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

Good morning, everyone, and welcome to our full year results presentation. I'm going to start off with a brief summary and overview, and then I'll hand over to Kate, who will give a more detailed analysis of the numbers, which we have obviously published this morning for the full year. And then I'll come back and talk through some of our current growth strategies. And then after about 20 minutes, we'll do Q&A and take any questions that you have. So if we go to the first slide, please. A decade of Knights' scalable corporatized model. So we've been building the business, Kate and I, obviously, with a growing management team now for the last 10 years. And over that period, nothing's fundamentally changed in our strategy, with regionally focused outside London. There's lots of reasons for that, that make the business very strong and sustainable and none of that's changed. I think what we have seen in the recent year or two now is the scale of the business and the national scale and coverage that we have, and what that means is that we're able to do more for larger clients, frankly. And we started to look in the last sort of year. We started to now look at the business more vertically. So we started to look at our overall corporate team, our overall development team, construction team and so on. Residential property would be a good example of that, where I think we've now got a great opportunity to be the sort of [indiscernible] equivalent for residential property conveyancing nationally. National scale has brought more and more opportunities to us, and we've needed to gather ourselves and we've done that very effectively in recent months to look at the business now much more vertically as far as the different -- the disciplines which we do, but also looking at the larger clients because we've now got much more capability, a broader base and a deeper base of expertise. And the clients have recognized this, and the larger clients have started to respond really well to that expertise. So the national coverage and scale, I think, is something that is bringing new energy and momentum to our business. If I just go to the next slide, please. As I've said already, nothing has fundamentally changed over the 10 years as far as the mix of work that was shown there on the biograph, that hasn't changed. We do corporate work. About 80% of our business is for corporate clients, probably the corporate real estate, litigation and employment. The real estate, which we get asked about quite often, is very spread across many, many different disciplines and a lot of day-to-day property management there that doesn't have reliance on the market conditions or transactional work at all. The client base is growing in all shapes and sizes. When we think about the client base regionally, that is still very much the core focus, our local business clients and owner, but also we've got now regional focus where offices are connecting together, say, in the Northwest or the West Midlands or East Midlands and so we can look at things with greater scale regionally. And then we've got the national coverage, I've already mentioned, and you can see that now we're covering 22 offices across the country there. Next slide, please. So just now illustrating quickly about the growth. Really pleased that we've maintained our momentum through 2 charging years of COVID. Of course, we had a difficult Q4 against expectation, but Kate will talk more about the fact that we've delivered on the results which we forecast in March, but we've maintained growth through this period. I'm particularly pleased as we've grown the business substantially since we listed now from GBP 35 million when we -- before -- just before we came to market, now GBP 125 million. What we've managed to do in that period and Kate will talk much more about this is maintain a very strong discipline and a market-leading discipline on cash generation through our working capital days and it's shown in the cash conversion. Next slide, please. So I'll talk more after Kate's done on the numbers about our growth strategies, but just to sort of remind you all is that the corporatized model, which we started 10 years ago, is still very much differentiating in the market. The market is still a partnership model. That gives us a great opportunity. The platform we've created now is known as a different base, a different platform, different culturally where we work very much together collaboratively as a team, which is quite different to [indiscernible] partnerships and in the law firms. That cultural integration really stands us in great step to share work across experienced levels across disciplines when we cross-sell and do more for the clients and try and gain more of the clients first. And with the larger clients, the national scale, the national coverage, that culture, that cohesion really stands us in great stead and we've had something only a couple of weeks ago, where we needed to get together 100 lawyers to do a big project, and we could bring those together in a matter of a couple of days because of that culture because of working together as one. And I think the structure has allowed that but our people deserve great credit for building that culture, which is unique as well as the model itself. So very well placed culturally to go and now grow, and I'll talk more about that. And I'll hand over to you, Kate, to do some of the numbers, please.

