Good afternoon and welcome to the Keystone Law Group PLC Annual Results Investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated in the right-hand corner of your screen. 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 will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll, and I'd now like to hand you over to James Knight, Founder and Chief Executive Officer. Good afternoon, sir.
Thank you very much, and good afternoon. Thank you for joining us today on this presentation of the end-of-year results for the year finishing January 2023. The presentation that is before you has been prepared by us. I'll explain a little bit about Keystone itself before we move on. This is a firm that was started by myself and others in 2002, so we've just had our 20th birthday. It is a fully regulated law firm, often described as a platform model for reasons I'll explain shortly. Nowadays, we have over 500 high-quality, closely vetted solicitors and barristers that work on a very simple pay-when-paid basis, a performance-based remuneration structure, which is another way of saying that they receive a high percentage of fees for the work that they have done, the work that they do, and which is invoiced through the firm.
The lawyers themselves bring in 98% of the clients for themselves and for their new Keystone colleagues. We use a central office in the heart of London to support our lawyers, to provide all of the infrastructure and support that they need, and that is staffed by about 60 individuals and management, including myself. We use technology to drive efficiencies and to help with the remote working. Our lawyers are self-employed. They work from their own offices, whether that be at home or any other commercial premises, and are paid on a pay-when-paid basis, paid when the clients pay their bills. In doing this, we give our lawyers all of the freedom and the flexibility and autonomy of being self-employed, but all of the support and the infrastructure of being in a fully vetted, full-service law firm.
It's an extremely effective way of giving people that freedom. It's a very happy place. The lawyers know each other extremely well. We do a great deal of events and networking events so that they do know each other well, so that they can work together, so that they will refer work from one person to another. 30% of the work that comes into Keystone is cross-referred by one lawyer to another or to a group of their colleagues. We grow the Keystone primarily through the recruitment of a high caliber of quality lawyers. We vet them. We interview them in much the same way as a conventional employer. As I mentioned earlier, they bring in their work, their clients, mostly commercial work, some private client work, some family work. But predominantly, our clients are small, medium-sized companies and individuals.
We do have quite a number of famous names in terms of the blue-chip clients, but SME is the predominant. We have an excellent ability to scale the business. We can grow very quickly subject to having the right lawyers there wishing to join us and us wishing to recruit them. We're not inhibited by cash flow considerations in the same way as many businesses because of the paid-when-paid nature of the business or inhibited by office space, as many conventional firms are. We have introduced in the last couple of years a Pod concept, which basically enables senior lawyers to employ junior lawyers and to further enhance their own profit-making potential. The firm is profitable. It has been profitable for a long time, way before IPO in 2017. It is cash-generative. We maintain that it is a low-risk, resilient business because of the business models.
We do have a very good track record, certainly since IPO, which has been an extremely good experience for us. We're seen by many observers as the potential model where a lot of conventional law firms are going to adapt towards this way of working, or they will not adapt, but the lawyers will be looking to adapt themselves. Conventional law firms will find it pretty much impossible to adapt in this way, which is quite typical of new organizations on the block. The market that we operate in is extremely large, GBP 10 billion, and we at the current time turn over GBP 75 million. We have plenty of way to go. Turning over the page to the results highlights for the year that we have just undertaken, it was a good year for Keystone. Revenue increased by 8.1%.
Revenue per principal, those are our senior lawyers, increased by 4.1%. The adjusted profit before tax up 6.3%. Operating cash conversion is always good and strong at Keystone, 96.5%. This particular year, we will be issuing a dividend of 16.1%. During the year, it was a very strong year for the legal profession as a whole. It was also a very competitive year for recruitment because so many law firms were so busy that there was a lot of demand for lawyers. We did extremely well during that period, recruited 32 new principals, which was more than just about any other law firm. But of course, we have quite an insatiable appetite for good-quality lawyers, and so we would have been happy to take on more. But having said that, in the circumstances, we did very well.
The junior lawyers, otherwise known as Pod members, grew from 80 to 95. We finished up with 398 principals, and the total fee earners at the end of the year was 507. Other reasons why the year just gone was a good year for us is that we were able to have a full year of networking and other sort of in-person events, which is something which is a very big part of Keystone, something that, of course, we weren't able to do for two or three years during the COVID pandemic times. Despite the fact our lawyers work from their own offices, despite the fact that they are self-employed, they know each other extremely well. They collaborate extremely well.
