DWF.L Regulatory News (DWF)

DWF Group PLC

("DWF" or "the company" or "Group)

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon publication of this announcement, this inside information is now considered to be in the public domain.

25 August 2023

Full year results for the year ended 30 April 2023

DWF, the global provider of integrated legal and business services, today announces its full-year results for the year ended 30 April 2023. The Board is pleased with the Group's performance considering the challenging backdrop for the broader economy and the legal sector.

GROUP FINANCIAL SUMMARY

FY2022/23 HIGHLIGHTS

· Group net revenue growth of 8.5% (5% like-for-like3) to £380.1m. Reported revenue growth of 8.6% to £451.6m.

· Gross profit margin reduced by 1.3ppts to 50.4% (FY22 51.7%) reflecting direct cost pressure from salary increases.

· Cost to income ratio improved by 1.2ppts versus FY22 to 37.2%, helping to offset margin pressures.

· Adjusted PBT up 4.7% to £43.3m, with direct cost and interest rate pressures weighing on profitability.

· Adjusted PBT margin4 of 11.4%, a reduction of 0.4 percentage points on FY22 reflecting cost pressures.

· Reported PBT of £17.2m (FY22 £22.3m), which differs to Adjusted PBT due to adjusting items of £26.2m (FY22 £19.1m).

· Adjusted diluted EPS of 10.2p (FY22 10.7p) a 4.7% decrease on prior year due to the non-recurring tax benefit in the prior year which related to deductions for historical restructuring costs.

· Lock-up days of 196 versus prior year of 179, representing a 17 day stretch (14 excluding acquisitions) due to sector wide trend towards extended billing and payment terms

· £12.9m free cash flow generated (FY22 £12.9m), flat on PY due to lock-up stretch.

· Net debt of £101.7m, £29.9m higher than FY22 due to initial consideration payments of £10m for the acquisition of Acumension and Whitelaw Twining in the year, combined with the impact of the 17 day lock-up stretch versus the prior year. 

· Leverage has increased to 1.46x EBITDA (FY22 1.08x).

STRATEGIC HIGHLIGHTS

· Two strategic acquisitions made in the year with Acumension and Whitelaw Twining.

· Cost efficiency programme has continued with target savings of £15.0m offsetting salary pressures and interest rate increases.

· New divisional structure from 1st May 2023 further integrates the delivery of client service by combining legal and business services which are aligned with the needs of the Group's clients, whilst maximising the opportunity for future profitable revenue growth.

· On 21 July 2023, we were pleased to announce the Board's unanimous recommendation of an all cash offer for DWF Group plc from Aquila Bidco Limited, a newly incorporated wholly-owned subsidiary of funds advised by Inflexion ("Offer").

OUTLOOK AND CURRENT TRADING

· The first three months of trading for FY24 have been in line with management expectations from a revenue and income perspective, however lock-up stretch has had a balance sheet and cash impact.

· Management are considering the achievability of the lock-up target of 170 days given economic headwinds which are driving longer billing and payment cycles.

· With the current trends not expected to abate, the Board is not expecting to undertake any material M&A in the short term on a stand-alone basis as it seeks to address the ongoing challenges presented by lock-up stretch, increasing interest costs and the balance sheet leverage.

ACQUISITION BY INFLEXION

· The acquisition by Inflexion is expected to complete during the final quarter of this calendar year.

· As part of the Offer from Inflexion, shareholders will be entitled to receive a special dividend of 3 pence per share. The special dividend, payment of which will be funded by Inflexion, is conditional upon, and only payable if, the Offer becomes effective. Absent the Offer, in light of the broader challenges in the sector and for DWF, the Board would need to consider the appropriate level of dividend for the 6 month period ending Apr-23, if any, and also its medium term capital management framework including sustainable dividend distributions.

· With respect to the recommended cash acquisition of DWF Group plc by Inflexion Private Equity Partners LLP the shareholder Court Meetings and a General Meeting are to be held on 12th September 2023 to consider the scheme of arrangement.

· The DWF Directors recommend unanimously that DWF Shareholders vote in favour (or procure votes in favour) of the Scheme at the applicable Court Meetings and vote in favour (or procure votes in favour) of the Resolution at the General Meeting as the DWF Directors who hold DWF Shares as at the date of the Scheme Document have irrevocably undertaken to do (or procure to be done) in respect of their own beneficial holdings, amounting to 9,655,772 DWF Shares in aggregate, representing approximately 2.8 per cent. of the ordinary share capital of DWF as at 11 August 2023.

· Bidco has also received irrevocable undertakings to vote (or, where applicable, procure voting) in favour of the Court Meetings and the General Meeting from 107 DWF Partners and Senior Employees who hold DWF Shares totalling 132,370,677 DWF Shares representing approximately 38.7 per cent. of the existing issued ordinary share capital of DWF as at 11 August 2023.

Sir Nigel Knowles, Chief Executive Officer, commented:

"We have once again grown the business profitably in what continues to be a very challenging economic environment. Like other legal businesses, we have seen salary and inflationary pressures, the impact of interest rate increases and variable demand particularly in transactional areas. Despite these challenges, we have seen our organic growth strategy and integrated propositions continue to resonate with clients, and have also added quality businesses to the Group via our acquisitions of Acumension and Whitelaw Twining"

Paul Rimmer, CEO of Commercial Services, commented:

"The Senior Partners and leaders and I wanted to take this opportunity, on behalf of ourselves and the broader DWF partners and employees, to say thank you to our institutional shareholders for their support since DWF's IPO. The business has made substantial progress over the last 4.5 years in an evolving market and we are now excited about delivering the next stage of our strategy under private ownership. The quantum of irrevocable undertakings obtained from the senior partners and leaders demonstrates our collective strong belief in the rationale for the proposed acquisition, especially access to additional capital, more flexibility on investment spend and the ability to maintain additional leverage capacity in the business as we invest to counter macro headwinds. This is an essential opportunity to ensure DWF has a firm footing for growth over the medium term and we all look forward to supporting our clients under Inflexion's ownership."

The person responsible for making this announcement on behalf of the Company is Chris Stefani, Group Chief Financial Officer.

