Keystone Law Group (LSE:KEYS) Q2 2027 Earnings Call

0:00 Good afternoon and welcome to the Keystone Law Group plc investor presentation. Throughout this recorded presentation investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q&A tab situated on the right hand corner of your screen. 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 publish responses where it's appropriate to do so. Before we begin I'd like to submit the following poll. I'd now like to hand you over to James Knight, CEO. Good afternoon sir. Thank you. Welcome to interim results for Keystone. Six months ended 31st of July, 2026. I am unsure exactly how familiar you are with the model, but Keystone has been alive and well for the last 25 years.

0:50 and operating very much the same model now as we did right from the start at the time a very revolutionary disruptive model lawyers working from their own offices earning a high percentage of fees rather than the conventional partnership employed salaried model this gave lawyers this continues to give lawyers a great sense of freedom and flexibility whilst also allowing them to be part of a strong community to have all of the support and the infrastructure of the conventional law firm as we throughout the years we've grown bigger we've grown stronger the support has become increasingly sophisticated in line with the sophistication of our lawyers and our clients and of course technology which always played a strong part of what we do has increasingly come to the fore, never more so than today with AI innovations.

2:15 The firm has grown really well on an annualized basis for the last 25 years. We IPO'd in 2017 and have continued to go really well since then. The market in which Keystone operates the mid-market commercial law market is large it's about 14 billion pounds and that's just the sector that we operate in and most of that well I'd say almost all of that is addressable by the Keystone model we are able to scale quickly unencumbered by We operate a very efficient paid when paid model which allows the lawyers to achieve the efficiencies and the freedoms and the flexibilities that they want whilst helping our financials.

3:18 We operate a progressive dividend policy and that has consistently returned value to shareholders ever since IPO in 2017. Moving now to the results of the six-month period just gone I'm delighted to announce another strong financial performance with revenue increasing 22.5 percent Revenue Per Principle up 14.5%, adjusted profit before tax increased 31.3%. Those are the income high level stats. The payaways, this is the first time ever that we have completed a full gamut of different styles of pay-away share buyback interim dividends and special dividends and you can see the figures there the share buyback of 1.5 million pounds is let's say roughly related to the value of the LTIPS which ensured or eliminated the dilution that would have flown from the issuing of new shares for the LTIPS interim dividend 9.6 pence, special dividend 15 pence.

4:47 Whilst we grow as a firm, it is also extremely important that we Improve. I like to say that this is a law firm that is improving quicker than it is growing. It has been wonderful to have launched our brand Refresh over the last six months. bringing the look and feel of Keystone up to where we've become every 10 years or so it's necessary to deal with do these things cultures change time change looks change so we need to keep abreast with that the AI is another big focus we have been rolling out an extremely Good Tool called Co-Counsel owned by Thomson Reuters, one of the big choices available and certainly the one that we believe is highly suitable for Keystone.

5:49 It has been well received by our lawyers and the rollout and uptake continues. Recruitment is always a big part of the story. 23 high-caliber principals joined us and the same number coincidentally of POD members. These are junior lawyers that are employed by our senior lawyers who we call principals. Looking focusing on the recruitment KPIs last year was an extremely strong market for us certainly we recruited stronger more substantially than than usual this last six months is a little bit off from where we are there but still extremely good in many ways certainly the caliber of the lawyers it's very important that we maintain a high caliber for our reputation because that is our product for our liability our risk for all reasons this firm it has a tremendously good reputation because we have such good lawyers 23 new principals recruited during the period as I mentioned earlier brings us up to 501 principals in the firm 682 lawyers in total

7:22 I mentioned earlier that the AI is a important focus for us at the current time obviously it's important for our lawyers to have the tools so that they can remain competitive there's some excellent tools out there for lawyers there's the legora the harvey's the lexus nexus and co-counsel the one that we believe is appropriate for this firm uh rollout is is ongoing and follows on from other AI initiatives that are continuing to receive take up from lawyers. We're also producing a number of tools or have produced that help with the operations of the firm internally.

8:16 The most recent one that we are launching in the near future just testing at the current time deals with a source of funds and a requirement for us to establish where our clients monies have come from by asking certain questions it's a device that will save time and deal with what is often a rather difficult exchange for lawyers when delving into the wealth of our clients. We'll pass over now to Ashley to take us through the financial highlights. Yes, it's been a very strong period for us this year, or this six months.

9:03 We've seen revenue growth of 22.5%, taking us up to 66.3 million, whilst adjusted PBIT has grown 31.6% to 8.1 million. The continued strength of interest meant that we have adjusted PBT up 31.3% to 9.6 million, which is a margin of 14.5%. Cash conversion in this business is always strong the pay when paid model fundamentally makes that the case so our conversion of 95.6 percent in the first half is reflective of that. That left us with 10.5 million pounds of cash and the adjusted EPS in the period of 23.1p is an increase from 17.8 pence the same period last year and James has already mentioned the dividends that we are paying at this time.

