Knights Group Holdings plc

("Knights" or the "Group")

Full Year Results

Continued momentum, building on the critical mass achieved

Knights, the UK's fastest growing legal and professional services business¹, today announces its full year results for the year ended 30 April 2021.

Financial highlights

·      Revenue increased by 39% to £103.2m (2020: £74.3m)

o  H2 organic² revenue growth of 10% (H2 2020: 10%), representing a significant recovery from the 15% decline in H1 2021 due to COVID-19

·      Gross margins increased to 49% (2020: 48%), despite the impact on revenue from COVID-19 in H1

·      Underlying PBT³ rose by 35% to £18.4m (2020: £13.6m)

·      Underlying PBT³ margin of 17.8% (2020: 18.3%)

o  Strong H2 2021 margin of 21.8% (H2 2020: 19.8%, H2 2019: 17.4%), represented a significant improvement from H1 2021: 13.0% (H1 2020: 16.4%) despite some COVID-19 impact, reflecting the continued leverage of overheads

·      Underlying EPS³ increased by 27.7% to 18.30p (2020: 14.33p). Basic EPS of 4.14p (2020: 2.44p)

·      Strong cash conversion⁴ of 91% (2020: 80%), following a year of significant investment and reflecting the roll out of Knight's approach to cash management in recent acquisitions

·      Lock up was 89 days (2020: 85 days excluding acquisitions), aided by robust systems and a strong culture of day-to-day cash collection

·      Net debt of £21.1m (30 April 2020: £15.9m) was lower than anticipated due to the Group's strong cash management

·      No final dividend declared

Strategic and operational highlights

·      Strengthened our geographic coverage and practice areas as we scale throughout the UK

o  Four acquisitions in line with our strategy to be the leading legal and professional services business outside London

o  Keebles and OTB Eveling expanded the Group's footprint into Sheffield and the South West, Mundays strengthened Knights' presence in the South East

o  Housing Law Services, which completed in April 2021, brought a niche housing team to complement Knights' existing housing services offering

o  Acquisitions continue to integrate faster than plan

·      Strong recruitment and continued investment to build a platform for future growth 

o  Momentum in recruiting high calibre talent; the majority from other top 50 law firms

o  Continued to invest in high quality office spaces in Birmingham, Leeds, Nottingham and York

o  Strong culture supporting increased net promoter scores (Client NPS up 15 to +75, Employee NPS up by 3 to +39)

o  Continued to invest in technology to support growth and acquisitions, drive efficiency, enable automation and enhance client relationships

o  Appointed two additional Client Service Directors adding cultural leadership and integration capability

·      Significant progress with our ESG agenda

o  Developed a newly strengthened framework of ESG related KPIs, in line with our commitment to building a sustainable business

o  Appointed Gillian Davies as Senior Independent Non-Executive Director, bringing significant experience in high growth businesses and achieving 50% gender diversity on the Board

Current trading and outlook

·      Momentum has continued into FY 2022, with an increasing quantum of new, quality instructions, supported by a growing team of motivated and committed people across the Group

·      We continue to see a strong pipeline of senior fee earner candidates

·      We continue to have active engagement with a strong pipeline of possible acquisition opportunities

·      In a challenging year for many businesses across the UK, the Board's confidence in the Group's strategy and market leading position in the regions has been reinforced

David Beech, CEO of Knights, commented:

"We have delivered a robust performance during the year, with a rapid return to stronger levels of organic growth in the second half, complemented by high calibre acquisitions that further elevate our position as a market leader outside London.

"Having reached critical mass following recent acquisitions, the Group is increasingly attracting high calibre talent with strong client followings, good quality clients who recognise the value of our premium service, and legal service firms that would like to be part of a larger, diversified, forward thinking group.

"Looking forward, we expect that COVID-19 will only accentuate these opportunities for our resilient, well-invested, diversified and cash generative business in the highly fragmented and often under-invested market for legal services outside London."

These footnotes apply throughout the announcement:

¹ Ranked number one for revenue growth over the last four years in the Lawyer's Top 100 Survey (published October 2020)

² Organic growth excludes revenue growth from acquisitions in the year of their acquisition, and for the first full financial year following acquisition, based on the fees generated by the individuals joining the Group from the acquired entity.  Recruitment of individuals into the acquired offices post acquisition is treated as part of the organic growth of the business.

³  Underlying PBT is before amortisation of acquired intangibles, non-underlying costs relating to acquisitions, non-recurring finance costs, restructuring costs in the reporting period, and non-underlying share based payments. Underlying EPS excludes these items and the tax related to these items. The Board believes that these underlying figures provide a more meaningful measure of the Group's underlying performance.

⁴ Cash conversion is calculated as the total of net cash from operations, tax paid and payments of lease interest and lease finance liabilities under IFRS 16, divided by the underlying profit after tax, which is calculated from profit after tax by adding back amortisation of acquired intangibles, non-underlying costs relating to acquisitions, non-recurring finance, restructuring costs in the reporting period, and non-underlying share based payments and the tax in respect of these costs.

A more detailed explanation of the Group's alternative performance measures used in this report is included in the glossary.

A presentation of the full year results will be made to analysts via a webinar at 9.30am today. To register interest in attending, please contact Pandora Yadgaroff at MHP Communications on 020 3128 8168 or email knights@mhpc.com.

