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

Good afternoon, and thank you to those of you who are joining us today to hear from Knights plc, who announced their interim results earlier this week. Today is an opportunity to hear from the management team directly who will take you through the presentation, which will take roughly about half an hour or so, and then there'll be an opportunity for Q&A after. As ever, please do submit questions as we go along. Otherwise, I will hand over to David Beech, CEO, for the presentation.

Thank you, Hannah. If we can just hold the page there because I think it's worth me doing sort of 5 minutes or so of general overview and introduction of Knights because this is probably the first time that you've heard directly from us. So I just want to set some scene about Knights and the uniqueness of Knights. So if I go back to 2012, the law -- legal sector in England Wales deregulated by an act that's called the Legal Services Act in January 2012, it came into force. And we were the first to embrace that in June by buying the first law firm that was called Knights. That was a GBP 9 million law firm that we bought coming up 13 years ago. My background was as a lawyer, I qualified in 1990 and then I left the law in 2004 to into private equity. And what brought me back to the legal sector was very much deregulation. And the big difference between us and law firms is that we've been owner managed for coming up 13 years. And you're seeing this happening in the accountancy sector now more with private equity starting to buy accountancy businesses. There's 25 consolidators that are private equity backed in the accountancy profession in the U.K. But we were the first to do it in a similar fashion, but nearly 13 years ago. And the advantage that brings to the legal profession when we did it all those years ago, we've grown the business from GBP 9 million back then, 12.5 years ago to now GBP 160 million plus is that we can own the business and manage the business. Partnerships sort of pass-through businesses competing for profit share. It's very different. They're in the business together, but not in a normal owner managed sense. They're actually competing with each other to try and earn profits by earning fees. They own the fees themselves individually and then they earn profits. Our business owned by capital investors, originally private investors for the first 6 years and then we listed in June '18. And we have a management team that today is 25 directors on the Business Services side and the Client Services side. And Kate and I and the COO are the executive management of 3. So we've been owned and managed now for 13 years. And that's why we've been able to grow the business by reinvesting the cash we generate by bringing a very strong cultural principle to the business. We're very focused on all our fee earners. We've got 1,100 fee earners today, supported by 260 business service colleagues doing all the IT, finance, compliance work for the whole business that's centralized, but the 1,100 are spread across the 26 offices, doing the client services work, doing the lowering, doing the fee earning. And we've been developing this for this time through a one team culture. And the power of the one team culture is a couple of big drivers. First of all, this allows our lawyers to share work across the experience levels. It allows partners to get the associates to do the bulk of the client work under their supervision with paralegal support, doing all of the data processing and the processing that is part of it at a better cost of delivery, giving strong value for money. So a real team business model and a real team culture, which is quite different to the silo culture that you see in law firms where people work to individual fee targets competing with each other. And it's made the business very strong and sustainable and very strong in competing with silo law firms. We've been able to really demonstrate our one team culture. And as we've got bigger, this has become more and more tangible to people. And it's very attractive, and after Kate goes through some of the numbers, I'll talk about the appeal of Knights to the next generation of partners coming through that we want to hire. I'll talk much more about recruitment. But I think it hopefully sets the scene that we -- I came from law in 1990. I then left law. I got certainly attracted back by deregulation to become an owner manager of a law firm, of a Legal Service business, we call it. And all of our people, all of our managers and all of our partners and fee earners, they're partner name, but they're all employed and everybody understands the real one team ethos that Knights have a national business now across 26 offices, all working together to give fantastic value to clients by sharing work across experience levels. And secondly, bringing all of our expertise to the clients. The client has the benefit of 1,100 lawyers, even if they, say, only 50 of them sitting in a place like Chester or Stoke or wherever we are. If there's a 50 local in Chester, there's actually 1,100 behind those people giving all of the expertise to the clients. So it's quite a powerful combination and a powerful culture. So I'll just go into the presentation. I'll do a quick summary of the half year, and then I'll hand over to Kate to do some numbers, then I'll talk a bit more about current trading and what we see looking forward in our growth strategy. So here, Kate will talk in more detail about what we've worked on for 18 months, and that's our margins. So 18 months ago, our PBT margin, we use PBT for the listed world more than we used to use EBITDA. Our PBT margin was 18% pre-COVID. It went down to 12% 2 years ago, so we weren't happy with that. And we've worked hard to get it back to 18%. We got it back to 15% a year ago at half year to 31 October. And this time, we got it back to 18.4%. Kate will talk about that and the drivers to that. We're really pleased that we've got this back to high margin now, which is where it should be. And we've -- it's taken us the last 18 months to deliver that, and we've done that as owner managers as a management team. We've worked hard on the revenues. I think we've demonstrated the quality of our management team and to be able to deliver a 6% increase in that net PBT margin over the last reporting half years. And we'll talk -- I'll talk about the recruitment, as I've already mentioned, and I'll talk about recent acquisitions and how well they are performing. The last one we did was in September, a business in Worcester, a GBP 12 million turnover law firm, and that has integrated superbly well. And I'll chat through our whole integration strategy going forward. But on the next slide, I just want to show you now the recent history since we listed the business. Hannah, if you can go to next slide, please. Here, this is from 2018 for 6 years of reporting to '24. No, the slide before, please, Hannah. Thank you. Just go back to the bar graph for us. Here, you see from 2018, we listed the business at GBP 34.9 million revenue, making GBP 4.8 million PBT. And in the 6 years to 30 April '24, we got it to GBP 150 million revenue, and we filed GBP 25.3 million PBT. And we've shown the current consensus, which we're in line with of GBP 165 million revenue and GBP 28.7 million PBT. And you can see, I think, the consistent revenue growth of 17% compound annual growth in those years since we listed and also the 16% compound annual growth in the PBT line and hopefully demonstrates, I think, significant value on current share price because whilst we've grown the profit sixfold since we listed in June 2018, our share price is still exactly the same. Our market cap was GBP 103 million when we listed, and it's exactly the same market cap of GBP 103 million today, even though we're 6x more profitable. So I'll let that do the talking for us as to the value that I think is probably on offer in our share price at the moment. So I'll hand over now to you, Kate, to do some numbers, please.