9:55 If we move across for a bit more colour on the income statement, you'll see that the revenue growth has been driven essentially by broad based client demands. So we've seen strength across the business as a whole, albeit that we have had some standout strength within the corporate and corporate restructuring. Essentially a couple of million pounds worth of revenue was slightly lumpier in the first half and so we've seen about 20% of the revenue come from corporate this year versus 16% last year. We've also seen continued strength in recruitment during the second half of last year particularly and into this half driving that revenue. So we've seen the average principals increase 7.1% year on year whilst total fee earners rose 12.5%.

10:42 All of this resulted in an increased revenue per principal of 14.5% taking us up to £133.8k. Now we're a very real business and it's really important that whilst we recruit these lawyers of the high quality and the high calibre we need to ensure that we continue to invest in the business to provide the support and infrastructure that they need and to that end we've continued to invest in our people. So we've seen staff costs increase 15% year on year with average headcount increasing from 79 to 92. Other admin costs also increased by 14%. Within that sort of one of the larger areas was a transition, a move to a different IT managed provider, managed service provider, we now work with Acora. And the reason for that migration was very much that we identified about 18 months ago, that the provider we were with at the time wasn't really the part that we needed to continue to scale the business and grow into the future the new part that we've taken at core is much better suited to deal with the complexity that we have now as a growing as as the business of the scale we are at so we're very happy with the transition it went exceedingly well and as I say but it has resulted in a slightly increased in cost all of these factors resulted in our enhanced drop through of revenue to adjusted PBIT with a margin at 12.3% which is up 0.9% this year or this period and the net interest remains strong increasing 0.3 million

12:17 leaving us with a margin adjusted PBT of 9.6 million On to the balance sheet. The balance sheet here is, as always, very clean, very strong and very simple. We are always cash positive. We don't have any debt and we're net cash position of 10.5 million at the end of the period. The pay when paid model of the business ensures that trade debtors remain very much aligned in interest for the lawyers have to get paid so 33 debtor days remains very strong and there is always a corresponding liability for any remaining debtors on the balance sheet. We've already explained that we carried out the share buyback of one and a half million in the period which when we bought just under 268 000 shares which we used to fulfill our commitments under the LTIPS which vested in the period.

13:13 on to the cash flow and again it's a very clean cash flow statement this year as always very strong cash conversion as is the nature of the business capex is operating at normal levels which for our business is sub 0.1 per annum on the balance on the cash flow obviously reflective of the share buyback we have the 1.5 million which is new this year and whilst the dividends in this year reflect as lower than previously that was because in 1h last year we paid not only an ordinary but also a special dividend at that point in time. Thank you Ashley. So I'm very delighted to bring you a set of results that certainly I hope will instill some confidence.

14:07 In terms of outlook, as you probably guessed, I'm sort of quite positive about that. Certainly this six-month period has started. We're only a month in or so. It started well. um there's a lot of advantages now with Keystone as we've become from being an outlier small firm we are now a really significant very very good law firm that operates behind the scenes very differently but in terms of the output in terms of the product that we deliver it is a conventional legal service and whilst we used to be successful in attracting lawyers with the promise of better work-life balance we still have all of those advantages but now we can also attract lawyers on the basis that we are more often than not a better firm than the one that they're coming from or certainly able to stand alongside them so it makes me extremely positive that not only are we I suppose in some ways getting better at what we do getting more experienced but there are very many reasons why this firm is in a much much better position than it was even five years ago

15:38 so in terms of these next six months anyway we expect to be comfortably ahead when it comes to revenue and materially ahead when it comes to profits. So hopefully that is something that we will turn into a reality. I'm pretty sure that we will. So that's the end of the sort of formal report and we'll work through some questions now. Okay so if I can take the first question. So James has asked could I talk through the economics of newly recruited principals? How long does it typically take for a new principal to reach mature level of productivity and has that changed over time?

16:28 In terms of the period of time it takes lawyers to come up to spin, in terms of individual lawyers, there can be all shapes and sizes depending on their personal circumstances when they come across. But broadly, if we look at cohorts of lawyers each year, they broadly come on board and get up to around up to productivity up to the level they will be billing pretty quickly typically within sort of a quarter of being on board so that's what we see there and and that's really been a fairly consistent theme for a number of years now that's not really changed dramatically over time. Gareth H asks should we be concerned about the reported rise in AI generated assisted legal actions and claims as it affects the legal sector in the UK?

17:18 Certainly the AI claims are becoming a very significant issue. Now that It relates in all sorts of different ways. AI claims against our clients in areas like employment. The employment tribunals are, I understand, at the point of collapse already because it is so relatively easy and quick for claims to be put in, whereas in the past they would These are by and large individuals who would not be going to a law firm for a claim and they would not know how to do it anyway.