Good morning. So just looking very briefly on the full year overview, we are pleased to deliver what we said we were going to deliver in March. We obviously had the headwinds in the last quarter of the year, but pleased to have delivered what we said we would and to have still generated 22% revenue growth in the period. And I'll talk a little bit more about the breakdown of that growth and where that came from on the next slide. But as part of that as well, we've also, as David talked about, maintained our very strong cash conversion throughout the year. And the way that we do that, as we've talked through that, is our management of our lock-up days that the amount of time it takes to convert time spent on a matter into cash. And you can see there that we've actually reduced slightly our lock-up days from 89 days last year to 86 days. And again, I'll talk about that in a little more detail a bit later on. And that control of our lock-up days and underlying strong cash conversion has meant that we've ended up at the year-end net debt of just under GBP 29 million, which is slightly ahead of where we expected it to be. So again, really pleasing position for us in terms of our balance sheet strength [indiscernible]. Moving over on to the next slide then and just looking at the profit and loss account in a little bit more detail. There's obviously an awful lot of information on this slide, so I'll just pick up 2 or 3 points to bring out to you in particular. The main one being the revenue growth and where that's come from. You can see there that the main revenue growth and shares come from the acquisitions. So it's come from the acquisitions that we've done during the year. So we've completed the Archers' acquisition in November, and we completed the Langleys' acquisition, which we exchanged in January, completed in March. And they've generated GBP 5.8 million worth of revenue in the business this year. Just on those, I think it's important to note that actually they've integrated really well already. And I think the more acquisitions that we're doing, the more experience that we're getting, the better that they are integrating and quicker. Archers, for example, has actually delivered in its first 6 months ahead of where it was performing before. It's managed to use [indiscernible] to actually grow its revenue, so integrating really well [indiscernible] and trading well. And then we've also got the full year impact of the acquisitions that we completed in FY '21, the ones that we announced. I said there was [indiscernible] and they generated just under GBP 17 million worth of revenue in the period, which is just under GBP 15 million increase year-on-year. And they, again, all on our systems and integrating really well into business. The next part on revenue growth is the organic growth, and that we're reporting 2% for the year. We reported 9% for the half year. Obviously, we had the headwinds in the last couple of months of the trading year, which impacted our organic growth. Another factor that has impacted the organic growth is the fact that we have, and we've always talked about this, the fact that we want to grow a premium service and sort of profitable revenue growth is what we want. And so we made the decision, as we touched on the half year, to come out of some less profitable areas such as volume debt recovery and volume conveyancing early on in the year. And the impact of that is that it's impacted organic growth by round about 2%. So without that, organic growth would be about 4% for the year. Looking then down the cost base. We're pleased to have slightly increased our gross margin in the period despite the headwinds that we had. Our people costs are well maintained, and I'll talk a little bit more about the drivers behind the gross margin and what drives KPIs that we monitor on a regular basis. Operational staff costs have increased as a percentage of revenue. It's important to us, as we've talked about in the past, to continue to invest in our operational support to make sure that we've got a sustainable base there. We've got the full year [indiscernible] mainly of the cost that we invested in last year, but also, we've invested in our client service director group. So the number of client service directors that we have who help us to manage the business on a day-to-day basis, and they take responsibility for gross margin and delivery of our lock-up and integration of our acquisitions, that's increased from 8 to 12, but it gives us that really sustainable base to go and grow the business going forward. Other costs, you can look at the margin and you can see that the margin has actually come down, but in terms of other costs, they all were in line with budget. They all are well controlled and came out as we expected. It was just the headwinds, the loss in revenue productivity not being as high as we expected in those last couple of months, which has impacted that margin now. If we look next -- on the next page and just look very briefly at the bridge that we've put there. I've picked up most of the points already said, but I'll talk about -- you can see there the strong contribution to PBT from the acquisitions and the revenue that we've grown there. And then obviously, the leveraging of some of the direct staff costs. A couple of costs, mainly as we've talked about the cost space, is impacted by the headwinds that we faced in the last couple of months, but a couple of costs just to point out. PI costs increased very slightly in the year. That's just as a general housing in the PI market. And then obviously, as we've come out of pandemic, there's more travel and BD costs. But as we go forward and [indiscernible] top line, we do see those costs leveraging going forward. Moving over on to the next slide then, the key performance indicators. These are the key performance indicators that as a management team, we monitor on a regular basis as it's what our client service directors take responsibility for and managing for their offices, the regions that they look at. And you can see that really pleasing direction on the gross profit margin. It's increased slightly in the year, showing control of our staff cost. And also the key driver behind that is the work that we've been doing on pricing and actually covering more of our time and increasing our rates, meaning that our fees per fee earner are increasing slightly. And you can see there that, that's increased to GBP 124,000 in the year compared to GBP 121,000 last year. Over on to the balance sheet. It's very similar to last year, not an awful lot to pull out that, but a couple of points just to pull out. The accrued consideration, just for information, it was a consideration that was due on Keebles last year. There's a one-off. And then if we look at working capital, it's increased slightly from last year. That includes a movement in the corporation tax balance. And if we take that corporation tax balance out of there, the only other movement is effectively increase in working capital from the acquisitions that we've done. Our working capital is well maintained and sort of as we've talked about, lock-up is very similar to last year, in fact, slightly improved. Net debt, we'll talk about it a little bit more in more detail, but pleased with where that ended up at GBP 29 million, and for the year just over 1x EBITDA, given us a really strong position in the balance sheet. And just one point to pick up briefly there is, we did hold at the year-end -- remember when we did the Langleys acquisition back in January that we said there were a couple of areas that we were going to look at strategically to see what we wanted to do with those going forward with that one of them being HPL, and we did last week agreed to sell that. We did have a look at it and we decided that it wasn't -- didn't fit strategically with the business. And so we have sold that, delivered on what we certainly would do when we acquired it. Moving over on to the next slide and looking at our working capital. As we've talked about for this is a real key KPI for us and we're a key focus for us and it has been for the last 10 years. We are industry leading in how we're performing this, but industry average is round about 150 days, and we average that you can see on the graph average. And we target 90 days, but for the last few years at year-end, we've actually reached in our target. And this is -- very briefly, it's the amount of time it takes to turn 1 unit to time spent on a matter into cash in the bank. So it's working on making sure that our fee earners are billing their time quickly and that they are then collecting the cash from the debt as quickly. And you can see what we're doing as a key focus for our client service directors. And just as a bit of an example on the right-hand side there, you can see what's happened with the acquisitions that we do. And you can see that the level of lock-up that they have when we acquired them. Typically, the average 150 days that we acquire. And that gives us an opportunity to work with them and work get cash out of them and reduce their lock-up days down to more in line with our average for the business. And you can see that at the bottom what we've done over a couple -- in the last year, so the Archers acquisition, which we acquired in November, when we acquired [indiscernible] data round about 150 days. And in just 6 months, we've worked with them to reduce that down to 75 days. So another example of how well that's integrated into our business and our sort of culture and just very simple and cash production procedures taking effect. And you can see then Langleys, which we've just completed on, its got lock-up days of 170 when we acquired it and that's down to 157. But there's an awful lot more that we can do with that over the next 6 to 12 months. Moving over on to the next page and the net debt bridge. It's really summarizing what we've talked about already. Strong cash generation from our operating activities, and then we're using that cash to fund our acquisitions -- payments for acquisitions in this year and then the deferred consideration from prior year acquisitions. And that's given us, as we've talked about, net debt of GBP 29 million at the year-end. Given we have, we still have our RCF facility of GBP 60 million. So that gives us headroom of approximately GBP 31 million to go forward and fund our future growth. And if we look on the next page, our capital allocation, as to how we look at our allocation of funds and what we're looking to do with those funds. First point to note is that the business is very cash generative. And so as a sort of stand-alone businesses operating and generating cash effectively as we go along. We then look to invest in organic growth. It doesn't take an awful lot of investment, but there is some because when you recruit some other, it generally takes probably 3 to 6 months, maybe a little bit longer in some circumstances for them people to become fully fee generated. So we are investing in the recruitment fees and their silos for the first 6 months. We're then looking to pay a dividend. We want to reward the investors. And so we've reinstated our dividend this year and that we're paying our dividend as a similar policy to be paid in the past of circa 20% of adjusted profits after tax. And then the big place where we'll look to invest our funds going forward is in acquisitions. And if I very quickly look at what headroom we've got at the moment. So we've got, as we've just talked about, just over GBP 30 million headroom. If I look at what deferred consideration and consideration is due on the Coffin Mew acquisition as well that we've already paid in the next 12 months, that's just over GBP 10 million. So taking all of that together, that gives us circa GBP 20 million worth of headroom to go and invest in acquisitions. And again, if I look now at the Coffin Mew acquisition and what we acquired it for a day 1 cash payment, our day 1 cash payment was GBP 5.5 million. When we acquired [indiscernible] GBP 11.5 million of revenue. So looking at our funds available to us that's of GBP 20 million. That gives us firepower at the year-end to go forward and acquire revenue of GBP 40 million, and that's before taking into account of any of the cash that we'll generate in the business under normal circumstances this year. So lots of firepower for us still to go forward and invest in the business. And I'll hand back over to David now, who will take us through our growth strategy.

