Hello, and welcome to the first half of 2021 financial results conference call for Kelly and Partners Group Holdings. We will open for questions after the presentation. I'd like to introduce your hosts as Kenneth Ko, CFO of Kelly and Partners, and Brett Kelly, CEO and Chairman of Kelly and Partners. Brett, please go ahead now. Thank you.
Thanks Erica, and good morning. We're pleased to present the first half 2021 results. Hopefully, people on the call have been able to see the announcement and the presentation. I plan to speak briefly about the results pack and then take some questions. I'll do the first section and then hand over to Ken for the second section. In the last six months, we published our Kelly Partners Group Holdings owners' principles, and we think that they are very helpful for anyone who is or wants to be a shareholder of the group. We aim over time to build a group of shareholders who understand the business intimately and share our values and long-term aspirations to build a meaningful organization.
To very quickly run through those, you know, our attitude is very much partnership in everything we do, partnership with the operating partners in the underlying businesses, partnership with our people, our clients and communities that we operate in and our shareholders. We've been doing that for 15 years in June, we just think that that is the sort of attribute that most defines what we're on about. Number two, we invented in 2006 a Partner-Owner-Driver model that we've rolled out in over 39 transactions now in all of our operating businesses on consistent documentation. Those operating Partner-Owner-Drivers do have the majority of their net worth invested in the business, as do I.
We believe that creates really unusual alignment in a business that research demonstrates is likely to, over the long term, provide meaningful above metric returns to our partner shareholders. Number three, our long-term goal is to maximize the intrinsic value on a per share basis of our KPG shares. Number four, our intention is to grow by continuing to acquire accounting firms using our proprietary Partner-Owner-Driver model. In particular, you shouldn't expect any, radical, you know, often touted transformational acquisitions, outside the accounting space. We intend to continue to refine our ability to acquire accounting firms and bring them into the group and make them even better at what they do, which we've got quite good at.
Number five, we'll make decisions to maximize intrinsic value of our KPG shares even when those decisions might result in unfavorable accounting treatments under accounting standards. Number six, we use debt prudently and structure our loans to be aggressively repaid. Seven, we measure our performance using earnings per share growth and owner earnings. Eight, we intend to sell them if they ever issue shares to acquire a business. I think this is very important. I get, even from long-term shareholders, consistently asked, would we issue shares to acquire a business? I don't intend to dilute you or me as a shareholder in issuing shares to make acquisitions. When we are buying accounting firms, typically the vendor is able to access a small business concession so that they get their proceeds tax-free.
If they do wanna buy KPG shares as a listed company, they can turn around and use some of their proceeds to do that. In particular, we're not a roll-up. We are a Partner-Owner-Driver business. Number nine, it's not our intention to sell a business that we've acquired. We intend to own our businesses forever, is our typical holding period that I would expect. Number 10, we'll be completely transparent in our reporting to shareholders, treating you as genuine partners in our business, and we'll be fairly direct in our language. I think most people know me quite well now and know that's the case.
The reason I run through those is the more understanding we think people who are shareholders have in our business, the more likely they are to be better able to accurately value, the strong and growing cash flows of our business and to better understanding the defensive mode that we've been building for 15 years in June. Number three slide number three, growth and performance. Our business wasn't put together five minutes before an IPO. It's been consistently built with a consistent operating model for some time now with a 32% revenue CAGR, which is far in excess of the industry. Importantly, we've managed to double the business consistently, and that's because we have a consistent operating model. Quickly to the summary on page five.
96% of our revenues are accounting annuity-style revenues, as is our wealth and finance businesses, which means that this is a 99% annuity-style business. I think that pre-IPO, I was asked and did comment to people that I did feel that accounting firms were recession-proof. I do think that the results that we're presenting today demonstrate that this type of business is pandemic-proof. When our shares went to AUD 0.60 in March last year, I did comment to a number of people that I thought a few things might change, but the desire of the government to continue to collect money probably wouldn't go away.
We have found that even amidst all of the handouts that the government might undertake, there has not at any time been any suggestion that they would stop collecting taxes. And so, we feel that this is a business focused in an area that's likely to be able to do quite well for a long time. On slide six, I've often had the comment from investors, because we are a small, not particularly relevant company in a market sense, that they needed our story in 10 seconds.
If you don't have any time to look at anything other than slide six today, essentially Kelly Partners is a resilient business model delivering solid fundamentals with growing revenues, very strong EBITDA, industry-leading EBITDA margins, strong underlying NPATA growth that we expect to continue, high return on equity, low debt and falling, increasing operating cash flows, and a real ability to convert cash very, very efficiently. We had a COVID response, which we've covered in other calls. Essentially, we tidied up our team, got our costs very strongly under control, increased the liquidity in the business.
Because of our, you know, focus since our inception in 2006 on annuity-style revenues, we're very much protected from the sort of strangeness and variations that you get in typical consulting style revenues that we don't have any of, and we don't intend to have any of. On page eight, the KPG strategy is summarized, and there's some results against those numbers. Fundamentally, we're trying to improve the earning power of our operating businesses. You can see growing EBITDA margins. We expect that can continue. Our target in the coming years is 37.5%. Number two, further increasing our earnings through tuck-ins.
Tuck-ins are low risk situations for us, where we have an existing business, existing management team, and we can take a business and integrate it with our business, to grow that business', earnings and sustainability. We see really no limit to how many of those we can do. The market that we're focused on is over 10,000 SME accounting firms. 50% of those firms are reported to need a succession plan in the next five years. That means that the pool that we're looking at is thousands and thousands of firms. In any given market, there's many, many, many firms that are available for looking at.