One of the reasons they do that is because we make sure that there are a lot of events, seminars, non-legal interest sports, and general sort of activities that are far more than you'd find in any conventional exercise and any conventional law firm. It's really designed to make sure that people know each other well and they can work well together. We continue to invest in the central office team as we normally do. That team does grow. It doesn't grow as fast or in line with the growth of lawyers, but of course, it does develop, and we invest in the IT systems constantly. Focusing now on the legal lawyer recruitment, number one driver of growth at Keystone, we report on various metrics: the applicants, offers made, offers accepted. You'll see that we made 79 offers during the year, two principals, 42 were accepted.
Just like in a normal employment scenario, we meet with lawyers if we like them, if they like us. If we like them, we will make an offer. If they like us, they will accept it. Having said that, they may well be looking at other alternatives. They may well come and interview with us, interview with a couple of other conventional firms, and then maybe decide to join us. They may decide to stay where they are. They may decide to go in-house. They may decide to go to another conventional firm. Hence, the 42 accepted offers and 79 offers made. As I mentioned earlier, 32 new principals joined us. We finished up with the net figure of 394 up to 398. So the net figure is only four.
Now, that accounts for the leavers, which is a normal rate of leavers at 26% was a normal figure for us percentage-wise, people retiring, people who have joined the firm and for one reason or another not made it work. Not everybody joins and is able to bring the clients that they thought and we thought they would be able to bring. But that's fine because it allows us to be entrepreneurial. It doesn't really impact upon the operations of the business. If we take on a lawyer that doesn't work out, it's a little bit of administration.
But far better for us to take the risk of a lawyer as long as they're the quality, as long as they are a good fit with the firm, and if they don't actually manage to bring in the business, well, so be it, and they will go off and do something else. So although the net figure is only four, the 32 that we bring in, while not every single one will knock it out of the park, it is likely that it's a lot of a stronger new cohort than the ones who are retiring and have moved on. As I mentioned earlier, Pod members grew from 80 to 95. I'll pass now back to our CFO, Ashley Miller, who'll take me through the financials.
Yes. If we just talk through some quickly of the financial highlights. So as we've mentioned, we grew the business, the revenue, by 8.1% to GBP 75.3 million this year. The gross profit margin of 26% was slightly down on last year, which was 26.4%. And the reason for that was very much that there was a slightly greater concentration of the work being delivered through our Pods as opposed to the use of some of our central office lawyers on whom we gain an enhanced margin. The adjusted PBT was up 6.3% to GBP 9.2 million, and that was against an underlying adjusted PBT last year of GBP 8.7 million.
The margin of 12.3% compares to an adjusted underlying of 12.5% last year, and the cash conversion of 96.5% remained very strong. The business is consistently strong operating cash conversion of over 90% due to the pay-when-paid model. That left us with GBP 9.2 million of net cash, and the EPS in the period was 24.2p.
We'll pay out a total of GBP 0.161 by way of a dividend, which is the GBP 0.052 interim, and a GBP 0.109, which we'll be proposing at the AGM. That's over the last five years since we came to market. We'll bring the total amount of dividend paid out to shareholders of just shy of GBP 25 million or just over GBP 0.79 per share. We'll just give a bit more color around some of the income statements. So as I said, the revenue grew 8.1%, which was driven by an increase in the revenue per principal, which increased to GBP 190,000, which was up 4.1% from GBP 182,500 last year, while the average number of principals increased by 3.8%. I've touched on and explained why it's the gross profit margin movement.
In terms of the staff costs, the increase of 9.2% is comprised of two elements, which is a reduction of costs in respect of National Insurance contribution on LTIPs, which decreased from GBP 236,000 to GBP 75,000. And that's just a function, really, of the valuation of the potential LTIPs, which are linked to the share price, obviously. Other than that, there was an increase of 14.2% in staff costs, which was, again, driven by our continued investment in the people we need in the central office team to support and deliver those high-quality services to our lawyers, and the average increase from 53 to 59. On the other admin costs, the last year, as in 2022, benefited from about 0.4% of cost savings due to some overhang of COVID restrictions, which were in place last year or COVID impact.