For further information:

H/Advisors Maitland (public relations advisers to DWF)

Sam Turvey or Sam Cartwright

+44(0)20 7379 5151

DWF Group plc

James Igoe

+44(0)7971 783533

Head of Communications & IR

About DWF Group

DWF is a global provider of integrated legal and business services. It has approximately 4,000 people and with offices and associations located across the globe. For more information visit: dwfgroup.com

Forward looking statements

This announcement contains certain forward‐looking statements with respect to the Company's current targets, expectations and projections about future performance, anticipated events or trends and other matters that are not historical facts. These forward‐looking statements, which sometimes use words such as "aim", "anticipate", "believe", "intend", "plan" "estimate", "expect" and words of similar meaning, include all matters that are not historical facts and reflect the directors' beliefs and expectations and involve a number of risks, uncertainties and assumptions that could cause actual results and performance to differ materially from any expected future results or performance expressed or implied by the forward‐looking statement.

LEI: 213800O9QREOHTOGQ266

1 Described in the glossary to the financial statements

2 Gross profit margin is defined as gross profit divided by net revenue

3 Like-for-like ('L4L') net revenue growth removes the impact of acquisitions

4 Adjusted PBT margin is defined as Adjusted PBT divided by net revenue

Chair's Statement

Dear Shareholder,

I am delighted to introduce our Annual Report and Accounts for the year ended 30 April 2023. The past year has been marked by continued macroeconomic volatility with considerable inflationary pressures across food, energy and other essential consumer categories. These pressures have led, in many countries, to a cost of living crisis and rising interest rates, which in turn, has fuelled further uncertainty about economic growth rates.

Despite these challenging conditions, our differentiated integrated legal and business services offering and our focus on delivering positive outcomes has enabled us to continue to perform well relative to some challenging sentiments in the legal sector.

I would like to offer my thanks, and the thanks of the whole Board, to all of our colleagues across the Group for their continued commitment, dedication and high-quality delivery throughout the year.

Group performance

We are focused on driving shareholder value through the delivery of sustainable attractive growth. That is what we have achieved again this year.

The Board is pleased with the Group's performance on revenue growth, profitability and cost control. Net revenue is up by more than 8% to £380m, with a like-for-like growth rate of 5%. Pleasingly we have seen this rate of growth improve in the second half of the financial year although this was against a challenging H2 in FY22.

Adjusted profit before tax increased by 4.7% to £43.3m, supported by our cost programme which now anticipates savings of £15m, helping to in part offset the well-publicised upward salary cost pressures affecting the sector. Reported profit before tax was £17.2m which represents a £5m or 23% reduction on prior year owing to an increase in adjusting items of £7m in the year as well as rising interest costs.

This performance reflects the impact of the Group's Integrated Legal Management strategy and ongoing key client focus, delivering integrated solutions to more Group clients.

Culture

We are a people business where developing a positive and inclusive culture, underpinned by our values and behaviours, is critical to our success.

Over the past year, I have enjoyed spending more time in our offices meeting with partners and colleagues, hearing first-hand about their experiences of working for DWF and perspectives on the culture within our organisation.

We have been able to organise more colleague engagement activities in-person and in different locations. This allowed the Board to hold informal meetings with a cross-section of DWF colleagues, at every career level and from all parts of the business. We have all found these very valuable.

I would like to express my thanks to all attendees at these meetings in providing their thoughts and opinions in an open and constructive manner.

The feedback received at these meetings is echoed through our well established engagement survey, where our engagement score has remained stable at 76. In the context of macroeconomic volatility, we are pleased with this strong performance in this key indicator.

Our role in society

ESG is core to our business model and long-term strategy and it remains a priority focus area for the Board. FY22/23 marked the first full year since publication of our ESG Strategy and I am pleased to report that we have made meaningful progress in a number of areas.

This includes reductions of our Scope 1 and Scope 2 CO2 emissions of 20% and 41% respectively, compared with FY21/22. We have continued to enhance our office space, with Pune, India and the new Edinburgh office both powered entirely by renewable energy.

On our diversity & inclusion agenda, we increased overall ethnic minority representation to 14%, against a target of 13% by 2025 and we invested in a range of new and improved family friendly policies, significantly enhancing our maternity, paternity and adoption leave schemes.

We are also proud that in the last financial year the DWF Foundation, an independent charity established by DWF in 2015, exceeded the £1 million mark for grants distributed. Funded in large part by the fundraising activities of DWF colleagues, the Foundation is an excellent example of the positive outcomes achieved through colleagues living our values. A point reinforced by the nearly 9,000 hours of volunteering time delivered by colleagues through the last financial year.

I talk more about our purpose, values and culture in the Governance introduction. You can read more detail on our priorities and actions in the ESG section of our Annual Report and Accounts.

Annual General Meeting 2023

The Annual General Meeting will be held on 20 October 2023.

Looking ahead

On 21 July 2023, we were pleased to announce the Board's unanimous recommendation of an all cash offer for DWF Group plc from Aquila Bidco Limited, a newly incorporated wholly-owned subsidiary of funds advised by Inflexion. This transaction is highly attractive not only for our internal and external shareholders, but also for our clients, employees and other stakeholders. The DWF board of directors recognises the opportunities that could be delivered under private ownership with Inflexion, which includes access to significant capital to invest in people and technology, accelerated lateral hiring and transformative acquisitions across jurisdictions. Inflexion has a clear ambition to support the management team to execute its strategy to create a global professional services business emanating from the legal sector and this will enhance the already exceptional and differentiated services that we deliver for our clients.

Shareholders will already have received a copy of the Scheme Document which was published on 15 August 2023. The shareholder Court Meetings and a General Meeting to approve the scheme of arrangement have been scheduled for 12 September 2023.

Subject to shareholder approval and the satisfaction (or, where applicable, waiver) of the Conditions and further terms set out in Part 3 of the Scheme Document, the Acquisition is expected to become effective during Q2 FY2024.

I would like to thank all of our Board members for their time and focus throughout this year.

Jonathan Bloomer

Chair

24 August 2023

Chief Executive Officer's Review

How did the Group perform this year?

