do to keep ourselves competitive. But then -- we still feel we've got sort of some headroom there. But it's bringing the people on with us. It would be pointless for us putting that full 20% on to the rates if we haven't got the fee earners from our quote [ and have kept ] rate values to reflect those increases in rates. So yes, there's still a bit of headroom and we're constantly working on the challenge of pricing. And it's something we'll continue to do.

I think just building on that, Tom, it's pretty unique with the regions in some sense is because the top 50 are largely have a London presence and some have an international presence as well. So if you look for the scale of Knights that's solely regionally, really it hardly exists now. And I can pick residential conveyancing is an area that we have grown in actually in the past years. And we've taken a minimum fee of GBP 750 and made it into GBP 2,500 as a minimum, and it's still -- we think it's got some room ahead of it. So we've more than traveled the minimum fee and we're seeing very little -- it's about 10% volume reduction while we've more than traveled the fee. And you would have never predicted that. And it just I think shows the unique -- we've actually carved ourselves pretty much our own area of the segments of that residential conveyancing market away from high street for those people that the house is more expensive and it's the high net worth clients that we're looking for. So it's -- and trying to answer your question around the whole business, we are going to be compared to anybody that we can compare to, which is challenging. I would say it still feels that we've got 15% headroom when we look at what the top 50 are achieving and what we're charging for very comparable, if not, we think, on plenty of occasions, our people, excellent services to those clients and yet we're still not charging what peers would charge. So there's no -- I think the answer to the point though is there's no pressure at the moment from a client perspective, which I think some people feel is unusual. But I think we've taken an independent law firm market, which we're consolidating, and we're moving it sort of up the ladder, and I think that gives us even further opportunities annually on the first meet to carry on with pricing. And on the number of partners, we don't do net numbers, and we talked about this last time. I think it gets quite confusing at Knights at the moment, just one net numbers and fee in the numbers times fees because we've actually, over this period of COVID, particularly, we've changed the mix of the personnel. We've concentrated on hiring partners and not hiring paralegals. But then when we also do acquisitions, and if you look over the last sort of 2 years how many acquisitions we've done, there is part of churn in those acquisitions which would be, I think, quite distracting if you're doing just pure fee and account and partner account times fees because often the fees don't really go down when you lose partners and you churn partners, their managing partners got new clients or senior partners got [ a miss in ] doing any family work and you brought one out, one in, the fee revenue actually goes up. So it's not as simple as just doing headcount. So that number I've given you, Thomas, is actually it's grossed up [ '22 ] number. You asked a third question, I'm sorry, I can't remember it. What was your third question, Tom?

It was just about the churn level that you mentioned on Slide 16. Is that sort of comparable to historic levels?

Yes, it is. When we look at, again, there's effectively 3 lens of churn, and you can't just say churn. There's this -- the churn that we know we have when we go into acquisitions with partners, managing partners, senior partner, some of the [ fixed ] share member partners. There's a restructuring of that partnership group as you acquire it. So it's that churn. There's then churn of partners who retire or are perhaps not growing with this business. When you more than travel the revenues and you see the business go up, end up sort of share a lot of quality, different clients, that presents some churn that we need to deal with. So those still are very positive churns. We would call it necessary churns. And then there's what we call regretted churn across all the levels, partners and associates, et cetera, and that would be absolutely single digits and always around the middle single digit like it's always been. We've not seen any change there. Going forward, if I'm being totally honest, I think if we get any salary pressure, it will be at the NQ level. And that's why I think we need to -- we'll be sort of very watchful of our rates and what -- how the churn is there at the NQ level. I think that's going to be an important area for us to focus on. I don't anticipate any change on some of the pressures or churn at partner level or sort of 5 years PQE post qualified experience and above. But certainly, and nearly qualified at [ north to 5 ], I think, is an area that we'll need to just keep an eye on.

And we'll go to James Allen from Liberum.