Over on to the next slide, please, Hannah, on to Slide 5. Thank you. Good afternoon, everybody. As David talked about, we're really pleased with the half year results that we've delivered to the end of October. Just key highlights here, and then I'll dig over on the next slides into more detail. But here, you can see we've grown revenue by just under 5.5%. But really pleasingly, our underlying PBT has grown by just under 26% to GBP 14.6 million, which reflects the reason for that large growth in revenue growth, as David has talked about, our work that we've been doing on profitability, which has increased from 15.4% the last half year to 18.4% this half year. And we'll talk about the drivers. But fundamentally, that really is a drop-through of increase in our gross profit, which has increased from 47.5% in the prior year to 50.5%. We've always grown the business. We have always had a real focus on profitable revenue growth, and you can see there the results of what we've been doing. The other key focus for us throughout the whole time that we've worked at Knights and with Knights is cash management. And you can see there our focus on lockup days. And there's a slide later which [Technical Difficulty] lot more detail about lockup dates, but that's really important for us as to how we bill our work and then how we collect that from our clients. And we're at 98 days at the half year, which is where we want to be. It is market-leading. If you look at debtor days there with 33 debtor days at the half year. Industry average is around about 75 days. So you can see there how much better we are than the rest of the industry in generating that. And that gives us good cash conversion, and it takes us to a net debt position at the end of the half year of GBP 50.1 million, which again, I'll talk about the key drivers, but that's exactly where we expected it to be at this time of the year. And in terms of our facilities and our covenants, we've got plenty of headroom so a really strong position to be in. So going over on to the next slide, please, Hannah. We've got the PBT bridge. So here, looking at the key drivers of what's driven. You can see there the underlying PBT has increased from 15.4% margin to 18.4% margin. And as I talked about, that's fundamentally a drop-through of the increase in the profit -- gross profit margin, which has increased from 47.5% last half year to 50.5% this half year. And that's been achieved through a number of things. It's been achieved through our continual focus on premium and premium work and recovering all of the time that we spent and charging the correct amount for the work that we're doing. Increases in our prices. We put our prices up each April. Last April, as of April '24, we increased our pricing by around about 7%. And so you can see the benefit of that coming through there and various other things. I think one of the important things to point out here is that of that GBP 4.3 million gross profit increase, GBP 2.1 million of that has actually come from organic revenues. So organically, we've grown our gross profit by just under 6% for the period, which is really important and really shows that our focus on premium revenues, and we've done a bit of a change in working and making sure that we're always focused on premium coming out of anything that's less profitable, et cetera, which is over on the next slide, you'll see that's probably impacted slightly the organic growth that we've delivered, but actually really pleasingly 6% organic growth. And then our other costs that we've started to leverage as we go through, and we expect to continue to start to leverage those. On this slide then, on the revenue bridge for the half year, you can see there we've grown by 5.4% in the year. The majority of that increase has come from acquisitions. Part of our strategy is to acquire businesses, integrate them fully into Knights and then grow them organically, and David will talk about that more. But you can see here, we've got the half year impact of the acquisitions that we did in FY '24. So that's the increase this year compared to last year. We acquired 2 businesses, Baines Wilson and St. James' Park (sic) [ St. James' Square ]. They're performing very well as we'd expect them to do and so contributed some additional income in this half year. And then there's also the acquisition of Thursfields, which we acquired in September '24 and how that's contributed to the year. That's again integrated very well. It's on our systems. We always integrate and bring the acquisition straight on to our systems at the date of completion. So it's on our systems and generating income [Technical Difficulty]. So that's generated really well. Then looking at the organic growth, organic growth for the year was 0.7%. We did make a strategic decision this time in last year. So in November '23, we made the strategic decision to come out of the majority of our insolvency work because it was operating at a loss. And so we did that. So that's that strategic reduction there that I've taken out because that revenue is not repeated in this financial year. So if we're looking at a like-for-like basis in terms of organic growth, we're generating just under a couple of percent organic revenue growth in the period, which is [Technical Difficulty] that's modest organic growth. We want to increase that, and David will again talk about the drivers for that. But I think over the slide, if we move over on to the slide, you can see the key KPIs that are driving that organic growth, which give us real confidence in where we've moved the business. And you can see here how we've moved towards premium and profitable work and the fees and everything that we're generating. A key KPI for us is the gross profit margin. And you can see there the pleasing improvement that we've done in this half year from 47.5% to 50.5%. And then you can also see then the increase in the fees per fee earner, the gross profit per fee earner and how that's all moving on a really positive trajectory and that gives us -- that's as we've positioned the business and the fee earners within the business to be generating income at a higher level and recovering that time that they spent. And that puts us in a really good position for generating organic growth in the future. And the result of all that is that we continue in that last box there, you can see we continue to generate strong underlying cash flow. Cash generation has always again been a key consideration for us. If we move over on to the next slide, please. We can see here the key movements in the cash flows. The first half of the year is always a slightly lower cash conversion than the full half year just because of our working capital cycle. It's always slightly higher by the full year, we're talking 80% plus closer outflow to 100% cash conversion. So nothing particular to pick out there. And if we move over on to the next slide, I can talk about how we do generate our cash conversion and what's always been a key focus for us. And this is our lockup. So our lockup, we define for those of you that have not heard the story before, the amount of time that it takes to convert a unit of time being spent on a job into cash in our bank. So it's 2 measures. It's our WIP days, the amount of time it takes us to build the work and then our debtor days, the amount of time it takes us to collect that cash. And as a business, we're looking generally to be at around the 90 days mark, which is around about 30 days debtor days and 60 days WIP days. And at full year, we achieved that half year again because of our billing cycle is always slightly higher, but you can see at half year, we're really pleased with where we are. It's very much in line with where we'd expect to be at the 98 days. When we do that, there might be a little bit of information in the press about the fact that we exclude, we have a CL Medilaw business. It represents 9% of our business, less than 10%, and it does have a different working cap cycle than the rest of our business. If we include that in our calculations, the orange line at the top there shows you our working including that. That has a longer working cap cycle. It's all very good. It's very profitable work, but it is completely different. And so we exclude it from our normal KPIs that we use internally because we don't want the 90% plus of the business to be distracted by the lockup that's within there. How we do this and how we collect the cash quicker, it really isn't rocket science. We encourage people because we're one business, we're one culture. We can say what we want people to do. It's just operating normal business principles that you'd expect in many of the businesses of expecting people to build their work done regularly and then phone up their clients and expect them to pay. And if they don't pay, then we will put the matter on hold and we won't do any further work until they do actually pay. And I think what's really demonstrates this and how we are better than the rest of the industry out there is the table on the right-hand side of the page there, which shows for acquisitions that we've done over the last 3 years, it shows what their lockup days were when we acquired them. And you can see there that's considerably higher than where we are ranging from 115, which is one of the lowest we've ever done to quite often into the 200 days profile. And how we work with them then over the period that they're with us, it takes us 6 to 12 months sometimes, but generally quite quickly to actually reduce those lockup days down. And you can see there sort of October '24, how we've worked with all of those acquisitions to bring their lockup days down. And that's on average there, we've knocked off 95 days in terms of lockup. So that's getting cash out of their balance sheet into our bank account. So it's generating cash out of the acquisitions balance sheet, which I think just demonstrates how good we are compared to the rest of the business as a whole. If we go over on to the next slide, please, Hannah. We can then see how that impacts our balance sheet and our net debt. Our net debt for the end of October has increased to GBP 50.1 million from GBP 35.2 million at the year-end. That's -- there's 2 key blocks in that. You can see the strong GBP 6.9 million cash flows from our operations, which has come in. The outflows in that relate to the GBP 2.5 million, which is deferred and contingent payments on acquisitions that we've done in prior years. When we do an acquisition, we pay generally about 60% upfront and then the rest will be in deferred payments over the next 3 to 4 years. And then we've also had a net GBP 6.4 million cash out on the Thursfields acquisition, which we acquired in September this year. So that's GBP 8.9 million of cash outflows relating to acquisitions. The other larger item on there is GBP 6.2 million of CapEx in the half year. That is as we expected in July when we announced the full year results, we talked about this year being a catch-up in terms of CapEx. We hadn't spent much in the prior [Technical Difficulty] towards getting our margin and everything together, but we certainly saw this year as a catch-up in terms of CapEx. And what we've done primarily there is it's bringing in all of our office spaces up to Grade-A office space. We've talked an awful lot about our focus on premium and increasing the quality of the work that we do, recruiting really top talent into our offices. And it's really important for us to invest in the office space and the environment that people are coming into so that they can deliver that premium service and we can attract the quality people that we want to in the business. So that CapEx is most definitely a one-off. We expect to spend around about the GBP 11 million that we forecast for the year. But then going forward on a run rate basis, it's going to be closer to a GBP 4 million, the amount of CapEx. We'll have done the majority of our offices by the end of this financial year. Where that puts us then just in a balance sheet position at the half year-end, we're at GBP 50.1 million. We do have an RCF available to us for GBP 100 million. We increased that in November '24 our facilities to GBP 100 million available facilities. So we've got GBP 50 million headroom at the half year. Our banking covenant leverage is at 1.36x. From a banking terms, we can take that up to over 2, 2.5x. In terms of where we feel comfortable having that appetite for leverage, we feel comfortable taking that to around about 1.5x if we've just done an acquisition, knowing that then we are very cash generative, we'll get cash out of the balance sheet, and that will come down quite quickly. By the year-end, by April this year, we would expect that to come down to around about the 1.1x leverage level, giving us lots of headroom going forward. So in terms of leverage and in cash facilities to invest in the business going forward to grow organically and to grow acquisitively. David will now talk about our strategy for growth.

