Keystone Law Group (LSE:KEYS) — Final Resuts

0:01 Good afternoon, ladies and gentlemen, and welcome to the KEYSTONE LAW GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so on the Investor Meet company platform. And before we begin, I would just like

0:32 to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the management team from KEYSTONE LAW. James, Ashley, good afternoon. Thank you very much, Jake. This is me, James Knight. I am pleased to present the results for the year ending 01/31/2024 for KEYSTONE LAW. KEYSTONE, as you may be aware, is a regulated law firm. We're an unusual model. We have, 500 self employed lawyers working across the country, operating out of their own office or commercial premises, whether that be at home or anywhere else. We operate a simple pay when paid remuneration structure.

1:21 That is a high percentage of fees that are recovered from clients, for the legal work that's undertaken. We are often referred to as a platform model. This is because our self employed lawyers can join us without needing to setting up their own law firm. They can it's almost like a plug and play whereby they get all of the infrastructure and the support of being employed by a conventional law firm, but they get all of the freedom and the flexibility and autonomy associated with self employment. One of the great driving factors behind KEYSTONE and what has made it successful is the fact that the lawyers bring in their their clients for themselves and for their new KEYSTONE colleagues. In fact, 98% of the work undertaken by KEYSTONE is brought in by the lawyers, although we have a very good brand and a strong reputation in the mid market, which is the place that we work, where, client the demand client work does not just come through or rarely comes through the receptionist without a lawyer referral.

2:43 We are a firm that has grown very quickly over the twenty two year history, and we continue to grow very well. We pro grow predominantly through the recruitment of high caliber lawyers who are suitable to work in this way, who have good clients to bring, and who wish to participate in KEYSTONE and to just be part of of the firm because this is very much a a law firm and a lot of interactions between our lawyers. The market that we operate in is a very significant at about £10,000,000,000 of revenue, and, Keystone is seen very widely now as the leading platform model.

3:39 And the fact that the platform model is the way a significant part of that market, that £10,000,000,000 market is moving towards. So we find that this is an exciting time, for KEYSTONE with a good future. Turning now to the, the results, for the period just gone. I'm pleased to say that our revenue increased by 15.1%, taking us to 87,900,000. Revenue per principal increased by 9.8% to £212,000. I would say that that has been helped slightly.

4:27 About half of that is down to rate rises as a result of the inflationary environment that we are now in, but the remainder really denotes an increasing caliber of lawyer, caliber of client, sophistication, increasing brand, of KEYSTONE, and the fact that we are undertaking more ever increasingly, sophisticated work. The adjusted PBT is up 22% to 11,300,000, and the operating cash conversion, which is always, pretty good at Keystone, is at 96.1%.

5:15 Keystone is a profitable organization, and we have paid dividends ever since the IPO in accordance with our progressive dividend policy. This time, we actually paid six months ago. We paid a special dividend of 12.5p in line in conjunction with our ordinary dividend of 5.8p. And at this end of year period, we there is a proposed final ordinary dividend of 12.5p. The real story for this last twelve months for KEYSTONE is the return of a positive recruitment market. We had found in the previous year that due to the legal profession being so, buoyant, there was a lot of demand from other law firms for the recruitment of additional lawyers, and we found ourselves very much competing with conventional law firms to try and recruit the level of lawyer that we were looking to do. We did quite well last year in the environment that we were in, but this year has been much more of a return to normal.

6:32 And I'm pleased to say that we have actually added 51 new principals, taking our total principal number to 432,

6:42 and pod members have grown from 95 to one zero two. Pod pods are, a concept which we introduced a few years ago whereby principal lawyers can recruit junior lawyers to work with them in their pod. And this is a way for senior lawyers to leverage the junior support, to do lower end work and, increase their overall profitability. And the pods, now at a 102 members or a 102 pod members, is a significant part of this business and something that we, believe will help to grow our firm, even further.

7:38 Total fee owners finished at 549. The other factor that we are reporting on a little bit, in this period is the quality of our lawyers. Rather than just being anecdotal and saying this is getting ever increasingly better, we've thrown in some figures here, such as the 20 out of the lawyers that we have crew recruited during this, period, 25% come from the top 25 law firms. We also have a 172 of our existing lawyers of KEYSTONE LAWERS are listed in the, legal directory, the legal 500, which is, a tremendous endorsement of the quality because this is not an easy, it is not easy to get in the to the legal 500, and it is, a very good sign of quality.

