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

Okay. Good morning, everyone. Thank you for joining our presentation of our half year results for the 6 months ending 31 October. I'm going to do a brief introduction with a couple of slides, and then I'll hand over to Kate to do the numbers and then back to me to talk about some of our growth strategies. So if we could start, thank you on the first slide. I think the highlight of the 6 months that we're now reporting is the improvement in our gross margin and our PBT margin. Kate will talk about that, and I'll also talk afterwards about some of the drivers today and going forward, how we've increased those margins. In summary, it's from maintaining our focus on good quality revenue, but also obviously managing our cost base strictly. And I think we've demonstrated that the proven leadership team that's now had several years of tenure across all 25 directors, we've been together now a good while. And I think we've really been able to demonstrate how well we're managing our overheads and costs to deliver this improvement in our gross margin, gross profit margin and in the PBT margin. I also will want to talk about how we're recruiting people and how the recruitment of partners is now growing and why -- and also our M&A strategy, I want to talk on that -- about that and how well they're integrating, but also the pipeline going forward. So if we can just go to the next slide, please. This just summarizes the revenue growth and PBT growth since we listed. We listed in June '18. So this shows the 6 years that we've delivered since listing and also the consensus expectation, which we're in line with. And I think really just shows that we've grown the revenue fivefold and the PBT we've grown sixfold. So I think listing certainly, we feel is very much work for the business to raise awareness and credibility for what we've done and how we've grown the revenues and profits. Obviously, worth pointing out that despite growing our PBT sixfold, our share price and market cap is the same as when we started 6 years ago. So I think that really probably demonstrates the value of Knights when you consider our track record and our consistent track record of growth but profitable growth as well as the cash generation, which Kate will highlight. So over to you, Kate. Thank you.