Thank you, Kate. Can we go to the next slide, please, Hannah. So we talked about the quality of the revenues, improving the margins and the management and the cost discipline that's gone with that. I will briefly talk a bit about the wins and about the revenues, but I want to talk about recruitment and acquisitions. So can we go to the next slide, please. To give you a sort of flavor of the mix of the revenues, there's 2 broad areas we look at. There's the commercial side, which is Real Estate, Commercial Real Estate, Corporate M&A, Litigation and Employment. And then there's the private wealth side, which is Private Client, Tax and Trusts, Landed Estates and High Net Worth Divorces. So if we look at the sort of mix of work, we've got 2 subsidiaries. One is the Medilaw business Kate described, which has long WIP days, but a real quality group of people majoring on brain injury and cerebral palsy. That's been growing and continues to grow. In the core business of Corporate and Private Wealth, we're seeing actually Residential Property business growing substantially at the moment. It's up 25% in this period we're reporting in this half year. That's to get back to pre-trust interest rate hikes. I think we're seeing the volumes returning now in Residential Property. I think demand is driving that. We're certainly seeing in the regions. M&A work is still into a headwind. We're seeing M&A work is about 8% of our revenues. And we saw a buoyant October pre-budget transactions were happening, but that's dampened off, and we're certainly still seeing a bit of a headwind in M&A. But we're not seeing that in any other areas of our business. I think it's a very resilient defensive type of business in the regions. And the one buoyant area we're certainly seeing is in that Residential Property area. What I really want to talk about now is the organic growth through recruitment. On the right-hand side on this slide, you'll see that we've hired 23 senior hires. These are partners and senior associates that bring clients with them. It's a very relationship business model. Our partners have relationships with clients, and those relationships are sticky if the partner moves, the client moves, and we can build our client base and our revenues by hiring partners and senior associates. And in this period, we've had 23 start in the first half ending 31 October. Last year, in the same period, we had 20. And what we're starting to see now is a growth in that recruitment area. And if I can just go to not the next slide, but the slide after, please, Hannah. And the next slide, please. And the next slide, please, Hannah. I want to spend some time on this recruitment strategy of ours. What we're seeing currently -- thank you, Hannah. What we're seeing now is an increase in hiring. And I think there's 2 reasons. And one reason is described on the left side, and that's the push away from the partnership model and the pull that Knights has is on the right-hand side. And I think interest cost has had something to do with this. I think more evolution of the partnership model that was designed in 1890 and the banking sector in the U.K. got rid of it in the 1950s. And I think you're seeing a change now in our sector that people and the next generation of partners don't want the financial risk of partnership. To earn more money in a partnership, you normally have to buy in to become an equity partner. And to do that is the average capital account in a partnership is GBP 250,000 in the regions. And obviously, the cost of borrowing that money now has gone up to probably 7%, 8%. It's a personal risk to try and earn more money. They can earn the same or more money with us without having the financial risk. And I think we're seeing that push to us away from the partnership model and the pull Knights. And I think the Knights pull is stronger because of our national presence, our national reach. I think our reputation has become much more established in a very strong positive way that we've proven that this owner-managed corporate model that we introduced coming up 13 years ago, works. I think the scale now of having over 1,000 fee earners gives all the capability and expertise and specialty in areas like intellectual property and tax to support big client followings. So I think we're seeing more volume of people joining us and that 20 a year ago increasing to 23 in the second half, I think we'll go to 30-something. So I think we'll hire 50-plus partners this year in total before 30 April. Last year, we hired 40. And I can certainly see the number growing much more beyond 50 in the next financial year. And this is very important for our organic growth strategy because these people come away from partnership, they come into our business, they onboard their clients. They're bringing bigger client followings to us. It's not unusual now for us to see a 7-figure, million-plus client following. They average around the GBP 400,000, but we do see some bigger client followings as well. And we can grow our revenues through winning those relationships with clients through recruiting the people that hold those relationships. Cultural integration is a lot faster and easier with one person than it is with, say, 50 lawyers on an acquisition. And we're really encouraged by what we're seeing now day-to-day. I have interviewed 2 partners even this morning before speaking to you in this office. We're seeing a lot of talent now being attracted to our corporate owner managed model, where they can work in a very enjoyable environment and a strong one team culture, no financial risk, and they've got all the expertise from that one team culture wherever they sit throughout the U.K. that they can then do all the work that the client needs to be done and enjoy themselves and earn some decent money along the way as a salary. So that's what's happening to us in the recruitment stage, and that's what will fuel our organic revenue growth. The modest growth Kate's talked about just under a couple of percent. We certainly now want to see grow to the sort of mid- to high single-digit area like it was before 3 or 4 years ago. And I think we'll certainly see our business grow organically from here largely through hiring more people and certainly more people than would be leaving our business. If I go to the next page, I just want to talk now briefly about acquisitions. And in a similar vein to recruitment, we are seeing some momentum in our pipeline get bigger. And if I look, we actually listed Knights in June '18 for one simple reason, and that was to grow faster. We were pretty sure and it was proven to be true that as a listed company, people would identify with it more easily than it being a private company that was majority owned by myself. If it was listed, owned by institutions, people would trust it more and be able to join it more. And that was the big reason, more than actually capital raising, to be honest with you. And it worked. We started to do 4 acquisitions a year in the first 3 years. That was the rate. And then we slowed it down through COVID. We had a lot to do with a lot of the acquisitions we were doing around COVID to settle the business and integrate everybody, which is what we've seen finish off in the last 12 months. And I think these results show that with the margin return. Now we're ready to do more acquisitions. And I think you'll see us do 3 or 4 acquisitions a year now going forward. And where we want to go next is shown orange on the map on the left-hand side. All the dots are obviously where we are today in the 26 locations. The orange is where we focus on expanding our footprint. It's always led by cultural fit. When we're onboarding on average, 50 to 100 is the range of lawyers in an acquisition. We need to know that they are very willing in the main to join this corporatized model. They want to join a premium service business with premium pricing. They understand quite a bit about what they're going to be joining to make their decision. And we're looking for that cultural fit. That's the key thing. But with the cultural fit is strong, we then want to see if they are more focus on commercial work and private client work. It's -- we do 64% of our business is for corporate clients. Then we have all the private client services, which we really enjoy doing as well, very profitable work and very underserviced in the regions for tax and trust, particularly. But it's very corporate-led, our focus, our strategy. So we need to look at the commercial law firms. And there's around 200 of these as a fragmented market throughout England Wales outside London that we pretty much know about and that we