In our history, we've done deals in, you know, on typically three out of 100 businesses, but we've looked at 39 deals across more than 1,000 businesses we've looked at. We do know the industry very well, and so we're particularly careful. Three A and B, grow our accounting subsidiaries. B, grow the complementary businesses. We think the complementary businesses have really outsized potential over the next decade, and we're doing that organically in the main to continue to help our clients in areas that they've asked us for assistance. Four, repurchase shares from time to time. We do consider the stock not overvalued, not close to intrinsic value, and wherever we see that opportunity, we'll continue to buy back shares. We will do that within the limited capital that we have, and
We won't do anything that stops us being able to deliver on our stated growth objectives. Number five, we'll make an occasional large acquisition. That's an acquisition with more than AUD 5 million of revenue in the accounting space. But to emphasize, we're definitely not pursuing a strategy of finding something transformational. We think that if we can grow at the sorts of rates we have in our history for a long time, that'll be transformational enough. Our business model, clear mission and values, unyielding focus on the SME market in Sydney and Melbourne. Partner-Owner-Driver model that we invented and have really refined over numerous transactions across multiple sites, CBD and regional. A clear proprietary client system that is incredibly unique and means that we can bring clients to the business continually.
A clear brand across every office and a growing brand presence. You know, I'm often asked, "Brett, why must you use your brand on a given accounting firm that joins your group?" The strongest reason is that the talent is the battle that we're trying to win, battle for the best talent in the market. The talent wants to work with a brand that's known and respected, and that's the brand that we have been building. It means that our retention rate of our people is very, very high, and our ability to recruit the best people in the market is also extremely high. When we find firms that are out there under their own brand, single sites, their biggest struggle is finding the best people to be and to remain competitive.
Number seven, growing the network in locations that we've identified continually for some years now. We have a unique acquisition capability that's been refined over many transactions and a clear service offering. Page 10, we have shared in the last six months. It's worth some reading. If people have questions, please be in touch. Just don't call us a roll-up. This is not a roll-up, never has been. A roll-up is where you buy 100% of an underlying business. This is an Owner/Driver, Partner/Owner-Driver shared equity model that we invented and are refining and perfecting over time. It is unique in our industry and has been pursued to great effect by Austbrokers in the insurance broker market and Steadfast. It was very simple from day one.
We just aimed to be the Austbrokers of the accounting industry. Page 11. This is the published five-year plan, which we think we're on track to deliver. Basically, to double revenues to AUD 80 million by FY 2024 and substantially grow the NPATA. We're well more than halfway there, and we think we've got good momentum to deliver that. In the period, we tucked in another small firm to Oran Park. Oran Park's a very strongly growing part of southwestern Sydney, with very much above trend growth that we are enjoying in that area. We've added Pittwater, which is north of Sydney, but the type of location that we see more and more people working from for more time post-COVID.
We do think that our network of firms outside the CBD, is 15 years ahead of the market in the sense that people are going to work, less from the CBD, less from big offices, closer to home and prefer to. We're incredibly well-positioned with CBD quality fit outs, technology and client bases in each of our offices outside CBD. 13, we've added these new services. The Kelly+Partners Investment Office was founded in July, 2018. In 2020, we've added Anup Kara, ex Ellerston Capital. I met Anup when they invested in Kelly Partners and Ellerston remain our largest shareholder. He's a great guy with 25 years investment experience. We intend to build a significant business in funds management over time. We're currently closing our second fund.
We expect that that fund will have between AUD 15 million-AUD 20 million in a, in a, I think, a 1.65% management fee and 20% of the, of the performance fee closed for seven years. We think that that'll be a tremendous achievement for a firm that hasn't typically or previously operated in a material respect in the funds management market. We do believe that the confidence shown by our clients and network in this initiative bodes well for our ability over a decade to build a significant business in that space and deliver substantial value to shareholders. We've also attracted Paul Butler, who's 52, more than 30 years in general insurance with some of the world's leading insurers. We've entered a 50/50 partnership with Austbrokers, who have 700,000 SME clients.
We expect to build a significant insurance business and to be able to build significant revenue growth through access to the clients of Austbrokers on a unique arrangement that we've structured with them. We've brought Mark Shield, who was the Global Head of... Very awesome title at Westpac Private Bank. He's now our Head of Alternative Investments. What we're doing is intending to aggregate our almost 3,000 clients who qualify as wholesale investors onto a digital platform to be able to offer them the unique opportunities that we see through our network, so that we make those clients even more aware of the unique value that we can bring to them and build a substantial business, typically focused on alternative sources of income for our clients.
Page 14, we're very proud to be the only listed accounting firm and the only top 100 accounting firm in Australia to be B Corp certified. We believe that tomorrow's consumer or tomorrow's client is more focused on the conduct of organizations. We are very pleased that values and behaviors of our organization easily met the criteria for B Corp certification, which is not an easy thing to do. We also are pursuing a net zero carbon position just because we can, and we don't think it's a bad thing for a business like ours to do. I'd like now to hand over to Kenneth Ko, who is our CFO. Now, Ken's been with us for more than five years.
He's a wonderful guy, and it was very pleasing to be able to step him up as an internally trained up and generated CFO for the group. Now, I know Kenny's a little nervous to talk about these slides, so I'm gonna sit back now, put up, put my feet up and enjoy your first presentation, Kenny.