Pleased with the results that we've delivered for the half year. This demonstrates revenue growth of just over 5%, which we'll talk about the building blocks of that later on. But actually, I think what it demonstrates is that our continual focus that we've had on delivering profitable revenue growth and focusing on the premium end of the market has really delivered strong results this year in terms of our PBT margin, which has increased from 15.4% to 18.4%. And I'll talk a little bit more on the next slide about where that is. But fundamentally, that comes through from the drop-through of an increase in gross margin, which we've been working on really hard. And that's meant that we've delivered a 25.9% increase in our underlying PBT, which gives us GBP 14.6 million for the half year, which is half of our consensus figure for the full year. So it puts us in a really good position at the half year position as well as delivering and continuing to deliver on our profitable revenue growth. We've maintained our focus on our cash discipline and maintaining our lockup days. Our lockup days are 98 days at the year-end -- at the half year, and we'll talk a little bit about how that's broken down. That's very much with where we'd expect it to be at this time of the year. And that's meant that we've ended up at net debt of GBP 50.1 million, which is in line with where we expected it to be at this point in the year, given we've done acquisition during the first half of the year, and it positions us really well in terms of our leverage headroom and our headroom in our facility, which we've increased during the half year. If we go over on to the next page and talk a little bit more about the key drivers of our PBT margin. You can see there the increase that we've done. We've gone from 15.4% to 18.4% comparing the 2 half year periods. And the majority of that, you can see the fundamental reason for that increase is the increase in the gross profit, which has increased by GBP 4.3 million over the period. Pleasingly from that, so some of that has come from obviously the acquisitions and what they've added into gross profit. But really pleasingly is the organic growth in the gross profit, which has come through there. And I've put there that of that GBP 4.3 million, GBP 2.1 million relates to growth in our organic gross profit, which actually represents about a 6% increase on what we've done last year, which again just demonstrates how we focused on our cost control, controlling our costs, controlling our -- and moving very much focusing towards the premium end of the market and the more premium work, which we've wanted to do, which is profitable, and that's now showing really good increases in our gross profit. Our gross profit in the period has actually increased from 47.5% last year to 50.5% this year. So a really pleasing move and what we've been looking at doing. As well as doing that, we've actually managed to leverage some of our overheads there. You can see that as a percentage of revenue, those overheads have dropped by 1% in the period. A key figure there, which we've talked about many times in the past is our non-fee earning staff costs compared to our staff costs, which have leveraged now. They were 11.4% of revenue at this point last year. They're now 11% of revenue. And our ratio of fee earning to non-fee staff has increased from 3.6% last year to 3.7%. So again, demonstrating the results of what we've been working really hard on over the last few years to get to. That PBT margin does drop through. It increases our underlying EPS margin as well. So our basic EPS margin has actually increased -- well, our basic EPS has increased 34% in the period from 5.34p last year to 7.14p this year. So all following through to our EPS as well. In terms of where we look to go in terms of margin going forward, I know everybody is always interested in that. We see this very much as a maintainable margin going forward. We've worked hard to put all the drivers and all the focuses on maintaining that margin. In the medium term, we do see that increasing, but at a gradual level. I think we're pleased with what we've delivered. We don't see ourselves going backwards from here. And over the medium term, we see that gradually improving. We move over on to the next slide, please, just the revenue bridge. Just talking about our revenue growth that we've talked about, 5.4% increase in revenue. The majority of that, as you can see there, has come from the acquisition income. So the acquisitions that we did in FY '24, which was the Baines Wilson acquisition and St. James's part. That's the full year impact of those acquisitions. They're both performing well. In total, they're delivering more than what we expect them to do. So integrated well and performing well and starting to deliver organic growth in those areas as well as we recruit into those areas. And then the FY '25 acquisition is the Thursfields acquisition that we exchanged on in July, and we completed in September, and that's delivering well again in line with what we expected it to be. It's integrated fully on our systems and performing well. The organic growth, the net organic growth is 0.7% as we reported, but if we do take out of the strategic exit out of the insolvency business, which we did last year, we talked about last year, it was loss-making. If we take that out, we're delivering just under 2% organic growth on a like-for-like basis, which although modest, I think it's good considering we've moved and we've changed our focus most definitely to make sure that we're actually always focusing on the premium end and the profitable end of the market, which you can see has given us the 6% organic growth in gross profit. So that we see is actually a positive move towards our fundamental focus of focusing on profitable revenue growth. We move over on to the next slide, you can see that, that organic growth that we've delivered has actually come from really positive movements in some of our key KPIs. So these are the key KPIs, which we monitor the business on, one of the main ones actually being the gross profit margin. And you can see there the significant increase that we've had in the period over the last couple of years. We've gone up to 50.5% now. And that's us managing our cost base, focusing on premium work, the effect of our rate increases that we put through in major coming through a number of those factors coming through and we manage our work to make sure we are focusing on the premium and the profitable end of the market. And as that's come through, you can see also it delivers into the other KPIs, which we've got there, which is the increase in fees per fee earner and the increase in the gross profit per fee earner, all delivering really good strong KPIs, reflecting the quality of the work and the fee earners that we've got in the business now. And all of those generating there mean that in cash flow, which is another key KPI, we continue to deliver strong underlying free cash flow for us to invest in the business going forward. So all of those KPIs, I