Thank you, Kate. I'm just looking at the growth strategy [indiscernible] for growth. Again, similar to what we've been seeing over the recent years focused on organic growth, and I'll talk more about that in a second and then strategic acquisitions, which I'll talk about. And then how we can leverage the operation, which we scale, which Kate's talked about, particularly in respect to the client service directors that Kate mentioned. So just looking at leveraging our scale and national reputation and the organic growth, the fastest way to grow the client list in our business in the regional relationship world that we live in much more than the institutional brand world of London is to bring those people in that have got long-standing client relationships through recruitment. And this has gone very well for us over recent years and continues to really thrive with our unique corporate model and culture of all working together with our silo targets and that internal competition, people are attracted by that, but more so they're attracted by no financial risk. That's how -- that's why people want to come out of the partnership model [indiscernible] money with us, but not to have that capital risk or needing to borrow money from the bank to put into a partnership, or LRP, that then entitles them to more money, hopefully. So that's driving people to us. It pushes people to us and as Knights' pull in terms of recruitment is growing with that national scale and presence. And we're seeing real quality coming through with bigger client followings. The volume of people in recruitment has definitely gone down at the moment as the market conditions have changed in recent months. I think in the short term over the next 6, 12 months, I think that will reverse, and we'll see the volume go up again. It does -- it's cyclical volumes, we people you hire. We saw a great volume, a spike in the summer '20 as we really hit recruitment hard while people [indiscernible] themselves after the COVID. And over the last year, that's softened off with market conditions and basically, there's less people to hire in the market, but the quality is certainly there and increasing. And through that quality and through those recruits, we grow the client base. One of the most important things with growing our client base and in terms of equipment is to look at the churn rates and the attrition rate, and we maintain really strong churn rates of 9% that we've mentioned to you there. Again, our model is a very strong model from a retention rate for a couple of reasons. The culture, I think it's really crucial. We'll talk always about the culture, but also the regional locations. If you look outside of Manchester, Birmingham, Leeds and our other 19 locations, we are often the go-to for the quality work, the quality presence that people want to stay at, and that maintains a very high retention rate. So high retention rate, excellent recruitment. The quality is only increasing in terms of those hires coming in and that then grows the client base, and that's how we can continue to grow organically. And we really are focused at -- the sort of 4% Kate mentioned, if you ignore the volume reductions we made in conveyancing a debt recovery, then we look now to get that back to where it was before, that's very much an aim and recruitment will be a key feature of that. Next slide, please. Just talking a bit more about the culture briefly there. The churn rates I've mentioned at 9%. The Net Promoter Score, 24. A very positive net promoter score. It's come down from the previous of about 39. I think it has been a challenging period. I think the market is different. The recruitment industry is very active and talking to our people, I think we're seeing a slight reduction there. But nothing fundamentally has changed in the culture or the morale of our business at all, and I think that score confirms it. Next slide, please. I want to talk briefly about pricing. I think it's a really important feature and has become, I think, more important over the last 2 or 3 years. And here, we've got the opportunity in our regional world, particularly with when we acquire regional businesses to then look at their pricing and give the groups of people that join the confidence in how to price properly that may struggle in a partnership, an independent firm fearful of losing revenue, fearful of losing clients. They're not growing. It's a very static place in terms of those independents. Most independents, we look at haven't grown revenues for 4 or 5 years. So this -- the fearful of speaking to clients about price increases. I think that challenge is only growing at the moment with inflationary costs that are in the whole marketplace, both salary, but in terms of like Kate said, indemnity, insurance, et cetera. So what we do is talk to the people, coach them. And we have, I think, quite a unique approach to pricing but this is not taught at a law school and law firms, and we definitely coach this relentlessly. And we get people to be very clear on fixed cost pricing, working to a long stop date, which is the term of the contract for that fixed price. And then change things, if the date has passed and we're not done or our time spent engagement where we give regular updates and we bill regularly. By billing regularly, that's the WIP days there that Kate mentioned of 55 days. By doing that, we derisk the model of professional services. If you let the job go on and on and on and the amount of time increase and grow, the risk goes with us and then if things abort, you're in difficulty charging the client properly. So it's a discipline. It's a routine. It's starting with the right numbers, particularly in terms of fixed fee. And we're doing a lot around that and that certainly covers at least any salary increases that we see in our business of mid-single digit, and we seek to do better than that to then contribute to the organic growth as well through pricing the way I've explained. Quick slide, next slide, please, on the other opportunities. This is still quite embryonic. We've had some great success over the last 5 years with town planning. This is other professional services other than all. And we've really done well in the last couple of years to grow our tax. We've now brought in a debt advisory team, which is going really well. This is helping clients look at their balance sheets as COVID loans now need to be refinanced and all the whole debt market is changing, obviously, with interest rates, et cetera. So we're exploring more and more. It's not that this is early days in terms of our revenues, which will be predominantly mid-90% will be low, but we will, I think, creep now forward and start to look at some other examples I've mentioned there, corporate finance, surveying and property management for all the property work we do. HR outsourcing, those sorts of things. We are, I think, going to explore some of those areas as we go forward. But still very much over the next 2 or 3 years, continuing to consolidate this fragmented market based on law. And that turns me to the next slide, please, our acquisition strategy. And this is -- the pipeline is really starting to build for a couple of reasons. First of all, we have been able this year through the calendar year, we've been able to look much more consistently by being out and about, meeting law firms. We try to do this through Zoom. We were successful in recruiting through Zoom where we certainly weren't finding that -- we were able to acquire it through Zoom. That wasn't working. We're having to navigate through committees of partnerships, committees of partners and we need to be in the room to almost help facilitate their discussion because you can't just talk to an owner. So it's a strange section. That seems that you can't talk to owner managers unlike ourselves. We're an owner managed business and have been for a decade, This needs us to be in the room, where we've been in the room now for the last 4 or 5 months, and that's given momentum to the whole acquisition pipeline. You've seen the first sign of that is what we've just acquired in Coffin Mew in Portsmouth. Now the second driver of acquisition for us is an economic downturn and the economic conditions we're in. That will only drive acquisitions to us as fear enters that committee partners, nobody concerned about the future economically. There's no one who got