Hays PLC

LSE:HAS

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Hays Q1 Conference Call. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, Paul Venables, to begin today's conference. Thank you.

[David Ian Phillips, Head of Investor Relations]

Thanks, Molly. It's David first. Good morning, everybody, and welcome to Hays' quarterly update call for the 3 months ended September 30, 2021, the first quarter of our 2022 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 code provided in the release. Please be aware that our discussions 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, CFO, Group Finance Director & Executive Director]

Thank you, David. Good morning, everybody, and thanks for joining us. I'll present the highlights and key themes of today's update and discuss our regional performances before taking questions. As usual, all net figure and percentages are on a like-for-like basis versus prior year unless stated otherwise. Performance overview. We've made a strong start to the year with net fees up 41% ahead of expectations and delivered good sequential growth in all regions, particularly in Permanent Recruitment, up an excellent 65%. Temp was up 26%. Currency translation had a significant negative impact, decreasing headline net fees by 5%, and there were no material working days adjustments in the period. I'd highlight the following key features. One, trading in all regions continued to improve through the quarter, and we delivered quarterly fee records in 12 countries, including the strategically important markets of the U.S.A. and China. In Germany, our largest business, we exited the quarter with record contracted numbers. Two. Perm, 44% of group fees, continued to rebound significantly faster than Temp, although encouragingly activity levels are high in both markets. Three. September delivered a highest period of fees since the start of the pandemic with an exit rate of 40% despite increasingly tough growth comparatives. Four. Fees in the quarter were in line with 2 years ago, with Perm up 6% and Temp down 5%. Fees in September were 4% higher than September 2019. Five. The specialism level, technology, our largest global specialism at 26% of group fees delivered a record quarter with fees up 36%, and technology fees are now 7% above pre-pandemic levels. Six. We delivered record consultant productivity despite increasing consult headcount by 8% or 600 in the quarter, which included our normal seasonal graduate intake. Headcount is now up 19% year-on-year as we continue to invest to capitalize on the cyclical recovery and strategic growth opportunities. Seven. Cash performance was good, and we ended the quarter with net cash of GBP 360 million, in line with our expectations. Subject to shareholder approval we will be making core and special dividend payments in a combined GBP 170 million in November. I'll now comment on the performance by each region in more detail. Our ANZ division, 17% of group net fees, increased by 34%. After a step-up in fees in July, fees remained broadly at the same level in August and September despite the ongoing current lockdowns in place in the largest states, including New South Wales and Victoria. ANZ fees decreased by 1% versus Q1 FY '20. Perm, 37% of ANZ fees, was up an outstanding 95%, while Temp increased by 13% against a relatively resilient performance last year. The private sector, 66% of fees, increased by 45%, while public sector grew by 15%. Australia increased 32%, including a standout performance at Queensland, up 42%. And our 2 largest specialisms, Construction & Property and Technology grew by 18% and 44%, respectively. New Zealand, 7% of ANZ fees, increased by an excellent 58%. Consult headcount in Australia and New Zealand decreased by 8% in the quarter and by 27% year-on-year. Germany, our largest business at 26% of group fees, reported good sequential fee improvement through the quarter with net fees up 39%, supported by continued improvement in client and candidate confidence. Germany fees are down 4% versus Q1 FY '20. Conditions in contracting, 57% of German fees were strong, with fees up 21%, and we ended the quarter with a record number of contractors on assignments. Perm increased by 56% in the quarter, including a record month in September. Temp, which is mainly in engineering, continued to recover, up 83%, against a weak year-on-year