So 2 questions, if I can. So on Page 12, I'm just looking at the starting point for the lockup for ASB Law and [indiscernible], which I think are some of the bigger acquisitions you've done. What were the reasons for the lockup fees being higher than some of the other acquisitions you've done to start with? And would there be any reason why those 2 acquisitions can't get down to, say, 100 days like you've managed the [indiscernible], for example? And then second question, just on Page 19, the GBP 385 million Scottish market on the map on that slide. I know that Scotland operates under slightly different legal bodies and legal frameworks. In spite of that, are you still interested in that space despite the different legal frameworks, England and Wales. And if you did enter that market, how would that different legal framework can stall and impact the way that, that office would operate. For example, would the different frameworks inhibit cross-selling towards offices based in England?

So in terms of the lockup, James, I mean, [indiscernible] significantly as you can see sort of cost -- it's an awful lot to do with what focus has been on those businesses and how it's been managed and the makeup of that business as well. I think for both ASP and probably for [indiscernible] it's possibly part of it of real estate work and they've got historic agreements that were still on completion work and sort of [indiscernible] work and things like that. So that's why it's longer, and that's why it's perhaps it will take a little bit longer for us to get there, but there's no reason why we've worked with businesses that have gotten this sort of work before. We won't get them down to the sort of levels that we want them to have. In the end, it takes a little bit of time. We'll just introduce new ways with clients. We're introducing end to end billing and making sure that we have loans updates, and we'll have abortive fees that we'll bill as loans update if things have got -- are driving them longer than we expected. So it's just to do with a bit of buildup and how those firms, what the focus has been for them -- for those firms in the past. But it takes a little bit longer as you can see. But I don't see there's any reason eventually why they won't come down to be in line with what we have because we'll bring them on to our systems and sort of manage in our clients as we manage our existing clients.

On the Scottish front, James, it's a really good question. So the main difference in law in Scotland is property law and real estate law it's quite different. There are differences as well in procedural and litigation and criminal procedure crimes [indiscernible] just to sort of say the difference is. But corporate law and contractual are sort of pretty much based on English law, too. So there are differences. And it doesn't need careful thought. This isn't something that I expect in the short term. We are sort of now just curious as to what's in the main, [indiscernible] because they feel very much like Manchester being leads. And therefore, we'd quite like to explore. And I think we're just at the exploration stage. But some of the law is different, some of it is similar. The key difference is that it hasn't deregulated like English and Welsh, England and Wales has deregulated allowing private ownership. But that doesn't prevent any problem for us doing. We just have to have a separate entity that's actually registered for Scottish regulation purposes that we can wholly own. So it doesn't become that complicated. Just know the entity. But we would need a Scottish regulated lawyer to be part of that entity. I think the key thing would be cultural fit for me with this is that we can make it work. We know it's doable. They look similar markets. It's interesting that it brings the breadth of geography that's Scotland for, I think, some of our clients. We know -- we've asked them, some of our clients would like that. So that's interesting. We've got to now explore what going into such a different country looks like. And if it went independent, what would that mean? So I think this is going to take us a while. It won't be something that happens in the immediate future. And we've -- you can see from the map that's been there all of that sort of [indiscernible], you can see we've got sort of areas on the south that would be interesting. On the east and then going up to the Northeast. We've got Teesside and places like [indiscernible] as well. So there's plenty of gaps in English and Welsh market that I think we want to fill first.

And that's the end of questions. David, do you have any closing remarks?

Yes. So thank you for all of your questions. And thank you for your attendance today. We very much appreciate that we've got such a good analyst coverage. It's important to us, and we enjoy working with you. The -- and I'll repeat how we feel about the future. I think what we've done over a decade now positions us brilliantly for an exciting decade ahead. And that's certainly how I feel about it. I think we know as this world is changing, I think we're very fit for purpose as a modern business with the structure and the culture that we have and the quality of the people. And just what a happy ship we have with people and with clients. So we're very buoyant and we're very positive now about going forward. But thank you for your attention. Thank you for your analysis of us, which we do appreciate. So thank you very much.