the government support that was there through COVID, and therefore, now that will drive an appetite for those groups of partners to come and talk to us and to seek [indiscernible] Knights where they can become financially independent and take away that financial risk as well as giving their people great career paths and a much bigger career in a larger national group than their small independent regional firm. So we're seeing great activity in the pipeline. If I just go to the next slide, where we look at recent acquisitions, this really fuels our confidence. If I look at the 4 that we've done there, so going back to a year ago at the Sheffield business, Keebles. And then Archers, as Kate mentioned, and just how well that's intubated. And I'll just highlight that in a second. Langleys is the York and Lincoln, Coffin Mew is the one we've only just actually bought and completed last Friday. So yesterday was the first day of ownership. And even Coffin Mew, which we've only just completed on, they're all coming through better and better. And I think there's a few obvious reasons. We've now done 17 since we listed, and our team of client service directors and operational directors and other colleagues are very experienced at this now. And we really have mastered integration operationally and then culturally as we own the businesses and develop them and integrate them so that we become more experienced, would become better. I think we've learned what we're looking for more through experience of those 17 recently in 4 years. So I think we're picking better, and it's getting better and better how we're integrating. And if I just go to the next slide and quickly look at Archers. This is the business we bought only 8 months ago, 1st November. So 6 months of trading and this year that we're reporting, and Kate's already mentioned, with half lock-up days from 151 to 75. So we've already halved them out of time they're taking to collect cash and amazing results in 6 months. Normally, as you know, we provide for 20% attrition of fees with the disruption of acquisition brings. Not the case here, revenues went up 10%. Again, it just shows the willingness of this group to come on board, be part at Knights, all stay. We had a few people there, 6 people [indiscernible], which is quite normal, but all the fees remained intact. They've embraced our pricing way ahead of schedule. Normally, we take a year to bring all that full pricing in that I've mentioned earlier. Here, they embraced it straightaway. So I think this is, hopefully, a sign of things to come with acquisitions and just how smoothly and efficiently that they're coming in, and that will mean we'll hope to then keep and retain more of the revenues and we'll get them generating cash even faster than before. Next slide, please. I've mentioned this already, but it's worth just sort of pausing on for a minute or two. Another reason we've become very successful in integrating acquisitions is the Client Services Director group. Kate mentioned it, and I just want to mention myself here. We've expanded this group to 12 now. We're about to, I think, sign up with 13th Client Service Director. These are the answers to query I had 3 or 4 years ago, how we're going to scale our culture. Our culture is unique. It's very different to law in 2 ways. We take people from a silo culture into a big team environment across the national presence that we have, and we get people to think about our terms of trading, not just being bullied by the clients [indiscernible]. So that's big changes in mindsets, and these people have the responsibility of carrying that culture and influencing that mindset change on the ground, mentoring all the people. No matter whether they're newly qualified or 30 years qualified, everybody -- the longer more experienced people, normally, the longer it takes to change the mindset, but we want to change the mindsets of professionals that join Knights, and these are the people that are charged to do it. And then the financial management and the delivery to the gross margin line is their responsibility. We're also now charged with growing business, particularly organically, but occasionally as well. And they have a real appetite for this now in recent weeks and months to come up with ideas for acquisitions, too. So they're a lively bunch. They're a fantastic team with all the different strengths [indiscernible] they got on well with each other and they're loving working together to really maintain and nurture the standards, but then drive the business for organic and acquisitive growth. And they're doing exceptionally well. Next slide, please. On the ESG, from -- [indiscernible] making some great progress, particularly on the people side. I've mentioned there, the growth in the client service executive, and I'm delighted that 4 of the last 5 that have come in being female has brought great balance to that group that was, I think, really important to make sure that we were -- we had that diversity and a very important group of people in the business, and we can feel the benefits of that balance straightaway. We're not just ticking boxes there. So that's been a really important thing for our business and culture. The way that we're thinking about employees, we were delighted for the first time in 3 years that we could have our annual conference again. We've not had it since 2019, and on the 10th June, we got over 1,000 colleagues together at the NIA in Birmingham. And we got everybody in a room together and have the whole day on a Friday, where they could come together, see the scale of the business, and that's one reason for doing it. You don't really feel you're a part of it until you can see it and touch it, but also to make friends and get to know people is a massive success. And then we celebrated with an after-party. These things are really important to us, and from there, we want to springboard into a much more social connection in the business, in the offices, in the regions. We think this is really important for health and well-being. We have our retained psychologists that we've worked with for the last 3 or 4 years, Jamil. And actually on the stage for a couple of hours and brought [indiscernible] our people really respond well to this because they can see that their health and well-being together coming out of homes and that lowness that they've experienced and the stress that's brought, these things are really important for us going forward. And we're going to do more around the office community to really help our people in lots of ways to come together. And that's what we think, is an important part of our ESG strategy. Next slide, please. So just to summarize, and we'll go to questions. I think we've got this robust platform. Yes, we had some headwinds, Kate's mentioned, but we're through that now. I think we can get back to a normal trading organic growth, fueled by as well the acquisitions when we see the cultural fit. All that's going, I think, extremely well both in terms of recruitment and in terms of acquisition. The way people have been coming on board and integrating, I've mentioned, we're absolutely delighted, things have been getting better and better. We see good momentum. I still think you'll find us being cautious and optimistic at the moment. We're only 2 months in. So -- and COVID spikes starts to show that, and in March, we have hit 5 million at the end of March in a number of cases. That does seem to be [indiscernible] but certainly, with other things that we built into headroom, as we explained to everybody in March, we're very comfortable in reaching expectations, but we want to get back to our normal, I think, trading that you saw us for all the period up to that Q4, and we're confident in that. But obviously, we remain cautiously confident because of COVID illnesses. As far as the economic conditions, we do feel defensive and resilient to that. The model is, I think, law is generally, we are in the regions because we don't rely on the peaks of transactional M&A types of activity and we don't get the highs of that, and we don't get the lows of the downturn. So as far as economic conditions, we do feel very resilient, and with our culture, with our focus of discipline around financial management and cash generation, and that stands us in good stead to going forward. So thank you very much, and we'll now go to questions.