8:46 It's so important to recruit to have exceptionally good lawyers in a law firm that wishes to be ambitious. The best law firms, the best lawyers will go where the best lawyers already are. And, in terms of brand reputation and ultimately commercial success, then maintaining a high caliber of solicitor and other lawyers is extremely important. Focusing over the next slide, thank you, on the lawyer recruitment side. These are the, all of the metrics that we report to the market on applicants, offers made, offers accepted, new principles, and so forth, have increased.

9:39 The applicant figure, these are not just, CVs. These are people who have applied one way or the other to KEYSTONE who look of interest, who go into the pipeline, and that figure is up 16.4%. Offers made is up 30.4%. I always mentioned that these are not necessary subsets of each other. These figures such as, 270 applicants in the period, they're not all the offers made at one zero three do not necessarily relate to those 270 because it's that is just offers made during the period and not a direct correlation.

10:25 But, yes, offers accepted is up 61.9. And as I mentioned earlier, new principles, a figure at 51, net at 32. In other words, there has been, sorry, it's the, the net figure, I think, is 34. In other words, there's been, 17 departures from retirement or from those who really haven't made it work at KEYSTONE. We have a very small churn rate. It's very unusual, extremely unusual for somebody to join KEYSTONE to be successful and to leave to go on to something else. And it's absolutely totally unheard of that they might go to another platform firm.

11:14 So new joiners, generally, those that leave are retiring or have not been successful at KEYSTONE, and so the new principles are is a a welcome addition. I would like to pass over now to Ashley Miller who will take us through the financial highlights. So so as James was saying, we've seen a good period of growth in revenue, up 15.1% to 87,900,000. And the adjusted PBIT has grown by 13.3% to 10,400,000, whilst adjusted PBT has benefited over and above that from the step change in the interest rate environment we've been in, such that that's grown 22% to 11,300,000 with an adjusted PBT margin at 12.8%.

12:06 We've already referred to the very strong cash conversion at 96.1% leaving cash in the business at the end of the period of £8,400,000 and adjusted earnings per share of 27.4p Whilst the dividends in the period totaled 18.3p as ordinary and a special of 12.5p. And we've returned in the to date over £30,000,000 worth of dividends since we came to market.

12:34 If I just move to the next slide and a bit more detail behind the revenue statement. So revenue the growth in revenue of 15.1% has been driven by the combination of sustained client demand across the business, which has helped to drive revenue per principal up by 9.8%. And that's as already referred to a combination of the busy the the the the level of business with done by the lawyers as well as the rate rises put through whilst we've been in the inflationary environment, which we've had two rate reviews during the period. Typically, have one a year. In terms of staff costs, refer to the inflationary period, we've seen an 11% increase in staff cost this year, which is a combination of the pay rises and also the increase in average headcount from 59 to 63.

13:23 Other admin services stepped up by 1,200,000 with the most two significant factors being the increasing cost of, recruitment fees through our agency channel, which is is, stepped up by point four. Now that's a a positive feature actually because what we the way we pay our, agents is as a percentage of the revenue that lawyers introduce. So consequently, whilst we have seen a cop up a step up in costs, it's also a reflection of the revenue stream which we're coming online through there. It's driven because we've seen an absolute increase in the number of lawyers join increasing to 51, but also some of the practices that those lawyers who came through that channel have been higher value, meaning the increased cost. We've also seen an increase in the professional indemnity insurance premium this year. That's linked to the step up in in revenue as well as a slight tightening in the marketplace.

14:16 Net interest is a major step change this year. Obviously, up until the pre our financial year, we haven't really had any interest as interest rates have been virtually nonexistent. But the change in rate there has mean we've seen an increase to point one about a point nine income in the period.