We have once again grown the business profitably in what has been a very challenging economic environment. Like other legal businesses, we have seen salary and inflationary pressures, the impact of interest rate increases and variable demand particularly in transactional areas. Despite these challenges, we have seen our organic growth strategy and integrated propositions continue to resonate with clients, and have also added quality businesses to the Group via our acquisitions of Acumension and Whitelaw Twining.

You have further extended your capabilities in North America through the transaction with Whitelaw Twining in Canada. How is this integration progressing and what next for this region?

We were pleased to complete this transaction with Whitelaw Twining, one of Canada's top legal businesses which we knew would always represent a high quality opportunity for our clients. Good progress has been made since they became part of the DWF Group in December.

We have already expanded into the Toronto legal services market with the hire of three partners, four additional lawyers, one paralegal and two support staff. We are also seeing great collaboration - between our legal and business services colleagues within Canada and between our Canadian team and colleagues globally.

This move marked the next step in DWF's North American strategy and has given us an integrated legal and business services offering in Canada which also aligns to the Group's existing claims and legal operations offering in Chicago.

In a highly-competitive talent market, what have you done this year to strengthen your colleague proposition?

Attracting and retaining the very best talent remains a top priority. That is why in the past year we have taken steps to continue strengthening our colleague proposition. I would highlight two areas where we have made particular progress, through significantly enhanced family friendly policies and improvements made to a number of our office locations through our future workplace strategy.

Our enhanced family friendly policies including aligning our maternity leave provision for all colleagues and partners to offer 26 weeks at full salary, with this same 26-week provision available to colleagues and partners taking adoption leave. We have doubled our paternity leave entitlement from two weeks to a four-week benefit and increased our Shared Parental Leave benefit from two weeks with full pay, to eight weeks. These investments carry a cost, but the improvements benefit our colleagues and support our drive to create an inclusive culture.

Our future workplace strategy includes a commitment to reducing the amount of overall office space and improving the quality, contributing to our ESG commitments through our use of materials and improving colleague wellbeing with smart and functional work areas. The actions taken this year include a relocation in Edinburgh, where we selected a building which has been designed with a clear focus on sustainability, creating an exceptional working environment and having a positive impact on the local community.

We have also delivered a refit of our Bristol office, with work also underway in Liverpool. Whilst this strategy remains a work in progress, our expectation is that we will review all of our office space globally with the aim that our current and future colleagues view our office spaces as places they enjoy working from.

In March you announced changes to your global operating structure. What will these changes allow you to do differently and how do they support your integrated legal management approach?

The changes we announced in March were a natural evolution in our strategy as they allow us to go further in how we deliver our integrated offering to clients. It means our internal operations are better aligned with the services we provide and the clients and markets we serve. Many of our largest global clients are insurers and our integrated legal management approach is of particular relevance to them. By bringing legal and business services colleagues together into our two largest divisions, we are delivering a truly integrated offering to clients, driving greater internal collaboration and supporting profitable revenue growth.

What is the outlook for the year ahead?

We continue to be in turbulent times economically, and indeed the legal sector has seen pressures from both rising costs and volatility in demand particularly for transactional work. We have always viewed ourselves as having a defensive model but are not immune to the environment in which we operate. The margin dilution from salary and interest rate increases, which brought us in at the bottom end of Adjusted PBT expectations, will continue to need mitigating actions on price, productivity and cost control. We believe we have put the right initiatives in place to protect our P&L, but are also having to work hard to ensure lock-up stays within a sensible range as clients are inevitably holding on to cash for longer. This has implications for our leverage and our ability to execute our strategy. We remain confident in our prospects, but cannot be complacent about the headwinds affecting all businesses. Indeed, absent the Offer from Inflexion, the Board would need to consider the appropriate level of dividend, if any, for the period ending Apr-23 and DWF's medium term capital management framework.

Sir Nigel Knowles

Group Chief Executive Officer

24 August 2023

Financial Review

A Challenging Environment

The Group has delivered profitable growth in a particularly difficult environment for the sector. The results include reported revenue growth of 8.6% to £452m (PY £416m), net revenue growth of 8.5% to £380m (PY £350m), a 4.7% increase in adjusted profit before tax to £43.3m (PY £41.4m) and a reported profit before tax reduction of 23% to £17.2m (PY £22.3m).

In addition to top-line growth rates, the Group is gradually seeing the stabilisation and reversal of gross margin dilution from salary inflation over the last 18 months. The gross margin gap to prior year at FY23 has reduced compared to HY23, reflecting some improvements in pricing combined with the cost programme announced in December 2022. Overheads and the cost-to-income ratio are trending favourably with £11m of the previously announced cost savings secured by the end of FY23. These dynamics help to underscore confidence in market guidance as management has taken action to offset some of the adverse economic circumstances not envisaged when guidance was last issued.

Working capital performance continues to be an area of challenge in an environment where clients are generally looking to manage their own working capital cycle by often seeking longer billing or payment cycles. The Group reported lock-up days of 190 at HY23 which reflected an 11 day increase on FY22. As expected, this position stabilised in H2 with the like-for-like lock-up day performance for the full year at 193 days (like-for-like excludes M&A). Net debt performance follows lock-up days with FY23 net debt of £101.7m.

Revenue

Revenue for the year is £452m (FY2021/22 £416m) representing growth of 8.6%. However, the Group focusses revenue measurement on net revenue as revenue is distorted by the level of irrecoverable expenses incurred on delivery of client matters where such expenses do not necessarily reflect the activity levels of the projects or the business.

Net revenue for the Group is £380m (FY2021/22 £350m) representing reported growth of 8.5% and like-for-like growth (excluding acquisitions of Acumension and Whitelaw Twining) of 5%.

Divisional performance

Highlights of the performance by division are set out below:

Legal Advisory (83% of Group Net Revenue/85% of Group Gross Profit)

Legal Advisory delivered net revenue growth of 8% (LFL growth of 5%) despite facing a number of challenges throughout FY23, including the impact of the Russia and Ukraine conflict and significant political uncertainty in the United Kingdom during Q2 and Q3. High single digit percentage growth in a number of our global teams such as Dispute Resolution and Finance & Restructuring, with double digit percentage growth in Tax & Private Capital, has been partly offset by transactional teams which have been impacted by the broader economic uncertainty and delays in the regulatory pipeline. Insurance grew by 5% and is generally less affected by macro factors due to its defensive nature. As the first financial year following the easing of Covid-19 restrictions, FY23 chargeable activity was also adversely impacted by increased absence as many colleagues took their first substantial holidays since 2019.