Thank you Brent, for the introduction and hello to fellow shareholders and investors. I will now go through the financial section of the presentation, section two, starting on slide 16, on the highlights, financial highlights of the business. I'm just gonna talk about the key numbers here. Revenue is up 5.8% from AUD 23.5 million to AUD 24.8 million for the half. This is mainly driven by acquisition growth from the two acquisitions we completed in FY 20, being Melbourne and Glenbrook. Our EBITDA is up 19.3% from AUD 6.9 million to AUD 8.3 million, and that is a combination of our revenue growth, as well as our reduced operating expenses at both the operating business level and the parent entity level.
Our group EBITDA margin is now 33.3%, up 12.7% from 29.6% from the prior year. This really shows the efficiencies we've achieved during the half year. Our operating businesses, as we went through in the previous slide, were achieving 36.6% EBITDA margin, which is exceptional compared to, industry average margins of 19%. We'll look at that, in a later slide that we talk about that.
In terms of underlying NPATA, which is one of the most important numbers that we measure ourselves against, our underlying NPATA grew 55% from AUD 1.8 million to AUD 2.8 million and our earnings per share from AUD 0.0401 per share to AUD 0.0624 per share. Demonstrating huge improvements we've made to our bottom line. Cash from operations grew 33.9%, and we're converting our cash at 92.9%. Again, this shows how strongly our cash generating abilities are in our businesses and our ability to pay monthly dividends, which we started to do last month. And also just wanna highlight the ordinary dividends per share.
Again, we've increased that 10% and we've done so, as we said we'd do since the IPO to grow that 10% per annum, and finally, just wanna highlight in the table the return on equity and return on investment, invested capital measures, of 44.5% and 28.1%. You can see both measures are strong, and it just shows the return we're able to generate on our equity and invested capital being debt and equity. Onto slide 17. This is a summary of our income statement. We've covered a lot of these just now in the last slide, and it just shows the strength in our P&L. We said in our five-year plan that this year is to accelerate through growing our NPATA, and this is exactly what we've done.
You can see statutory NPAT for the group has grown 59.2%. Statutory NPAT for the parent entity has grown 127%. Obviously, most importantly, as I said before, the underlying NPAT A to shareholders we've grown 55% to AUD 2.8 million. I just wanna highlight here that you'll see that the statutory NPAT numbers are higher than the underlying NPAT A numbers, and that is mainly because of the one-off income items we've received during the half year that we've deducted out of the stat numbers to arrive at the underlying performance of the business. That is onto slide 18, t hat is the reconciliation that we've provided from the statutory NPAT to the underlying NPAT A number.
You'll see that we've basically deducted the one-off government grants in relation to COVID-19 that we received of AUD 500K. We've taken that out to present the underlying numbers. We really believe that is the right thing to do to take that out from our underlying numbers. Onto slide 19. This shows our operating business margins. As I said before, our operating business are running very profitably at 36.6% EBITDA margin compared to the prior year. In the prior year and in FY 2020, our margins were only 32.5%. We've basically improved and expanded our margins by 4.1% through improved operating efficiencies.
During the COVID-19 period, we basically undertook a thorough and comprehensive review of our costs, and we better positioned the businesses to be more competitive, more sustainable and more valuable for our shareholders. Again, per the slide, I highlight that the industry average is at 19%, and we're operating at 36.6%, being 17.6% above the industry average. We're operating significantly more efficient than the industry average. Onto slide 20. On our balance sheet. Our balance sheet remains very strong. We measure ourselves using lockup, meaning WIP and debtors. As at December 31, our lockup is at 55.4 days. That is in line with the 54.1 days at June 3rd and nine days less than the prior period of 64 days.
Basically, through reducing lockup days, we also unlock cash into the business. As you can see in the graph there, you can see that AUD 0.6 million of cash has been unlocked since the prior period into the business. This reflects our tight management of our receivables and our cash flow being so great is a direct result of this. On the table, balance sheet summary table on the bottom right, you'll see that our net assets, we've grown our net assets from AUD 22.9 million to AUD 24.7 million. That is, if you look at the borrowings line, a result of us reducing our debt and repaying our debt, which we'll cover in the next two slides. Onto slide 21.
Our cash flow, as I've said before, our cash from operations have increased AUD 2.4 million or 42% compared to the prior period, that is mainly a result of our improved profits for the half. Conversion of our cash is at 92.9%, that's comparable to our prior periods where we convert basically 90%-100% of our profits into cash. This just shows the strong cash generative abilities of our business. As I said before, that is the reason why we're able to pay monthly dividends as we have started in January last month. Slide 22, gearing and liquidity. Similar to third of June 2020, our cash and headroom remains ample at AUD 13.2 million. That equates to AUD 33 million in revenue that we can acquire without basically applying for extra debt.
On the right there, the table there shows the comparison of the gross and net debt against June 3rd, 2020. You can see that we've basically repaid the gross debt by AUD 1.6 million and our net debt has decreased AUD 2.1 million. Again, shows you how strong our cash has been and the ability for us to apply some of our cash against debt repayments. Our group gearing, just the comment box at the bottom right, has reduced to 0.76 of EBITDA from 0.94 at 3rd of June. Our net debt per partner has decreased substantially by 22.9% to AUD 257K per partner. Page 23. This is just a reconciliation on the profit attributable to the parent versus the non-controlling interest.