Notes to Editors

Knights is a fast-growing, legal and professional services business, ranked within the UK's top 100 largest law firms by revenue. Knights was one of the first law firms in the UK to move from the traditional partnership model to a corporate structure in 2012 and has since grown rapidly. Knights has specialists in all key areas of corporate and commercial law so that it can offer end-to-end support to businesses of all sizes and in all sectors. It is focussed on key UK markets outside London and currently operates from 16 offices located in Birmingham, Cheltenham, Chester, Crawley, Exeter, Leeds, Leicester, Maidstone, Manchester, Nottingham, Oxford, Sheffield, Stoke, Weybridge, Wilmslow and York

Chairman's statement

The Group's strong performance has demonstrated the resilience of both our business model and our people, continuing our vision to build the leading legal and professional services business outside London, as we emerge from the pandemic in a stronger position than ever.

The Group has delivered 39% revenue growth to £103.2m (2020: £74.3m), including a £2.1m contribution from the acquisitions made during the year and £28.4m from the full year impact of acquisitions made in the prior year, which were in line with our ongoing commitment to broadening Knights' geographical reach and scale. Following the initial impact of the pandemic in the first half, the Group returned to strong organic growth in the second half of the year. This reflected the strength and agility of our business, which is highly diversified by client, sector and service, as well as our continued focus on recruiting high calibre senior fee earners.

Our early and prudent actions to manage costs demonstrated the benefit of the Group's corporate structure and ability to trade through an uncertain economic environment, with our underlying PBT margin improving to 21.8% in the second half, leading to underlying profit before tax of £18.4m (2020: £13.6m) and a 27.7% increase in underlying EPS to 18.30p (2020: 14.33p).

These results were achieved without the Group benefitting from the Government's COVID-19 related support schemes, such as the Job Retention Scheme, and despite the initial disruption from COVID-19 during the first half, which saw the Group's ability to transact on behalf of its clients impacted due to a slower transition to working from home amongst counterpart law firms. Importantly, Knights' position as a modernised and well-invested legal services business operating on a single technology platform meant that the team was able to transition seamlessly to working from home with strong levels of productivity. Our resilience also allowed us to execute carefully selected acquisitions and continue to make operational improvements across the business. On behalf of our Board, I would like to thank our people for their tireless commitment throughout a year in which we have worked together more closely than ever before, despite the majority of the time being spent apart.

Confidence in our strategy reinforced

Unlike many businesses which struggled at the onset of the pandemic, Knights has continued to execute on its vision to become the leading legal and professional services business outside London. Our confidence in the Group's strategy and its strong financial position enabled us to continue to build the business both organically, with the Group continuing to attract high quality senior candidates across the country, and through acquisition.

Our momentum in recruitment has demonstrated that, with its increased scale and breadth, Knights has reached the critical mass to be a highly attractive prospect to top talent in the regions, with the majority of new candidates coming from other top 50 law firms. We also believe that the pandemic has only served to make Knights more attractive as an employer, as it has prompted people to seek to work closer to home. As a result of hiring high calibre people, we have onboarded larger and higher quality client followings, which smaller regional independent law firms would not be able to adequately support due to their limited scale and range of services.

Integration of the three acquisitions completed at the end of the previous financial year was completed successfully and ahead of schedule in the first half, bringing further scale to the Group and increasing our confidence in our ability to rapidly integrate simultaneous acquisitions during a period of working remotely. The Group's four acquisitions in the second half provided entry in to the South West, an expanded presence in Yorkshire and the South East, and an extension of its housing services offering, with COVID-19 only accentuating the pipeline of quality acquisition opportunities available.

Board and ESG

Despite a full year of working remotely, our executive team has shown great commitment to ensuring the Group's highly collegiate culture remains as strong as ever and to ensuring the wellbeing of our people. There has been a heavy focus on engaging with, motivating, nurturing, and developing our existing talent, and our 'one team' approach has ensured new joiners feel welcomed and connected to the broader Knights community.

Volunteering in local communities has played a key role during the pandemic, and I am particularly proud of our colleagues that have supported local organisations in offering their assistance for four hours of work time per month through our flagship 4OurCommunity programme. We were also pleased to announce our new partnership with mental health charity Mind during the year and look forward to bringing our teams together to raise our target of £20,000 over the next two years.

We also look forward to welcoming colleagues back to our offices as part of the Group's return in September which, whilst allowing our people to retain the flexibility to work from home productively some of the time, will enable greater collaboration and ensure less experienced colleagues feel supported and are learning from other team members in an office environment.

Gillian Davies was appointed as Senior Independent Non-Executive Director and Chair of the Audit Committee with effect from 17 March 2021. She brings significant experience working in senior roles at high growth businesses, which will be of great value to the Group as we continue to execute on our strategy, Gillian's appointment also means the Group's Board has greater gender diversity with an equal weighting of men and women. The appointment follows Steve Dolton's decision to step down from the Board as Senior Independent Non-Executive Director, to pursue other opportunities.

In addition, we continue to operate and govern the Group in line with the key principles of the QCA Code, as set out in the governance section.

