Gateley Holdings PLC

LSE:GTLY

Q2-2025 Earnings Call

[Roderick Waldie, executive]

Hello, and welcome to Gateley's Interim Results for the 6 months ended 31st October 2024. My name is Rod Waldie, Chief Executive of Gateley, and I'm joined by Neil Smith, our Chief Financial Officer; and also by Nick Smith, our Acquisitions Director.

So going through to the overview slide. The numbers on this slide, I think, point to a good H1 outturn, and that was a period during which the macro wasn't always easy to navigate, particularly in the erratic pre-election and pre-autumn budget periods.

We were pleased to deliver an increase in revenue, in part from an increase in fee earner utilization from the period. At last year-end, we said we anticipated that margin would remain a challenge for this year due to stubborn inflation and because a lot of our recent investments in platforms, systems and people is for medium- to longer-term return. So set against that, our H1 underlying operating profit and operating profit margin is pretty much as expected. But during this presentation, I'm pleased to be able to point to the beginnings of returns from some of our recent investments and also to be able to touch on our ambition for margin improvement looking forward.

In the meantime, our unbroken track record of growth since listing in 2015 is inextricably linked to the business model the listing gave us the ability to create. Our 4 platforms, each housing complementary legal and consultancy services, absolutely remain our unique vectors for growth.

From a standing start in 2015, we've now got 322 consultancy professionals in group and consultancy services accounted for almost 30% of our first half revenue. In short, the group is now very different to the business that we brought to market.

Our balance sheet, well, that remains strong and M&A remains a key part of our capital allocation policy to which Nick will speak later in the presentation. Meanwhile, we grew our average headcount in the first half of the financial year, including onboarding 10 new partners in our Legal Services business.

Our track record really should give our stakeholders confidence that we will remain forward-looking and disciplined in progressing our strategy, including continuing to apply the right balance in capital allocation from period to period and instilling more operational discipline for margin improvement. Our key objective here being delivery of both growth and progressive returns for our stakeholders.

During this presentation, we'll elaborate on some of the points that I've just made in overview. In the meantime, we're pleased to be in line at the half year and to propose an interim dividend of 3.3p. We confront the second half of the year with a more positive mindset than we had at this time last year, including anticipating some tailwinds that we hope will help offset volatility resulting from the fast-moving macroeconomic situation.

So moving on to the next slide, please. I'm not going to dwell on this slide because what I'd like to do really is move on to give you a bit of insight to each platform. As a lead into that, I guess the key points for you to pick up from this slide are that 3 of our platforms grew their revenue during the first half of the financial year, and 3 of the platforms grew their contribution to group margin. I'll touch on the revenue contraction from our people platform and the margin contribution reduction from our property platform in a moment.

So moving on then to platform overview and starting with the Business Services platform. Well, we're pleased to see an 8.5% revenue growth position from this platform. And really, we should think about this platform as housing service lines that are more countercyclical or economically agnostic in nature.

In Legal Services, our commercial litigation team remains the biggest segment on this platform, and it performed in line during the first half of the year with good momentum being carried into the second half. In addition, we're benefiting from our recent further investment in complex international dispute resolution from which revenue was significantly ahead on prior year.

Ongoing mandates in this space from various jurisdictions are reflective of our agile international strategy in this particular work stream. Back here in the U.K., our Legal Services IPCT team continues to work very closely with both our corporate platform and the patent and trademark attorney businesses, Adamson Jones and Symbiosis, both of which delivered growth in H1 and carry good momentum into the second half of the year, including benefiting from our recent investment in IP valuation and commercialization expertise.

Moving on to the next slide, the corporate platform. Here, we're pleased to report revenue growth of over 11%, 11.1%. And the platform, whilst performing very well in its own right, also remains the biggest referrer of work to other parts of the group. So all 5 segments on this platform grew their revenue as they benefited from strong transactional activity during the period. In our case, that was dominated by private equity and acquisitive corporates.

In parallel, our restructuring advisory team was busy, and we reasonably anticipate ongoing good activity in this space as financial pressure on companies continues to build. This will necessarily involve input from other experts on both this platform and other platforms.

In period, we strengthened our corporate tax and restructuring teams with laterally hired partners, each of which is London-based and each of which is indicative of our focus on quality expertise. We hope and expect to extend our corporate services internationally, including by planned investment in our existing offer in the Middle East currently based out of Dubai.