think, showing a very strong trajectory of improving over the period. If we move over on to the next slide, a summary of our cash flows. There's not an awful lot to pick up on here the first half of the year because of our normal working cap cycle is always a little bit lower in terms of cash generation than we'd expect for the full year. That's normal. That's what we'd expect. We still expect our underlying cash conversion to improve when we get to the full year-end. There's an increase in working cap during the period, which is expected because April is always a particular low point. October, we don't get to quite that. So we will expect some of that to unwind in the second half of the year. There has been a slight increase there, as we pointed out on the slide due to the increase in our CL Medilaw business. We've talked about that in the past. It does hold slightly more working capital than the rest of the business. It represents less than 10% of the business. So I don't want to focus on it too much. But because of the growth in network, which is very profitable, there is a bit of an increase in our working capital there, but that changes regularly. And as I've said, we would expect that working capital within our normal working capital flows to reduce by the end of the full year. Moving over on to the next slide, we can talk about the key factors really that we manage on helping us to manage our cash flow and our cash generation. And it's the key thing which makes us very different from a lot of other professional practices out there, business law firms. Our key focus is looking at our lock-up days. So our lockup days, just for those of you that haven't heard this before, is effectively the amount of time it takes for us to convert a unit of time spent on a job into cash. So it's our WIP days, the amount of time it takes us to build that time and our debtor days, the amount of time it then takes us to collect that cash. We focus across the business of having around about a 60-day WIP target and about a 30-day debtor days target. And the way we do that is it isn't rocket science. We just encourage people to bill on a regular basis, and we encourage people to set their matters up on a basis that they will interim bill and raise bills regularly throughout the period of the matter and then all of our clients will know that their debt is all payable on 30 days, and we encourage our fee earners simply to make sure that they actually ring up and collect those debt. And you can see there set out on that slide the results of what we've done during the year. So our lockup days there are showing at 98 for the full year. Now in terms of how we calculate our lockup days, we exclude any of the work in progress that relates to our clinical negligence business because it works on such a different profile than the rest of the business, and it is less than 10%. It's circa 9% of the business. We don't want to distract the rest of our business from focusing on that 95-day target, which we set for them. Therefore, we do exclude it and you can see like-for-like where it's moved. But just for comparison purposes so that people can see what we actually are delivering, that orange line at the top there does actually demonstrate what our lockup would be if we include everything. So still a very pleasing 144 days, which I think still continues to compare favorably with the rest of the market. I think a key thing for us to look at actually is our debtor days, debtor days are debtor days. There's nothing which we exclude from debtor days. And you can see there consistently, we're at the sort of 33, 31 level at a half year period. At full year, we'd expect that to get that down to 30 days, and that compares very favorably with the average for the industry, which is, as you see there, just under 73 days. On the right-hand side, it's very important and a really interesting stat for you to see how different we are from the market. So what I've put there is the acquisitions that we've done over the last 3 years, the lockup days that they had at when we acquired them, so where they were when we acquired them. And you can see that they're all well over 100 days up into the 200 days, which is very normal for businesses out there in the market. And you can see what we do, how we bring their lockup down to the average there of those is 169 days when we acquired them and we brought that average down now to 74 days. So we've improved their lockup by 95 days overall. And again, it's not rocket science. We simply do it by encouraging people to bill regularly, phone clients, and ask for the cash, and get the cash in. And we leave that with the fee earners to do themselves, but potentially, we will help if needed to help them. And I think Thursfields there at the bottom, you can see that had very low lockup days when we acquired it for what we normally see. But we still within a couple of months, managed to improve that and bring that down to 104 days, and we will work with them in the next 6 to 12 months to bring that down to within our normal levels they would expect. So that's how we generate our cash and which I think makes us very different in terms of our cash management from the rest of the industry. If we move over on to the next page, we can then see how that converts into our net debt. So you can see our net debt in the period. It has increased from GBP 35.2 million at April to GBP 50 million at the half year, that's very much as we expected it to be. The 2 main areas there, as you can see, that we've paid GBP 8.9 million relating to acquisitions, which is GBP 2.5 million relating to deferred and contingent payments on acquisitions done in prior years and a net GBP 6.4 million outflow on the acquisition that we've done during this year. So GBP 8.9 million of that increase is relating to acquisitions. And then the other big increase there is relating to the GBP 6.2 million in terms of capital expenditure. In July, we did explain that this was going to be a high year of CapEx for us. We deferred some and we were doing a bit of a catch-up on refurbishing a number of our offices. It's really important for us to make sure that we have Grade A offices so that we can -- because that supports our ability to attract Grade A staff into our business and to ensure that we're delivering the premium service. So it's really important for us. And where all of that brings us at the year-end -- at the half year-end is GBP 50.1 million in terms of net debt. We did increase our RCF facility during the half year to GBP 100 million. So that still gives us headroom of GBP 50 million at the half year. Leverage at the half year was 1.36, that will come down to closer to the 1x leverage at the half -- at the full year. So given us lots of headroom there in order to continue to pay dividends. We've declared a dividend for the half year, a 9% increase on what we did last year. And then that still leaves us plenty of cash for us to invest in growing the business both organically and acquisitively, which David will continue to talk through now our strategy.

