Hays PLC

LSE:HAS

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to Hays Q1 analyst call. My name is Molly, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, David Phillips, to begin today's conference. Thank you.

[David Ian Phillips, Head of Investor Relations]

Good morning, and good morning everyone, and welcome to Hays quarterly update call for the 3 months ended 30 September 2019, the first quarter of our 2020 financial year. I'm David Phillips, Head of Investor Relations, and I'm here with Paul Venables, Group Finance Director. Before we begin, please be aware that this call is being recorded with the recording accessible using the number and the code provided in the release. Please be aware that our discussion may contain forward-looking statements that are based on current expectations or beliefs as well as assumptions on future events. There are risk factors, which could cause actual results to differ materially from those expressed in or implied by such statements. Hays disclaims any intention or obligation to revise or update any forward-looking statements that have been made during this call regardless of whether these statements are affected as a result of new information, future events or otherwise. I'll now hand you over to Paul.

[Paul Venables, Group Finance Director & Executive Director]

Thank you, David. Good morning, everybody, and thanks for joining us. I'll summarize the highlights of today's update, cover key themes and discuss regional performances before we take any questions. As usual, all net figures and percentages I give will be on a like-for-like rate basis versus prior year unless stated otherwise. First, highlights of results. We delivered a solid quarterly performance with deep net fees flat on a headline basis in line with market expectations. This is despite tougher macroeconomic conditions, ongoing signs of reduced business and candidate confidence and a 9% year-on-year growth comparative. When adjusted for working days, net fees decreased by 1%. Currency translation had a positive impact and increased headline net fees by 1% in the quarter. I'd highlight the following key features in the results. First, all of our 33 countries delivered double-digit growth including 8 all-time quarterly records. Overall, growth was flat in both our Temp and our Perm businesses. Australia net fees declined by 2% or 3% working days adjusted. The overall market is broadly sequentially stable at near-record levels as our conditions in Construction & Property remained flat. Third, Germany delivered flat net fees or down 2% working days adjusted, and we saw broad signs of reduced business confidence and increased client cost control, particularly in the manufacturing and automotive sectors. Four, in the U.K. & Ireland, fees declined by 4% or down 5% working days adjusted. This comprised a good 6% growth in our public sector business and tough conditions in the private sector where net fees fell by 7%. Five, performance in the Rest of the World was solid at 4%. Asia and the Americas both performed well, up 7%, and EMEA ex Germany was up 2%. Sixth, group consult head count was up 1% in the quarter and year-on-year, and we opened 1 new office in Bremen, Germany in line with our long-term plans. Seven, cash performance was good, and we ended the quarter with net cash of GBP 90 million, GBP 10 million higher than Q1 FY '19. I'll now comment on the performance by each division in a little more detail. Our ANZ division, 18% of group net fees, declined by 2% or down 3% on a WDA basis. Temp representing 68% of ANZ fees declined by 1% and Perm down 3%. Important to note the overall market is broadly sequentially stable at close to record levels. Australia decreased by 3%. And in New South Wales and Victoria, together 57% of our Australian business, net fees decreased by 6% and 5%, respectively. Queensland declined by 2%, although South Australia and ACT were up 5% and 1%, respectively. At the Australia specialism level net fee growth in IT was strong at 11%, and HR grew by 6%. Construction & Property, our largest business in Australia, remained challenging and declined by 20 -- 16%. It is now 21% below peak. Accounting & Finance was also difficult and reduced by 13%.And finally, I'm pleased to say that following management changes made in New Zealand last year, we've now returned to growth in that country at a strong 19%. Our head count -- consultant head count in ANZ increased 1% in the quarter, but was down 2% year-on-year. Our largest business, Germany, 27% of group net fees, was flat or down 2% on a WDA basis versus the prior year. As noted earlier, there are broad signs of reduced business confidence and increased cost control. We also faced a tough 13% growth comparative from prior year. Our Temp & Contractor business, which represents 83% of Germany's net fees, was flat with Contracting down 2% and Temp delivering solid growth of 5%. Perm continued to slow and decreased by 2%. After strong growth in recent quarters, our German public sector business deserves a mention as it now represents 11% of net fees and it grew by 31% in the quarter, whilst private sector was down 3%. Our largest specialism of IT, 41% of the German net fees, grew by a solid 4%, but