talk to. So it's cultural fit and then strategic fit and then the locations in these orange areas. So we're very focused on Norfolk, Suffolk, Essex, Kent on that right-hand side coming over more to do in Surrey, more to do down on the coast, Southern Coast and Dorset and around Southampton, Bournemouth, going up into South Wales in Cardiff, perhaps going up into Shropshire there just on the left-hand side and then over to Hull. Those are the sort of pockets of geography where we're looking to try and fill to really create probably around about a 40-office business over the next sort of short, medium term. In the next 3 or 4, 5 years, we see our 26 going to 40 locations as we increase the revenues. We are very focused on doubling our revenues over that short, medium term to GBP 300 million. The profit should increase at a slightly more accelerated rate than that as we leverage overheads from our centralized business support function. And that's the strategy of acquisitions. Now I mentioned cultural fit. As they come in, they need to become comfortable to become employed within a corporate business, which is what we're looking for as we start talking to them and see if that's going to be led by the previous equity partners. Are they going to want to enjoy being part of a bigger group? So if you're doing commercial real estate in your town or city, are you going to enjoy being part of, say, 250 commercial real estate lawyers that we have nationally. It's a big, big part of our business, but we do all the development, construction, town planning work at a really sort of premium level throughout the regions. And a lot of people want that expertise to support them and want their career path. So we find with the solicitors and associates, they're normally really keen if they've been acquired to become part of this because they can see a much career path with themselves. And then we have to work to do with the partners to sort of allow them to adjust from that partnership culture into our business culture. And I've just picked on the right-hand side and really what we see is a typical example now for ourselves. I could have picked several other examples of what we've seen with small acquisitions. But this one was done in Bristol in 2023. It was a very small -- it was right at the bottom end of the range that we buy GBP 2.7 million of fees. In its first full year with us to 30 April '24, it did GBP 4 million. And in this current financial year ending 30 April '25, we see those going just shy of GBP 6 million. And we've built those revenues through recruitment. So as we go in with our new name, Knights, having bought a small business in Bristol and partners that they want that partnership structure that I've just talked about, that financial risk, that silo competitive structure where they're all subject to fee targets, and they've got to hit their fee targets, their personal targets in our business, they can come and be part of one big team, then we hire people and we grow revenues. And I think Bristol is a really typical example. We've seen this sort of increase where we've doubled revenues in the first couple of years in Teesside. We're seeing the same in Carlisle at the moment. We see the start of this in Newcastle on time. And we certainly see all this happening in those Norfolk, Suffolk, Essex, Kent, Dorset, Cardiff, structure and whole areas that we're focused on. We'll see this type of model repeat. We price these at around the 1x revenue is a sensible sort of way of understanding the value. We actually look at the multiple of EBITDA after we've made all the synergy cost savings. We take out all their back office of finance, IT and compliance, et cetera. And then we see around about the 4.5x EBITDA valuation for ourselves, which we think is an excellent valuation that means it's accretive valuation. Certainly, as we hope to get our business properly rated again, then you can see how value accretive buying business is at 4x EBITDA. Certainly, if I look at the one we've just done in Worcester in September last year, that was a GBP 12 million revenue. The multiple of EBITDA post synergy cost savings was less than 4, and that's all come in brilliantly and maintain the revenues, and we can start to grow those revenues in Wester and Birmingham, where we already operate. So that's the way we value. That's the way we pay for them. It's all cash at the moment. We don't use shares because it's too expensive. We were using shares when we were properly and highly rated. Now we just use cash. We defer 40% of that cash over 3 or 4 years, so 60% in year 1, which pays for the balance sheet and a little bit for the goodwill. They have to stay for those 3 or 4 years to get the remaining part of the consideration. We don't apply earnouts because you can't integrate businesses into one business, one team culture with one P&L if everybody is fighting for their individual P&Ls, it wouldn't work culturally. But they have to stay to get the remaining part of the consideration. So we retain that partnership and client goodwill that way. So that's how we do acquisitions. It's a very proven strategy. We've done 26, 22 of those are since we've listed. The team now of our 25 directors have all gone through certainly more than one acquisition, often several. We've got a dedicated M&A director that's out there really filling the pipeline and helping us find and then execute acquisitions. We're very confident in how we integrate. Particularly, we've done the hard work in Manchester, Birmingham and Leeds, and I would say Bristol actually as well. Those are your sort of second cities where the other top 50 law firms operate. Once you've come out of those 4 second cities into all the other regional centers, we're often the only really large legal service provider competing with, say, a small independent local law firm. So it's much easier for us to retain the people and attract new people to have all those sticky revenues because in the locations outside of Manchester and Leeds, then it's a lot stickier because there's not much competition. So the future now of our next 15 offices is all away from those second cities where it's been harder for us. So that's the acquisition strategy. If I can just go perhaps just to the last 2 slides. The next slide is really just showing how we grow as an owner-managed business, we've done this for the whole 12 years where we grow organically, we certainly want to get that back to high single digits I've talked about. You've seen the profitability margins that we're able to achieve, and we'll certainly maintaining these profit margins of 50%, low 50s in the gross margin and 18%, 19% on the PBT margin. Acquisitions, you've seen the value accretion I've talked about there and all the cash generation, we've got the whole business, 1,100 fee earners now are really focused on billing promptly and collecting their invoices as quickly as any business should, but we see law really struggling to do that. And most of that money we look to reinvest with a 20% of profit after tax dividend policy that will progress because the profits will progress, but we also want a lot of the money retained in our business to grow and recruiting more people that we certainly see now happening and making more acquisitions to keep the whole momentum of our growth as we seek to now double our revenues in the next 3 or 4 years. If I go finally, in summary, you've heard about our first half, and Kate has gone through that in some detail. Our second half is trading in line with what we'd expect to reach those consensus expectations. We have confidence in increasing our organic revenue growth, which is a key area for us to go and improve. I think you can tell from how we're speaking on the results that we've achieved in the last 12 months and in these half year results that the management team, I think, are proven. We've got a very strong leadership team. I've mentioned the residential property market is really surging for us, which is important for us. It's 10% of our revenues that's doing very well. All the other revenues are maintaining nicely. And I think as the scale of our business now doubles and our reputation grows and increases, we'll simply keep attracting more people in the regions to join and more acquisitions to really accelerate our growth. So I was going to say we're quite confident. We're probably not so quiet at the moment. I think we're starting to be quite bullish about our opportunities in this fragmented legal sector that's outside of London that we can really make our own. So that hopefully gives a good summary of our business for you. Thank you, Hannah.