In the meantime, turning to consultancy. The public sector focused team within Gateley Global is benefiting from the in-period appointment of it by the West Midlands combined Authority to support the authority's High Growth Accelerator program. Key to that appointment was the group's ability to provide wider services alongside the expertise in Gateley Global as a stand-alone component of the group.

Moving on to the next slide, the people platform slide. Revenue from this platform declined. It's the one platform that showed a slight decline in revenue. So that decline was 6 -- sorry, 3.9%, and that was really a product of contraction in headcount in our Private Client Services team. That's now stabilizing with a deliberate focus on high net worth clients, supplemented by the in-period appointment of a chartered tax adviser with high net worth expertise.

In the meantime, in Legal Services, our employment and pensions teams, well, they grew revenue by 10%, and both of them have got a positive outlook with tailwinds in various areas. So for example, new employment legislation offers us opportunity. In fact, our Head of Employment described the recently enacted Employment Rights Bill as the most significant change in employment law in a generation. And in pensions world, ongoing activity by pension schemes to complete full liability buyouts for which our Entrust business provides technical support should maintain strong momentum in that business.

In Consultancy Services, we were pleased to see revenue growth of 2% in a difficult market for leadership assessment, leadership development and cultural change services. Our experts in these areas seem to be winning more than their fair share of mandates and consultancy revenue on this platform, as you can see from this slide, was 29% of total platform revenue in the first half of the financial year.

Finally, moving on to the property platform, please. Well, this remains our largest and most diverse platform, against the backdrop of challenging market conditions in the U.K. property sector, we were pleased to report revenue growth of 4.1% from this platform. And it's a testament, I think, to the resilience in the mix of services on the platform. We continue to make targeted investment in headcount, including the in-period recruitment of partners to our housebuilder, real estate and real estate dispute resolution teams. And one of those recruits brings new expertise in the form of expertise in environmental law.

Consultancy services contributed 43% of revenue, up from 39% at this point in the last financial year. Growth factors here include, well, the full period contribution of RJA, which provides specialist advice to housing associations and corporates in acquiring affordable housing stock and ongoing growth in GSP, providing specialist services to U.K. insurers in relation to major loss claims.

Finally, in relation to this platform, we do anticipate some tailwinds and they'd be generated, we think, from government policy in relation to planning and also in relation to housing strategy. So that will most directly benefit our planning team in Legal Services, our housebuilder team, our construction team and the business I've just referred to, RJA dealing with affordable housing stock.

In addition, government directives in relation to building safety, well they provide opportunity for our well-established Building Safety Act team in our construction unit, and that type of work is complex, long-dated and specialist. And we are seeing inflationary pressures, in fact the construction industry from which our specialist advisers in the U.K. surety space should benefit.

Finally, recent weather events, well, they should be to the benefit of GSP assisting U.K. insurers in dealing with major loss claims. And I'm deliberately highlighting some of these hopeful tailwinds because the reduction -- the contraction in this platform's margin contribution is a direct result of the investment that we've made in headcount, particularly in our housebuilder team and in our construction team, but we do expect to see relatively short-term returns from that investment. At that point, Neil, over to you in relation to financials and financial highlights.

[Neil Smith, executive]

Thank you, Rod. Next slide, please, Jane. Thank you. My section today contains further detail on the key areas and drivers behind our performance. I'd like you to take away from this part of the presentation, the following highlights: our increased activity levels, the progress on our journey towards progressive operating profit margin improvement, our measured discipline in the balance of capital allocation and the continued strength of our balance sheet. So let's get into that detail.

Next slide, please, Jane. Our activity level is our best indicator of client demand and whether we have appropriate staffing levels to service that demand. We carefully manage both of these and target an average for the business of 85% as a normal performance. I find it much more helpful to look at this on a rolling 12-month basis.

The graphs on this chart indicates the differing H1 and H2 performances that we've navigated over the last 4.5 years as a group with some of these showing significant changes between H1 and H2 on an annualized basis. So in period, this specific period, as the U.K. experienced a change in government and we're anticipating the autumn budget, corporate activity was at its highest levels we've seen for a while in a number of years.