comparative. And excluding the effects of Temp underutilization and severance costs in the previous year, underlying Temp fees increased by 27%. However, given a slower recovery in the automotive manufacturing sectors, Temp volumes remain circa 20% below pre-pandemic levels. As expected, average Temp hours worked returned to more seasonally normal levels for the summer as temps took holiday. Consult headcount increased by 3% in the quarter in Germany and by 8% year-on-year. Coming to the U.K. and Ireland, which is 23% of group fees, it grew by 45%, led by excellent Perm performance up 69% and Temp up 29%. Fees are down 5% versus Q1 FY '20. Growth in the Private Sector was excellent up 57% with the public sector up 21%. Most regions traded broadly in line with the overall business except the Northwest, which grew by 74%. And our largest U.K. region of London grew by 46%, including London City, which is predominantly private sector focused, up an excellent 73%. At the specialism level, we saw excellent growth in technology, which delivered another record up 57%, while the fastest growth in our larger specialisms was HR, up 127%. Consult headcount increased by 4% in the quarter and by 15% year-on-year. Moving on to the rest of the world, which represents 34% of group fees and comprised of 28 countries, this grew by 45% and included 12 quarterly fee records. Perm, 68% of Rest of World fees, increased by 59% and Temp up 22%. Our Rest of the World fees increased by 6% versus Q1 FY '20. In EMEA ex-Germany, fees increased by 37% and activity levels remained high across this quarter with much less of a seasonal summer slowdown than normal. Our largest Rest of the World country up 57% -- sorry, Rest of the World country of France was up 37%, and Switzerland produced a record performance, up 18%. The Americas grew by 66%, including records in the U.S.A., our second largest Rest of the World country, up 63% and Brazil up an outstanding 138%. In Asia, our fees increased by 44%, both China, our third largest Rest of the World country, up 45%; and Malaysia, up 65%, delivered record quarterly performances. Consult headcount for Rest of the World was up 14% in the quarter and 24% year-on-year. Moving on to cash. Cash collection was good, and we ended the quarter with GBP 360 million, in line with our expectations. Current trading and guidance. I'd make the following points. One. The positive trading momentum we entered FY '22 has continued with an exit rate in line with the quarter as a whole and with September fees 4% ahead of September 2019. Two. After significant investments in consult headcount over the last 9 months, we expect headcount investment to moderate to 2% to 4% over the next quarter as we continue to balance adding productive capacity, including our strategic growth initiatives with driving strong consultant productivity and profit growth. Our SGI program is performing well and helping to accelerate the opening up of the many structural growth opportunities we see and specifically in technology. Three. The strengthening of sterling versus the euro and Australian dollar is currently a headwind to operating profit in FY '22. If we retranslate our FY '21 operating profit of GBP 95.1 million at October 11, 2021 exchange rates, operating profit would decline by GBP 5 million, similar to position at the interims. But importantly, this group operating profit increases materially in FY '22, FX is highly likely to have a much larger negative impact. And four, I reiterate conversion rate guidance we gave at the prelims. We expect a drop-through of incremental fees to profits of 40% to 50% in FY '22 and well above 50% in FY '23. In conclusion, while there is a degree of global macroeconomic uncertainty candidate and client confidence remains at very high levels, and there are clear signs of skill shortages and wage inflation, particularly at the higher salary levels. We've made a strong start to the year with good sequential growth, and we're confident we can deliver substantial profit growth in FY '22 and beyond, while significantly investing for the future. There are many opportunities to build much bigger businesses and we are firmly focused on positioning Hays as a clear market leader in the most attractive long-term sectors and geography. I'll now hand you back to the administrator, and we are happy to take your questions.