We often get asked the question why, you know, the parent's net profit attributable to the parent in the financials doesn't always equate to 51% of the net profit. The reason basically is tax and any additional costs borne by the parent. We've reconciled that, you'll see that at the bottom of the table. The, the actual split is 52% and 48%, and it doesn't always align at 51%-49% because our ownership interest varies in our underlying businesses from 50.05% to 58%. Onto the last slide, in slide 24. This is a summary of our dividends that we've paid since the IPO.
As I've said before, we've grown our ordinary dividends by 10% per annum. We're looking to do so exactly the same this year in FY 2021. We expect to pay out AUD 0.0532 per share ordinary dividend. As I said before, we have started paying monthly dividends from January 2021. We believe that that is an excellent return to our shareholders and we believe in the value of our dividends. That's it from me, Brett.
Thanks Kenny. Turning to page 26, we think that there's a strong outlook for the business, for a range of reasons. We've never had more demand from accounting firms to join the group. The quality of the firms looking to join the group is as high as it's ever been, and our ability to add dramatic value to firms has never been better. The centralized team that we've built is a specialized active management team of only really one type of asset, that's an accounting firm, and we can prove to firms that if we get involved, we can generally double their profitability. We can reduce their working capital by two-thirds, and we can make them competitive in a way for talent and give them a succession plan that they can't achieve themselves.
We think that at the heart of what we're doing, there's really unlimited demand for that proposition in the market, and there is no one else in the market that has our track record in delivering those results. The benefit of being a public company is that firms now can look at our data and feel very comfortable that they're dealing with a reputable group that isn't just saying things, but is in fact able to prove the results that they're delivering to the people that are within the group and that have joined the group. Revenue growth on page 27 since IPO is 54%. We expect with the pipeline that we have, that we will deliver on page 28 our plan, our 5-year plan. Importantly, we just look after private business owners. 95% of our revenues are in Sydney.
We are a very concentrated business meaning that, the 8,500 client groups that we look after, being in that private business owner category, we have an unusually strong market position in what we believe is the best market to provide accounting and tax services to. We also believe that given the extra money that's being thrown around by governments in all Western countries, but certainly in Australia, it is unlikely that tax rates will fall in the next 20 years. It is very likely that surveillance of people and aggression from the tax office will increase. We believe that the demand for excellent accounting and tax services will also grow because of government's increasing need to raise taxes. High-net-worth family-owning groups will need to access excellent advice. Our 5-year revenue growth plan is on page 29.
I would direct you to the middle column, where this year we're working to accelerate our NPATA growth. In particular, we've broken out there across the years to show that we need to do a little bit of organic growth and a little bit of acquisition growth each year. None of those numbers are higher than any numbers that we've achieved in previous years, and so we believe that these goals are moderate and very achievable, but that they will make us a relevant listed organization that becomes even more competitive over time and that can continually grow out to become a very significant business in time. Emphasis on in time, we're not in a rush. Page 30, our complementary businesses continue to progress.
We see that these are small, organically grown businesses. We also believe that there's huge opportunity here ultimately to grow, kind of material businesses. We think if we get any one of these businesses right, that each of these divisions could ultimately be as large an earnings contributor as the accounting businesses are today. Again, it took us 15 years to build the business that we have. It will take time to build these businesses. If we continue to look after our clients, and they continue to have high trust for us, it is very likely that we can continually build out, services that are recurring income in nature, that are needs, not wants, and are likely to be very good performers over all phases of any economic cycle.
With that, I wanna thank Ken and the team for all of the work that they've put together. I direct shareholders or anyone interested that's on the call to read today's announcement. In particular, with the set of accounts that we're producing, there's no flashy photos, there's no exciting marketing gumph, but there is I think very transparent and clear information that helps you if you're serious about understanding the business and valuing its intrinsic value. There really is everything there that an intelligent investor, to use the words of Benjamin Graham, one of my heroes, would use to make a fair assessment of the value and the growing competitive mode of this business. With that, I'd love to take any questions if anyone has any.
Thank you Brett. The question and answer session has now commenced. Guests are invited to press star one on your telephone keypad now. You will then hear a tone as you are joined to the queue. Please listen to your name, and I will introduce you through to the call. Please press star one on your keypad now if you would like to ask a question. Our first question is from Scott Murdock. Please go ahead.
Thank you. Morning Brett and Ken. Just a couple if that's all right. Firstly, you called out billable hours or revenue that you wrote off to support your clients during COVID. Just a bit of an update, if you can, on the intention now around that fee relief and returning, I guess, to the organic growth that you'd typically expect in the business.
Good morning Scotty. In the six months, we saw We have terrific clients, but we saw people under pressure, and not always financial, just the pressure of looking after their clients and their teams in challenging circumstances. It, it was our directive and intention to make sure that even where we did extra work for clients, that we weren't sending a bunch of random extra bills. We've always worked on a fixed fee basis, our clients have come to very much trust us and engage us. We just haven't gone out and sort of, taken the opportunity to gratuitously bill clients for extra work.
We invested about AUD 2 million, AUD 2.1 million in the clients over the period, the six-month period, that we might otherwise have billed. We feel good that the clients feel very good about the business and are referring new clients and are likely to stay with us. People tend to remember in our business how you treated them when they were under pressure. I think our firm has behaved in a way that will set up the business for its continued long-term growth.