Dividend

Given the cost saving measures taken by the Group during the year, the Board has decided that no final dividend is declared for the year ended 30 April 2021.  It is the Board's intention to resume paying dividends in respect of the year ending 30 April 2022 in accordance with the previous dividend policy of paying out 20% of profit after tax.

Summary and medium-term outlook

Despite a year of macroeconomic uncertainty, our resilient, well-invested, diversified and cash generative business, and highly committed management team, have allowed us to make significant progress in executing our vision to become the leading legal and professional services business outside London. While we are emerging stronger, the impact of COVID-19 has accentuated the near-term challenges for many firms across the traditional legal services industry, making Knights' unique proposition ever more relevant to talented lawyers, acquisition candidates and clients alike.

Bal Johal

Non-Executive Chairman

13 July  2021                              

Chief Executive's Review

We have delivered a robust performance during the year and significantly elevated our position as a market leader outside London by continuing to deliver on our strategy.

The Group's rapid return to delivering strong levels of organic growth in the second half, following the disruption in the first half, is testament to the momentum in the business.

With the critical mass that the Group has now achieved, it is increasingly attracting high calibre talent with strong client followings, good quality clients who recognise the value of our premium service, and legal service firms that would like to be part of a larger, diversified, forward thinking group. The four acquisitions occurring in the period expanded our footprint into Sheffield and the South West, extended our housing services offering, strengthened our presence in the South East which we expect to benefit from a growing pool of talented lawyers that no longer wish to commute into London.

Our ability to react quickly to a changing external environment at the onset of the pandemic demonstrated the benefit of our corporate structure. Early and prudent actions, supported by our well invested IT infrastructure, positioned the Group to trade well through all of the lockdown periods, with our diversified, full service offering proving resilient, our staff moving seamlessly to working from home, and the successful remote integration of prior acquisitions, which were completed ahead of schedule.

The safety and wellbeing of our people remained the Group's priority, with all staff working from home continually throughout the COVID-19 pandemic since 13 March 2020, ahead of the UK government lockdown. I am particularly proud of the continued high levels of outstanding service delivered by our people as well as the efforts of the wider executive team in ensuring colleagues were kept informed and felt part of our 'one team' culture despite being away from a traditional office environment. We look forward to seeing both familiar and new faces in the coming months as part of our return to more office-based, hybrid working in September.

A year of significant progress

The increased scale and geographical presence achieved in recent years has delivered a step change in the Group's credibility as a leading legal and professional services business which, in turn, is attracting more high quality talent, clients and acquisition opportunities.

At a time when the pandemic has only served to highlight the challenges and uncertainties inherent in the traditional partnership model to some partners, Knights has earned a reputation as a well-positioned, growing business with an attractive model. As a result, we have continued our momentum in recruiting high calibre talent from other Top 50 law firms and well-reputed professional services firms, typically with strong client followings. Importantly, we have also continued to invest in the training, development and wellbeing of our existing talent, and in modern offices in prime locations from which to work, helping us to retain the high quality people that will enable the business to grow.

The quality of our people and Knights' premium full service client offering has allowed us to continue to both win new clients and build on our already strong relationships with existing clients. The level of trust and reputation ascribed to Knights' services in the regions has validated our market position and brought the confidence to our fee earners to charge clients appropriately for the premium service we provide. Alongside greater focus from our growing pool of talented lawyers on strengthening our client relationships, our expanded Client Services team and Sales Director are also developing a greater understanding of our client base with a view to identifying opportunities to expand the services Knights can offer its clients. Whilst at an early stage, this greater focus on data will aid our drive to deliver continued strong levels of organic growth, allowing us to leverage our investment in our strong operational backbone.

Our scale has enabled us to support the onboarding of larger, high-quality clients, with our 'one-team', service-driven culture encouraging greater collaboration across a growing suite of services. During the year we have achieved a number of significant organic client wins across the Group including easyJet, Papa John's, British Airways and William Hill.

In addition, we are widening our offering where we believe we can strengthen our position as key trusted advisors to our clients and expand the existing relationships across our corporate teams. For instance, we have built a significant dedicated team of specialist tax advisers, combining lawyers and accountants, which we are also replicating in debt advisory, where we believe there is a unique opportunity for Knights to offer a holistic accounting and legal service to corporates.

To support the Group's ongoing growth, we continue to invest in the business. We have agreed attractive lease arrangements in Birmingham, Leeds and Nottingham, with high quality office space remaining an important element of supporting Knights' collaborative culture, whilst hybrid working is expected to provide us with c.20% greater capacity. We continue to enhance our technology platform, launching our HR hub in the first half to complete our scalable operational platform, and remain focussed on continually developing tools to better support the business, its clients and acquisition integration. We have also appointed two additional Client Service Directors, taking the total number in the Group to eight.  The Client Service Directors play an essential role in delivering operational performance across the business.  Working closely with the executive Board they have overall responsibility for the financial performance of their offices and delivering organic growth in line with the Group's key objectives and culture.  They also support the Group's acquisition strategy by taking the lead on the integration and management of each new business into the Group before, during and after the acquisition.

Building on our acquisition track record

The successful integration, ahead of schedule, of the Fraser Brown, Shulmans and ASB acquisitions which were announced in February and March 2020 during a period of transitioning to home working, only served to increase our confidence in our ability to execute on our attractive pipeline of acquisitions.