Given these various top line headwinds, fee earner, team and location performance levels have been closely monitored to identify potential strategic cost savings and protect margins. Along with tight controls over recruitment, these activities helped mitigate the impact of cost pressures that intensified from the FY23 sector 'war on talent' and market demands including cost of living pay increases for non-qualified grades upwards. Such actions needed to be balanced sensibly with the longer-term needs of the division.

Recruitment has been enhanced where the future pipeline warrants investment, for example in insurance and our new sustainable business offering and global arbitration teams. There has been a drive to build presence in London and to recruit high quality lateral hires into France and other overseas locations, whilst supporting wider growth in lower cost jurisdictions to facilitate efficient best-shoring of work.

Consequently direct costs have increased ahead of net revenue growth, resulting in a degree of gross margin degradation. There has also been an impact from lengthening matter lifecycles which have led to slower payments from clients, placing pressure on working capital and increasing lock-up days. This is consistent with trends reported across the sector and a broad range of measures have been introduced to mitigate risks in this regard. This working capital stretch is considered to be a timing issue which will ultimately unwind.

The end of the year saw the launch of a number of initiatives, such as the planned introduction of pricing technology solutions to help counteract ongoing inflationary cost pressures.

In addition, expansion into new locations (including Saudi Arabia and Canada) will support the drive for profitable future growth.

Connected Services (11% of Group Net Revenue/9% of Group Gross Profit)

Connected Services delivered net revenue growth of 20% compared to FY22 (LFL growth of 14%). This growth was supported by the acquisition of Acumension in September, a team of 47 legal costs management specialists in the UK, which has expanded DWF's costs management capability and enhanced the service for clients in the insurance and public sectors.

Whilst net revenue has grown by £6.8m, gross profit did not increase by the same proportion, resulting in gross margin decline for the division. This was due to cost pressures driven primarily by cost of living linked pay increases across a number of territories, particularly the UK, US and Canada. This margin dilution began to ease in Q4 as a result of cost measures and pricing interventions and is expected to improve along with the rest of the Group over time, particularly as efficiencies are secured through the new divisional structure.

The Claims Management and Adjusting business has grown by 12%. This was driven by both the US and Canadian geographies where the strength of the North American insurance market led to new client wins, teams in Chicago and Vancouver were expanded and as the business benefitted from the pound weakening against the dollar. The United Kingdom and Ireland business remained flat as new business replaced Covid-19 Business Interruption claims work. Combining the Claims Management and Adjusting business with Insurance Legal Services in FY24 will promote greater client sharing and collaboration.

The Regulatory business, which largely aligns to the new Commercial Services Division, has grown by 23% and saw an improving gross margin. With the exception of Audit, which underwent a restructure during the year, all businesses showed double-digit net revenue growth, reflecting a strong pipeline of work due to our clients increasing demand for regulatory advice.

The wider Group restructure produces synergies with what was the Legal Advisory division and presents the opportunity to reduce cost within the division. The full impact of the cost efficiency programme began to show through in the final quarter and, with the majority of the identified savings being support roles, should have limited impact on revenue.

Mindcrest (6% of Group Net Revenue/6% of Group Gross Profit)

Mindcrest had a transitionary year as structural changes were implemented, including a change in leadership and the recruitment of new sales resource. The focus for H2 has been on building pipeline and embedding the new dual go-to-market strategy, focussing both on sales to the top 450 Group clients as well as internal work transfer to secure Group margin benefit. As with other divisions, the cost efficiency programme has driven some cost removal but has also facilitated investment into sales resource in the US (the largest alternative legal services provider market globally).

Divisional net revenue contracted by 6% in the year, owing to the conclusion of one of the division's flagship engagements which began winding down in H2 of FY22. Despite net revenue having contracted year-on-year, H2 of FY23 saw top line growth of 9% as compared to H2 of FY22 as the division starts to generate momentum. Certain services within the division have enjoyed particular success, reflecting improved demand from financial services clients. This includes eDiscovery services, which grew revenue by 15%, and lender/recovery services, which grew by 10%.

In addition to the restructuring and refocussing activities, the division saw similar inflationary cost of living pressure across all geographies (more so in United Kingdom following announcement of Living Wage increases). The margin pressures began to ease in Q4 due to cost savings and the positive pipeline development.

Direct costs

Direct costs, which reflect the salary costs of fee-earning partners and staff, have increased by £19m, or 11%, to £188m. The acquisitions of Acumension and Whitelaw Twining accounted for £6.5m of year-on-year increases, and in addition salary increases and recruitment of new partners and fee-earners accounted for the remaining £12.5m (7%) increase. A combination of broader inflationary pressures and the well documented legal sector battle for talent have driven the salary uplifts.

Gross profit

Gross profit of £192m reflects the impact of organic and inorganic revenue growth and the salary increases from recruitment and salary uplifts, with gross profit increasing by £11m or 6% on FY2021/22. This reflects a gross margin % of net revenue of 50.4% (FY2021/22 51.7%). This reduction reflects the investment made in additional fee earning resources and the impact of salary increases driven by sector and broader inflationary pressures. Pricing and productivity are areas of focus which are expected to help mitigate the gross margin dilution.

Administrative expenses

Administrative expenses (including impairment) have increased to £168m (FY2021/22 £153m) which is a £14m or 9% increase. However, on an underlying basis excluding adjusting items, administrative expenses for FY2022/23 are £141m (FY2021/22 £134m), an increase of £7m or 5%. Approximately two thirds of the year-on-year increase is attributable to the additional overheads from the acquisitions of Acumension and Whitelaw Twining. The balance predominantly represents increases in support staff salaries, travel, business development and IT costs.

The restriction of underlying overhead growth to 5% has delivered a cost-to-income ratio of 37.2% (FY2021/22 38.4%).