Thank you very much, Kate. I just want to highlight one point. When Kate was talking about lockup and how we generate cash and reduce the WIP and debtor days, the reason that's so achievable for us is our One Team culture. We've been owned and managed now coming up 13 years. And because we've been owned and managed, we've been able to bring together all of our lawyers to think and operate in a very similar way. And part -- a good example of that is how we've been able to get clients to pay us within a 30-day credit period. And that just highlights the One Team culture. That goes into the quality of revenue. Quality of revenue is really important and comes from our people thinking premium. So it's a premium service built on speed and accessibility and communication, and we're able to charge for that premium service correctly. And again, through the One Team culture, we're able to get people to work in a similar way, consistent way across all of our 26 locations to achieve these margins and the increase in the margins that we've talked about. So that premium quality revenue comes from a mindset of our people, which we can achieve through having such a strong One Team culture. You've seen as well that we concentrate on managing our overheads. I'll talk a bit more about that, and I'll talk about recruitment and acquisition. So next slide, please. The example of what we mean by some of these revenues is actually perhaps not what people think. When people think premium, they might think of M&A, corporate work, et cetera. But actually, we see fantastic profit and high margin in things like the Medilaw business, in our residential property business, the new homes business where we act for buyers of new homes, working close to the residential property developers is really increasing both in terms of volume and scale, but also in margin. So in the regions, we see high 50% plus gross margin. We see this from lots of areas of work, not just what people would think on the premium side. This is all about coaching high performance and getting lawyers to think about pricing and cash collection. And again, the One Team culture really is important when we come to get people to work in a very consistent way. And we get people to charge more for their services because they think more about profit and cash, not just fees, which we certainly see in the legal fashion, people think fees and fee targets, we actually have been able to succeed in getting our people to think about profit and cash, bringing that investor and owner influence into our business. And that's what's led to these margin increases. Organic revenue growth has been very modest, as Kate said, just under a couple of percent. The increase in profits organically is obviously much better, but we are now very much still remain focused on revenue growth, too, and I'll talk a little bit about that shortly. Next slide, please. The client relationships and leveraging those client relationships through a One Team culture is what we're focused on. We've got all the partners, 300 partners now coming through a coaching program with some of the senior leadership team, myself and a couple of others where we're working with all partners every week to really see how we can bring our One Team culture to lead to more organic growth from existing clients. That's a real feature. We're talking about organic growth much more in our business than we've done before. I think we've got an excellent platform now, both in terms of all of our 1,100 fee earners and in the business services support. I don't think we've ever been in a stronger position now to leverage our client base and actually do more for the clients and get more -- a bigger share of the wallet. And we're working weekly now with all partners to achieve that goal. We're also seeing the scale of the business achieve client wins. We've had some exciting client wins recently that I think will start to fuel our organic growth strategy going forward, too. Next slide, please. So it is about driving revenue growth organically, absolutely. It's also continuing with the acquisition strategy, which I'm going to talk about. But you've been able to see in these results how we've been able to have strong cost discipline across a very established and mature management team now that has a lot of experience together to do this. And I do see us going forward to improve the 3.7 fee earner to 1 non-fee earner. The industry average in the legal profession is 1.5 fee earner:1 non-fee earner. We leverage overheads a lot more than a typical partnership model. And we -- that's the 3.7:1, but we certainly, I think, now are able to leverage our overheads even more going forward. And I think we'll increase that ratio hopefully to above 4:1. Next slide, please. Here, I just want to talk about recruitment. Recruitment is a key organic driver for our revenues, too. You achieve and win client relationships faster if you can actually hire the people who have got the relationships. It's very much a relationship business model in the regions, much more than, say, in London, where you see institutions going for legal services of recognized brands, CIRCLE and U.S. law firms. Once you're outside London, it's much more about our partners having those client relationships. And we are seeing an increase in our recruitment. And why is that? Well, I think there's a couple of main drivers. I think, first of all, the traditional partnership model, I think, has been sort of creaking. I think people have started to see that to put capital at risk and the average capital account of an equity partner is GBP 250,000 to try and earn more money in a turbulent market. I think the macro environment economically in the U.K. is certainly up and down at the moment. And I think that risk -- that financial risk is the #1 driver why people would choose Knights rather than go into a traditional equity partnership. I think it's a really important push away from traditional partnership model towards us that's existed throughout the whole of the last decade, but I think that's gaining momentum. I think people now want that traditional partnership model less. I think you're seeing a parallel in the way you are seeing a lot of now consolidation and private equity coming into the model, which is what we did almost 13 years ago. So I think there's a sort of driver away from that because of financial risk away from partnership. I think the attraction to Knights is getting stronger because of our scale and our recognition that what we've done over the last 12 years, 12.5 years by growing the business now as we have done by achieving such a strong collaborative One Team culture, which is now, I think, starting to be known and better recognized. I think that pulls people from that partnership model. And we're certainly seeing a significant momentum in our recruitment numbers. They're up about 15% at the moment from last year, and I see that continuing to increase for the reasons I've said. A quick reminder here as to the runway ahead of us as well. We're by no means exhausted, our growth throughout the U.K. This is almost a GBP 4 billion market we see. And obviously, we've just shown GBP 150 million of that last year. And there's a lot for us to win out there through recruiting more people, winning new clients and doing more for the clients. There's a lot to be done outside London. I think as we continue to grow our scale, I think our brand, our own reputation and the awareness of Knights will become stronger and we'll pull more people into it going forward. Next slide, please. I just want to touch on acquisitions. This is very much an important theme for us. We built this business through acquisition over the last 12 years, and we've done a lot more of that since we listed as we've shown to grow the revenues and the profit sixfold. Here on the left-hand side, you can see where we want to go next in the orange sort of into the Norfolk, Suffolk, Essex area, sort of northeast of London, further in the Southeast, I think there's more to be done. So in that Southern Wales area, there's more to be done and in the Southwest, too. So there's a lot of Southeast Southwest and South Wales to do as far as expanding our footprint. Similar to the recruitment strategy, we are seeing law firms now be more receptive to our approach and a few firms -- now a few more firms actually contacted us in the first place. So it is shifting in momentum, and I think our pipeline is filling up. And we can be very selective and choosy about what we do in terms of acquisitions going forward, but we will be acquiring law firms. There's no doubt. I've highlighted, and I could have picked several examples that are similar to this. We acquired the firm in Bristol that was just under GBP 3 million of revenue when we acquired it. In its first full year, we took that to GBP 4 million. And this year, it looks like it's going to get close to GBP 6 million. And I think that just shows what we can do with law firms to grow them. A couple of drivers to that. We take a traditional partnership model and we get them to work as One Team. We get them to work together with the rest of our business, and that includes pricing better for their work, collecting cash. You've seen from Kate's slide, Slide 10 showed the acceleration of cash collection that we're always able to achieve. And we can start to win more business in the area, particularly through hiring more people in, say, a Bristol location in this example. And we've hired quite a few partners in our Bristol office with that breadth of fresh air that goes into a city like Bristol and has that alternative model where people can join us without the financial risk of the partnership model. And that's very attractive to people to earn the same or more money without having to worry about borrowing money, which obviously is going to cost them more now with interest rates being what they are. So I think Bristol is just an example. I could have picked Teesside, I could have picked Carlisle. I could pick other examples that are very similar to this where we can sort of double revenues after a couple of years by going in with a very modern approach, which really, I think, enthuses people to join. Next slide, please. Just want to finish here that organic growth -- revenue growth is obviously a key focus for us, too. We've had very modest organic growth in this period, but we've been able to organically grow profits as we've talked about. And as we continue to now work on the organic revenue growth and maintaining the margins and the profitability and leveraging our overheads, that will obviously increase our profits, and we will continue to invest the vast majority of those. Acquisitions only fuels all this, as I've shown, the last 8 acquisitions have all maintained revenues much stronger than we saw historically before. I think we're bigger, we're more experienced. I think we're better known for it. People integrate faster now than they did before. So I think acquisitions is a key part of the revenue growth and even organic growth, too. And all this generates more cash to invest in our business to maintain this momentum that we now see that we have going forward. So I'll just finish off on the next slide, please. So you've had a good summary of these 6 months, but also hopefully got a flavor of what we see now currently and going forward. We do feel the momentum. The marketplace has obviously changed all the time. Sentiment obviously just taken a knock in the last couple of months. We all know that. But I think the legal sector is fairly resilient and defensive in market turbulence and in whenever there's market downturns, I think Law is pretty resilient, and we feel that. Our H2 has begun as started just as we expect in line with our expectations. We're confident about our year-end expectations. And we are confident about organic growth. It's not come through in the first half as we would want it to, but we're confident that with all the work we're doing with everybody in the business and particularly the partners that we will see organic growth develop and increase going forward. I think you've shown -- we've shown the operational excellence of our business and the quality of our management and what we've been able to achieve together. I've highlighted residential property because that is 25% up this year in the 6 months. And in the last couple of months, we're seeing a real increase in the residential market, notwithstanding the interest rates sort of being stubborn now and coming down, but not coming down as quickly as people first thought, we are seeing that demand for residential property. And I think our offering there is to build the equivalent of Savills, if you like, in law that we want to occupy that premium space, which we see unoccupied in the regions. And I think that's really proving to be successful and fuels the organic growth going forward. There is a lot of diversity and breadth in our business but the scale is definitely now attracting more people to it. And some of the recruits coming through are really exciting at the moment. I think the numbers and the volume of recruits is certainly on the up together with the acquisition pipeline that I've talked about that we will be acquiring law firms going forward, and that will only fuel more organic growth, too, going forward. So we're confident about where we are in the marketplace. We're confident about our regional strategy. Haven't touched on the resilience as well of not having that inflationary pressure of salaries, which is another reason we're able to increase the gross margins. We're able to maintain and manage our costs and overheads because we don't have the big city inflationary pressures that others have. So hopefully, that gives you a good summary of where we are with trading and how we see things going forward. And I'll now hand over to questions. Thank you very much.