Building on our track record of acquiring high quality businesses with a strong cultural fit, we have continued to execute on our strategy to acquire businesses that provide entry in to a key market, providing a platform for organic growth in the region, or that can be bolted on to build scale in our existing locations.

Entry into Exeter, a key city in the large South West legal services market

Accordingly, on 14 December 2020 we completed the acquisition of OTB Eveling LLP, providing an entry into the South West and the city of Exeter, a key city in one of the largest regional markets for legal services (Bureau van Dijk, Mintel UK Legal Services Report 2021).

Founded in 2012, OTB Eveling further extends Knights' existing national presence with a full offering including corporate, employment, dispute resolution and real estate services. Since welcoming its 17 fee earners to the Group, Knights' scale and national reputation has already attracted quality recruits across the region. Now fully integrated into the Group, the business continues to progress well, with performance to date in line with our expectations.

Strengthened presence in the South East provides a strong platform for recruitment

On 16 April 2021 we completed the acquisition of Mundays LLP, an independent commercial law firm based in Surrey. Established over sixty years ago in Weybridge, Mundays' strong corporate, real estate and private client services offering further strengthens Knights' existing presence in the South East, achieved through the acquisition of Crawley and Maidstone based ASB, in April 2020.

With its strong cultural fit evident from meeting a considerable number of the team before acquisition, its 34 fee earners and systems have integrated well, delivering initial synergy savings in line with expectations. The period of home working during lockdowns has also shown early signs of some talented lawyers being drawn to working in towns surrounding London instead of commuting, providing invigorated momentum to an already strong recruitment pipeline for talent on the outskirts of London.

On 23 April 2021 the Group completed the small acquisition of Housing Law Services, a niche housing team based in the South East, to complement Knights' existing housing services offering.

Joining up our presence in Yorkshire with entry into Sheffield

Having grown our position in Yorkshire significantly, we were delighted to announce the acquisition of Keebles at the year end. Established over a century ago, its full service offering and leading position in both corporate and real estate law provides an entry into the important city of Sheffield and the wider South Yorkshire area, complementing Knights' existing presence in Nottingham and Leeds.

The acquisition added 138 fee earners to Knights, bringing critical mass in an important market. The business has proved to be an exceptional cultural fit for Knights and early integration is encouraging.

Current trading and outlook

The well-balanced and highly diversified business we have built over a number of years proved to be resilient during a difficult economic period and, having further strengthened our depth and breadth, the Group's enhanced reputation is attracting high quality talent, clients and acquisition candidates.

Having emerged in a stronger position from the initial stages of the pandemic, our momentum continued to build through the second half of the year, allowing us to return to strong levels of organic growth in the last two months of the trading period. This momentum has continued with an increasing quantum and quality of new instructions across the business as we entered FY22, supported by a growing team of motivated and committed people across the Group.

We continue to see a high level of senior fee earner recruitment and acquisition opportunities, providing a strong pipeline of candidates from which to select. Having effectively executed several acquisitions and onboarded new joiners despite a period of home working, we look forward to building on this track record as we exit the latest lockdown.

In a challenging year for many businesses across the UK, the Board's confidence in the Group's strategy has been reinforced. We expect that COVID-19 will only accentuate the recruitment and acquisition opportunities for our resilient, well-invested, diversified and cash generative business in the highly fragmented and often under-invested market for legal services outside London.

David Beech

Chief Executive Officer

13 July 2021

Chief Financial Officer Review

I am pleased to report a strong performance for the Group in the financial year, despite the impact from the economic effect of the COVID-19 pandemic during the period.

Our swift and prudent cost reduction programme undertaken at the start of the pandemic enabled us to trade well through the difficult macro-economic environment during the first quarter of the financial year. Although our robust IT platforms and paperless way of working meant that, as a business, we were able to transition to remote working immediately with no down time or reduction in our ability to transact, difficulties encountered in the wider economic environment had a significant impact on our level of fee income for the first quarter of the financial year. However, as the wider environment adapted to the new way of working, we experienced a significant increase in activity levels and new business instructions and were well positioned to maximise the opportunities available.

During the year we continued to invest in the recruitment of high quality senior recruits, who bring with them a strong client following, develop and train our client service professionals and expand the strong management and operational professionals required to support our continued growth strategy. We also used the time working remotely to invest in the high quality office environment that we consider key to maintaining our collaborative, one team culture by relocating to new office space in Birmingham, Leeds and Nottingham and investing in the refurbishment of these spaces as necessary, taking advantage of the attractive lease arrangements available. Despite the disruption caused by the pandemic, I am delighted that we have continued to build on our historic strong track record of cash generative revenue and profit growth over the past six years, with a further 39.0% increase in revenue and a 35.3% increase in Underlying Profit Before Tax (PBT).

Our continued focus on cash flow has resulted in excellent cash conversion of 91% for the year, with net debt being lower than expected, positioning the Group well to maximise on the organic and acquisition opportunities that are expected to arise as we emerge from the pandemic and lockdown conditions.

Revenue

Reported revenue for the period was £103.2m compared with £74.3m in FY20, representing a 39.0% increase.