14:36 And that's really why we've drawn out both the adjusted PBIT and the adjusted PBT, which we've always reported on previously. Highlighting the adjusted PBIT continues to grow strongly, and that's the underlying performance of the business, if you will, with a small slip of point two, which equates to about 200,000, which, as I've said, with the agency recruitment fee step up of point four, that's really more part of that. But that was more than compensated by the increase in the interest income, which resulted in the the step up in the p b PBT margin. I highlight the corporation tax on here, not so much in in in relation to its impact itself so much as the fact that in spite of the increase of 5% on the the standard corporation tax rate, we've continued to drive good growth at earnings per share and maintained our progressive dividend at DPS level in spite of that 5% increase in corporation tax.

15:35 On the balance sheet, very clean and positive. We've got a very, strong balance sheet with £8,400,000 of cash, and we remain debt free. Our debtor days are are are very good. We trade debtors at thirty four days. Like all businesses, there are bad debts in the business and provisions against those, etcetera, because, obviously, we are the contracting party with with the clients. But the alignment of interest that exists between our lawyers on their pay when paid terms and ourselves really makes them the most interested party in ensuring, that we, have good payment terms, with our clients. And consequently, that's reflected in the debtor days there. The payables, because of the pay when paid nature, there's a a relationship between our trade debtors and our our payables with a 75% liability being recognized there.

16:26 This year, we've seen a we've we've renewed our leases on our two premises in in Chancery Lane. And as a result of that, we see a step change on the balance sheet again with the right of use assets and liabilities in respect of leases increasing to reflect those new terms of the leases. And the intangibles are, there. It's a historic piece in terms of how the investment by Root Capital, the private equity firm that invested in the business in October 14 structured that deal. Moving on to the cash flow. The business is fundamentally cash generative, and that's, really, always been the case and will always be the case because of the pay when paid nature of the lawyers. And that's reflected in the operating cash conversion at 96.1%, largely in line with last year.

17:13 That means we've generated 10,400,000 of cash from operations. And, really, the the model is fundamentally capital light. So we have minimal CapEx, circa point one typically in the business. And then the outflows are the dividend outflows and are clearly a bit more disclosure there on the net interest received.

17:35 Thank you, Ashley. So in summary, I am pleased to report a strong performance across the business. The client demand that we have seen over the last couple of years may have abated slightly, but it's certainly not something that has reflected reflected in our own figures, but what the impact has been on recruitment, making it easier for us to recruit. And I'm very pleased to say that our levels of recruitment have now reached the pre pandemic levels.

18:20 The caliber of lawyers, as mentioned, is well, continues to to step up, and the firm is in a strong cash cash position, meaning that we have continued to pay, dividends, including a the third special dividend we paid this year, the third since IPO. As an outlook for the year ahead, it will probably come as a little surprise, bearing in mind, the conditions at the current time that we are optimistic that we will be able to meet analyst expectations for this year and to continue to attract a good flow of good quality lawyers and continue to grow the firm and for 2025 to be a a good year.

19:24 So thank you. I'm going to pass back to Jake, and we'll I will also then be happy to take questions. Perfect, James, Ashley. That's great. And thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that's situated on the right hand corner of your screen. But just while the company takes a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. James, Ashley, as you can see there in the q and a tab, we have received a number of questions from investors throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But at this point, Ashley, James, if I may now hand back to you just to read out those questions and give your responses where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Thank you, Jake. What I'm going to do is I'm going to summarize a couple of questions that have been submitted

20:26 and then and answer those myself, and then I think Ashley will do likewise for questions that fall more into his area. There was a question from David b and from Ildor concerning asking for a little bit more information and details about what could be described as the competitor law firms. Other law firms operating what is now largely called the platform model. Other law firms looking to grow, by recruiting good quality or by recruiting lawyers, onto the platform. Now this is a concept. The platform model is something that which actually Keystone invented when we founded in 2002.

21:17 So we have a twenty two year track record and progression in building up the firm. The for quite a few years, we were the only firm doing this. And and I'm very pleased that we were given that time to find our way, to make mistakes, to understand what was a completely new model that we were creating. Over the last few years, particularly since the pandemic, there has been a quite a number of firms that have emulated us. And we are absolutely, very pleased, about that because the story that we have long been, telling is our belief that the platform model is so much more better suited to the mid market law firm nowadays that the, the the market is actually moving.