They were predominantly due to the inability of us to run face-to-face networking events last year and also due to the way that professional indemnity insurance is priced. Professional indemnity insurance is priced off your previous year's revenue. Because the revenue in 2021 was adversely affected by COVID, the price of the PI in 2022 was also lower. The combined impact of that was about 0.4%, which is why we refer to the underlying profit last year of 8.7% as opposed to the 9.1% adjusted PBT. The other remaining driver of the increased cost base there was the full-year impact of software costs, where we rolled out new software to enhance the IT security during 2022, and we impacted the full-year run rate this year.
As a result of those points, we had an adjusted PBT of 12.3% in the year versus an adjusted underlying prior year of 12.5%. The majority of the movement in the margin was really the switch in the gross profit margin mix and then some savings in the overhead base. The balance sheet of the company is exceedingly clean, too squeaky. To emphasize the fact, we are a debt-free business, and we have very much a strong cash position with GBP 9.2 million. The alignment of interest that the lawyers have in terms of the pay-when-paid really focuses the mind in terms of debtors. Consequently, we have very low debtor days at 36 versus 32 last year. Again, within the payables, it's important because we pay our lawyers once we've been paid.
Within the trade debtors and accrued income, there is a corresponding liability to our lawyers to the tune of 75% of that in the payables. In terms of leases and the right of use assets, we have leases on the two floors of our central office building in Chancery Lane, which is a small footprint for a firm of our size due to the way we operate. Those leases run through until April next year. The intangible asset on the balance sheet is a function of the way that Root Capital so Root Capital is a private equity business which invested in Keystone in 2014. They used a very standard PE structure, which created goodwill on the balance sheet. That's really what the intangible is. It has no reflection or impact or function of the business.
It was just structuring at that point in time, which is why the amortization gets added back when they calculated the adjusted PBT. The cash flow, as we've said, was exceedingly strong. The business model fundamentally is cash-generative, and as a result of which, we have a very strong cash conversion. Once we move further down the balance sheet, you'll see we're an exceedingly capital-light business. So our CapEx is typically sub-GBP 100,000. And again, that's been the case this year.
In terms of movements on the corporation tax this year, the increase in corporation tax payments is just a factor of the way that we pay corporation tax, which is by quarterly installments, which means half of the corporation tax for a tax year is payable in the following financial year, which means that the reduced profits or the lower profits in 2021 fed through into the cash flow in 2022. Therefore, we see that step up this year as the profits from 2022 stepped up. In terms of the dividend payment, the increase in cash flow there is a reflection of the payment of not only our normal dividends, our ordinary dividends last year, but also the special dividend which we declared at the end of last year, the GBP 0.10 special dividend which flowed through.
Thank you, Ashley. So in summary, I would say that it's been another good year for Keystone. We have been assisted by strong client demand across the board, which has helped to drive revenue. Profit is up. It's good to continue to be in a position to pay a healthy dividend of GBP 0.161, which is up from GBP 0.157 last year. We've been pleased, in a challenging environment, to have managed to have recruited those 32 principals I was telling you about earlier. In terms of the year ahead, we've started well. Lawyers are busy. Recruitment is looking up. The demand for lawyers across the legal profession is falling slightly, which will, in turn, make our recruitment initiatives much more effective. We believe that that will continue and are confident that the year ahead will be another good year for Keystone.
Ashley and I will be now very happy to take any questions. I believe that some have been presubmitted. I'll pass you back to our organizer, who will take it from there.
James, Ashley, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab, which is situated on the top right-hand corner of your screen. As mentioned, we have received a number of questions from investors. I want to start off the Q&A session with this one here, which reads as follows: Are there acquisitions that Keystone might consider with the same business model or in adjacent verticals?
Thank you. So Keystone has a very strongly organic policy of growth. In other words, we don't have a policy of acquiring other organizations or other law firms. We're very happy in the area that we operate. We're very happy in the legal sphere remaining there. There are really no suitable targets for us to acquire. We believe that our organic mode of growth is a lot less risky, even if there were suitable targets, and there aren't. So that is something that we can answer with quite extremely good certainty, that our strategy remains to continue to grow by recruiting good-quality lawyers in the way that we have been for the last 20 years.
Thank you very much for that, James. Just moving on to the next question: To what extent do you think that the widespread prevalence of hybrid/homeworking that remained in the sector post-pandemic is contributing to headwinds to your recruitment effort? Should the situation improve as listeners generally encourage back to their offices?