[Operator Instructions] We have a question from Sam Dindol from Stifel.

Congratulations on the results. Three questions from me, please. Firstly, you've been very clear on sort of the margin guidance. I was just wondering on organic growth, where do you think that could get to maybe in the second half or next year? Is that sort of mid- to high single digit, has your initiatives come through? Secondly, on pricing, I think you normally tell clients in November, December for the following May. So I was just wondering if you can give us an indication of what sort of pricing will be from 1st of May. And then finally, on the M&A pipeline, first was a big deal. How is the pipeline looking? And are multiples sort of going up or going down given pressure in the market? And sort of any thoughts on that?

Kate, do you want to do organic growth, I'll do pricing and M&A.

Yes, that's fine. In terms of organic growth, Sam, we were looking to get that, I think, sort of mid-single digit, I'd say, is a sensible look. We're focusing on in terms of profitability, making sure that we keep that at the high profit level there. I think for me, a mid-single-digit sort of run rate is a really sensible place for us to be at. We've got all of our client service directors in the business and we are very much focusing on that. We're seeing some good client wins coming through, which will start to deliver us good organic growth run rates going forward. So I think if we're looking at a medium-term figure for organic growth, I think we all feel comfortable with what's in there, looking at a mid-single-digit organic growth figure in the medium term.