Okay Thank you. I think you mentioned, very briefly the new initiative or partnership with Austbrokers. Just interested in progress, of initiatives under that partnership, like referral agreements, anything that I guess can help, broaden your presence, with the new partnership.
Scotty, what we've done there is Paul is now sitting on, you know, nearly AUD 2 million worth of opportunities that we hope to convert some of, from his life as a, as a corporate broker. We are looking at the data, working with Austbrokers to match out the data of our client set with their specific, best offers, for those clients. That'll roll out in the next six months, making those offers. We, we expect some take up, during that, you know, that period, but over a 12-month period, we think we'll have some revenue from it.
We've proposed and are working on with Austbrokers a model of a referral arrangement with their nearly 1,000 brokers, where if they send us some clients, the individual brokers, then we'll send them some value. We think that while we expect to work on it over time, we think that can become a very significant business. You know, if we could get even a 0.5% conversion rate on the Austbrokers client base, that'd be 3,500 clients, nearly 50% of the clients that we have today, and the cost of acquisition would be very low. We like the, you know, large asymmetrical sort of opportunity there. It's cost us, in terms of capital, to put that deal together, nothing.
All the legals were done in-house with our team and negotiated by me. The conception of the plan was pulled together by our team. You know, we're really in there for no capital. We now need to invest in having Paul and the team. It's a 51, 49 with him, so, you know, we're dollar for dollar on any investment. We don't expect that business to cost us anything in the first year, and we do expect that it'll make a full profit. You know, this is a part of a strategy to pursue, you know, very large upside opportunities without having to outlay any capital to pursue them.
Okay Thank you. Around acquisitions, I guess you answered my typical questions around the pipeline. Just with respect to the pipeline being stronger and better quality, outside your core market area in Sydney, which you described in your address, outside that area, is the pipeline expanding? Are you looking elsewhere outside your core area?
Scotty, we're very much focused on Sydney and second to Sydney, Melbourne. You know, my odds strategy, I think, has proved to be quite helpful during COVID, where, you know, I prefer to be 95% invested with Gladys than 95% invested with Daniel Andrews. I'm not looking to be in Perth or South Australia or Queensland or frankly, outside the two states that we are. I have a preference to double down on where we are in New South Wales because of our ability to actually do that quite easily and at, and at, you know, better margins, without the risk of COVID at the moment. So you know, we don't see the clients.
Clients have their head office really in Sydney, Melbourne, or Brisbane, and where their head office is where we need to be. We think we can own the market in Sydney for private business owner accounting, and don't need to at the moment. You know, we haven't even got close to exhausting the opportunity here. We are getting inquiries, but if I can't get on a plane and go anywhere, then I'm not willing to make a large investment or really much investment at all when I can't meet the person face-to-face. That, you know, that said, we've got between AUD 15 million and AUD 20 million worth of acquisitions in the pipeline, and I'm confident that we can deliver on those. Our management team's in blackout today. After this call, you can work out what that means.
You know, I'm pursuing firms every day, but we're extremely selective. Unless somebody really appreciates the difference that we can make to them, regardless of people that they would like to be in business with, not just take a check from, then we don't feel any need to do a deal for the sake of it.
Okay Thanks Brett. Just one last one, from me thanks. I noticed you put up the revenue per FTE metric in your presentation. Just interested, it's obviously something you track closely, if there's a target or an aspiration around that certain metric you track.
Typically, traditionally Scotty, I was looking for AUD 220, AUD 120,000 per FTE. We're not, you know, while we track it, I can't say that we're focused on it. We have many flexible arrangements, part-time people, full-time people. So long as they are meeting their individual billing targets, which we do track, you know, with a huge degree of focus, then that number will look after itself. I'm not quite sure where we might be able to get that, but I am, you know, all about every AUD of additional revenue needs to occur at the right margin, and that's more than 30% and ideally 37.5%. That should continue to deliver sort of ROEs of 45%+ for a long time.
Okay. Thanks, Brett. Thanks, Ken.
Thank you Scott. We have our next question now from Anthony Sheath from AL Capital. Please go ahead Anthony.
Hey guys. Congratulations on a fantastic result. I've just got some questions here, two on the revenue side, two on the cost side. Firstly, just with acquisition again, can we just get your more high-level view on what's to come, whether it's tuck-ins that you're talking about, whether it's marquee-type things. Also just to go with that, what makes your pipeline different from somebody else's? I know you've talked in the past about being continuously in the market and talking to people, you know, over 5 to 10 years. Could you just give us some color on that?
Anthony, it's important to know that on the acquisition piece, I started PricewaterhouseCoopers in 1993 as an undergrad, and I worked in business advisory services, which looked after private business owners and had a corporate advisory function. I then went into a corporate advisory group. My background is understanding cash flows and valuation and M&A. I brought that skill set to the group in 2006. I've looked to buy firms and bought 2 firms within the first 12 months of the existence of our business, which is 15 years ago in June, and subsequently, we've done 39 transactions. That makes us very different. The business is led by an accountant who is a chartered accountant, has been in the industry for 27 years.
I love accounting firms, understand them deeply from undergrad all the way through to partner in formats from AUD 5 million of revenues up to, you know, what PW was in those days, which is very large. I think that in and of itself is very unique. We built a system from day one as to how to think about accounting firms and what the problems are that are experienced by accounting firms. Then we build a solution, Best Buy, to solve those problems. What we've done subsequently is continually improve, but continually prove that we can solve those problems. Very key to what we do is our centralized management, where we have experts in HR, recruitment, IT, risk, legal, operations. That by aggregating the low value activities of firms, we can dramatically improve the financial performance of the businesses.