Well, I would say that Keystone is about many things. Part of it is about remote working, working from the location of the lawyer's choice. But it is also about a remuneration structure which is very fair, very transparent. It is also about a flat structure of a law firm. All our lawyers have the same deal, the same arrangement, the same title. Lawyers join us for a number of reasons, but really, they join us because they want to focus on doing legal work. They're very passionate about being lawyers. They wish to escape from management obligations, office politics, and so forth. Rather than the fact that some lawyers are allowed to work two or more days a week from their own home, the headwinds of growth that we've experienced have been much more related to the competitiveness about how busy the legal profession has been.
Now, that's been good for us as well, but it has made it very competitive when it comes to recruiting people. As the legal profession cools down, as the demand cools down, then we think that that is much more likely to reduce the competition and to support our growth and recruitment process.
Perfect. Thanks again. The next question here asks: While you have commendably added 32 principals in the year, 28 have evidently left. Some of your competitors say you have a lot of people on their glide path to retirement. Have the 28 leavers retired, or have they just moved to competitors?
So earlier, I mentioned that there was some retirement and that those that didn't make it work. Certainly, the average age of lawyers at Keystone is about 50 or so, but it's a massive range all the way from junior pod members or even those lawyers that we employ that work in the central office. I suppose that age-wise, it's ranging from early 20s into 60s. And that is very much in keeping with a conventional law firm. We have a lot of senior, very experienced individuals. But it is not accurate in any way, shape, or form to say that the firm is predominantly made up of older people who are retiring. And that is absolutely not the case. The vast majority of the lawyers at Keystone are up-and-coming or in the absolute sweet spot of their career.
That's great. Thank you very much. Have additional opportunities been identified to develop the IT platform and improve lawyer efficiency?
How can you go for that?
Yeah, sure. The development of the IT platform is just an ongoing part of the business. The reason for that is very much that whilst it is all in place and completely scalable, as we develop and evolve, bring in more lawyers, there are always new bells and whistles to develop. This year, within our annual report, we highlighted a couple of projects which have been taken and initiatives, one of which was very much focused on supporting the lawyers to put together bids and tenders in a more agile manner and drive efficiency for them there. The other side was looking at driving some further efficiency in the central office and the marketing team in terms of supporting the lawyers in their applications to the various legal directories in which our lawyers appear. It is a continual thing.
We have a continual dev list, and we have three developers working full-time on it. We see that as part of the business as usual of the firm. We'll continue to invest in IT because it forms such a central hub to what we do. It will continue to drive efficiency.
Perfect. Thank you very much, Ashley. Moving on to the next question, which is around AI: What role do you see AI playing in the business? Is it less relevant for Keystone than the Magic Circle firms?
I think it's fair to say that it's less relevant, but it's not irrelevant. AI has jumped forward significantly over the last year. We've been keeping close tabs on the progress. Certainly, the Magic Circle has used it increasingly because they undertake such massive due diligence projects and such amount of detail and information that needs to be assimilated and essentially processed. Now, our world is different to that. We're involved in the SME world, very bespoke type of work. But having said that, AI has jumped so much recently that there are relevancies in terms of tools that can be made available to lawyers which will help to reduce costs, drive efficiencies, drive profit. And so we are, of course, like any diligent organization, looking at those options, looking at the ways in which we can use these tools to help our lawyers and improve our service.
Perfect. Thank you very much. In your accounts, is cost of sales exclusively the lawyers' share their billing to clients, or are there other costs included?
Predominantly, the cost of sales is the lawyers' share of the fees. We also employ some lawyers centrally, and the cost of those lawyers who are doing fee earning is also in that line. There are some other very small peripheral costs that go in there, but that is the vast majority of the cost base, yes.
Thank you very much, Ashley. Just moving on to some live questions now. Your business model appears to shelter Keystone from principal salary inflation. Is this a correct interpretation?
In terms of the principals, absolutely. Our lawyers are not on a salary, and therefore, their income is generated as a percentage of the revenue that they generate. So absolutely, we are very much and substantially protected from wage inflation. But also, we have complete flexibility in the cost per sale we pay is always linked to the revenue we drive. So that's also proved to underlie the resilience of the model and prove it very clearly during the course of the pandemic, where in the early stages, we saw a significant drop-off in legal activity, which subsequently came back. But we were profitable throughout and heavily insulated as a result of that.
Thank you. Moving on. Among your Principals, could you please give a split by type of specialization? Are there specializations to which you would like to increase your exposure?