Engineering, our second largest specialism at 27%, saw fees decline by 5% due to continuing tough conditions in manufacturing and automotive sectors. Sales & Marketing grew an excellent 21%, although Construction & Property was tougher, down 16%. And consultant head count was flat in the quarter and up 1% year-on-year.In U.K. & Ireland, 23% of group net fees, conditions were tough and net fees are down by 4% or 5% working days adjusted. Perm declined by 8%, whilst Temp was flat. Growth in the public sector, which represented 28% of U.K. & Ireland, was a good 6%, and within this, Temp grew by 8% and Perm 1%. The conditions in the private sector were tougher with ongoing uncertainties continuing to affect business confidence, and we also saw a reduction in candidate confidence, and thus, net fees decreased by 7%. All regions traded broadly in line with the overall business except for the South West & Wales up 4% and the Midlands and North down 10% and 7%, respectively. And our largest U.K. region of London fell by 2%. In Ireland, net fees declined by 13%. At the specialism level, IT grew a solid 5%. Accounting & Finance and Office Support both fell 4%, whilst Construction & Property was down 7%. Education continues to face tough Perm market conditions and declined by 11%. And overall, consultant head count increased by 2% in the quarter and year-on-year, reflecting our graduate intake and investment in our IT specialism. Rest of the World, comprising 28 countries and representing 32% of group net fees, grew by 4% against a tough 14% growth comparative. Within this, 8 countries delivered all-time records. EMEA ex Germany grew by 2% and remained broadly sequentially stable. Within this, our largest Rest of the World country, France, is up 3%, Switzerland 7% and Italy increased by a strong 11%. However, The Netherlands and Belgium were tougher, decreasing by 12% and 7%, respectively. And in Spain, we saw a decrease in the quarter, down 6%. Americas delivered good 7% growth. Our U.S. business, the second largest Rest of World country, produced a record quarter and grew by 12% with growth in both Construction and IT. Mexico increased by an excellent 36%. However, Canada was tougher and declined by 5%. Growth in Asia was also good at 7%. China, our third largest Rest of World country, delivered another record quarter up 7%, Japan grew by 3% and Malaysia produced an excellent result of 32%. And in the Rest of the World, consultant head count was up 2% in the quarter and up 1% year-on-year. Cash flow and balance sheet. We delivered a good underlying cash performance in the quarter with a net cash position at 30th of September of GBP 90 million, GBP 10 million higher than at the end of Q1 FY '19. Current trading and guidance. I'd highlight 5 points. First, the group's net fleet exit rate was broadly in line with the working days adjusted rate of growth in the quarter. Second, we expect group head count to remain broadly flat in Q2 FY '20. Three, for comparative purposes, if we retranslate our FY '19 profits of the average exchange rate seen during FY '20, our reported operating profit of GBP 248.8 million will be GBP 248 million, which is GBP 6 million reduction versus the position on prelim results in August. Four, looking ahead, we remain mindful of economic and political uncertainties. We're focused on managing the challenging conditions in cyclical sectors like C&P and Engineering whilst investing in key structural growth markets like IT. Ring-fenced investments into our IT specialism over recent years are delivering strong results with 11% growth in FY '19 and 6% in the last quarter on a global basis. In Q1, thus, we added a further 70 consultants into our IT specialisms in Australia, France, Spain and the U.K., the initial charge of a ring-fenced investment program. And five, when you sit here today and with the usual caveat that we've only got 3 to 5 weeks' visibility and little forward secured revenue stream, I'd expect our group like-for-like growth rate in Q2 to be down 2%, slightly below Q1's working days adjusted growth rates. In conclusion, we've delivered a solid performance in tougher macroeconomic conditions. We'll continue to balance investing for the long term whilst managing the more challenging markets we currently face. Our cash performance was again good, and we ended the quarter with GBP 10 million more cash than the same point last year, demonstrating again the highly cash-generative nature of our business model. Our financial strength in global network, which is the largest and most balanced in the industry, means we have an excellent platform to manage more challenging markets while still investing to deliver our long-term strategic goals. I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rory McKenzie calling from UBS.

[Rory Edward McKenzie, European Support Services Analyst]

It's Rory here with a few questions on behalf of Bilal. Firstly, just on that last comment you gave where you said that you expect the group to be at minus 2% in Q2. Is the bigger areas of deterioration still in Germany, and can you talk about how business confidence is maybe still falling there? And also what should we be aware of in Germany in Q2 in terms of comps and working days, please?