We will take the first question from Robert Plant from Panmure Gordon.

Two questions. The first has 2 parts. First of all, are you still sticking to the guidance of 5% organic growth this year? If so, given Omicron was a bit of a one-off, hit you hard in '22, shouldn't we see more of an uplift into this year, notwithstanding what you're saying about Omicron still being out there? And then secondly, clearly, your acquisition pipeline is very healthy. But given the share price derating, would you consider a share buyback compared to some of the deals that you're being presented with?

Okay. Kate, you want to take the first one off and I'll take the second.

Yes, that's absolutely fine. So in terms of organic growth, Rob, I think you know we guided to 5% and as David has talked about that, we feel comfortable with that. And we think -- we do think it's prudent. We think it's cautious. But in the light of what happened in the last year, I think it's cautious to maintain that guidance. So from our perspective, yes, we're comfortable with where we are. We're trading in line with where we would expect to be, but I'm not putting any increased guidance out there at the moment just purely just as a cautious -- to be cautious about the future really, but we are confident with where we're trading at the moment.

And then turn to buyback of shares. Robert, thank you for that, good morning to you. No, we don't have that plan. I mean we listed this business to grow. I think we have an exceptional opportunity that's unique to grow, to consolidate the sector that we've got to ourselves. We're not -- we've never once found another bidder from the law firm, and we're finding more and more recruitment terms that people are calling us now, not just as sort of in the recruitment market through recruitment agents. People are coming to us as it's now got a great sort of reputation and scale and national coverage. So this is a really key moment coming up as we also have economic difficulties, challenges that are in the market, which we are resilient to in our underlying business, but will drive, as I've said, opportunities more and more to us. So this is the time to really make hay and drive this business for profitable growth. And I think that's ultimately how we'll generate shareholder value and return because there is a lot of value accretion in this world that we're in to create rather than, I think, sort of pausing for a period and sort of starting to try and do something which might just create another way of sort of simulating share price. I think the important thing for us is to really focus on the business and the core business and the fundamentals and the great opportunities that we have that we're really excited about. I'm more excited about this now than I was 10 years ago, 4 years ago. So no, we're not planning that at all. We're going to carry on and really drive this business as we've done before.

Next question comes from Thomas Brookhouse from Investec.

David, you spoke to the sort of solid pipeline of fee earners, which is great to hear. I just wonder if you could sort of like disclose the number of senior hires that you've made organically during the second half or in total? You've not got the sort of split H1, H2 of this year. I know you obviously don't give it net or gross. Whatever you've got, it would be really useful. And then secondly, sort of moving forward, in terms of the acquisition pipeline, again, [indiscernible] strong and growing. In terms of the structure of the deals, obviously, you used to be sort of 1/3 cash, 2/3 shares. Given where the share price is, do you envisage that's going to sort of move to a more cash-based structure as we saw with Langleys when you change that. And then finally, in terms of the sort of return to office, obviously, you mentioned that's deeper culture. That's always been sort of your slogan throughout the pandemic. Where are you guys in terms of returning to the office? Are you in 2 days a week, 3 days a week? What's sort of your policy on that?