The mix of work across the firm without actually giving a mix by the principals per se, actually on the slide deck, which is available slide 19, you can see there is a split of the revenue last year, which gives a mix of the firm. Now, excuse me, just try and pull that up for you there. There we are. So you can see the mix of billing last year, and that's been available within the slide decks there. So while we don't disclose this by sort of number of principals, we certainly do disclose the mix of the firm. You can see it's a very broad, well-balanced firm covering all the principal areas that one would expect for a corporate commercial law firm in the mid-sector.
And again, that diversity goes to supporting our lack of dependence on any area and underlying the lower-risk nature of the business because we have a balanced, broad spread there.
Perfect. That's great. Just turning to the next question: On recruitment, what are the factors affecting the demand for lawyers?
Well, the demand that other firms have for lawyers really just depends how busy they are. Keystone is very different to conventional law firms. Conventional law firms will work and then go out to the market to try and resource it if they don't have enough. Keystone works in a different way, of course, because we focus our recruitment on our development and our growth on recruiting lawyers who bring in the work at the same time. We may then go out and recruit juniors to help them. But yeah, the demand across the board is really based on client demand and whether law firms need additional resources.
That's great. The next question here reads as follows: Without particular willingness to do acquisitions, could we anticipate more distribution of cash either through a dividend or share buybacks?
Well, we've got a very clear policy on our dividends, which is from an ordinary dividend perspective, we pay out two-thirds of adjusted earnings. And that policy is progressive, and we followed that. That said, we absolutely, as a board, monitor and keep an eye on the balance sheet. We will always maintain a strong balance sheet and a strong cash position on that balance sheet. But where we've assessed that we've accumulated surplus cash on the balance sheet, to date, we've dealt with that by further distributions through special dividends. And we paid one special dividend last year, which was GBP 0.10. And that's the second we've paid since coming to market. There was another one a couple of years further back, which was about GBP 0.08 from recollection. So that's the approach we've taken.
Thank you very much, Ashley. What are the main explanations given for candidates who are given an offer but decide not to join Keystone?
Without a doubt, it's that they decide to remain where they are. Often, they're looking around. They're thinking, "Well, maybe I'm going to leave. Maybe I'm going to go to a conventional firm. Maybe I'm going to go to Keystone." Maybe they decide to stay. That's something we do keep an eye on. That's our favorite as well because it means that they'll probably be back at some time in the future, not definitely, but they may well do. But it's a recruitment process. Yes, we're sort of very pleased when people do join us that we like.
That's great. The next question here asks: How do you manage performance of your lawyers in terms of generating profitable work and then efficiently getting the work done?
Well, it should be borne in mind that Keystone operates this paid-when-paid basis model. We don't pay salaries. We also are a place that lawyers come to escape the pressures of billing targets and constantly being hounded to achieve targets and to do more and more and more. And so it's a very, in some ways, a gentle law firm. Certainly, it's one that is very entrepreneurial. It can afford to be. It's about lawyers doing within reason what the amount of work that they wish to. So we don't push them to achieve targets or to bill more. We do, however, make their life easy by putting in as many tools and help and logistical support as possible to help them be as efficient as they wish to be.
We also manage risk and compliance to make sure that the mistakes are not being made, to make sure that compliance is being achieved. And that is a place that is an area where we are far less relaxed, if you see what I mean. The legal profession has rules. We must make sure that those rules are enforced. We must make sure that the firm operates in an extremely efficient, professional, dynamic way. And that's part of the job of central office and the compliance team to make sure that that happens.
Perfect. Thank you very much. And just one final question here: What is the optimal number of lawyers to achieve in terms of matching the types of work that comes in or is one?
I don't really think there is an optimal number because of the way we operate and the way we grow. When we bring in lawyers, our lawyers bring in work for themselves and their colleagues. And consequently, there is a natural matching of the resource to the demand. So we don't need to manage that number because the way the structure just self-manages itself in that perspective. Furthermore, we don't ever pay for work which is of no value because of the percentage-based remuneration structure. We always pay the right cost of sale and get the efficient return for whatever work is being done in the firm.
Perfect. James, Ashley, thank you very much for updating investors today. I think you actually managed to get through every single question as well. Thanks once again for that. Could I please ask investors not to close the 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 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'd like to thank you for attending today's presentation, and good afternoon to you all.