During the year, the Group announced a cost efficiency programme with the aim of reducing both direct and indirect costs to help offset other inflationary pressures. The outturn on administrative expenses and the resulting reduction in cost-to-income ratio is partly attributable to the savings delivered by this cost programme, which began to reflect in the numbers in the final quarter of the year. In May, the Group announced an increase in the cost savings target from £10-£12m to £15m in recognition of the continuing (and in the case of interest rates, increasing) pressure on the Group's 'Adjusted Profit Before Tax' guidance. Cost control will continue to be an area of focus with savings in property (via estate reduction), project spend and other discretionary overheads helping to mitigate ongoing salary inflation and interest increases.

Adjusting items (the difference between reported and underlying administrative expenses) were £26m (FY2021/22 £19m). The increase is due to additional share based payment charges, accelerated depreciation for vacant property, acquisition fees and restructuring costs. The table below provides more details with full analysis contained in note 2 to the financial statements:

Adjusting items in FY2022/23 can be summarised as:

1. Historical office closures, impairments and scalebacks where some final costs were charged to the income statement in the year in relation to Germany and the Pune lease for the unused 8th floor was impaired;

2. Acquisition related expenses principally relating to amortisation and impairment of intangibles recognised on acquisition, acquisition related remuneration for Acumension and Whitelaw Twining and acquisition related advisory fees;

3. Share based payment expenses reflecting grants from the Employee Benefit Trust which is a pre-funded trust established on IPO; and,

4. Non-recurring costs relating to the execution of the cost reduction programme

Net finance expense and interest payable on leases

Net finance expenses relating to bank charges and borrowings were £5.3m (FY2021/22 £3.7m). Interest on bank borrowings increased as a result of a combination of higher interest rates and an increase in the level of net debt due to acquisition outflows and higher lock-up. 

Interest payable on leases of £1.7m (FY2021/22 £1.7m) reflects the notional interest cost relating to lease borrowings.

Profit before tax

The Group reported a profit before tax of £17.2m (FY2021/22 £22.3m) which represents a £5m or 23% reduction on the prior year. The reduction is primarily driven by the £7m increase in adjusting items as detailed above in the administrative expenses section.

Adjusted PBT is £43.3m (FY2021/22 £41.4m) which represents a 4.7% increase on the prior year. The key factors driving the slightly lower "drop-through" from revenue growth are the gross margin dilution due to direct cost increases and significant interest increases from both base rate rises and sector lock-up stretch driving higher net debt. These factors are partially, but not wholly, offset by the initial impacts from the cost programme which means the adjusted PBT margin of 11.4% represents a 0.4ppts reduction on prior year (FY2021/22 11.8%).

Tax

The reported tax charge for the year, excluding prior year adjustments, is £5.7m (FY2021/22 £6.1m) on a profit before tax of £17.2m (FY2021/22 £22.3m). This represents an effective rate of tax of 32.9%. The effective tax rate was higher than the UK statutory tax rate primarily due to current year tax losses that have not been recognised as deferred tax assets (increasing the tax charge by £2.5m) and the tax effect of non-deductible expenses (increasing the tax charge by £1.7m) offset by the utilisation of unrecognised losses brought forward (reducing the tax charge by £2.1m).

The Group also booked prior year adjustments of a net credit of £1.0m. Those adjustments principally arise as a result of (a) finalisation of prior period partnership tax returns and partner drawings impacting the profits subject to UK corporation tax (£0.5m), and (b) revaluations of the Group's deferred tax assets relating to tax depreciation timing differences and expected tax deductions for share based payments as at 30 April 2022 (£0.5m).

This gives a net tax charge of £4.7m for the year (FY2021/22 £2.0m).

There are no open tax audits or investigations across the Group. In line with Group tax strategy, it is not considered that any aggressive or materially uncertain tax positions have been adopted by any of the Group entities. As such, the level of tax risk faced by the Group is considered to be low.

EPS

Diluted EPS has decreased to 3.8p in FY2022/23 compared to 6.5p in FY2021/22. The reduction is due to three factors: an increase in one-off (adjusting items) compared to the prior year, reducing the reported profit; an increase in tax charge compared to prior year, which benefitted from deductions from historical closures and scalebacks; and an increase in the share count from the acquisition of Whitelaw Twining during the second half of the year.

Adjusted diluted EPS has decreased to 10.2p (FY2021/22 10.7p), a reduction of 0.5p or 5%. This reduction is due to the aforementioned one-off benefit in the prior year tax charge which enhanced the prior year EPS by an estimated 0.9p.

Dividend

The Group's capital allocation policy is to prioritise having sufficient capital to fund ongoing operating requirements and strategic investment in the Group's long term growth. Under normal circumstances, the Board targets a pay-out ratio of up to 70% of adjusted profit after tax. For FY2022/23, however, no final dividend has yet been declared given the proposed acquisition of DWF Group by Inflexion (which will include a special dividend payment of 3 pence per share if the Offer becomes effective) and unanimous recommendation that DWF Shareholders vote in favour of the deal. If the Offer does not become effective, the Board will need to consider the appropriate level of dividend, if any, for H2 2022/23.

Working capital, cash flow and net debt

The Group measures working capital efficiency using "lock-up days". Lock-up days are comprised of two elements: Work-in-progress ("WIP days"), representing the amount of time between performing work and invoicing clients; and Debtor days, representing the length of time between invoicing and cash collection.

During the year, the Group saw a stretch in lock-up days to 190 days at the half year, after achieving consistent reductions over the previous four reporting periods. This lock-up increase was in line with reported lock-up stretch in the legal sector as client demands have driven either extended billing cycles or longer payment terms. Whilst the lock-up increase for the Group, at 5% at half year, outperformed the sector-wide increase of 10% it nevertheless has driven a higher overall lock-up balance and resultant net debt outcome. The stated intention at the half-year was to stabilise the position and this was broadly achieved with year-end lock-up of 196 days (193 on a like-for-like basis excluding Whitelaw Twining acquisition). In an inflationary environment with rising interest rates the upward pressure on billing and collection terms is potentially an ongoing risk. Whilst the Group will continue to mitigate this by improving the efficiency of internal influencing factors, the external environment is not expected to enable significant near-term reductions in lock-up.

The Group expects to continue to operate well within its available facilities and for all covenants to be compliant for the remaining tenure of the RCF. 