So as a result, our H1 performance, the blue line is now starting on this rolling 12-month basis to materially move ahead of where we were in H1 of '23 and H1 of '24. So a positive trajectory on this trend. So whilst not all of our activity in period turns into fees in the same period, the overall group position at this time of the year and the outlook are encouraging for H2 and beyond. And as I say, this is in direct contrast to last year's position.

So on the whole, our activity levels are much more aligned to the performance of corporate activity and demand of our corporate clients, more so than, say, consumer-led, of which we have minimal exposure, if virtually none.

Next slide, please, Jane. So Rod has talked in detail about the performance on each of our platforms. It's graphically represented again on this chart, our revenue bridge. And as highlighted by our segmental margin contribution slide, 3 of our 4 platforms have improved their direct margins in this year, which we're really pleased with. And I wouldn't be surprised if over the next few years, you see slightly less revenue growth, but much more focus and positive trends and movements in terms of profit performance. And we'll talk shortly of the focus on margin that we've got across the group.

I wanted to highlight the H1 and H2 relativity of fees and profit and where we are. Although against full year consensus, our H1 revenue position is slightly behind where we were this time last year, but our closer metric -- our profit metrics are much closer. So alongside a much more encouraging year-to-date activity position, as mentioned on the previous slide, our expectation is the full year remains in line with market consensus targeted performance.

Next slide, please, Jane. So the key financials, the balance and shape of our income statement demonstrates a real consistency in many of our metrics. As always, our highlight is good organic revenue growth and cost control.

Our people cost percentage of revenue is identical to last year. And whilst overheads as a percentage of revenue have increased marginally, this is down to deliberately higher recruitment spend, travel and marketing costs, partially offset by the drop in our energy prices on our property fleet.

So we've grown our diluted earnings per share in line with organic growth. And despite the in-period issue of share options to our senior leaders in July '24 deliberately, we're pleased with the earnings per share growth. And this helps us to maintain, as Rod mentioned, the interim dividend at 3.3p for the half year performance. Our annual dividend per share is very attractive in our sector.

Next slide, please, Jane. My next slide is our H1 '25 underlying operating profit bridge. And in terms of that profit, as a result of our previous year's acquisition of RJA in July '23, the first proportion of this chart relates to acquisitive profit movements netting out to GBP 0.3 million.

We fully integrated RJA in period from an IT perspective, which alongside its strong revenue growth will further support profitable growth in H2. The second proportion of this chart relates to organic growth in period, which also remains strong with sensible control maintained over inflationary impacts of both people and overhead expenses, organic profit contribution totaled GBP 0.2 million.

The majority of our costs remain fixed, meaning that as revenue increases in H2, its effect drops straight through to the profit line. Next slide. I'll give Rod an opportunity here to maybe reiterate some of the points that he was making in his slide before I go into some of the operational focus that we have on operating profit margin here. So I'll hand back over to Rod for a second.

[Roderick Waldie, executive]

Yes, Neil, thanks for that. That's helpful. Yes, just as I mentioned earlier in the presentation, margin improvement is a key objective in our strategic and operational focus. And that's elevated really by the need to confront what appears to be quite stubborn inflation in professional services terms, compounded by, of course, the impending national insurance contribution increases announced in the autumn budget.

So this slide is a new slide in our presentation, and it's indicative of our intent in the context of margin improvement. So what we're doing is we're pegging our objective to improve margin to a near-term ambition to achieve not less than, and that's important, the words not less than, a 13.5% underlying operating profit margin, this slide is an illustration of the key pillars in the strategy via which we anticipate realizing the ambition.

We'll definitely be revisiting this slide in future presentations, but we are really keen to highlight the objective today as a priority direction of travel for us here at Gateley. Some of the routes to realization, I think, are latent, one example being internal activity to improve pricing discipline, WIP management and, of course, conversion of WIP into fees. Another example of latent opportunity is improved cross-selling activity. And our unfair advantage here is the fact that we are a wider professional services business, and we will continue to invest in that model, which gives us enhanced cross-selling opportunities. I'm going to describe that actually as a tailwind in our model that we can benefit from.

So it's a statement of intent. It's an ambition. It's my way of setting the scene for Neil to talk a little bit more about how we're utilizing internal systems to aid our margin improvement initiative. And therefore, back over to you at that point, Neil.