[Paul Venables, Group Finance Director & Executive Director]

Yes. Thank you, Rory, and good to hear from you again. Look, I think we were very clear when we talked at the prelims that we've seen a step-down in activity levels in Germany and the U.K., and of course, that was clearly reflected in the results today. And whilst our exit rate in September overall was in line with kind of the underlying growth in Q1, we have to remember 2 things. I think, first of all, September a year ago was a weaker quarter. That was a quarter in which we had a quite sharp decline. And then, secondly, all the forward indicators we see show that we don't expect to see any improvements, you've got a slight deterioration again in the U.K. and Germany. In Germany's case, I think now the -- what started off a year ago as the start of a quite sharp slowdown in the Automotive and manufacturing sector, I think that's now, for obvious reasons, hit confidence more broadly. And you only have to follow the business press in Germany to see that there was a lot of discussion about will there be a technical recession, how long might it be, how deep might it be and all of us will have seen the PMI indices in Germany, which is whether it's in the manufacturing sector where it's at 44, whether it's in the service sector is well below that in Europe. So for everything we're seeing, our clients have moved more to cost control. It's interesting within these numbers that you'll have seen that the Temp growth quite significantly exceeded Contractors. And again, Contractors is a longer-term commitment from our clients. Temp is a shorter-term commitment, whilst, as you guys know, an average, our temp assignment in the last 12 months they're on a rolling 4-week basis. So it gives clients more protection. The positive, both in those markets and everywhere in the world, is we're seeing no distress at all in any sector or any country. But what it is clear is in Germany, we're seeing more cautious decision-making from clients. And moving on to the U.K. I think it's fairly obvious that there is an enhanced level of uncertainty at the moment. And the new news in this quarter was that we saw a reduction in candidate confidence, which means, of course, that you have a number of jobs where you get to the end of the process, an offer is made and the candidate then pulls himself out of the process. So it's fairly nominal in a weaker market. But again, I'm trying to get some comfort in many respects by saying with the experience I've got, we expect Q2 to be worse than Q1. So therefore, we've said it, but we don't expect it to be significantly worse. There's no working days impact. And of course, a year ago, we were still growing pretty well, Rory. Overall, at group level, we were 8% and in Germany, as you know, still double digits. So against -- still against in hindsight some strong comparatives.

[Rory Edward McKenzie, European Support Services Analyst]

Yes. Sure. And just against that we just talked the talked, it was notable that EMEA ex Germany actually saw some trends stabilize or improve. So why do you think there's a difference there? What's different with the clients you're interacting with, particularly in France, for example, because it does seem to have done a bit better?

[Paul Venables, Group Finance Director & Executive Director]

Yes. I think that point is very well made because France is our largest country within the Rest of the World region. I think the mix of specialism is different. We don't have a large automotive business in France. We have a greater proportion of our French business towards the professional services, Accountancy & Finance. But we also do have a decent-sized business in markets such as Life Sciences. And whilst there's no doubt that the broader trade issue has impacted all exporters globally, I think pharmaceuticals has been less impacted. And then finally, Rory, a year ago, the real problem that we had in Q1 was very much in France and in Belgium and The Netherlands where we saw quite a sharp slowdown in Perm in that part. So of all of our regions, Europe ex Germany is the one that feels the most stable at the moment. I think that's great, so we'll take that. But we were trying to bring out separately the difference between, let's say, France and Germany. I think in Germany is a great exposure, i.e., to manufacturing and being much more of the economy is export driven.

[Operator]

The next question comes from the line of Paul Checketts calling from Barclays.

[Paul Daniel Alasdair Checketts, Director]

I kind of have 3 questions. The first, I would say there results are slightly better than expected at Q4, certainly better than I had it and possibly what you'd guided to. Can you just run us through the areas that were a bit better than fair, that's number one? And then it may encompass this, but probably often us given through Australia and you see in your growth rate this quite divergent trend. Would you give us an update on how you see that panning out? And then the last one is can you remind us how you're planning to strike the balance between cost and fees in a more difficult environment?