I don't believe you should buy a business that you can't dramatically improve its profits and make it more competitive by building out its service offering, its ability to continually recruit talented people and manage its succession, you know, for the next 100 years. That is, in my view, something completely unique within this business, and I think we've proved that for a long time now over many, many transactions. As a result, I've been continuously emailing accountants in the industry for nearly 15 years. I have people call me and say, "I've received your emails, Brett, for the last 8 years, 10 years, 12 years, 14 years. I really appreciate you writing to me. You sent me a gift or a bottle of box of chocolates or whatever after we met. I saw you speak at a conference. I've seen you here." People know we exist.
They know that we are somebody worth speaking to if they're serious about looking after the baby that they've built. People that have built these firms have spent more time with the firms often than they have with their babies. It's very personal. They want somebody who will be a great steward of the thing that they've built, look after their clients and their people. We just think that's deep, and it's unduplicatable. When we get in front of people, they can feel that, they know that. That's why we're very successful at bringing on really the very best people. Now, we've never been a sort of size for its own sake organization. I'm not looking to buy every accounting firm on any particular street.
I'm looking to build in each of the places we play the best possible private business accounting firm that any owner of any business could run into that delivers really world-class and technical outcomes for the clients, and that they feel very cared for and that they wanna deal with us multi-generationally across the needs that they have. I'm confident that we're doing that, we're a very small, insignificant business today. You know, if we track ourselves against Austbrokers since inception, we're doing pretty well. I intend to build over time with our team a business that is significant. That's sort of how we do it. We've only done 2 of those transactions through brokers. People come to us direct.
They send me a little text message, or respond to one of my emails, or send me a LinkedIn message. That means we're operating often at, you know, with somebody who really values what we can do for them and the way that we'll treat them and the long-term value that we can bring to them and their family. This is not simply a transaction that we're undertaking with people. This is an effort to make them, their clients and their people and their families genuinely better off for a long time.
Fantastic. Thank you. I've also looked through the documents that you released this morning. A little bit of different wording around how you're gonna grow. You've got some new partners, employing new partners, other people call them lateral hires. Could you just make some comments around that? Also, what you do to make sure, you know, if people leave, that they don't take their clients with them?
Yeah. Importantly, Anthony, culturally, our partners, when they join, they know firstly, of our 52 partners, I think 46 of them have been grown through the businesses now. They sign the right agreements up front. They sign up to the right values up front. They know that the clients are Kelly Partners values. They're not individual people's clients, and the clients know that as well. We, we use our particular system with the clients that has multi-service lines into the clients so that the clients are really genuinely dealing with the firm, not an individual. The partner, the, you know, the employee and partnership agreements are extremely detailed and very clear, as well as tough around what the expectations are and what the behaviors are.
There is also a situation where we do know the law and are prepared to, you know, protect the business, and we have some expertise and background that a typical person that might be trying that adventure on for the first time doesn't understand. We're deep in the business. We sorta know how to do that piece. Partners are people that come through the firm, become an operating partner. They buy equity. It's a goodwill partnership. New hires are talented people in the market that we wanna bring into the firm. We grow through both of those sources. We also grow through tuck-ins, which is where we buy a firm in an existing market, and we bring that in and tuck that into an existing business.
The other way we can grow is through marquee acquisitions, which is a new business in a new location that we don't currently operate in. Finally, you know, our complementary services where we have wealth, finance, insurance, Kelly Partners Investment Office, and alternative assets where we're growing out those other businesses through providing excellent services to our existing clients. We see that we've got, you know, multiple paths to grow. You know, we've done all of them before. The new adventure really is growing out the complementary businesses, and if we get those half right, they'll be very significant businesses over time.
All right. Fantastic. Moving on to the cost side now. I think one of the big standouts is how much you guys have cut out in the cost section. You've taken out, I think last year it was $2.6 million in reinvestment into the head count. You've it's brought down to $150,000. You're looking to try and keep that relatively close to zero as you can with the caveat in the report this year. Different wording again. It says, "If there are attractive opportunities you'd like to invest in those." Could you just give us just make some comments around that? What does that mean? What's an example of something like that? What's, you know, the return on capital, that type of stuff.
Yeah. Anthony, what we did was, you know, we were founded in 2006, we got the GFC, we got pretty good at working through a changing environment. We saw COVID as a great opportunity to go back to our roots as the lowest cost operator in our environment, but also the highest quality, most professional organization in our sector. Basically anything that wasn't, you know, nailed to the floor or that wasn't essential to reinforcing the competitive position of the business and growing the business, we simply had cover under the, you know, the nature of the crisis to be able to reduce costs on literally every single line of the P&L in all of our businesses. Ken and I undertook a review of every single business, every single line.
You know, the nature of a 15-year-old business in June is that over time, a lot of the things that you're asked to do, often through acquisitions, pick up a sponsorship of this, or pick up a second person doing that, or pick up a bit of software you don't. It turns out that the vendor thinks you need, but you ultimately, over time, don't really use. Vendors themselves tend to get comfortable and put the prices up over time. We were able to go through in March and say, "Hey, there's a crisis. We're gonna change everything." There's great freedom in a crisis to change and go back to your roots. It's very much a, you know, a low-cost operator.