[Neil Smith, executive]

Thanks, Rod. Yes. So our internal focus remains on using in-depth data analysis we've collected from our systems and through benchmarking that data to assist in the improvement of scoping discipline and greater management of unbilled time just by way of 2 examples.

We are using this data route to refocus all of our teams, and we have further system enhancements planned and even possibly the use of AI, which will eventually play a part in this. But for now, the introduction of greater project management around this topic and the reallocation of internal resource specifically towards this important project has now been deployed.

The key for me here is that we have many opportunities in which we can improve profit. We can always refine further what we do. But by giving this topic, the prominence we have over the last 12 months, we're confident of seeing results in the near term.

Next slide, please. Of course, our focus will always remain on the sensible deployment of our cash and our ability to generate cash in order to maintain our balance sheet strength and our dividend policy. We will, of course, maintain our relentless focus on cash collection.

I've been pleased to see debtor days reduce significantly in this period, and this follows a specific focus on our collection processes during FY '24, the previous full financial year, and that focus has enabled us to counteract the increase in WIP days that has arrived following the in-period activity increases.

You can see from this slide, the financing steps taken to sensibly manage overall cash flow during H1 and this will be enhanced further as we move into our higher cash generating H2 period. We're currently finalizing the renewal of our funding facilities and expect to announce before our year-end, the scale of our headroom for expansion using the acquisition-focused revolving credit facility.

On a typical 50-50 cash and shares basis, we currently have circa GBP 34 million of consideration potential to utilize during the remainder of H2 and beyond. This is the perfect segue into Nick and progress he's been making on our M&A activity. So over to you, Nick.

[Nick Smith, executive]

Thanks, Neil. Since our last market update, there's been a lot of activity in our M&A function. And as of now, our deal pipeline is as strong as it's ever been. We've completed 15 acquisitions since IPO and legal and consultancy services now sit on all 4 of our platforms. We now have the opportunity to add both additional quality and reach, but also depth as a result to each of our platforms.

As of now, discussions are ongoing on all of the platforms with both legal and consulting businesses. A number of those involve deals of greater scale and complexity than we've considered previously.

Securing an acquisition involves more than identifying a new service line opportunity and finding a corresponding business with the right financial profile. Every bit is important is finding a business whose culture and values match our own.

In this context, there have been opportunities where in the end, we felt that we couldn't proceed. Gambling on and losing on that destroys value more than just in the context of the acquired business itself. Hence, these discussions take time, quite a lot of time actually. And that, coupled with normal transaction risk means that conversion can be lumpy.

But if we look here at progress made since IPO, I think you can see that our M&A strategy is working. Consultancy revenue has been growing consistently with strong organic growth delivered post acquisition. A key part of our diversification thinking is that diversification brings trading resilience through differing environments.

Since the pandemic, organic growth in acquired consultancy businesses has been strong, double-digit teens growth rates in all but one period. The lowest was 9.1%, the highest over 30%. And we've reached the milestone of 30% of group revenues, which we referred to at IPO. And the results that we've seen in getting to that point give us the confidence to continue. We have no fixed vision of how the long-term relative proportions and legal and consultancy will stack up. That will be dictated by opportunity.

Next slide, please. It's worth reminding ourselves that all of the consultancy businesses comprising that circa GBP 50 million of annual turnover have been acquired. And by that, we've now developed our original legal business into a scaled broad-based professional services group.

We've established integrated services businesses in each of our 4 chosen markets or platforms as we term them. Those acquisitions have resulted in over 30 new service lines, over 320 new non-legal professionals and at last count, 19 new trading locations, and whilst there's still much more for us to go at, our group is already transformed since IPO, but we've achieved that transformation whilst at the same time delivering 9 years of continuous growth, continual progressive development of our group, but at the same time, delivering on our numbers and on our dividend is and always has been our goal.

We're looking to acquire businesses which not only broaden our offering, but also have good growth potential in their own right. The organic growth numbers I've mentioned earlier bear that out. But what that also means is that in deal pricing terms, we are able to secure businesses at that point in their development, which justify reasonable risk-adjusted multiples.

In comparison with large-scale established businesses being marketed, including where financial buyers may be more interested, pricing is more modest and better value is available. Because we see growth, that also means that our typical deals justify an earnout, delivering value to sellers as they perform after completion in our group, but adjusting risk for us as acquirer.