An extremely helpful introduction, David. Thank you, and it's nice to hear someone feeling confident. We've got a number of questions in. So let us make a start. I think -- well, Kate, you did a helpful overview on sort of debtor days. But the question is, could you comment on the figure, please, and how management action to improve this?

Okay. So our debtor days at the half year were 33. I think at the October end, they were 28 days. We do target across the business 30 days. I think we're quite -- 30 days, the 28 days, I think, is good. I don't think we'll achieve it -- improve it much more than that. We will get to 30 days. We're confident that we always get to that 30-day figure by full end just because of working cap cycle and because of people's -- people will always push a little bit harder at year-end to collect cash in more than they do at the half year-end. We're quite good in that we do bill regularly and we collect cash regularly, and it is a focus for us throughout the year. So we are very good if you were to compare us to an awful lot of the law firms out there. But there is always more push at the full year end than those at the half year end. And we manage our business with client service directors. So client service directors are effectively responsible for a couple of offers and their management of lockup is a really key focus for them, and they are now starting to already work on making sure that people are in advance of looking at the April year-end, making sure we're already starting to bill and collect that cash in before the year-end. So that's a key focus for them. And that's those client service directors that make sure that the actual partners and senior associates and solicitors deliver what we want to do. So they take the responsibility for delivering that.