Yes, sure. So the -- as far as recruits, I'll pick up those 3 take if you're okay with that. As far as recruits -- I think it's -- I think I'm right in saying, for the whole year to the full year to April, we're circa about 30 partners, senior hires that we made. That's probably talking something like [indiscernible] I think those numbers are pretty thereabouts. And so in the second half, definitely a reduction in numbers that we saw hired, and we think that will probably continue. At the moment, I mean, it is a different market. It's changed quite dramatically over the last 6 months. I think that change will reverse again in short order, and we'll see the volumes return. We don't mind that. I mean, there's a fair life period to organic growth with recruits because it takes, particularly the more senior, it takes 6 months now for them to humble because they're generally serving long in experience. And it takes 6 months, sometimes even longer for them to get going with bigger clients. So you're always looking quite a long time ahead. We've seen these cycles over the last decade with recruiting. So there's a real change at the moment. I don't think it's that fundamental. The thing that has changed without a doubt is the quality, and we are seeing some sudden figure hires. In other words, clients -- recruits that bring [indiscernible] with them of client following, which is new for us. So that's where we are on full year, and that's where we're as a trend. As far as acquisitions, the Langleys is almost, I think, unique in the sense that there was a severe reaction to what we think was a much more modest impact on one-off, but there's a severe reaction. It is what it is, and that felt really novel to maintain a share structure on the contract that we have. That would have been mildly incorrect, and we wanted to done that. So we kind of re-corrected that using cash. I think you then saw a Coffin Mew deal a month or so later that we exchanged, which had 10% of the consideration using shares. They were very keen for that. They wanted the shares. They actually might have wanted more because they saw the value in the shares. So I think that's what we've seen a mixed view from the marketplace on the pipeline of acquisitions. Some definitely remain cash focused. There've always been more cash focused on shares, but we've been able to, as our bargaining positions grow, contain using consideration shares in paper. Now there's either -- they want cash and not paper, but some actually do want the paper more than they did before because they see the value and the potential growth in value of those shares. So we're seeing a sort of mixed reaction and some appetite that's growing for shares. So I think we'll go forward either using cash or using a modest percentage of the consideration 10%, say, for our shares. We wouldn't want to use much more because obviously it's become expensive capital to us. So we'd limit it to the 10%. As far as return to offices, your question there, it's really good point. I mean our approach to it is to encourage, but not invent layers of rules. That's our culture. We don't like to tell people or want to control them. We don't like rules to say, you've got to be in these days or these amounts of hours. What we are saying is, there's a clear benefit for young people to learn through osmosis if they're with experienced people, for experienced people to be able to process cost effective by using less experienced people, that works much better if they're sitting next to each other. It's more fun. It's more healthy. It's more creative. There's lots of things that I think create great purpose to coming back to offices. So we're watching and seeing. It's not easy with COVID because we have this 5 million people's case spike in March. We're up to 2.5 million again and now [indiscernible] in the news. We'll have to see how that impacts this. It's not that easy to measure because when people have it, they're not themselves for a week or two [indiscernible] off sick for 10 days, 2 weeks, but it does mean that their performance is impacted, and it certainly means that they're testing positive for 13 days. Like I did, you can't really go into offices. So it's disrupted a bit, and we'll see how that goes. Up until this latest sort of new momentum in COVID, we were seeing sort of around 60% attendance rates to answer your question. And I certainly think that will maintain, hold, subject to COVID now to July and August being different. I hope in September that we start to see that type of attendance, and we see that hopefully grow. I don't think we're miles away [indiscernible] we were probably at about 90 -- 85, 90 before we didn't have a COVID. I hope that we can get to something around 70%, 75% attendance going forward longer term over the next year or so. But we're going to do that through creating a great environment for people to want to actually go and be part of, and we'll see how the habits change. I've always said, Tom, going back right back to May 21, so over a year ago, let's not try and invent hybrid rules. And people were doing that in May and June last year and closing office space down and all these things. Let's get COVID done, and it isn't done yet. It's still on the news. There's 2.5 million plus people today who are ill with it. But let's get COVID done, let's get it out of the way and then let's see how things go before we start and then seeing what the position is or what the approach with policy is. And I think we're a good year away from that because I think we've got to let this be done and then move away from it to see how people are feeling about it. And we'll talk to our people a lot about this, and we have done and continue to.

Really great. Just one more quickly, sorry. Just on the corporate side of things of your work. Obviously, that was one of the sort of headwinds that you were facing at the time of the March '22 update. How has that progressed in terms of -- I know you spoke to sort of your productivity was down in Q4. Where is that now as you sort of move into the new year? Obviously, you've had positive momentum. But I just wondered, specifically on that corporate work, has that picked up again? Is it sort of still behind you?

I mean just to put the whole thing of corporate work in perspective, it's single -- high single digit in terms of percentage of our revenues. So it's not a huge thing for us. So we referred to it, but maybe it was distracting when we referred to March. It was much more around productivity and all that as certainly a corporate transaction. There was a few things that kind of store that 2 or 3 large things that I think we're referring to there for year-end. But to answer your question sort of generally at the moment, since September '20, as I'm sure the top 50 firms have seen, we had our share of that in that sort of in our corporate M&A team. They had a really fantastic time from September '20 right through, I think, to Jan, Feb this year. So sort of that 18-month period. Since then, since March, April, May, June and now, we've definitely seen a softening in the corporate transaction work there, no question. For the time being, it's softened off. It's still for us ticking along nicely, but it wasn't what it was for those 18 months. I think there's a softening there. Again, the impact for us there not really worthy of any mention, not material because we're not reliant on that. It's -- we've got many other things that day-to-day management type work that we don't have to rely on the sort of spikes of corporate transactions to see us through.

The next question comes from James Allen from Liberum.

Three questions from me, please. So firstly, you mentioned that you exited some lower margin parts of the business and also sold the non-core part of Langleys. Is there kind of any other area within the business which you could potentially tie up? Are there any kind of extra bits which you plan to sell? Secondly, are there any plans to install a new COO? And thirdly, the fees per fee earner, I think that was previously dropped as a key KPI. Why has that come back? And do you plan to keep on that going forward?

Kate, do you want to deal with the lower margin [indiscernible] and I'll deal with the last two.