22:22 In other words, it is over the next few years, I believe we're going to see a significant movement of lawyers, of business from the conventional law firm in the mid market to the this new type of law firm. And if we were the only law firm doing that, then that would be a strange story to tell because you cannot move a £10,000,000,000 market on your own. You and it would be very strange. It would not be happening. But as it is, in terms of specifics, I have read recently that there are approximately 50 law firms in The UK now operating, in one guise or another, the platform model, and about three and a half thousand lawyers.

23:14 Now that's, you know, it is a big market, as I mentioned, the the £10,000,000,000 market, but that is a and and this is quite, an early stage. Now some may think, oh, well, that's terrible. You've got all this competition. We don't look at it like that that. We believe that this 10 the these new platform for firms are will basically take business from the conventional firms. They won't be to be taking business from us. Recruitment for lawyers, may increase, but it's offset by the viability, by the fact that the, the widespread spread mainstream acceptance of this business model amongst lawyers is going to drive far greater benefits.

24:05 The other thing that is very important for me to emphasize is that we are the the original version. We've always been ambitious. We are the oldest firm operating this way. We're the biggest firm by in terms of certainly, in terms of turnover operating this way. And we most crucially, we're the only real choice for the sort of lawyers that we wish to attract in the areas that we operate of the caliber that we operate. We are the number one choice. Maybe if we if we do, not agree to take on somebody, often they will appear at these other firms. So it's absolutely great to have to be in a competitive environment.

24:50 That's where you want to be as long as you are leading it and set a trail brake trailblazing. And that, I believe, is what we are, and I believe that that is what is gonna serve us well, and it's going to make the market even bigger and will help to drive our our growth. One more question that I'm gonna take before I pass over to Ashley is quest a question from Trevor g, just simply asking whether the networking events, and program that KEYSTONE operated pre COVID is back to its normal level, and I'm pleased to say that that is the case.

25:38 We, we compensate for what we call our long corridors, by a whole raft of ways, but a lot of it is in person event, social, or business development, bringing our lawyers together. 35% of work at KEYSTONE is cross referred to from one lawyer to another lawyer. It is extremely important that people know each other well, like each other, can interact offline as well as online. And, that is something that is very important for us to do. We are a cohesive, seamless, joined up law firm, not a disparate network of individuals sitting at home working on their own. That is the future of KEYSTONE because if you want to do the best quality legal work, then you have to operate as a law firm, and that takes multi disciplined that takes a range of lawyers working on one transaction from different disciplines.

26:46 And, and and, again, for an ambitious organization, that is the future. So I'm very pleased to say, not just because it's good for business, but because it's very much part of the DNA of KEYSTONE. It's part of this is a place where work life balance and including fun at work is a very important part of what we do. So I'm gonna pass over to Ashley who may wish to summarize a couple of points as well. So David B has asked a question about the movements on provisions on the balance sheet. David is saying that they've stepped up this year. The quantum on provisions has increased this year, but really that's in relation to some reclassifications around the balance sheet with us. As you'll see, if you look into the notes, can see that point five of the movement was a reclassification of the professional indemnity insurance, which had previously been within accruals.

27:41 And you also have to look in conjunction with the reimbursement asset, which sits within within the other receivables. So really, there's been no significant movements in absolute terms once you net all that down. I'm afraid it's a bit of reclassifications. There's also been a question or a couple of questions really in understanding the position in relation by Damien C in relation to the trade receivables impairment and the provision. So in terms of understanding what it is, we are the contracting party for legal services with all of our clients. And consequently, like all businesses, unfortunately, some people don't pay or unable to pay their bills. Businesses go into insolvency proceedings, etcetera. And consequently, we do have a cost of those coming through. The the key most important feature for KEYSTONE, of course, is that because we don't pay anything until we are paid, essentially, there's the sent natural hedge there. So the net impact of the cost of that to the business or the run through the p and l is point four this year as opposed to point three last year.

28:45 In terms of the size of it as a provision, when you look at the balance sheet as opposed to it being written off, is really a timing issue. We take the hit when, essentially, we believe that those are unlikely to be recovered. And consequently, we make the provision, which is the point at which the p and l hit happens. Because the lawyers are on a pay when paid, they are equally far more emotionally connected and tied to the recoverability of these debts than you would have in a conventional business. So we will often carry provisions far longer than you would have that there simply because the lawyer is keen to still see that on their book because they want to remember the fact that x a, and c limited or x individual didn't pay them, and consequently, they may carry it there. But once it's gone down net, as I say, the the hit's being taken, so we're not to anything after that point.