Thank you. There's a few for you, Kate. Is the cash flow of your acquired companies sufficient to fully fund the deferred payouts agreed as part of the acquisitions?

Yes. It will be over time. Once we get them on to our systems and we've taken all of their synergy savings, we're looking for them then to be generating a sort of 20% EBITDA. There's about -- if you're thinking we're paying about 1x revenue roughly, and we're looking to get them to a sort of 20%, 25% EBITDA margin, and you've got a bit of a 5-year payback period really. So yes, they're all cash generative.

Super. What is your statutory PBT for H1? And what are the adjustments made to get to underlying PBT?

Okay. So our statutory PBT is here. So the adjustments that we make, the key adjustments that we make are in relation to contingent and deferred acquisitions. So under IFRS, because when we make the acquisitions, the deferred consideration is, as David talked about, we have it dependent on the individuals remaining in the business. We don't do earn-outs because that's some work for integration. So it's linked to their continued employment in the business, which is our way of protecting that goodwill. under IFRS standards because it's linked to their employment, you have to show it as a deduction in your profit and loss account. Now we already pay them a salary, commercial rate salary. So it is an acquisition payment. So it goes to our P&L, but we do add that back. So that contingent payment is always added back as an add-back because it is payment of goodwill effectively. There's the amortization of intangible assets, which gets added back as well into the margin. And then any underlying/non-underlying costs. The non-underlying costs are essentially costs in terms of acquisitions generally restructuring. When we go in and we do an acquisition, we take out an awful lot of their support staff. That's the way we get the margin improvement, but there's a cost related to that. We will cancel an awful lot of the contracts and bring them on to our contracts, and we get the benefits of that generating synergies. So sometimes there can be a one-off cost in terms of -- it depends on what they signed up to, to get them out of that. So those are the costs that come out of it. So our underlying PBT at the year-end was just under GBP 9 million. And there is a slide on the -- in the pack, if anyone gets it, which is Slide 26, which does a reconciliation from the statutory to the underlying PBT.

Extremely helpful. David, what is the staff turnover at the partner level been over the last year?

So our churn has been higher in the last 3 years actually. We've seen on average over that period, it going to the mid-teens. And that's, I think, as a consequence of a lot of acquisition activity we were doing around COVID. We're adding 400 fee earners to the 600 in March, April, May '20 as COVID hit. And I think we've seen the finishing off of the tail of churn after that 3-year deferred payment period. So I think we've seen higher churn of mid-teens, which is about the same you see in the top 50 law firms, but we should have lower churn. And for the 9 years prior to '22, we were certainly seeing high single digits, about 8% churn. So our churn in the last 12 months to answer the question, has been in the mid-teens, about 15%. Going forward from now, we've certainly seen this in the last couple of months as we started the second half, we'd see that reduce to around sort of 8%, 9%, 10% churn, which is normal churn for us. And we will have lower churn than the profession, certainly comparing us to our other top 50 peers, if you like, because of being in the regions. When you're in a Stoke, Chester, et cetera, if I look where we're sitting here today in Stoke, we've got 110 peers here, 30 partners. And there'll be a retirement party for one who's leaving, who's been with us for 35 years. The partners won't churn from this place because there's no other law firm to work until they reach Birmingham South or Manchester North. And people who live here working in such a quality business, doing premium work for premium clients, both locally and nationally, they just haven't got any incentive to start commuting a couple of hours a day to go and try and find an alternative. So your churn rates in the regions should be -- It's part of the principle of our business, part of our focus, part of our strategy right from the beginning was to build a very low churn model. So currently, it's been higher, but I think we've seen -- we know the reasons for that. Going forward, I would expect that to be now certainly back in that 8% to 10% area of churn.

Perhaps segueing then on from that. There's a question here. What makes you confident that you can hire another 50-plus partners in the next year and going forward? You've touched already on the pull factor for Knights. But is this going to be from lateral hires? Or is it including acquisitions or perhaps you could expand?