[Paul Venables, Group Finance Director & Executive Director]

Yes. And Paul, thanks for those questions. If I don't answer them fully, please do come back. I think -- remember, though, when we came out with the prelims, and certainly, for any questions that we were asked around the investor road shows, et cetera, et cetera, we said we expected to be minus 1%. And in that, I was talking about kind of working days adjusted. So for us, it's broadly in line. Where is it -- if anywhere, where is it a bit better? I'd actually say it's slightly worse in Germany, maybe 1 percentage point, but it is definitely better in the Rest of the World. And whilst in August, we talked to being broadly sequentially stable in Europe ex Germany, of course, September is a large month for us. It is 40% of the quarter. It's heavily Perm-dominated. And I think it is fair to say that we were very pleased with what has happened in that region. And when we look internally and we look at kind of the budgets that we set and everything else, that was the best-performing region and they've kind of -- and it's not just that they've hit the numbers we expected them to, but there's been no real surprises we've gone across the quarter in, a, Europe; and then b, without a doubt, the U.S. growth acceleration is better than we could have expected. We had some kind of restructuring within the business about 4 or 5 months ago in some of the sectors. We've got some real momentum now. We've had momentum throughout in Construction & Property. Based on our own analysis, we're now #1 in the U.S. market. We're going to continue to invest in that sector. That's one of the ring-fenced investment areas. Secondly, IT has returned to growth. And perhaps, it's -- perhaps, Paul, it's just that we're taking the PLC Board to the U.S. next week and our U.S. colleagues want an easy time. But either way, perhaps we'll take the Board around the world all the time because we've had a record quarter by some way, strong growth, real momentum. We're very happy with that business. Coming on to Australia. I think it's an interesting market at the moment. And for any of you that read the stuff that comes out of, for example, NAB or ANZ banks, what you've got is you've got the government and the Federal Reserve trying to do everything to stimulate the economy. You had 3 cuts in interest rates for a full-employment economy. To have interest rates at 0.5% is another kind of indictment on where we are as a world. You've also had tax cuts, and you've got stimulus being done on scale. At the same time, you've got business confidence remaining pretty subdued. And consumer confidence, whilst it has held up and there's no doubt the interest rate cuts have helped stabilized house prices, things like cars are still down about -- car sales are down 10%. So I think Australia for me is still mixed. We're very happy with our business there, and I think the best way you could describe that is 18 months ago, Construction & Property was 28% of our business; today, it's 20%, and we've managed that within not much of a reduction in our fees and we're only 2%, 3% above peak all-time levels. So I think we're doing well. We've got good growth in IT. We've got good growth in HR. We've got good growth in Policy. It is sequentially stable, but there's still some uncertainty in that market. So I'm not saying we're out of the woods, but what I'm saying is, at the moment, we're broadly stable. And then I think your last point is a critical issue for all cyclical businesses. And I guess the way that we approach this and certainly the way that my mind is on is in part related to the answer I gave to Rory a few minutes ago. There is no market anywhere in the world where we're seeing distress at the moment. What we are seeing is clients make very logical decisions after 4 to 5 years' worth of strong growth and strong investment, they're being a lot more cautious at the moment. Within that, of course, there are certain sectors, automotive and banking, which are, for obvious reasons, harder hit. Therefore, what we're trying to do is balance between where we've got some down in Construction & Property, absolutely reducing head count and making sure we're in line with that market. But equally, where we've got some long-term structural opportunities, and within that, IT, across the world, Life Sciences, U.S., we're going to continue to invest. And the balance is a hard one to have because we've often talked about consultant productivity. In good times, of course, both the tools and our management and the economy helps drive it. At the moment, even more in places like the U.K. where suddenly we've now got candidate confidence weakening, of course we have a reduction in candidate confidence. And we've said before, if productivity is up or down 1%, it has an GBP 8 million impact on our profits. And at the moment, we're in that down phase. Our aim currently is to be very cautious on head count. We talked to it about being broadly stable, which means it will probably decline a bit because that's just the nature of recruitment businesses. Keep an eye on every market as possible. But make sure in the long-term structural opportunities, we continue to invest for the long term on a controlled basis. So that means all up through some of these investments we'll make less money this year, but I think it positions us much better for a rebound when we see stabilization in the market.

[Operator]

The next question comes from the line of Anvesh Agrawal calling from Morgan Stanley.