Of this increase 2.8%, or £2.1m, was a result of the acquisitions made during the financial year and £28.4m relates to the full year benefit of acquisitions made in FY20.

The Group achieved strong organic growth of 10% in the second half of the year amounting to £3.2m when compared to the second half of FY20. This was offset by a 15% reduction in organic revenue in the first half of the year due to the immediate impact of the COVID-19 pandemic, giving a 3% reduction in organic revenue for the financial year as a whole.

As a well-diversified business with a full-service offering, the business has proven to be resilient as the macro economic environment started to recover from the initial shock of the pandemic. Whilst the extended lockdown in January and February 2021 had some impact on trading levels during February, momentum and activity have increased in the last two months of FY21 and the start of the current financial year as we emerge from the pandemic.

This strong momentum in activity with both existing and new clients along with recruitment of high calibre individuals and a continued focus on appropriate pricing of matters, gives confidence in our ability to drive our strategy to deliver strong organic growth, supplemented by further revenue growth from carefully selected acquisitions.

Staff costs

Total staff costs represented 60.8% of revenue during the financial year compared with 61.4% in 2020.

During the initial stages of the COVID-19 pandemic we undertook a cost reduction exercise. As part of this exercise all employees earning more than £30,000 took a temporary 10% reduction in salary, with the Board taking a 30% reduction. These cost saving measures remained in place until 1 November when all employees returned to full salaries as the Board became confident that activity levels were returning to pre COVID-19 levels. No companies within the Group benefitted from the Government's Job Retention Scheme whilst operating under Knights' ownership.

Fee earner staff costs have decreased from 52.1% of revenue to 51.1% reflecting the continued effort to control costs whilst also investing in high quality senior recruits who bring a client following. During the year 29 partners have joined the Group as part of our active recruitment process. This represents a significant investment as it would typically take three to six months for each of these new recruits to achieve the full expected fee earning run rate.

We have continued to invest in our operational infrastructure in FY21, focusing on increasing the management resource available within the Group to ensure we have a properly structured operational management team with the bandwidth to drive growth, operational efficiency, profitability and cash generation as well as the effective integration of acquisitions.  This together with the full year impact of the investment in FY 20 has increased support staff costs for the year to 9.7% of revenue from 9.3% in the prior year.

Management anticipates that these costs will now begin to be leveraged by the increased fee generating capacity of the business and the return to normal levels of trading as the economy recovers from the pandemic.

Underlying Profit Before Tax (PBT)

The first half of the year was significantly impacted by the impact of COVID-19, therefore headline figures for the year have been analysed into half years in the table below to enable a view of the Group's trading performance as the economy recovers from the initial shock of the pandemic.

Underlying profit before tax excludes amortisation of acquired intangibles, transaction and onerous lease costs in relation to acquisitions, disposals of acquired assets, restructuring costs as a result of the streamlining of the support function in acquisitions and the restructuring undertaken in response to the COVID-19 pandemic. It also excludes contingent consideration payments required to be reflected through the Statement of Comprehensive Income under IFRS and share-based payments for one-off share awards made at IPO and as part of the acquisitions, and the one-off Share Incentive Plan offered to employees as a result of the listing. Any share-based payments charges relating to ongoing SAYE and LTIP schemes are recognised as underlying costs of the Group.

Underlying profit before tax has been calculated as an alternative performance measure (see note 36 of the financial statements) in order to provide a more meaningful measure and year on year comparison of the profitability of the underlying business. 

Underlying profit before tax has increased by 35.3% compared with the same period last year to £18.4m (2020: £13.6m), representing a margin of 17.8% for the full year compared with 18.3% in the prior year. This represented a resilient performance given the significant impact of the COVID-19 pandemic in the first half of the year which reduced the margin in the first half of the financial year to 13.0%, compared to 16.4% in the prior period, despite the mitigating cost reduction measures taken.

As the Group entered the second half of the year and activity levels were beginning to return to pre pandemic levels, all employees returned to full salary levels. Despite the impact of the extended lock down in January and February 2021 and the continued investment in recruitment, the support function and the office base, the Group generated an underlying PBT margin of 21.8% in the second half of the year compared to 19.8% in the comparative period of the prior year. The improvement in margin is a result of the increase in fee income leveraging general overheads and finance costs in the business which is particularly encouraging given the level of investment in the business.

In addition to the investment in fee earning and support staff as discussed above, acquisitions also have a margin-diluting impact for the first full year post acquisition as support functions are streamlined and the acquired business is integrated into the Group more generally before obtaining expected profitability
levels thereafter.

Reported profit before tax (PBT)

The reported profit before tax for the year has increased by 35.8% to £5.5m (2020: £4.1m). The increase in reported profit before tax of £1.4m in the year reflects the net impact of increased underlying profit before tax of £4.8m driven by increased revenue at a slightly reduced underlying PBT margin, increased amortisation of acquired intangibles of £1.2m and the increased non-underlying costs of £2.2m. The significant increase in the non-underlying costs incurred is due to an increase of £2.9m in the contingent consideration element of the purchase cost of acquisitions being recognised in the Statement of Comprehensive Income in accordance with IFRS accounting conventions, offset by a reduction of £0.7m in other restructuring and one off transaction costs.