We've, you know, we've certainly taken that to the bank, and we intend to maintain that culture going forward. We think that COVID has sort of provided a bit of an attitudinal reset across the economy, which is helpful, which is great. Where we would invest, so for example, at the moment, we've got a very strong pipeline. We think we should add another person to our IT team so that we can roll out more than one acquisition at a time, more easily, without working our best people, you know, in an unsustainable way. So, you know, we're not particularly focused on quarter to quarter or six months to six months results. You know, we know our pipeline. We can't necessarily tell you that.
We'll just invest in the team as we always have ahead of the curve. When I started, I wrote a one-pager saying I would build systems to get us to AUD 50 million of revenue. That was absolutely ridiculous in 2006. Everyone thought I was completely crazy. Hey, as it turns out, we're nearly at that number, and we've never had to turn around and change our systems as a result of that sort of investor's mentality, just investing just in front of the curve and making sure that we never had to turn around and rebuild a business. You know, we're just flagging that we're gonna continue to maintain that mentality.
We think at the size we are now, the 6.5% service fee that we get from the firms is enough money to actually be able to carry the right team.
All right, amazing. Again, in the report, there's a line here talking about AUD 107,000-AUD 108,000 from a legal dispute. Could you tell us what that's all about? Maybe some background to that.
Yeah. We bought a firm, Anthony, and, as it turned out, the young lad, not too young, lad, went up the road after the conclusion of his 12 months and decided that he should start his firm up again. He was in his early 60s, and you would have considered that to be an unusual type of behavior in the, in the history of all of the transactions we've done. We haven't actually seen someone do that before. We just enforced our agreements and, you know, I believe we'd need to check if confidential under the terms of the settlement that we made with him. He did end up paying us back a very large amount of money for his misbehavior.
We're confident that that was another example of us having adequate documentation. There was nothing, you know, terrible about the situation other than, you know, we're very much about if you say you're gonna do something, you do it. You don't go up the road and take a bunch of clients with you. If you do, then, you know what we did through the legal process, simply a bunch of letters to the mediation was make him pay us back, which he did. You know, we've been restored to the position we should have been in. You know, we feel good about the fact that, again, you know, we had adequate documentation of, in fact, what we'd agreed.
Great. That answers my question on our lateral hires as well very well. I've got a final one for you. In your, I think it's the owner's manual or one of the documents, it says that you currently own 50, a little over 50% of the business, but long-term, you're looking to reduce down to 30%. Just wanna get your thoughts on that. I know you've been selling a little bit in the market, too. Not really significant amounts, but, just if, you know, just trying to get an idea of what you're thinking there. I'm sure there's a lot of people who are wondering why you're selling.
Anthony, from time to time, I think I bought a bunch of shares from time to time, and then I end up with some in my name and some in my super fund and a bunch that I own in my trust. If I'm moving things around, which I was during COVID, buying property, selling properties, I might need a few dollars here and there. I sell a few shares and fund my life. I intend to keep control of the group. You know, my hero is Warren Buffett. I wanted to build a whole co, and I intend to do it for a very long time.
I just get asked, very consistently, you know, "Will you own all the shares forever or will you sell some?" What I've done there transparently is give myself some optionality. I don't believe the share price even moderately reflects the value of the business. Because of my mindset, I intend to hang around long enough to prove that, which is kinda forever. I was reading on Buffett recently, he took his first mortgage at the age of 54 to buy his wife a house in California. He, on reflection, we recently sold a second one of those properties, he was asked, you know, why he took that mortgage and that he just paid off. He said interest rates were low, I couldn't bear to sell my shares. Those shares, he sold the properties. The properties were worth AUD 20 million.
The shares are worth AUD 1.1 billion. Look, I have a long-term value mentality, and I tend to, you know, A, hold the shares and B, keep control of the group forever.
That's fantastic. All right, thanks for taking the time. That's my questions. Congratulations again on a really fantastic result.
Thanks Anthony.
Thank you, Anthony. We have one more question from Brendan Harrington from Harrington Partners. Please go ahead, Brendan.
Hi Brett, Kenneth, Mate. Yeah, guys great result. Yeah, really impressed and it's refreshing to hear the type of commentary you guys are putting out. I guess my only question, the other gents have covered most of them, and they were really good. I was just thinking, you noted that it is a battle for talent and you're really building that brand. I'm sort of thinking the initial generation that comes in on the economic rationale to sell their business to you, that's one. Once we sort of get into that generational shift, how are you incentivizing the subsequent younger talent?
Great question Brendan. You know, we'll say a bit more about this in the next six months, but when we buy out, you know, the retiring partners, there are typically younger partners in the business who keep 49% of the equity. We own 51%, the operating partners own 49%. If you look at the margins, that's why the margins are so important. You know, our margins are almost double the average. Where IBISWorld report that the average margins are 19%, in my due diligence on hundreds of firms, when you public company account for those firms, post-partner profits are somewhere between 12% and 15%.
If we can roll out 36.6 at the operating business level, and the cash conversion's 100%, our lockup at 55 days, the average in the industry is 120+. You know, when I go to a firm, they've got 120 days lockup, and then they've got a separate list of debtors, which they say, "Oh, well, they're the special ones." When you add it all up, it's well over 120 days, often, you know, around 200 days. If you look at the margin and then you understand with, you know, virtually 100% cash conversions, we are paying our partners 50% of their projected profits every single month. They get a lot more cash in their pocket than they've ever seen before.