Capital expenditure

The main capital expenditure requirements of the Group are for IT infrastructure, replenishment and project work and office refurbishments. Overall capex (excluding right-of-use asset additions under IFRS 16, and intangible assets recognised from acquisitions) in FY2022/23 was £6.3m compared to £7.9m in FY2021/22.

Current trading and future outlook

The performance in FY2022/23 reflects another year of profitable growth, albeit delivering an Adjusted PBT figure at the lower end of expectations. Whilst profits increased year-on-year, gross and net margins were diluted primarily as a result of direct cost pressures from increased salaries demanded across the sector. The Group has taken actions to mitigate these cost challenges via the cost programme which has made good progress and is expected to help to mitigate the ongoing upward cost pressures.

The balance sheet, specifically lock-up, has proved to be a continuing challenge with the lock-up stretch seen in H1 sustaining through H2 and into the new year. This increase in lock-up days has led to increases in net debt and leverage and reflects sector-wide pressures on billing frequencies and payment terms. Working capital efficiency remains a key focus of the Group in order to maximise cash generation to manage borrowing costs. Inevitably, there are conflicting pressures between lock-up management, borrowing costs, leverage, investments in M&A and dividend requirements which are being carefully managed and considered by management and the Board.

The Group continues to see growth and profit opportunities but the various performance levers will require cautious management in what continues to be a challenging environment.

Chris Stefani

Group Chief Financial Officer

24 August 2023

FINANCIAL STATEMENTS

Consolidated income statement

Year ended 30 April 2023

The results are from continuing operations.

Consolidated statement of comprehensive income

Year ended 30 April 2023

There is no taxation on items within other comprehensive income.

Consolidated statement of financial position

As at 30 April 2023

Consolidated statement of changes in equity

Year ended 30 April 2023

Year ended 30 April 2022

Consolidated statement of cash flows

Year ended 30 April 2023

Consolidated notes to the financial statements

Year ended 30 April 2023

1 Accounting policies

1.1 Nature of these financial statements

The following financial information does not amount to full financial statements within the meaning of Section 434 of Companies Act 2006. The financial information has been extracted from the Group's Annual Report and Financial Statements for the year ended 30 April 2023 on which an unqualified report has been made by the Company's auditors. The 2023 statutory accounts will be delivered to Companies House in due course.

Copies of the Annual Report and Financial Statements will be posted to shareholders shortly and will be available from the Company's registered office at 20 Fenchurch Street, London, EC2M 3AG.

1.2 Statement of accounting policies

The preliminary announcement for the year ended 30 April 2023 has been produced based on the Group's annual financial statements which are prepared in accordance with UK-adopted International Financial Reporting Standards. The accounting policies applied in this preliminary announcement are consistent with those reported in the Group's annual financial statements for the year ended 30 April 2023 along with new standards and interpretations which became mandatory for the financial year.

1.3 Going concern

The Directors have assessed the going concern basis adopted by the Group in the preparation of the consolidated financial statements, taking into account the current financial position including its available financing facilities, the business model and future outlook, as well as the principal risks as listed in the Strategic Report. The Directors conclude that the Group has adequate resources to continue as a going concern across the period of assessment.

Assessment of going concern

The going concern assessment has been considered for the period to 31 October 2024 and is carried out as follows:

· The Group's Board-approved budget base case is used to calculate the net debt position, liquidity, covenant compliance and available headroom over the going concern period.

· The going concern assessment has been carried out on two different base cases, the first of which assumes the recommendation of an all cash offer for DWF Group plc from Aquila Bidco Limited is accepted, and the second of which assumes that the business continues as a Plc.

· The assessment of going concern is carried out with reference to available financing facilities under both scenarios, the ability to pay debts as they fall due and the covenants associated with the financing facilities.

· Plausible downside scenarios are modelled to quantify the impact of a variety of risks materialising over the going concern period.

· Mitigating actions which could be taken are identified, quantified and included in the assessment.

· The reasonable worst case scenario, along with mitigating actions, is then used to test that the Group would continue to have headroom in its available financing facilities, settle liabilities as they fall due and comply with the associated financial covenants over the going concern period.

Financing facilities

The Group closed the year with committed banking facilities of £158m (of which £139m were drawn). The largest of these is the £120m revolving credit facility ('RCF'), which was increased through exercising the accordion facility in February 2023. This RCF matures in December 2025, with one additional 12-month extension option. The undrawn portion of the RCF is readily accessible and does not require any further approval for drawdown by the Group's banking syndicate. The facility agreement also permits the Group to obtain a further £25m of external funding and £15m of leasing facilities, if required. The covenant thresholds across the assessment period are set out below:

Each of the covenants noted above is measured on a pre-IFRS 16 basis in accordance with the banking facility agreement. Interest cover is defined as the ratio of EBITDA to interest expense, and leverage is defined as the ratio of net debt to EBITDA.

If the recommendation of an all cash offer for DWF Group plc from Aquila Bidco Limited is approved, the current facilities will be fully repaid on completion, and new committed banking facilities of £330m will become available to the Group. The new facilities have long-term maturity dates, and include two working capital facilities, comprising £30m initial, with an additional optional £40m to drawdown on. There is also an additional £60m facility available to be utilised for future acquisitions, subject to lender approval. There are different covenant thresholds across the facilities, but the minimum covenant ratio has been modelled for the assessment period and these are as follows:

Future outlook, risks and uncertainties

The going concern and viability assessments are closely linked and therefore the conclusions of the going concern assessment are directly relevant to and should be read in conjunction with the viability statement. The Board-approved base case combined with the annual three-year plan, adjusted to include Whitelaw Twining, has been used to measure the going concern and future viability of the Group. This assessment has been performed on the same two bases as going concern. This includes monitoring net debt positions and cash management activities of the Group and their effect on covenant testing. The going concern and viability of the Group have been assessed taking into account the potential impact of certain downside scenarios arising from the principal risks and uncertainties.

In particular, the Board has considered the impact of both a de-listing and business-as-usual scenario, including impacts on cash flows and covenants. In addition the assessment considers the potential reduction in demand caused by either macro environmental factors, commercial pipeline, our ability to retain or attract the correct level of talent as well as inflationary pressures over and above each base case.