[Operator]

[Operator Instructions] The first question today comes from the line of James Rose calling from Barclays.

[James Steven Rosenthal, Research Analyst]

I've got 3, please, if I may? The first is on Perm and Temp mix. So Perm looks very, very strong within the mix. What gives you confidence that Temp can come back very strongly in the rest of the year? And second is on, can you talk about the difference in trends you're seeing between lower-paid and higher-paid workers? And then #3, are you seeing signs of upward fee pressure, not just in spot rates, but also on contracts? Any sign you could reset some of those upwards?

[Paul Venables, CFO, Group Finance Director & Executive Director]

Thank you, James, and congratulations on your promotion into your new job. It's great to talk to you. On Perm and Temp mix, on Temp mix, this is really good growth. I've been doing this job for more than 15 years and our Temp business, of course, didn't fall as far a year ago. And the 26%, even if you take out, if you like, the slight catch-up in German Temp, take out the exceptional costs we had a year ago, that is still growth of about 22% overall. And I think generally, what I've learned in Temp is every quarter you can have 10% to 20% growth, you take that, and that is excellent. Because we can all see at the moment that the Perm market is very strong, but at a certain point in time, some of that will start to weaken. Whereas the beauty of a Temp and contracting business is the degree of stickiness. So let me give you an example of this. The most important statistic in these results is the fact that we've got contractors at all-time record levels in Germany because it's the highest salary levels on average those contractors earn EUR 140,000. We get high margins. And of course, we get a high degree of stickiness because on average, those contracts historically have been about 9 months and at the moment, they're in excess of 12 months. So we're delighted with Perm, and we're going to ride that wave as much as we can, and we're investing into it. But we continue to focus on the long-term strategic attractive markets of Temp and contractors. And of course, a larger proportion of the IT market is in that space. So we're happy with it, and we continue to focus on it. What we never do at any point in the cycle is allow our businesses to solely focus on Perm. You've got to do both. And I think we're doing that. We're really very pleased with these results because clearly, the comps were getting harder coming into this quarter. Secondly, trends between lower- and higher -- paid jobs. Without a doubt, the largest element of skill shortage is in the higher-paid markets. And therefore, I think what we can see in our Perm markets is for those jobs that are at GBP 40,000, GBP 50,000 salary levels and above, that's where there's the largest skill shortage, that's where those candidates have multiple offers at the moment. And I think what's most intriguing about this market currently, and I mentioned this on a previous call, is that you've got a lot of mandates where the client is looking to hire 1 person. You give them a short list of 4 to 5 people that -- 2 of those candidates, they determine are superb and they take both candidates. So there's no doubt that, that is the highest banks-backed part of the market. But interestingly, if I take another area of our business, something like office support, where we both dominate the high end, all of the kind of senior PAs, but we've also got a very large business in lower-end office support, we saw strong growth across the board. I mean what's most interesting, James, in this recovery so far is both the strength and the uniformity. But from a skill shortage standpoint, and therefore, eventually from a wage inflation standpoint, that's more focused on the higher end. And then that comes naturally to what are the opportunities to push fees. And I think the beautiful part of it at the moment is, and if I answer this kind of 2 ways, clearly, in the professional ranks, most people change jobs to get a promotion they can't get in their existing business or to get additional experience. And when you're in that situation, you would expect moving from 1 job to another in -- and let's take in the last 10 years to get at least a 10% increase in pay. What's interesting at the moment is 2 parts. First of all, the opportunity to get close to 15% or 20% is there for a number of the roles, specifically within technology, within digital marketing, which are the hottest markets we see, but also in some of the kind of the senior finance commercial markets. And then secondly, of course, it enables you to hold firmer on the fee percentages. So we're not seeing a lot of fee pressure at the moment. We're not seeing a large amount of procurement play, which, of course, was a large aspect of the previous 10 years with most companies focusing solely on reducing cost base and reducing payments to general suppliers, including agencies. Currently, our clients are very realistic. One of the reasons there is a strong Perm market is they're making their decisions quicker. And I think that helps our agencies in both protecting our margins and particularly over time, increasing them. Clearly, time will tell. And in part, that will be driven by how long the strength in this market lasts. So I think kind of taking all of those together, we love Perm and we love Temp, and we're delighted with performance in both, better in the higher end and some opportunities to improve margins over the next few years. Hopefully, that answered your questions.

[Operator]

The next question comes from the line of Hans Pluijgers calling from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

Three questions from my side. First of all, on Temp versus Perm again, could you maybe give some feeling how the trend was through the quarter Temp versus Perm? Do you see, let's say, a further pickup in Temp through the quarter? Could you give maybe some feeling on that? And secondly, on the cash development down about GBP 50 million through the quarter. If you give maybe some feeling on that what was the, let's say, the background of that? And lastly, a more detailed question, you gave some, let's say, guidance on the drop-through rate for this year. I missed that. Could you please repeat that?