If a young guy's in the firm and thought that he could make more money, you know, on his own, there's just. I haven't seen, you know, a small firm generating, A, the growth and ultimately the growth in their equity value or B, the actual month-to-month cash flow that we can generate for a partner. Look, money does talk with respect to talented people, and I'm confident that our partners, young and old, can't make more money nor have a better lifestyle because of our centralization.
Yeah, yeah.
Our partners only have to look after their clients and their people. They don't have to do anything else. I'm sitting with a guy on Monday. I saw three firms same day in the same town, and all of them are struggling around lifestyle. They are not gonna be able to achieve succession internally at the quality that they would want. Those people, if they do an internal transaction, will have to be vendor financed, so they won't be able to get their cash out. They worry the young guy will mess the firm up. The young guy worries that if he buys in with the old guy, the old guy won't get out of the way and help, and let him improve the firm, so he'll never really be the owner. We think our model is very compelling.
Then, you know, because they own 49% of the firm, they fully share in the economics, the economics are awesome. You know, you come to me as a young guy, you invest AUD 250,000, you may put up 20%, we might 100% finance you. You're in for AUD 50,000, you know, 50 grand, you've got an ROE of somewhere between 35% and 55%. If a young guy can find a better situation than that in a firm that has traditionally got a 32% CAGR in our industry, which is not known to be innovative, energetic, forward-looking, or frankly fun to working, then, you know, all power to that person.
A rigorous examination of, you know, a like-for-like situation, there is no better place for a young, talented person to exercise their profession than within one of our firms.
Yeah. No thanks. That's, as you said, a powerful model. I guess in terms of, you know, past and current generation, it seems that the economic incentive was on top of the priority list, but as you said, that quality of life obviously is becoming an increasingly important element.
That's important Brendan, to understand, like, what is happening now, I typically find an older practitioner, and it's 95% the firms are owned by men. Those men worked in a way, six days a week, that today their wives, you know, a modern wife wouldn't allow. They were not able to be present. Right? They just weren't able to be present to, frankly the marriage to a great degree, or the children. Younger men are saying, "Well, hang on, I actually wanna speak to my wife. I wanna see my children." The younger women, they actually have children and don't wanna work, you know, 80-hour weeks. The Big Four firms still really grind their people.
I think there's a lot of evidence of that, you know, in the sort of press coverage you've seen over the last 6 months, but that's known in the industry generally. The second tier have a model that's just not competitive. We can offer lifestyle. You work close to your home. You have parking. You've got first-class people, first-class technology, wonderful clients, really some of the best clients in Australia, certainly in Sydney. And you can out earn any comparable situation knowing that you've got real lifestyle balance and a firm that you can be very proud of in terms of the value and the way, you know, values and the way that we behave. The Big Four have an issue that they are the global enablers of multinational tax planning, would be the general way to put it.
Most young people don't wanna be involved in that racket. You know, they're much more attuned to their values and how they, how they want your firm to behave. We know that we can outpace the Big Four. The second-tier firms are running in the same way that they did when I started in the industry in 1993. They're not particularly exciting, energetic, innovative places to play. You know, while we talk about the battle for talent, we have an 8% turnover of our people, and we can, you know, our recruitment days are less than 20 days, meaning that we can replace any role within 20 days.
You know, we've thought very hard about the operating model of the business, and I guess I've been at it for 28 years nearly, and I really reflexively, with my team, understand these businesses, the market, and I think how to compete in a unique way.
Yeah, no thanks, thanks again guys. That's brilliant and thanks for elaborating on that. Keep up the good work.
Thanks Brendan.
Thank you Brendan. We do have another question from Anthony Sheath from AL Capital again. Please go ahead, Anthony.
Sorry, just a quick one Brett. You mentioned that you think the stock is still cheap. Just wanna kinda get an idea of the, how you arrive at that, maybe your thinking behind valuation, the math behind the valuation.
Yeah. You buy a terrific book called The Warren Buffett Way. I think it's probably the best book ever written on investing. You go to the back pages, you pull out the appendix, you put in Excel a two-stage dividend discount model. You make an assessment as to how you think we will grow, you try and apply some sort of discount factor. I think the risk-free rate is very low. I think a business that is leveraged to a government's willingness to continually tax their people and make the system more complex, not less, probably has, you know, and has as strong an operating model as ours, probably a quite low, you know, intrinsic risk around it. I think we have some ability to grow.
If you sort of back solve by putting our last five years' numbers in that are public and then, you know, applying some sort of growth rate to what you think the future might be, you know, you don't get AUD 2, you get a number considerably higher than that.
All right, great. Thanks. Thanks for taking my questions, guys.
Thank you Anthony. If there are any more questions at this time, please press star one on your keypad now if you would like to ask a question. There seem to be no more questions at this time. In that case, we will conclude the question and answer session. Handing back over to you now, Brett. Thank you.
Thanks so much Erica and everyone for joining today. We had a really good turnout on the call. You know, I'd like to set expectations as to we'll continue to do what we've been doing for a very long time. Never anxious to sort of do anything rash or exciting, but we do think consistent performance as we've delivered for nearly 15 years will turn out over the next 15 years to be quite exciting. We really appreciate everyone turning up and being interested in the business. As I love to say, have a great day.
Thank you Kenneth and Brett. That now concludes the first half of 2021 financial results conference call for Kelly Partners. On behalf of Express Virtual Meetings, we'd like to thank you for attending and have a lovely day.