Mitigating actions

If faced with the reasonable worst-case scenario, the Board also considers possible mitigating actions available to the Group to maintain liquidity and covenant compliance. These can be swiftly implemented should the worst-case scenario arise and include (but are not limited to):

· freezing recruitment and a slowdown in investment in recruitment and reward;

· reducing discretionary operating spend such as marketing and travel;

· reducing non-committed capital expenditure;

· revision of the existing dividend policy; and

· cost cutting measures in non-fee earning areas including an acceleration of the execution of the Group's real estate reduction strategy

Reverse stress test

In addition to the modelling of the above scenarios, a reverse stress test was conducted by the Group to assess the quantum of increased inflationary pressures and a stretch in working capital that would materially impact our ability to comply with financial covenants. Such a material impact is not considered a reasonable scenario to adversely impact the going concern assessment, under either scenario.

Conclusion

Based on this assessment, the Directors have a reasonable expectation that the Group and Company has sufficient resources to continue its operations for the period of assessment. In particular the Directors have a reasonable expectation that the Group and Company will operate under its existing financing facilities, will comply with all covenants with adequate headroom and settle all other liabilities as they fall due. The Directors therefore consider it appropriate for the Group and Company to adopt the going concern basis in preparing these financial statements.

The directors are satisfied that under the no deal basis there is sufficient support and knowledge of the cash flows and operations of the business to adopt a going concern basis for the Group and Company. The all cash offer for DWF Group plc from Aquila Bidco Limited outlined above remains subject to shareholder approval. Assuming such approval is received, the transaction is expected to complete within 12 months of these Financial Statements. Aquila Bidco Limited have stated their intentions surrounding the Group's future outlook and funding plans and these align to the Group's current business plan and strategy. However, as the decisions around future strategy and intentions will no longer be in the exclusive control of the DWF Group PLC Directors, this creates a material uncertainty that may cast significant doubt on the Group and Company's ability to continue as a going concern as at 24th August 2023. The financial statements do not include the adjustments that would result if the Group or Company were unable to continue as a going concern.

2 Alternative performance measures

APM's are not intended to supplant IFRS measures but are included in response to investor feedback or to provide readers of the financial statements with additional understanding of the underlying trading performance of the Group.

APMs are fully defined and information as to why they are useful is provided in the glossary. Adjusted profit before tax reconciles to profit before tax as follows:

In FY23, an accelerated depreciation charge of £6.5m (FY22: £nil) was recognised in relation to the right of use, and other fixed assets located within a vacant floor in the Pune office. There are no future plans to occupy this space given the adoption of hybrid working, therefore associated assets have been fully depreciated in the year.

Adjusted profit before tax reconciles to profit before tax with reconciling items by nature as follows:

Cash used to settle non-underlying items includes £5.4m (FY22: £3.8m) relating to closures and other restructure costs and £1.4m (FY22: £4.6m) relating to acquisition-related advisory fees.

Non-underlying items are set out in the table below:

a. The Group periodically considers and analyses potential acquisition targets and recognises there is inherent complexity and risk associated with acquisitions. The Group manages this by employing external professional advisors to perform legal, financial, commercial and tax due diligence on targets. These costs relate to opportunities the Group identifies and pursues, of which a portion result in successful acquisitions. Acquisition fees in the current period relate to the acquisitions of Acumension and Whitelaw Twining as well as fees for aborted acquisitions.

b.  Acquisition-related expense relates to the remuneration expense from the acquisition of Mindcrest in FY20. Payments to the sellers of Mindcrest were deemed to be remuneration (and not consideration) under IFRS 3, and therefore expensed over the deemed service period rather than included in goodwill. As these costs are not considered recurring and ceased in February 2022, they have been included within adjusting items in order to give greater clarity of underlying trading performance. 

c. Closure and scale-back of operations in the current year relate to ongoing costs relating to the scale-back of operations in Germany which commenced in FY21 and final costs for the completion of closures and scale-backs in other jurisdictions such as Singapore. These costs comprise people and supplier exit expenses as a result of the decision taken.

d. During the year, the Group commenced an efficiency programme with the aim of removing cost from the business. Costs of executing the restructuring are considered non-recurring as a restructuring of this size is one-off and as a result is reported as a non-underlying item to provide clarity of underlying trading performance.

e. These costs are associated with the FY22 re-financing and include professional fees incurred that are significant in value and by their nature are not recurring annually.

The cost to income ratio is used to assess the levels of operational gearing in the Group. The cost to income ratio is defined as administrative expenses less adjusting items and divided by net revenue and is calculated as follows:

3 Operating segments

Reporting segments

In accordance with IFRS 8: Operating Segments ('IFRS 8'), the Group's operating segments are based on the operating results reviewed by the Board, who represent the chief operating decision maker ('CODM'). The Group has the following three strategic divisions, which are its reportable segments. These divisions offer different services and are reported separately because of different specialisms within teams in the business group.

The following summary describes the operations of each reportable segment:

The revenue, net revenue and gross profit are attributable to the principal activities of the Group.

Effective from 1 May 2023, the Group changed from the above strategic divisions to:

These changes to the Group's internal structure are a natural evolution to those made at the start of FY22, and will allow DWF to go further in how it delivers its integrated offering to clients.

For year ended 30 April 2023

In FY23, an accelerated depreciation charge of £6.5m (FY22: £nil) was recognised in relation to the right of use, and other fixed assets located within a vacant floor in the Pune office. There are no future plans to occupy this space given the adoption of hybrid working, therefore associated assets have been fully depreciated in the year.

Within administrative expenses, there is an impairment loss of £1.5m recognised relating to the Zing CGU. This is attributable to the Connected Services segment.

For year ended 30 April 2022

There are no inter-segmental revenues which are material for disclosure. Administrative expenses represent indirect costs that are not specifically allocated to segments.

Non-current assets, revenue and net revenue by region

The UK is the Parent Company's country of domicile and the Group generates the majority of its revenue from external clients in the UK. The geographical analysis of revenue and net revenue is on the basis of the country of origin in which the client is invoiced.

The Group's non-current assets, net revenue and revenue by geographical region are as follows:

Total assets and liabilities for each reportable segment are not provided to the CODM and therefore not presented.