Earnings per share (EPS)

The weighted average number of shares in the year to 30 April 2021was 82,189,113 (2020: 74,675,462) which gives a basic earnings per share (Basic EPS) for the year of 4.14p (2020: 2.44p). Taking into account the number of share options that the Group has outstanding at the year end gives a diluted EPS of 4.09p (2020: 2.41p).

In order to compare the EPS year on year, the underlying EPS has been calculated showing 18.30p in the year to 30 April 2021 compared with 14.33p in the prior year. This measure eliminates the effect of any non-recurring and non-underlying costs on the EPS calculation.

Corporation tax

The Group's tax charge for the year is £2.1m (2020: £2.2m) which was made up of a current corporation tax charge of £2.6m (2020: £1.9m) and a deferred tax credit of £0.5m (2020: deferred tax charge of £0.3m).

The deferred tax charge credit arises largely from the reversal of the deferred tax liability on acquired intangibles.The total effective rate of tax is 38% (2020: 55%) based on reported profit before tax. This has been adversely affected by non-underlying items (largely amortisation of acquired intangible assets and the recognition of contingent consideration on acquisitions against profits) that are not tax deductible. The effective rate of tax on the underlying profit of the business is 18% (2020: 21%) (see note 16 of the financial statements).

Dividend

Due to the COVID-19 pandemic and the resultant uncertainty of the effects on the UK economy the Board undertook cost cutting measures across the Group to ensure that the business was in the best possible position given the current uncertainty. The Board has therefore decided that, given the cost saving measures put in place during the year in relation to Covid-19, it would not be appropriate to propose a final dividend for the financial year at this time.

The Board intends to resume paying dividends in respect of the year ended 30 April 2022 in accordance with the previous dividend policy, being 20% of profits after tax.

Balance Sheet

* Net debt excluded lease liabilities

The Group's net assets as at 30 April 2021 increased by £6.7m from the prior year reflecting the shares issued in relation to acquisitions in the year and profit during the year.
 

Goodwill and intangible assets

Included within intangible assets and goodwill is £31.8m of intangible assets, identified on current and prior acquisitions.  This relates to customer relationships, values attached to restrictive covenants, brand and computer software. The balance relates to goodwill of £47.7m arising from acquisitions.

The Board carries out an impairment review of goodwill each year to ensure the carrying value is supportable. The value in use of the goodwill was calculated using a number of different scenarios, some of which assumed a considerably worse outcome than is anticipated by the directors. In all instances the future trading of the business was more than sufficient to justify the carrying value of goodwill. Therefore, as at 30 April 2021, the Board concluded that the goodwill was not impaired.

Working Capital

The Group manages its working capital requirements closely, with impact on working capital being a key consideration in all business decisions. The management of working capital has always been a key performance indicator for management with strong controls and systems in place to monitor the level of debtors and work in progress in the business. Lock up days is the primary metric used by the Group to measure the length of time it takes to convert work recorded into cash received and this is discussed in the Key Performance Indicators section.

Due to the strong controls already in place the Group did not experience any significant change in its working capital cycle throughout the year as a result of the pandemic. Bad debts remain low at the same level as prior years of 0.2% of turnover.

Management are satisfied with the level of working capital at the year end which at £28.6m remains at a similar level to FY20 (£27.7m) despite the acquisitions and growth in business during in the year.

Right of use assets and lease liabilities

The right of use assets capitalised in the Statement of Financial Position represents the present value of property, equipment and vehicle lease arrangements.  The increase in right of use assets during the year from £23.7m in FY20 to £40.4m in FY21 is due to new leases acquired as part of the acquisitions completed during the year and new leases entered into by the Group during the period. 

The lease liabilities represent the present value the total liabilities recognised for right of use assets and the increase during the year to £42.6m (FY20: £23.8m) again reflects the leases in acquired entities and new leases entered into during the period.

Net debt, financing and leverage

The strong cash conversion in the period has resulted in net debt of £21.1m at the year end which was £1m better than expectations. This figure represents an increase in net debt from the £15.9m as at April 2020 due to an aggregate cash outlay of £12.5m relating to consideration for acquisitions made during the period and deferred consideration paid in relation to acquisitions in prior years.

The Group's RCF facility remains at £40m giving significant headroom to continue to support the growth strategy into 2022 through organic recruitment and carefully selected, culturally aligned acquisitions.

Cash conversion

*see glossary

The cash conversion percentage measures the Group's conversion of its underlying profit after tax into free cash flow. Due to the continued focus on management of working capital and lock up, the Group has again delivered strong cash conversion of 91% (2020: 80%).  This includes the payment of the £800,000 of VAT deferred under the Government VAT deferral scheme at 30 April 2020.  Excluding this payment would give a cash conversion of 96%.

Capital expenditure

During the year the Group continued to invest in its systems and premises to expand its capacity and ensure staff continue to benefit from a high quality working environment, with consistent systems across the Group to aid integration and a one firm culture.

The total £4.3m (FY20: £2.1m) invested in capital expenditure (excluding right of use assets capitalised as part of the adoption of IFRS 16) included the following one-off non-recurring significant items required as a result of the acquisitions and continued growth of the Group:

Other capital spend in the financial year relates to general investment in the IT, communications and infrastructure required for the increase in the number of employees, and to support the programme of rolling out IT upgrades to ensure the Group's technology is up to date and sufficient to meet the needs of the business.