Yes. No, when we talk about 50 partner hires that we're making this year, that's excluding acquisitions. Acquisitions is totally separate. So in the Worcester business we acquired, there's probably about 15 partners from memory, and that's in addition to the 50. So that's -- the 50 is purely single lateral hire partners. What makes me confident about it is that in addition to the reasons I've said, we're also putting a lot more effort into it. So we've got now 12 client service directors working close to myself and the COO, so 14 of us. And we're, for example, meeting recruitment agents a lot now. We used to do this actually a few years ago, and we haven't been doing it as much through COVID, perhaps COVID interrupted this. And we've really picked up the pace now of seeing the recruiters. I've met 14 recruiters already this calendar year, just in 2 weeks. And it's really important that we do this to explain the uniqueness of Knights. It's like I'm doing with you as investors, potential investors today, it's really important that we fill the PR gap for ourselves with the recruitment industry. There's a lot of people and partners rather than -- even if they want to come to Knights and some know they want to come to Knights, but they'll bring the recruitment agent to put the call in because they feel more comfortable somebody doing it for them, like a football legal agent, I guess. So talking to the recruiters is really important. So we're now meeting recruiters every week much more than we've done before. That gives me confidence we'll hire more. We've increased the incentive to our people to introduce partners to the business that if they introduce a partner who's going to culturally fit, you'd think because they're going to introduce people that they want to work with. And we don't pay a recruitment fee. If they've introduced somebody and helped us hire, they get a 10% of their salary, the partner salary bonus -- sorry, GBP 10,000 bonus there. It's a fixed fee. So we pay a fixed GBP 10,000 bonus for any person in our business who's introduced a partner. And we're seeing some traction that's come from that in the last few months. So we're putting more efforts in. I think we're a bigger base across the 26. I think we're more established in the bigger centers. I think it's been hard work for us over the last 5 years, getting our feet on the table in Birmingham, Manchester, Leeds. I think we've done that now. I think we're established. I think there's good work for us to do now to hire from those bigger pools of talent. And I think we've got some good momentum and winning ourselves to do that. So yes, we're confident we'll hire more than 50 next year.

Great. What multiples do you normally pay for an acquisition?

As I've explained, if you take -- once you -- it's hard to look at a law firm in a multiple of EBITDA because they don't have an EBITDA because they just pull out all the profits for the partners. So they don't even know what EBITDA stands for in equity partnerships. But if you apply a notional salary to those partners, which we pay once they've sold to us, and we've taken out the back office, we're seeing about 4.5x EBITDA. If you look at the EV EBITDA multiple for a law firm that we buy, it averages out to about 4.5x EBITDA for buying that enterprise.

Do you see residential growing as a percentage of the group?

Not as a percentage of the group now. I think the business will grow. I think as we grow the overall business from GBP 150 million to GBP 300 million, I imagine our Residential Property business, which is around 10% at the moment. If you encapsulate all the elements of residential property to last year, GBP 15 million, I can certainly see that growing to GBP 30 million, but not as a percentage of the group now. I think it will always be sort of 10% or slightly less. I think it will possibly go as a smaller percentage of our revenues. But the key thing for us in residential property is we want to occupy the space that sits alongside Savills. So we want to be the equivalent in law of Savills. So if people think about putting an expensive home on the market with Savills, Knight Frank or several other independents, then we want them to think about using Knights. And it's not a cost-conscious thing. It's not I'm going to get 3 quotes and go for the cheapest. It's a minimum fee now for a house purchase or sale is GBP 3,500, which is considerably more than you'll see in the market. A lot of people would do it for GBP 500 even and some of those even decent firms are charging GBP 1,000, GBP 1,500, we're considerably more because it's solicitors and partners doing the work, it's speed and accessibility, you get hold of the people whenever you want and the service levels are 5-star premium. So it's a different service and it's a different price point. And we think there we can make that space our own.

You sound like you're making a pitch there as well. So if anyone is looking to sell there. Given the scale of the business now, do you think the days of 2019 to '22 when you grew at 20% year-on-year are behind you? And what is a realistic growth rate of profits going forward, including M&A?

No. I know it might sound a bigger business at GBP 150 million compared to in 2019, probably about GBP 70 million. It doesn't feel like a big business to us. I think in law, it can look like a big business because law firms are small. I think we're 40th by size. But once you get to sort of 50th and 100th and a lot of firms are sort of GBP 10 million or less. It's a really fragmented small business market. So I think we look bigger than perhaps that we actually are. We don't feel like a big business. I think those 300 partners in our business, we know all their names. The management team are really adhesive and high performing together. So we actually don't see this as being -- if you compare it to a lot of other sectors, we've just about become -- we've gone from the S to the M in SME and we've become medium sized. So we still feel very fleet of foot, very entrepreneurial. We certainly think we can pick up the 20% rate that you've referred to there through acquisition and through recruitment and through organic. We absolutely believe we'll grow this at 20% plus compound annual growth. Yes, we're confident about that. And I think just to finish that off, just to show it's not just me being -- it's a fragmented market. So you couldn't grow at that rate of 20% in an established market where you couldn't make acquisitions. And I think that will be really unrealistic. I don't think you could say with confidence, yes, it's a 20% organic growth strategy. And I'm not saying that. I'm saying it's a single-digit organic growth strategy, and it's an acquisitive growth strategy that puts us into the 20%. I think because it's fragmented, that gives us the confidence we can grow this with some acceleration from here, like we were before 2020, absolutely.

Clear. A couple of questions on buybacks. Obviously, your frustration with your share price comes through and the limits it places on being able to issue new shares to fund acquisitions. So would you consider buybacks?

