In early January, 2 weeks after initiating my position, I participated in a discussion with the management of ASX listed legal firm AF Legal (ASX:AFL). (Please note that unfortunately, 2/3 of the way through our call the audio feed cut out).
Here is the discussion to listen to below with accompanying notes taken:
Could you please explain to us the unit economics of the business:
Lateral hires vs Acquisition vs greenfield sites head office costs play into that?
Lateral hires bring book of work 400-800k form new region canberra adelaide perth sunshine coast, then AFL establish an office
30% overhead costs, 30% digital marketing and other costs infrastructure, 30% bottom line
Self sufficient from the get go, word of mouth referral work then turbocharge through digital
Opening new offices dont take big overhead cost in leases in space sharing, junior lawyer 350 an hour 250k-350k revs on top (150k overhead per annum, 15k,2.5k per month, software, public relations, marketing, digital)
2-4 mill strong law canberra
What are the key indicators you guys follow internally?
Capital raise sophisticated digital using sales force
Cost per leads, romi, where we spend in each jurisdiction
Board meets every week on monday: 1. Operational (productivity of each), Utility, Cash Flow and conversions, Money in trust (not float?), Days debtors 6. 2. Digital (big referral base) 3. Growth with lateral hires
What sort of post-tax profit margins would the business achieve at scale?
30% growth of revs and profit
25-30% benchmark pre tax margins for a lot of law firms (70% below 10%) (conservative and achievable)
Operating ebitda margin at existing scale
Disproportional portion of costs
Big ones lower margin with higher revs, small ones higher
How do you scale into each location? Do you have an expectation of margin expansion? Optional follow-up: Do you tuck in surrounding firms or do you add specialists per location?
6-12 month ramp up on digital to kick in, (cost effective leads, won't dump money into CPL).
Digital took off in melbourne pretty quickly
Brisbane more people know people rather than online search
Perth more people search online
Canberra brisbane perth adelaide just now seeing momentum build from digital
What is the ROI of lateral hire vs acquisition vs greenfield? - no answer
Can you please explain the math behind the 3-year target of 10% market share and what are the next steps?
Acquisitions (risk, avoid significant acquisitions)
Strengthen platform and growth
Can execute one or two acquisitions immediately (main strategy)
20 regions that they can expand to
3 years getting to 6% realistic, 50m revs, 10m ebit target
Biggest player is 12m in Sydney
Is there a geographic acquisition strategy? - no answer
There was a buyback authorisation approved earlier last year, Why were there no buybacks during the year? What is your view on capital allocation generally
Will withdraw that, it was in response to weak share price “to protect share price”
Backdoor door took losses and (on market)
Price was weak because of lack of communication
How do you choose between reinvesting in the business, acquisitions, buybacks and dividends?
What is your view on issuing your equity capital or raising debt and is it necessary going forward?
This year first half there will be a raise for further growth in the market
Are there hurdle rates you use when assessing potential acquisitions?
Strong Law - 250 +150, principle staying on with no wage locked in with wage (strong law)
WIP 1 or 2 months of billings (150-200k)
Are there hurdle rates you use when assessing potential acquisitions? - asked multiple times no answer
On Digital acquisition model (DSAS)
Short term hard to replicate
4-5 years of digital data makes it hard for competitors to catch up (data optimisation) Internal conversion process (4 people in call center with scripts etc)
Long term - Fly wheel will pick up once revs increase, can commit more money to it
Strong relationship with google (one director close with CEO of google AUS, insights competitor analysis etc, marketing experts)
Data tells you where to open, even before they have lateral hires because they know that clients don't want to travel more than 15m and trek in to city Incentives
What incentives are you providing those to come across as lateral hires?
Competitive remuneration and equivalent to when they came
% of earnings above budget
Long term incentives rolled out over 3 years
Work in pure family firm, organisation is a flat structure
If someone leaves, they can't take their clients with them, bring in lateral to take their place and building
What are the STI and LTIs? What are the long-term splits of how key management executives will be remunerated?
120k chairman 60k bonus, increased to 180 + bonus, up to 50% of base + performance rights high,
Ed forgeighted to incentivise CFO and COO
Targets for STI and LTI 30% growth, financial metrics revs and profit, stapled to share price, execution on business strategy
Cost of sales
Disbursements, rendered on behalf of Barrister H1 6-8% of revs
Summary
Strong deal flow
Continue fallout of lateral hire
Lots more referrals
Flight center is referring (corporate services package)