18:05 And it is possible to create a 20-page claim document in a very short amount of time using AI. Now it is likely, I believe, and we're starting to see some evidence of this, that lawyers are going to be very busy as a result of AI claims because or certainly those that represent commercial clients as we do because Our clients are seeing a lot of increased activity and they need lawyers to defend that. So, you know, that's one side. In terms of claims against us as a law firm, well, I mean, again, like every organization, yes, there's some Indication that there is going to be uptick in people that are putting in claims complaints I mean we have an extremely good strong claims record we're an extremely well-run efficient firm and we deal with these things but you can't please everybody all of the time All firms, from what I understand it, have noticed an influx from this. But it's just one of those things that you have to deal with.

19:29 And continuing a bit on the AI theme here, we've got a question. What is driving the big increase in value per principal? Is AI already having a positive impact? And how is AI impacting the daily working life of principals? In terms of the big increase in the value per principal this year, it's really a number of factors and we're not attributing this to positive features of AI as of yet. Really it's the step up of the drive through from the numbers of principals we recruited throughout the course of last year. We had a strong second half last year with 30 principals joined and a further 23 obviously in this period. So the drive is there. The broad client demand continues to be strong. We've seen our annual rate rises come through in the quarter as we do every year as well.

20:18 And in response to the demand that's there, we also, the normal nature of people using pods and recruiting juniors into the business now, we've seen such strength there with 23 pod members joining. that is both an engine for delivery but also a reflection of the demands or an indication of the demand that the lawyers the principals themselves have for client work so all of those have really been the features driving the the step up in terms of AI and positive impact on that I don't think anyone's ever going to be able to give absolute statistics as to how much additional revenue a business might acquire in due course as a result of AI Doing things quicker doesn't in and of itself provide additional client demand so we won't be able to provide direct statistics on that.

21:11 In terms of how it's impacting daily life, lawyers are using it for a range of activities. It's very powerful in in terms of both drafting comparisons research all of these things are available through there indeed obviously our new tool with co-council sitting across west law and plc means that the deep dive analytics and research tool is very powerful there so it supports our lawyers in all sorts of ways both across the business and it continues to evolve I think the important thing for us is the continued adoption of it with across the suite of tools we provide to lawyers to take advantages that it offers. Marcus H asks are you confident on the number of new principals picking up again in the short term or most likely not in this financial year?

22:03 First of all I'd say that in actual fact our recruitment was slightly less than a very bumpy year last year. is really something that I'm by no means disappointed about. It's strong and in fact if you combine that with the pod members it's 46 lawyers in the six months which is really really quite some going. The reason it's slightly down, I would suggest, and it is anecdotal, is geopolitical uncertainty. We see this every time there was an election, a Brexit, a Ukrainian war.

22:51 The uncertainty that is created until that abates does tend to mean that people are less likely to move jobs. I have no idea whether that uncertainty will continue over the next six months. I think it's likely to abate just as people get used to this situation in the Middle East, but we'll have to see. all we can say and make predictions on and is how we believe that we will do in by year end and as stated earlier we're very confident both in terms of revenue and profit.

23:40 So turning now to a question around whether there's any update on the Ministry of Justice consultation in respect of interest on client accounts. There's been no confirmation one way or the other, I'm afraid. So the consultation happened in the spring. Everyone responded from the industry negatively to the proposal, which was for the MOJ essentially to take a good chunk of the client's interest by means of There hasn't been an update so it doesn't remain there's no further clarity what I would highlight is if you do see analysts notes in the markets you will see that they are building into it now a decreasing interest income over the coming three years in reflection of this downside risk so to the extent that The MOJ do end up implementing something. The projections should be deliverable in light of that.

24:37 And if they don't, there could potentially be upside against that. There's a question, where do you think the ceiling is for Keystone? Is it the number of principals, revenue target or something else? Well, it's a very interesting question. What I would point out is that the market that we operate in is a £14bn market and our turnover is distinctly less than that in terms of The amount of growth that is available is obviously very significant. The lawyers are there, the market is there. There's a long way to go and we're looking forward to the journey.

25:34 and really then we've got the final question we have in here at the moment is in relation to revenue growth coming from new hires versus versus others and why we refer to principles when we use partners on the website in terms of the the revenue growth for us the growth of our business is through recruitment of lawyers and bringing on who bring on New clients for themselves and their colleagues. So that really is an organic growth strategy. So to that extent, 100% of our growth is organic. We're not an M&A business. There is no payout for other things. In terms of the terms principles versus partners, principles are for us those people who contract with us through the service company and partners is a title which is used externally.

26:22 Thanks Ashley, that concludes the questions. I'd like to thank you all for attending today and look forward to continuing to present to you in about eight months time. That's great thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will take a few moments to complete and I'm sure be greatly valued by the company. On behalf of the management team we'd like to thank you for attending today's presentation and good afternoon to you all.