What, sorry?

Consider buybacks.

Yes, we get asked about buybacks.

We've got 3 here.

Yes. No. And we understand the question. I think when we talk to our institutional shareholders, they don't really support buybacks. They want us to grow the business. They want us to really accelerate what we're doing and what we've proven we can do in the last 12 years and what we've certainly shown since listing. And they want us to really grow the business now because they're confident in us. We have a modest buyback program that I think we'll maintain into an EBT that supports share options for some of our management team. So it's something that stays under consideration at Board level. But at the moment, as far as capital allocation, which this is a question about, we're much more focused on growing the revenues quickly, profitably and really growing the value of our business by scaling it now. That's the focus much more than doing buybacks, being honest. And that might not -- I appreciate some people and some retail investors will think differently to that and want to see us do buybacks. But we're confident now we can grow this really quickly. So that's our priority at the moment.

Good. Well, can you share your thoughts on the opportunities and risks of automation and AI to change the future delivery of legal services? And do you have any plans to invest in this area?

Well, I'm going to slightly modify the question to say the opportunities as well as risks because we see plenty of opportunities. We see more opportunities than risks to be honest with you. And let me explain. So we've got, in our 1,100 fee earners, 250 of those people are newly graduates, new graduates doing paralegal with us or training contract. So we want to take the vast majority of our trainees who become solicitors with us. We want to take them from university through paralegal so that we can culturally integrate them and they can really understand the culture of our business, which is unique compared to law firm. And those 250 are also -- there's 2 things. They are youth academy for the next solicitors and associates and partners of the future. And we have partners in this business now that started 11 years ago as paralegals to show that sort of decade of youth academy coming through. But also they're there to process work cost effectively. At a low salary, they can data process and there's a lot of processing to what we do. Now AI, I think, plays -- it should start to play an important role in how we can expand the role of the paralegal and a newly qualified solicitor to work with our knowledge management and documents and precedents and knowledge library of all our documents where we start when we create a contract or a pleading document, whatever it is we're preparing, it starts from a precedent bank and a knowledge bank. And I think with AI, helping prepare those documents to a meaningful first draft with low experience levels, paralegal training and newly qualified, I think there should be a lot more done at a lower cost base before the associate picks it up to then give a bespoke service to clients. So I think it's going to add more efficiency and momentum to what we -- how we can use low experience levels and cost of delivery and managing those cost of delivery and giving tremendous value for money that then allows associates and partners to take a more advanced document forward. So I don't see AI coming in -- and this is where I think the premium nature of our business is so important. We're all about bespoke premium services. I've said that about residential property. You can go and buy -- virtually everybody else in the U.K. will do residential property way cheaper than we are. But if you want a partner to be overseeing every aspect of the biggest asset people normally buy in their personal lives, then people -- enough people want to use Knights' more expensive service. So it's a bespoke premium personal service. I don't see AI coming to particularly be a massive threat to that. But I absolutely see the benefit of AI to speed up some of the initial work to get the groundwork done of the legal processing. And I think with low experience levels and AI, we should be able to see a lot more in the future there. But I don't see this replacing partners and associates at all because I think there's always going to be a place for premium personal service that isn't automated and people talking to their computer. There will be a lot done on the Internet with AI, but we want to be at the premium end where people want the personal service.

Clear, really helpful. Can you add a little more color to current trading? Are utilization rates well up in recent months? And are you pushing through further price increases?

So utilization is staying as is, I wouldn't say pushing up, it's staying as is. The sentiment in the summer, I think, was more -- was getting -- there are some positive elements to sentiment. I think they've gone away. I think it's a bit more negative now sentiment in the business communities post budget, but we're not seeing any impact there. I think we're very resilient in the regions. I joked slightly about this, but Stoke-on-Trent where I'm sitting now, we've got 110 lawyers here as the only commercial legal service provider they went into recession in 1990, 35 years ago, Stoke's never come out. So it's not kind of really subject to this sentiment. The regions are much more immune from the peaks and troughs of economic cycles. So we're not seeing any increase or decrease in utilization. It's sort of trading as we'd expect. maintaining its levels. As far as pricing, yes, we always -- in the last few years, we bring in a price increase in November on the 1st November as far as it being introduced and comes into effect on the 1st May. So all the clients have had 6 months' notice about our hourly rate increases. In the last 2 years, those have been 7% hourly rate increases. This year, it's 4%. So it's slightly lower because we feel inflation is now lower, and we feel that's the right level to increase our rates. That doesn't mean it flows straight through to revenue because you've got things like fixed pricing and framework agreements with clients and lots of different elements to pricing, not just an hourly rate, but we'll certainly see a drop-through from that 4% hourly rate increase of at least a couple of percent on revenues coming through that's all in place from 1 May. And I think our salary increases that people would normally ask on salary question would be -- going to be fairly modest going forward next year. I think that's the environment we're in now. I think we don't really get a lot of salary inflationary pressure like other big cities do like London does. Certainly, law, some of the salary inflation stories you can read about are off the scale. We're not feeling that in the regions, but pretty stable as far as salary costs too.

Right. I'm conscious of time. We've had a strong number of questions. Are you all right for 5 minutes?

Yes, I've got, a 1:00, to go on to -- what we can do...

You have a 1 -- listen, well, in which case then, what I will do is I will share with these questions with you. So I would thank everyone for joining us today. And apologies if we haven't answered your question. I will force them on to the team, and I'm sure you'll get back to me when you have a moment. But great to hear from you both, a really helpful introduction. And we look forward to repeating it in another 6 months, and good luck till then.

Yes. Okay. Thank you, Hannah. Thank you, everyone. Bye for now.