Yes, I'd agree with that, Kate. And then on pricing, so we did do the price increase at the beginning of November. I've never seen law firms do what we do to be to so organized 6 months ahead. And the real importance of this is from a compliance perspective and our business adopting an increase in price. We don't have to worry about clients on 1 May because they've all been told for the last 6 months so that everybody is told, you're not relying on partners talking about their increased pricing or current engagements having to adjust. So you go into 1 May fully adopting the increase in pricing. We put a circa 4% increase on our other rates at the beginning of November for 1 May. So that's all in place. Slightly lower price increase this time. We're concentrating -- we felt that was the right number on what we've done with recent price increases to maintain and increase volumes, frankly. So that's all in place, and I think it's been very well received and adopted by our people, and we'll be there from 1 May. The M&A pipeline is increasing in terms of how people are receiving us, but also people approaching us, as I've mentioned. I don't see the actual valuations reducing at all. I don't think they're going to go up. I think there is an appetite now more from more law firms to sell to us, but we're still focused very much on the quality end of that spectrum. We want to buy the best law firms and they will hold out for what they believe to be the right price. That's going to be post cost synergies, we hope to get them under 5x, 4.5x is what we aim to achieve and we certainly see that. We think we can acquire 4, 4.5x EBITDA post cost synergy for the very best law firms. The one we bought in September in West was tremendous quality. It's as good as the businesses we bought. And we know that we can then get them to that sort of multiple 4, 4.5x post cost synergy, but they are top quality businesses that we're trying to acquire. I think what has helped us, to be honest with you, has been what's happened in the accounts profession. And you're seeing some new entrants in the league fashion. There's probably 4 now consolidators, there's 25 in the accounts profession in the U.K. We've obviously been the only consolidator for 12 years. And now we see 4 smaller ones come in. I think that helps actually because when we built the platform, others know and are trying to build a platform. We've got that platform. We can extract those cost synergies faster than anybody else. We can pay a good price to achieve -- to actually execute acquisitions for good quality businesses. But I think what we've done coming up 13 years ago has been validated in the accounts profession and we've seen some new entrants in the league profession. And I think people are sort of caught on to the fact that ownership in this professional service sector can work. It has its challenges, but it can work. And I think it validated what we did almost 13 years ago. So I think law firms kind of understand it a bit more. I think they -- it makes more sense to them. So I see the acquisitions growing in momentum from here.

And the next question is from Caroline Gulliver from Equity Development.

Congratulations on the results and the very good sort of improvement in gross profit per fee earner. I just want to talk a little bit about the CapEx that you've been doing. You mentioned there was some catch-up CapEx on office space. I just wondered how many you've done, whether you had others left to do and what you were doing there? My second question was just on -- obviously, you've got a very good integration process when you take on new companies and so forth. And the high-performance coaching that you're doing is obviously being extremely effective. Could you talk a little bit about the sort of what technological benefits you're getting when you take on new staff? And are you using any -- introducing any AI to help with sort of cost effectiveness?

Kate do you want to talk about CapEx, and I will talk about integration, coaching, and AI?

Yes, that's fine. So in terms of CapEx, Caroline, I think we talked in July about need to -- we got to catch up on various offices. So we have done that. We spent the year sort of doing a lot of offices. So we spent GBP 6 million in the first half of the year. It will be a sort of similar amount probably by the time we get to the second half of the year if we add in what we're doing in terms of the Thursfields acquisition. That takes us -- the majority of our offices are then done. We've probably got a couple that aren't done while we -- that will need to be done, but the majority are done. So we would not expect this level of CapEx year-on-year. It has very much been a one-off this year as we've done a catch-up, like I say, of various offices and one of the big offices, in our office has been done, which was very much years overdue. So it's very much a CapEx share -- a large CapEx share this year, but going back to normal levels. In terms of future, yes, and that the offices are all done to a high grade A level, which won't need an awful lot. They won't need doing every few years. They're built to last. So it will only be as we acquire then new offices doing those up there. So we'll be in a good position by the time we get to the end of this financial year.