During the year, the Group signed leases for new or upgraded premises in Leeds, Nottingham and York. Under IFRS16 these are accounted for as right of use assets and, accordingly, £16.4m has been capitalised within non-current assets in the Consolidated Statement of Financial Position.

The significant investment in both the signing of new leases and refurbishment of offices during the year underpins the Group's strategy of building a team culture of working together in modern offices in prime locations. The home working period during the pandemic offered the opportunity to carry out this work whilst minimising disruption to the business. Whilst our plan is to move to a hybrid way of working once social distancing guidelines allow, offering a high quality office environment is seen as key to encouraging individuals to work together collaboratively as one team and to attracting high quality recruits. The future hybrid format of working should enable the Group to get a further 20% capacity out of current office space, thereby maximising the potential leverage of these costs.

The capital budgets for FY22 include the normal level of expected investment in general IT, communications and infrastructure to ensure we have the capacity required for a growing business. Due to the acquisitions completed during the year and some relocation of offices due to expiring leases we expect some one-off refurbishment costs in respect of the York, Maidstone, Sheffield and Weybridge offices amounting to circa £1.8m in the current financial year.

Acquisitions

During the year we completed three acquisitions and exchanged on a fourth. The table below summarises the net impact of the acquisitions during the year and in prior years on cash in the current year and in future years. This shows the impact of consideration payable net of any cash in the acquired businesses.

The above includes estimated contingent consideration charged as remuneration in the Consolidated Statement of Comprehensive Income.

Acquisitions completed are generally structured with an initial cash outlay of just one third of the total consideration, with one third of the consideration being offered in shares and the balance being paid upon the first and second year anniversaries post completion.

The strong cash and lock up management systems in the Group mean that often cash is generated from the balance sheets of acquired businesses.

Tax - Cash flow impact

Corporation tax

Corporation tax of £2.1m (FY20 £2.9m) was paid during the year.

VAT

During the COVID-19 pandemic the Group benefitted from the temporary ability to defer VAT payments. As at 30 April 2020 this had a positive impact on cash of approximately £0.8m. All deferred VAT has been repaid before the end of the financial year but this had a negative impact on the cash flow figure during FY21.

Key performance indicators

Management uses a number of key performance indicators (KPIs) to monitor the Group's performance against its strategic objectives. These comprise a number of financial and non-financial measures which are agreed and monitored regularly at Board meetings.

The financial indicators are calculated based on underlying results excluding any one-off transactional and acquisition related costs. The Board is of the opinion that these operational factors are key drivers for the Group's financial success.

From our first acquisition in 2012, the management team has been focused on growing the profitability and improving the cash generating ability of the business.  As a result, the Board reviews KPI's related to these metrics in line with the long term strategy of building a strong sustainable business with strong cash flows and increasing underlying profitability.

As the business has grown and diversified the Board has de-emphasised the importance of KPIs related to absolute fees and profits generated per fee earner. Focus is now increasingly placed on overall growth in fee income and profitability with a view to improving the profit margins achieved across the business, whilst still maintaining a well invested business with a strong management and support function able to meet the changing needs of a fast growing business.

Lock up

Lock up days is a key driver in delivering strong cash performance and is the primary metric used by the Group to measure the length of time it takes to convert work recorded into cash received.

It is calculated as the combined debtor and work in progress (WIP) days for the Group. Management of lock up has continued to be a key focus of the Group over the period as it drives the cash generation necessary to support the growth strategy of the Group.

Year end lock up days of 89 remained below the Group's targeted figure of 90 days. This compares favourably to the total lock up of 105 days as at 30 April 2020. The prior year total lock up days of 105 was adversely affected by the longer lock up profiles of acquisitions during the year, which at 30 April 2020 averaged at 130 days. By 30 April 2021 this had been reduced to 97 days, which was more in line with the Group lock up target of 90 days, demonstrating how well all of the acquired businesses have integrated into the Group over the period, adopting our culture of ensuring strong cash generation.

The acquisitions made during FY21 have had an adverse impact on the lock up profile of the Group at the year end. Excluding FY21 acquisitions, lock up remains at 89 days (30 April 20: 85 days excluding acquisitions in the financial year). The average lock up days of acquisitions at the time of completion was 108 days which had reduced to 91 days as at 30 April 2021. These figures exclude the lock up relating to the Keebles acquisition due to the exchange on this acquisition taking place on the final day of the trading period. 

Management are satisfied with the level of lock up at the year end which remains significantly better than the industry average.

Underlying Profit Before Tax (PBT)

Since the adoption of IFRS16 in FY20 the Board has prioritised the KPI of underlying
PBT as a more accurate measure of its performance as this reflects all of the property and lease costs incurred by the Group. The Board believes that it is an important metric for monitoring the profitability of ongoing operations.

Underlying PBT excludes amortisation of acquired intangibles, transaction and onerous lease costs in relation to acquisitions, disposals of acquired assets, restructuring costs as a result of the streamlining of the support function in acquisitions and the cost saving exercise undertaken in response to the COVID-19 pandemic. It also excludes contingent consideration payments required to be reflected through the Statement of Comprehensive Income under IFRS and share-based payments for one-off share awards made at IPO and as part of the acquisitions, and the one-off Share Incentive Plan offered to employees as a result of the listing. Any share-based payments charges relating to ongoing SAYE and LTIP schemes are recognised as underlying costs of the Group.