With 15 acquisitions under our belt, integration methodology is also now well established. All of our acquisitions to date have been acquired off our own balance sheet and continuing net cash and a committed bank funding facility means we have the capital and the integration resources we need to continue our diversification plans. Rod?

[Roderick Waldie, executive]

Thanks for that, Nick. Yes, definitely exciting opportunities at the moment for us in M&A, grateful for the input there. Let's skip through to the people slide, our people. Of course, it goes without saying our people absolutely remain our most valuable asset. And as always, I am incredibly grateful to them for their hard work and for their commitment to the business.

We continue to adopt a measured approach to resource whilst, of course, seeking to attract and maintain the best possible talent in the business. You can see here some headline people data, including headcount increase and reference to the in-period recruitment of 10 legal services partners, which, of course, I referred to earlier in the presentation. Importantly, our employee offer remains differentiated to most of the wider professional services market. And that's most obviously by the ability for all of our people to participate in share ownership. So the fact that 70% of our people are either shareholders or are in share schemes is a statistic that we're very proud of.

This slide also references the in-period appointment of Edward Knapp as our Chairman, his background and credentials are, in my opinion, absolutely perfect for Gateley, and he really has hit the ground running, was super impressed by his enthusiasm, and we are really enjoying working with him.

Moving on to the next slide, please. This slide is in the deck. It's been in the deck before, and it's an important reminder of an important incentivization strategy that we discussed during our last presentation, the presentation at the end of our last financial year.

We compete in a sector in which potential overall reward for the best emerging and senior talent is definitely high. So set against this, our business model enables us to reward our people with equity earlier and more widely than in the competing partnership model.

Our restricted share award plan, which was launched by us back in 2022, is the share scheme that we point to our partner and partner equivalents in Gateley. It was really well received, and it continues to be a valuable differentiator in attracting and retaining senior talent.

Last year, our strategy evolved. And the key driver for that evolution was our wish to support the continuous recirculation of internally held stock in order to maintain a meaningful number of shares in the hands of senior people in Gateley, but to do that in a way less dilutive than pure new share issuance.

So as we outlined in our last presentation, our capital allocation policy now includes, of course, when it's appropriate to do so, funding our EBT to acquire shares, mainly from IPO holders, and those shares are then warehoused by the EBT for award purposes.

We saw this policy in operation during the first half of the year with our EBT acquiring about 2 million shares, and those will be applied in share schemes moving forward. In short, we think that this strategy makes our internal equity journey powerfully different and meaningful for those that benefit from it.

Moving on to the next slide. Responsible business. Well, I've said this many times before. Like our clients, we here at Gateley absolutely recognize that business is an important catalyst for change. And therefore, being a responsible business is a deliberate component of our purpose statement, and you can see that purpose statement on the slide here in yellow.

Our responsible business strategy is developed to positively impact the well-being of our employees and to help unlock potential in the communities in which we're based. I'm really proud of the progress that we've made since we launched our responsible business strategy back in October 2021.

And of course, that progress is measured and detailed in our fourth annual responsible business report, which we released during the first half of this year. I really would encourage people to read that report. It is impressive. But of course, we're not complacent.

Maintaining momentum is important, and we're certain that we can continue to enhance our community impact and make more meaningful progress in relation to objectives to help our wider environment.

So going through to the summary and outlook slide. In summary, I reiterate that we are pleased with our results for the first half of this financial year. We firmly believe that strong outcomes will continue to be gained from our measured period-on-period balanced investment in and between our platforms, our systems and our people.

And I've given some indications of where we've deployed capital during the first half of the year and where we've gained from capital deployment in periods prior to that. We're pleased to be able to point to recent service line investment now returning for us in both acquired and organic revenues.

Our underlying objective is for growth with long-term margin improvement, which is where our strategic and our operational focus is all pointed out at the moment. So whilst there appear to be some potential challenges in the macro, it's likely that it also contains some tailwind opportunities for us here at Gateley. Some of those I've highlighted in this presentation, and our group should benefit in the medium and long term.

We're confident in our strategy. We're pleased to be in line at the half year point, and we are, I'm pleased to say, more optimistic in outlook now than we were at this point last year. Thank you all for listening.