[Anvesh Agrawal, Research Associate]

Just had 1 question really. I know we are very early in the year, but just kind of you'd give some thoughts around how should we think about the operational leverage in the business, especially given the mix of the growth in -- which is higher in Rest of the World, which is, again, a lower-conversion margin business. And any kind of metrics around what's sort of impact on productivity on every 1% or 2 % of the fee growth reduction assuming we kind of remain in this minus 1%, minus 2% range for the year?

[Paul Venables, Group Finance Director & Executive Director]

I guess real simply that's where we're at now because in the end, none of us knows how the next 9 months are going to go. I've only done this job for more than 13 years and you have to start off and be humble and say we've got 3 to 5 weeks' visibility and not a lot of forward secured revenue stream. So that's the way we'll continue. But 1% of fees is about GBP 11.5 million. On that, we say commission, which gets you down to slightly below GBP 10 million and below that depends on what you do in head count. At the moment, we are expecting that head count, which I think is 1% up year-on-year in these results, is above the underlying fee level of minus 1%. 1% of that current rate is definitely reduction in productivity due to the uncertainties we've discussed. 1% is the decision to ring-fence investment so there's certain specialisms that we're going to invest slightly ahead of the curve because we're focused on the long term. I think we also have the luxury in that we have a very loyal shareholder base. Our top 10 own 55%. Myself and Alistair being here a long period of time, and therefore, we'll do the right things for the longer term. So number one, I think productivity will be down this year unless we see a strong rebound in growth in the second half. And kind of 1% gets you to GBP 8 million, that kind of -- the reverse that already is how you got to that GBP 10 million before so it's in that sort of range. And then you're right, that this is life. We want, over the longer term, a large business in the U.S. and a large business in Asia. And at the moment, those businesses combined are just above 10% of our group, but they're not 30% of our group. Therefore, we will continue to invest and strengthen depth of management across Asia. We'll continue to invest in the U.S. And we know by those sorts of investments that investment is going to be a good GBP 5 million-plus ring-fenced this year, and that, of course, will have an impact on profit. But I think those are the right things to do for the longer-term part of the business. And I take a bit of comfort and it might be spurious so feel free to shoot me down, but it's intriguing to make the generalists have all stabilized at about minus 3%, minus 4% and have been stable now for a couple of quarters. So we look at every single activity every single month. We will move quickly if we see any further real decline versus where we are now. But the right thing to do, I think, is to kind of keep our consultant head count where we are today slightly lower. And then finally, of course, we gave quite a lot of guidance on property and depreciation, et cetera, of which, of course, the greatest view of that is to the first half. But a great question, and I think we've got -- we have a nice position to make some choices. But rest assured, if market gets tougher, we'll take more costs out. But at the moment, we're more likely to continue with some modest investment programs and not do anything drastic.

[Operator]

[Operator Instructions] The next question comes from the line of George Gregory calling from Exane.

[George Nicholas Gregory, Research Analyst]

Paul, just following up on that last comment of yours. In terms of the starting point and what you need to offset, is the base level of cost inflation -- inherent cost inflation is still around 2%? Or is that -- to what extent is that slightly lower in the current environment outside of your investments into the U.S. and what have you?

[Paul Venables, Group Finance Director & Executive Director]

So I think 2 things. One, by its very nature, some of the property stuff that we put in that year-end note has some inflation in it and that's just come to life. But if you look overall, overall, it is less than 2% because it's parts of our cost base, which are fixed. There's others which don't go up in line with inflation because, of course, things like commissions go up in line with salary inflation. So if you looked at the overall cost base, you would have inflation of 1% to 1.5%. And then on top, we've got some specifics, which I've covered earlier on. Positive is we are continuing to see a bit of wage inflation so the nice part of it is there's still some wage inflation, whilst we've seen no acceleration of that across this period and I don't think that's surprising. Our average Perm fee, which is my best surrogate for that, is continuing to increase kind of modestly. So we're not -- I think from that standpoint, we're in a pretty good position, but again, we will continue to watch everything.

[Operator]

We have no further questions coming through on the phone line. So I'd like to hand the call back over to your host for any concluding remarks.

[Paul Venables, Group Finance Director & Executive Director]

Brilliant. Thank you. If that's all the questions today, we'd like to thank you again for joining the call. I look forward to speaking to you at our next Q2 trading update on the 16th of January 2020. And should anybody have any follow-up questions, David, Charles and I will be available to take your calls for the rest of the day. Thank you very much for joining us, and have a great day. Bye.

[Operator]

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