Yes. And I'll just repeat something Kate said in her main presentation that you -- we've seen this over the whole sort of 12 years. You can't get people to think about delivering a premium service and charging correctly from a scruffy stadium. They need to be in a really smart place to lift themselves to consider themselves to be premium. So we're taking sort of regional provincial parochial if I may say, cultures and we are lifting them to charge properly for all the work they do, and they need to be in a really smart office to do that. We've seen -- you have to see it almost to understand the importance of the money we're spending, and that will continue to maintain 50% plus gross margins. It's all investing in that area. And on your question around integration coaching, I think we're seeing and we're using -- we've refurbished our hub and spoke to really facilitate the coaching. So we're seeing partners now come through that office space every week for workshops and coaching to do a couple of things really to work together as one team, so we can do more for client by cross-selling, to act to behave as one team and bring all the different expertise areas to the client really, requires people to get to know each other. So it's a chance for every one to mix and get to know each other, but also be coached on pricing and on premium. And so that's where the real essence of that lies by being together and coaching, getting all the players together at the training round is how we see it. We are looking at AI a lot at the moment. We've been trialing Copilot for 2 years now. We're actually integrating Copilot into our document management system on the 1st May, so it's available for everybody. Frankly, we see at the moment, the progress and the impact at the moment, not that great. We don't see a huge impact from AI in our business at the moment, but we're very conscious that it's coming in its momentum in our lives and in business and people are talking about it a lot. So we're very much at the table with the main providers. Thomson Reuters is one of the main providers of how we put all our documents together and all of our library of documents and precedents. We're working on those a lot at the moment and seeing how we can introduce AI as precedents and how we can then coach people on the adoption of those precedents with automation AI. How we sum it up is we want to give a very bespoke hand-made service and feel to our service, so people get all of our partners immediately. It's accessible, it's quick, it's fast. That's what we think premium is. But behind the scenes, we produce the documents in factory style. So the documents are much more efficiently prepared and produced, but it still has that personal handmade touch is how we see it. So we embrace AI, and we can see, hopefully, advantages going forward and how we actually produce documentation, but the delivery of advice and the delivery of expertise needs to still be very personal is how we see it. And we see that -- and that's how we see AI going forward. Hopefully, that answers your AI question.

It does. That makes a lot of sense. I just had one further question. You talked -- you had a great trend on recruitment rates being up 15%, and you talked about some of the geographic areas of the country where you'd still be looking to do M&A. And I just wondered how you go about sort of marketing yourself in those areas where you still have sort of geographic opportunity? Is it sort of word of mouth? Or is there anything specifically that you're doing?

I'm really glad you asked that Caroline, because one thing that we've done in the last sort of 4 or 5 months starting -- we started this last September, has been to meet recruiters more. We'd love to recruit people that just calls up directly or talk to our people and our people introduce them. And we pay a GBP 10,000 bonus if one of our people hires a partner without a recruitment fee. So we'd love people to join us without recruitment agents. But the fact is a lawyer if they're considering a move, will often more often than not want to go through an agent because they want to talk to somebody who can talk to them about the marketplace about this important move they're considering. So even if they're putting Knights in the mix, they want the agent to help them on considering what to do. So what we've done in the last few months, we saw, for example, 6 recruiters last week and spoke and that covered Manchester and Birmingham markets as well as actually Leeds as well. So we're meeting recruiters much more. And that is absolutely filling a PR gap actually. We're going to work on PR too. We're building our PR resource, and we're wanting to do more PR to the market now. I think we need to explain clearly the uniqueness of our culture, which is one team. In law and professional services is quite silo, my client fees, my target. We've really disrupted that and changed that to create a team so we can share the work across experience levels and to share all the disciplines to be available for the client. It's quite different, very different. It's unique. And we need to explain that. So we're doing more PR, but we're certainly also meeting recruiters more now to explain what we're about. And I think that's going to significantly increase our recruitment by the number of recruiters that we're seeing now every week. I saw 7 last week. And this week, I'm seeing 6 myself. So we're seeing a lot of recruiters to help to fuel that recruitment. As far as the acquisitions, we pretty much know the 200 commercial law firms in the regions. There's maybe 300 if you go down to the smallest. And we know most of them, certainly by sort of name, reputation, we've probably met at least half of those. So we know the market. We're always on -- we've got a dedicated M&A director now that's talking to these firms. And we do it by basically contacting them and going and seeing them, myself and the M&A director do that with some of the other client service directors. And our client service directors know their regions. We've now set ourselves up for 1 client service director for 2 offices, and the client service director's job is to know their local market, including potential acquisition targets as well as potential recruits and hires. So we do it through a combination of all those things.

I'd like to hand over for any webcast questions.

So we've got a couple of questions from Steve Wolfe at Deutsche Bank. I'll give them to you in 2 batches, if I can. Firstly, are there any services that your clients are asking for that you don't yet provide? And could you give us some examples of client wins and cross-selling or expansion of services with clients? And in light of that, what are your hiring plans overall for fee earners for the business in the second half?