4 Operating profit and auditor's remuneration

5 Net finance expense and net interest expense on leases

6 Taxation

The effective tax rate is higher (2022: lower) than the average rate of corporate tax in the UK of 19.5% (2022: 19%), and excluding prior year adjustments the effective tax rate is higher than the average rate of corporate tax in the UK. The difference is explained below:

In the Spring Budget 2021, the Government announced that from 1 April 2023 the corporation tax rate would increase to 25%. The impact of the change in tax rate has been recognised in tax expense in the income statement, except to the extent that it relates to items previously recognised outside the income statement.

The reported tax charge for the year, excluding prior year adjustments, is £5.7m on a profit before tax of £17.2m, representing an effective rate of tax of 33%. The effective tax rate was higher than the UK statutory tax rate primarily due to tax losses that have not been recognised as deferred tax assets (increasing the tax charge by £2.5m) and the tax effect of non-tax deductible expenses (increasing the tax charge by £1.6m) offset by the effect of the utilisation of unrecognised losses brought forward (reducing the tax charge by £2.1m). Please refer to Note 20 for further details.

7 Dividends

Distributions to owners of the parent in the year:

The Directors are not proposing a final dividend for the financial year ended 30 April 2023. A special dividend, which is conditional upon the scheme of arrangement becoming effective, is proposed as described in the scheme document published by the Company on 15 August 2023.

8 Earnings per share

Adjusted basic and adjusted diluted earnings per share are APMs (as defined in the glossary) and have been calculated using profit for the purpose of basic earnings per share adjusted for total adjusting items and the tax effect of those items.

Adjusted basic and adjusted diluted earnings per share may be reconciled to basic earnings per share as follows:

Shares held in trust are issued shares that are owned by the Group's employee benefit trusts for future issue to employees as part of share incentive schemes. These are recognised on consolidation as treasury shares. The future exercise of share awards and options is the dilutive effect of share awards granted to employees that have not yet vested.

Shares held in trust are deducted from the weighted average number of ordinary shares for basic earnings per share and adjusted basic earnings per share.

The definitions of adjusted basic earnings per share and adjusted diluted earnings per share can be found in the glossary to these financial statements.

9 Acquisitions of subsidiaries and transactions related to previous acquisitions

Acquisitions in the year to 30 April 2023

Business combinations are accounted for using the acquisition accounting method as at the acquisition date, which is the date at which control is transferred to the Group.

Two acquisitions were made in the year; Acuhold Limited ('Acumension') and Whitelaw Twining Law Corporation ('Whitelaw Twining'). Details of the acquisitions are as follows:

Acumension is a leading specialist in legal costs management headquartered in Manchester, focused on utilising technological capability to deal with complex defendant costs, and will expand our existing Costs business within the Connected Services division. 

Whitelaw Twining, is a leading Canadian law firm headquartered in Vancouver, specialising in insurance, commercial litigation, personal injury and dispute resolution. Whitelaw Twining brings a strong strategic fit, greater scale and an enhanced platform in North America, with synergy opportunities alongside DWF's existing Canadian claims and adjusting businesses.

The fair values of the assets and liabilities and the associated goodwill arising from the acquisitions are as follows:

Within the £5,530,000 consideration for Acumension, £1,086,000 is deferred and payable over one year post-acquisition and is not contingent on future performance targets. Of this deferred consideration, £760,000 has been paid in the period. Contingent consideration of £1,250,000 was payable based on certain KPIs being met in the first year post-acquisition. These targets were deemed to be unlikely to be met as at the acquisition date and therefore not included within the fair value assessment of consideration. The provisional fair values in relation to Acumension as disclosed in the FY23 interim accounts have been updated resulting in an increase to goodwill of £452,000 and a decrease in acquired net assets of £1,761,000.

Of the £5,260,000 consideration for Whitelaw Twining, £2,347,000 was deferred and payable in February 2023. This was not contingent on future performance targets. During the period, all deferred consideration was paid. An additional consideration of £15,000 was contingent on future performance targets in FY23. These were achieved, and the contingent consideration paid in March 2023. 

In addition to the consideration paid for Whitelaw Twining, 13,143,000 of shares were issued that vest over a period of between one and five years to July 2027. These shares are contingent on continuing service of the sellers. This is accounted for as remuneration and within the scope of IFRS 2 Share-Based Payments. An IFRS 2 charge of £1,293,000 has been recognised in the income statement for FY23, and a balance of £9,234,000 included within prepayments.

The goodwill for Acumension is attributable to the benefits of operating an already well-established business in the relevant sector and the synergies that are expected to be achieved from incorporating the business into the Group's operations. The goodwill will be allocated to the Costs CGU. As the purchase was not made with any qualifying intellectual property, all goodwill acquired is non-tax deductible.

Goodwill is measured at the acquisition date as the fair value of consideration transferred, plus non-controlling interests and the fair value of any previously held equity interests less the net recognised amount (which is generally fair value) of the identifiable assets and liabilities assumed. Goodwill is subject to an annual review for impairment (or more frequently if necessary) in accordance with our accounting policies. Any impairment is charged to the income statement as it arises.

The following intangible assets were recognised at acquisition. These have been measured at their fair value through the multi-period excess earnings method (customer relationships) and royalty relief method (brand).

Cash flows arising from the acquisition were as follows:

The table below outlines the revenue and PBT of the acquirees since the acquisition date, which is included in the consolidated statement of comprehensive income for the year, and the annualised revenue and PBT of the acquirees had the acquisition dates for the business combinations been at the beginning of the year:

Transaction costs comprised mainly advisor fees, including financial, tax and legal due diligence. These are all included within administrative expenses (non-underlying items) within note 2.

During FY23, the Group has concluded on the fair value of the net assets in respect of acquisitions completed, resulting in an increase of of £3.9m in net assets and a corresponding decrease in goodwill.

Acquisitions in the year to 30 April 2022

Two acquisitions were made in the year; Zing 365 Holdings Limited ('Zing') and BCA Claims and Consulting Limited ('BCA').

Full details of the acquisitions can be found in the Annual Report and Accounts 2022 at www.dwfgroup.com.

10 Intangible assets