Yes. Yes. No, it's fine. So in terms of lower margin, so at the moment that we're looking to move out, James. I mean the key to it is really, if we talk about the conveyance and for example, the volume conveyance, we are in conveyance. We see that as a real growth area, but we're doing with premium quality conveyancing. And within the business, we've got sort of we acquired one team that we did where there was an awful lot of [indiscernible] volume conveyancing. So to try and have continued a strategy across the business, it was very -- becoming very confused in having a premium residential conveyancing team and then a volume team. So that didn't work with us. It wasn't as profitable as we wanted it to be. So we moved out of that. And again, with the volume debt recovery, again, that wasn't profitable. It was something that we sort of acquired and we inherited, and it wasn't what we wanted to see when we did that. In terms of HPL, we said when we did the acquisition of Langleys back in January, the local players that we wanted to look at and sort of [indiscernible] was strategically fitted for the business. HPL, we had a good look at it. And what it needs in order to fit it in with the business, it wasn't quite strategically aligned. And so we did what we decided we would do there and went time to find and acquire and if that's moving on. There's nothing else at the moment in the business, but we're always looking for quality work, and that's always what we're doing at, but there's no other strategic areas that we're looking at refocusing.

On the COO point, no, we're not looking to recruiting the COO. Richard did a good job for us on automating some of the back office operational areas. But what we were keen to do and which we decided to move on was to bring client service and operations closer together. It used to be before we listed in and as we've grown and grown operations, we've seen a lack of connection between client service operations. We wanted to very much bring that together. So one of our Client Service Directors has taken responsibility to be that bridge between them. And we've already -- we've only been at this for about 2 months max, and we're seeing great benefit from that already and how we're being more efficient and more aware between client services and what the needs of the professionals are and what the operational team are looking to do to support. I think the connection there, the communication language between everybody, I think, is really improved. And the morale has, I think, of operations colleagues as they feel very much sort of back at the [indiscernible] everybody. So that's going really well, and we're not looking to change that at all. On the fees per fee, I think it's quite a simple one. I think it came back through popular demand. I think you wanted this. I think it obviously helps make modeling much easier, and we understand that. We've always been a bit reluctant about fees per fee because if you, for example, lose a partner and bring a partner in, quite often in a sort of evolving business where we're modernizing legal services in a very traditional [indiscernible]. You can see a partner leaving and lose no fees and a partner [indiscernible] fees. So it can be quite distracting to think the denominator is the driver, where you've got a real change culturally of modernizing a very traditional sector. That's why, also it doesn't then deal with the mix of [indiscernible] and solicitors and partners. If the mix changes, you can see change between the number of [indiscernible] fees per fee. But I think as long as we talk about the 2 in tandem, and if this change explain what that changes because of the mix of personnel, and I don't think that's an issue. So it's come back due to popular demand, and we felt this was a good time to be as clear with you as we possibly can if you want that we wanted to give it you. And we think now we're going to keep that as a KPI for you to look at to model it.

The next question comes from Steven Woolf from Numis Securities.

Just a couple for me. In terms of that churn rate of 9% you mentioned, I wondered whether you could break that down a bit at sort of maybe the senior partner level and maybe the June year-end, if possible? And then secondly, just in terms of getting those new recruits through the door. I know people perhaps are reluctant at this point, but are you using any sort of equity rather than just sort of the general incentives, fixed salary, more security, et cetera? There's equity being a bit of a feature and a hook to perhaps get through people through the door?

Let's say, the -- we're not I think -- perhaps, more question breakdown here now, Steve, but it's something we'll take away and look at. And perhaps, we can. I think we've done it before, looking at partners, associates and paralegals. I mean, generally speaking, I can't let that sit down. But generally speaking, you do see some churn when people qualify. They might have been with us for several years to being a paralegal and trainee and then they reach [indiscernible] might want to get to London or a big city firm. That sometimes happens. We see some churn around partners around culture because to have a strong culture that we have and that we're passionate about requires people that are [indiscernible] culture to not be part of it. So we do, I think, see churn partners in a way a partnership would struggle to do because they have to navigate through an LRP members agreement or partnership deed. But we don't have those problems or some is draining the mood which affects performance and financial results, then we concentrate on culture so much that we deal with it. But we can take away that and consider whether we bring that forward. Using equity, the answer is generally, yes. We are starting to see that feature. When our partner is bringing high hundred thousands of breaking into the 7 figures, that is very much something that becomes relevant. I still think the key thing in that discussion there is, are they going to feel it's an important element of their life at Knights to feel vested because we see that being much more relevant and important to operational colleagues than we do to the legal professionals. Legal professionals want to earn money and extract income. That's what they want. Not many actually want to be an owner or investor, but you find in the operations colleagues, perhaps [indiscernible] business more holistically, they do all that. We've got people in IT, finance and other operational areas who've kind of obsessed about the shares a bit more on share price. You don't see to the professionals, which is why we've had such little reaction to the share price decline. We haven't had any -- definitely, a shock at the time, and we have to deal with it with last literally days. And there's been no ongoing impact on the business because they're not shareholders. So some people commentators sort of believe we should have lots of partners with shares. I've never subscribed to that because in my experience, whenever a partner get shares, they can't make to sell them the next day if they can. The way you see somebody that wants to be vested, wants to feel part of the ownership of the business because they're thinking holistically, and we've certainly got somebody joining in the autumn that is like this. And it brings lots of revenue and clients, but also wanted to really drive the business on as part of our vision for the business, and it's very appropriate and it is for that person then to have some equity. But it is the exception, not the rule, Steve.

We will now take the next question from Sam Dindol from Stifel.

Three questions from me, please. Firstly, on the salary. I think you said mid-single-digit salary increases. Is it right to see that goes through aligned in the financial year, 1st of May, so you wouldn't review that for another year. So secondly, linked to that, I think you said the fixed price element is going up by a similar amount. I would imagine your hourly rates have as well. So would that imply the organic growth of 5% is purely price and then hence, the volume is the upside just to hook up? And then finally, on M&A headroom, appreciate GBP 60 million RCF to net debt is about GBP 30 million, how much would you need to retain for working capital? So how much is sort of the realistic cash spend before it gets a little bit risky?