I'll pick up both those, if I may. So the client wins, there's probably 2 areas to highlight best. We've got a dedicated director on General Counsel. General Counsel has been a really growing theme over the last 20 years, to be honest with you a lot of lawyers who perhaps don't want that traditional partnership model, they can come to us, but they can also get out of law and go into business by being internal in-house General Counsel. And larger corporates do this because they want their own team. So we've got a -- it's a slightly different approach to a General Counsel, and we've got a director dedicated to doing that. And we're certainly seeing some large corporate wins because of our understanding of the General Counsel's world. So that would be a theme that's carrying on and we've been working on for the last 2 years, working with a business called Marcus Evans as well who introduces us to General Counsel twice a year at some of their forums that they organize. I think the other thing that's important to us that I think, starting to emerge is this focus on premium, the premium end. And what we mean by premium. We don't actually mean premium client. We mean premium service. And we're coaching all of our people. We're seeing 25 partners a week to coach this that premium service is what we're focused about. And clients of all different sizes and types want premium service and want to pay for that. And one client has been attracted by our premium service in the residential property world. It's public domain now, but they've come in as a new entrant on 100% loan-to-value mortgage to -- and they're really well funded and set up now, I think, to gain market share in the residential property market. And they've chosen us and actually point to us exclusively on a 4-year contract because they wanted our premium service. We were by far the most expensive. We were twice the cost of other providers they were looking at, but they wanted the premium service, which is accessible to actually qualified solicitors and partners and the speed of delivery and the technology working to central Internet and hubs together. And our technology is very strong and robust at working with clients who wants to set up a common Internet together, so everything can go through technology. So that would be -- and we're very excited about that. That's just started in terms of revenue and trading. So we're pretty excited about what revenues that might develop going forward. And it was all about being sort of focused on premium. So I think the premium focus is what we're seeing starting to deliver some results in terms of large corporates and certainly in terms of that residential mortgage provider. As far as your second question, Steve, on hiring, we had 23 new partner starts in H1 that compared to 20 the year before. The total number last year was 40, so 20 in the second half. This year, we're very confident it's going to start with a 3, so it will be 30 in the second half. So 23 first half, 30 something in second half. And going forward beyond that, so those numbers have gone from 40 to 50 something. I think beyond that, I think that number could increase substantially because of the effort we're making with recruiters, because of how we've incentivized our own people and because of the scale and reputation, which I think is stronger than it was a year or 2 ago. I think people are now understanding the Knights model in the League profession much more than they did before, helped by all the activity in other professional service sectors like accountancy. So I think we're in a really strong place now to increase the numbers beyond what we're going to see in H2.

And there's one follow-up from Steve, which is what do you think the impact of the autumn budget will be on your markets?

Yes, great question. I think we saw a surge, an uptick in corporate activity, M&A activity, particularly in October pre-budget, our best month in 3 or 4 years in corporate. And disappointing, I think that's now -- sentiment has now dampened that momentum in corporate. So I think M&A, we're certainly seeing at the moment sort of not carrying on that momentum that we saw in October. So I think it will dampen -- the sentiment will, I think, reduce M&A activity for the short term. I think the uncertainty about debt costs and the lack of reduction in the interest rate or the slowing down of that the uncertainty of inflation and correlated with those interest rates, I think, will slow down M&A activity. So I think that's one thing. Luckily, for us, it's 10% of our activities. So it's important. It's a very important part of our business, but it's 10% that I can see being impacted. It doesn't seem to have affected all the residential property market. That sort of mortgage rate interest not coming down for the time being, doesn't seem to have done much in the residential property market. That still seems to be maintaining its momentum. And we're excited by this new entrant that we're acting for in terms of 100% loan-to-value mortgages. The rest of the business, we think, will be pretty resilient. I think law is resilient. I think you have your ups and downs. And when transactions are maybe a little bit down, litigation can be up, Private Wealth at the moment because of the budget is certainly going to be on the increase. People now have got more to consider in protecting their assets in succession and IHT and how to mitigate IHT costs. So I can see Private Wealth really starting to grow in momentum because of the budget. So I think you'll have the plus of Private Wealth and the minus of M&A, which may neutralize to be honest with you, but I think we'll be pretty resilient overall.

That concludes the questions that we have over the webcast and the conference call, David. So I'd like to turn it back to you now for your closing remarks.

Well, thank you very much for joining us. Hopefully, we've seen that we are pleased with the results. We've worked on improving our margins now for coming up 2 years, and we're showing those results, in this half year. The organic revenue growth remains a priority for us. And hopefully, we've been able to give you an insight into how we see that improving from here, along with our acquisition growth, and we feel really well poised now with our platform to accelerate growth from this position. So I'll leave it there, and thank you very much again for joining us.