29:36 In terms of another question came in in relation to the finance costs and what they relate to. Fundamentally, our biggest pay away in terms of pay away of interest is actually interest to clients. We hold client monies, and therefore, we have an obligation to pay, a fair rate of interest to our to the clients for their money. And so that's really the principal reason for why there's a pay away even though we are a debt free business. I think that's most of the finance ones. Just oh, no. Damien c's also asked about the admin expenses, and will they continue to rise in line with revenue, or would we see further operational gearing coming through the business? We've always seen to date operational gearing coming through the business. So although most of the costs in the business do increase because we have to continue to invest in supporting our lawyers and technology people, etcetera, there are elements of fixed costs. And even those which increase on a variable basis have traditionally not increased at the same rate as we've been able to grow revenue. So if we look backwards, we've moved the adjusted PBT margin from sub sub 10% when we came to market to where it is today. And accepting there's a a step change there of some interest in there, it still stepped up from sub 10 to on a like for like basis.

30:57 Thanks, Ashley. I'll take over for a few questions now. Raymond g has asked how we drive the growth organic growth and for drive, persuade, encourage lawyers to go out and get new business. Well, there is a number of ways that we do grow. As I mentioned, the predominant way is by the recruitment of the right lawyers to join KEYSTONE and to bring their clients, and that is far and away the most significant factor. But, of course, it doesn't mean to say that once they join KEYSTONE, they just stop and they do not go and bring in more work for themselves and for their KEYSTONE lawyers.

31:45 They do constantly in order to reach the sort of level that they are comfortable with because we don't have targets. This is very specifically important part of the KEYSTONE model is to not have targets, not have that sort of pressure on lawyers. Having said that, we don't need to apply the pressure because we operate this percentage basis whereby, lawyers will receive up to 75% of the fees for work that they bring in and undertake. Then it is, it is self propelling. It is self fulfilling. It is self encouragement, and that is the that is the model. You know, growth, as mentioned earlier, revenue per lawyer is up as well, and that's you know, the the increased brand quality of the of the KEYSTONE brand, etcetera, is also part of the organic growth story of KEYSTONE as indeed are the pods and the recruitment of juniors.

32:53 All of these are, in actual fact, organic growth methods. Even the recruitment of lawyers isn't organic because it is not, acquisition. We are not, buying, legal practices, which is considered to be nonorganic. That brings me on to question from Lawrence c, saying, well, how about nonorganic? We are, m and a activity of other platform law firms. Our approach to that has always been we would prefer not to do that. We don't necessarily need to do that. It's an acquiring other law firms, acquiring the the liability going back six years, is an expensive, time consuming process.

33:48 Plus, of course, most of the firms do not have the type of lawyer that we're looking for, and they do not have the culture that maybe we have built. So it is far better for KEYSTONE to put its time, energies, and budget into recruiting lawyers from the conventional to join us, where we which we are doing quite successfully. It is far better to do that than to go out and to try and do a expensive and risky acquisition policy. So we have a stated non acquisitive policy. I'd just address one last question from me in respect to David b's question on the diversification of the legal subsectors.

34:43 In other words, we are well diversified in terms of our employment, corporate, commercial, the areas that we cover. We've been, in some ways, lucky. In other ways, we have tweaked it here and there so that we make sure that we're not too heavyweight in one particular area. Sometimes, it's interesting to report on certain sectors that have outperformed others such as during the early time of COVID, lockdown, furlough. The employment lawyers were very busy. Nobody understood what furlough was. The corporate transactions and property transactions fell through the floor. That was interesting. We were reported on that at the time.

35:31 And the period that we're reporting on now, it's been good, solid, consistent across the board. So in actual fact, no. There there has not been any significant variations or anything really to report on the different behavior of different sectors. Okay. Well, that seems to be all of the questions. I will, say thank you very much for being on this call from Ashley and myself, and, we'll pass back to Jake to conclude the presentation. Perfect. James, Ashley, that's great. And thank you very much indeed for addressing all of those questions and for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations.

36:30 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of KEYSTONE LAW GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.