Mid-single-digit salary view, yes, that is 1 May in effect comes into May and will not be reviewed until 1 May '23. So we don't pick up any salary reviews through [indiscernible]. The only exception is that we do the promotion settlement on the 1st of October. Last year, there's just over 100, and they get a salary review as part of that promotion. We keep that separate, which we think is the right thing to give merit to the promotions. And that mid-single-digit increases for the year and then reviewed 1 May. The organic growth, the -- I mean we were -- if you take the exceptional impact of that volume businesses that we took out, we're at 4%, we've said 5% because we're in the middle of a period there, which we saw as one-off but we needed to be obviously absolutely sure going forward in that headroom and great headroom unless reliance on H2 and H1 as we look to FY '23. So that's why we've guided to that. We're not ready to change that at all. And part of that organic growth is certainly fueled by the pricing, as I've mentioned already, because we look to do better than just cover salaries. And of course, you've got organic growth of revenue line and an organic growth of profit line, but we certainly look to beat that circa 5% of salary increase with pricing and are able to do that at the moment. So we'll keep that under review. We did more a year ago than we've just done on 1st May, but we'll keep that under review. And I anticipate maintaining high single-digit rate increases compared to mid or less than 5 on salary increases. And M&A headroom, on working capital, it's really the question. On the 60, I think we'd always want to be in the region of GBP 10 million headroom for working capital and [indiscernible], et cetera. I think we'd be very comfortable with that, that we knew that the business won't ever come under any sort of pressure [indiscernible], so I think we'd be using up to GBP 50 million of the GBP 60 million.

We will now take the next question from Joe Spooner from HSBC.

Just on Page 4, you've kind of provided the different areas of law that you're exposed to. I wonder if you could just kind of pull out the kind of main areas you think could be exposed to the economic cycle. And I guess within that, there are some areas that could benefit from the economic cycle, too. Just wondering if you could kind of [indiscernible]?

Yes, no problem. And we have lost Kate to IT issues. So if you can ask me complicated finance questions, please [indiscernible]. The mix of business, there's not a lot that's sensitive to the economic and economic downturn. The obvious one is the M&A work, and we've seen a softening of that market since February, March, as I've mentioned. And that would be certainly made up forward with things like insolvency, which we do, do. Again, it's not a huge element of our business what we do, do it. I think dispute resolution would stay pretty static, but you would be accounted to that M&A. These are really around the margins for us in the real estate. Well, for example, we don't see an upturn in that through economic, and we don't see a downturn to economic decline. This is, for example, one of the best examples to try an illustrate, the point is that we maintain all the core sites to the likes of [indiscernible] U.K. and [indiscernible] is a 30-year economic cycle and is [indiscernible] to economic booms [indiscernible] maintained with planning commissions, regulatory licenses and all of the property and [indiscernible] work that goes on with that type of work. We do a lot of property management work, and I think that's a classic example to illustrate the point. So we don't feel that at all. The only one I could pick to even answer your question would be M&A. But even there -- and we have seen a couple of transactions in the last week or 2 that are driven through sort of people wanting to get on with things as we go into this cycle. So I think there is an urgency as well in certain areas in this insolvency transactions, and I don't even see that much difference to our M&A business even because it is at a level that is relying on the normal things that the city or even Manchester or Leeds would be thinking about.

Just one question from me, and apologies if it maybe one more to Kate. It was just around the lock-up calculations. And just wanted some of the adjustments go into that and maybe a bridge to how you get to that 86 days. Obviously, if we look at just the kind of balance sheet numbers at year-end GBP 30 million in contract assets and GBP 27 million in receivables versus that GBP 125 million of revenue, a basic calculation on that would apply days much higher than your report. So I was just wanting to understand really how you look at those adjustments and where that comes from? I absolutely understand [indiscernible] pass on to Kate, given it's very much in the finance.

Yes. Apologies. Yes, I'll pick that up. Yes, so I mean we take those various things that need to be taken into account. We do exclude the clinical work we've talked about that. That sort of is an area, if you're looking at sort of lock-up days there, it's sort of -- you're talking in sort of years time. So we do take that out. You need to take that out of the calculation in terms of the WIP calculation. But in terms that doesn't impact our cash conversion because it does churn each year, and you can see that in the cash conversion figure if it was sort of building and sort of draining cash. You'd see that in cash conversion is not, but we do take it out because it's separate and it would deflect what the rest of the business is doing. So then we look at it and we look at the best days. Now you need to take out when you look at debtors, you'll need to take out the disbursement calculation disbursements. If you look in the note, you can't just about work out what the disbursements are because they aren't in our revenue figure, I can talk you through our plan in a little bit more of the detail of that. And obviously, you need to take the IT out of the data that were in there as well. And then we look at it and you need to pro rata your business. We look at it. So we look at debtors on account that matters. So what we've been building over the last few months. But if you're just looking at the statutory accounts, you'll only see one figure for revenue, and that will be pro rata in to take effect account of the acquisitions we've done during the year because we only have part of our revenue during the year. Whereas, actually, we'll have all of our balance sheet at the year-end. So there's a number of factors that need to be taken into account to work out how we get there, but those are the key ones that make the big difference.

That will conclude today's question-and-answer session. I would like to hand the call back over to your host for any closing remarks.

Okay. Well, thank you very much for joining us. We very much appreciate the full coverage that we have from some analysts. We enjoy the fact that we've got you looking at it from an independent perspective. It's great to have this opportunity to be able to, hopefully, clarify the full year. Obviously, it was a challenging March period. So hopefully, we'll be able to give some clarification, and I think deliver on what we said there, which hopefully starts to instill confidence and just how we feel now going forward against the adjusted FY '23 numbers that we put out there. So it's been a pleasure to talk to you. I hope that's helped you understand where we're at, and we look forward to seeing you again in the not too distant. Thank you very much.