The underlying PBT for 2021 has grown by 35% over the 2020 comparative period.

This represents a PBT margin of 17.8% compared with 18.3% in FY 20 and 17.9% in FY19. The profitability in FY21 has been held back by the significant impact that the COVID 19 pandemic had on the business during the first quarter of the year, and the acquisitions completed during both the latter half of FY20 and FY21 that initially operate at lower than Group margins, with the Group taking twelve to eighteen months to maximise cost savings and increase profitability in line with Group profit margins. However, analysis of the results on a half year basis shows that margins in the second half of the financial year were 21.8% compared to 19.8% in H2 of FY 20 and 17.4% in H2 of FY19. Comparing the profitability in the second half of FY21 to the second half of FY19 eliminates the impact of COVID-19 on margins in the last month of the FY20 financial year. The increase in margin over the two year period reflects the fact that the increased scale of the business is further leveraging the overheads of the business whilst also allowing the Group to invest in new fee earners, support staff and larger premises to provide a strong base for future growth.

Fee earner to non-fee earner ratio

Knights' business model and use of technologies have been key in enabling the Group to maintain a fee earner to non-fee earner staff ratio that is much higher than the average for the sector. This continues to be one of the key differentiators in Knights' business model enabling the Group to generate such strong margins.

This ratio depends on where the Group is at in terms of its growth strategy. As at 30 April 2021 the Group was operating at a ratio of 4.5 fee earners for every one support staff (30 April 2020 4.8:1). The reduction in the ratio compared to the previous period reflects the restructuring of excess resource at the start of the pandemic and a focus on recruiting at partner level.

Revenue growth

Although underlying profit before tax is our main KPI, a key strategy for the Board is to grow fee income via a combination of organic and acquisitive growth and as such the level of fee income growth is monitored closely by the Board on a monthly basis.

Acquisitive growth is generated via the acquisitions completed each year. No targets are set for the revenue acquired during the year as acquisitions will always be led by where cultural fit is strongest. Income from acquisitions is treated as acquisitive income growth in the year of acquisition and the first full financial year following acquisition, based on the fees generated by the individuals joining the Group from the newly acquired offices. Recruitment of individuals into the acquired offices post acquisition is treated as part of the organic growth of the business. Due to the Group's strategy to fully integrate all acquisitions into the business within approximately 12 months post acquisition, at the end of the first full financial year following acquisition the income from acquired individuals is deemed to form part of the base Group business and any future growth / decline in revenues impacts the organic growth of the Group.

Organic growth in revenue is achieved via annual pricing reviews and recovery of time recorded, cross selling of further services to existing clients, new client wins and recruitment of senior fee earners who bring with them a good quality client following and capacity to take on more work.

Acquisitive fee income growth

Acquisitions that completed during the year contributed £2.1m to revenue for the year and the full year impact of acquisitions made in FY20 added £28.4m.  Total income from the FY20 acquisitions was £38.9m, the full year impact being net of the income recognised in FY20 for these acquisitions of £10.5m.

The acquisitions that completed in FY20 were generating income of £45.9m per annum at the point of acquisition.  We typically budget for a circa 20% loss of income through intended churn and streamlining of unprofitable work streams giving a base expected fee income of £36.7m. Therefore, during the year, the FY20 acquisitions have outperformed management's expectations.

The number of full time equivalent fee earners in the Group more than doubled to 865 at the end of the financial year from 426 at the start of the year, which reflected a combination of new recruits and new joiners via acquisition, partially offset by the restructuring exercise undertaken as a result of the COVID-19 pandemic.

Organic fee income growth

The overall movement in organic fee income for the year shows a decline of 3% compared to FY20.  This reflects the impact of the Covid-19 pandemic on the macro economic environment during the first quarter of the year, with the organic growth result in H2 being significantly higher than H1 (-15%).  However,  through a combination of the increasing momentum through the second half of the year, the continued work on recovery of time, pricing and the recruitment of high quality individuals with a client following, the Group reported strong organic growth of 10% for the second half of the year (compared to H2 in FY20). As the economy continues to recover from the pandemic, management remain focussed on maximising the organic opportunities available to the Group through further focus on developing existing client relationships and further recruitment of high calibre individuals with a client following.

Although not a KPI in its own right, the level of fee income is a product of the number of fee earners employed and the fees per fee earner generated during the year, with the quality of the people in the business being an important driver of the latter. 

In summary

The Board is pleased with the profitability during the year which has been achieved despite the significant investment in the strengthening of the management and support staff function.  Income has grown as a result of acquisitions during the current and prior year and strong organic growth was achieved in the second half of the year, reflecting the continued onboarding of high quality talent and clients, as well as improving our pricing.

The ability of the Group to deliver such a strong result is particularly pleasing in the context of the significant impact of COVID-19 during the year.

In addition to the above, the lower than anticipated levels of net debt, due to the Group's excellent cash management, places the Group in a strong position to continue to grow the business both organically and through selective acquisition opportunities.

Kate Lewis
Chief Financial Officer
13 July 2021