[Paul Venables, CFO, Group Finance Director & Executive Director]

Thank you, Hans. And if I don't sort of answer those fully, please come back. Trends across the quarter, let me give an overall view on this quarter first, and then I'll go into Perm and Temp. I think the -- in hindsight, the -- we had a July in line with our expectations. We were happy. There's no doubt the end of August got much stronger and that continued into September. But that's been reasonably uniform. And of course, for us, we have general tech markets, and then we have some specific ones such as education, which will come back when the schools open. So it is -- there is no doubt that because September is the largest month we've had post-pandemic within that Perm will have been the strongest. But I think that is more seasonal Hans rather than a specific trend because, of course, September is for a lot of companies when they start to invest post summer. Secondly, on cash development. There's a combination of factors here. We had expected DSOs to go out slightly and may have gone out by about 1 day in the quarter. And then the rest of that is broadly timing because, of course, being a kind of a GBP 6.5 billion turnover business, actually, when period ends finish it is quite important from kind of a Temp payroll standpoint. So we're happy with the overall aging. We've had minimal bad debts, minimal increase in overall aging about 1 day overall. But certainly, at the higher end, overdue debt, no issues there at all. And I think that's more timing, and we'll see that as we go through the year. And all I did, Hans, is just reiterate the guidance I gave at the prelims, which is for this financial year, a drop-through rate of incremental fees to profit of 40% to 50% and then we believe that will increase significantly above 50% in the following year.

[Operator]

The next question comes from the line of Andy Grobler calling from Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Just 3 for me as well, if that's okay? Firstly, on productivity, which was very good again in the quarter. I guess 2 questions there. How do you balance in the short term, the your kind of optimism for the long-term future of the market with productivity gains? Do you focus on 1 over the other? And then secondly, to what extent are these productivity gains going to be sustained? I know you've talked to that before, but I guess that the underlying reality is continues to evolve? Second question, just on wage inflation, you talked to seeing some of that in certain end markets. Just a bit more detail would be fantastic? And then thirdly, in Germany, you mentioned that was the most important statistic within the release, which end clients are you seeing that specific demand for? You mentioned that automotive and manufacturing were still quite tough in within temping, is that true, within contracting? And if so, where is the specific demand?

[Paul Venables, CFO, Group Finance Director & Executive Director]

Andy, there were a lot of kind of sub-questions then, so.

[Andrew Charles Grobler, Analyst]

Yes, sorry about that.

[Paul Venables, CFO, Group Finance Director & Executive Director]

I almost certainly will miss 1. Let me answer Germany first. Contracting is mainly in the IT space and that really is very broad across our customer base. So first of all, I think it's a clear sign of confidence. In some respects, within the Temp -- the overall Temp book -- of course, contracting has some Perm-like characteristics because it's high salary levels, very skilled short and long assignments. So really, outside of automotive, all of the markets in Germany are very strong at the moment. And I think the pleasing aspect is whilst the election result might not be what business would have liked 1 or 2 or 3 years ago, actually, the fact that has the coalition with SDP and the liberals in it, I think, it is seen as a real positive. So I see no election issues. Secondly, coming on to productivity, we're about 4% up versus 2 years ago, and that's actually about 15% in the Perm space. It's slightly lower in the Temp space. How do we balance over the next few quarters? Look, we have the very nature of bringing our own recruitment in is the interviews that we do in May and June are the people that land in July and August, and we got to a stage where the various assessment centers we were doing around the world. We had a very high quality of potential candidates. You will see that we increased headcount by 8% in this quarter, that is slightly higher than we guided coming into the quarter, but the candidate strength were there. The market volumes and forward indicators were positive, and therefore, we landed that. And therefore, the reduction in Q2 to 2% to 4% is more accepting that we're already ahead of the curve in the first quarter. How do we balance it? It's pretty clear. In the strategic growth markets, we continue to invest whatever happens because as we were set out when we do our Capital Markets Day, our biggest opportunity for strategic growth in the next few years is, first of all, in the IT sector to double the size of our IT business in GBP 250 million to GBP 500 million over the next 5 years and that will be worth a lot on its own incremental about GBP 100 million profit versus pre-pandemic. So that's a key strategic area. And we're doing incredibly well in that space, and we're more minded to accelerate rather than to put the brakes on. I think in the more cyclical recovery markets, we are both investing and driving productivity. So if you look at a lot of the professional specialisms, we're absolutely driving productivity. And in the Perm part of it, we're investing slightly behind the curve because I think that's the appropriate thing to do. None of us knows yet what the level of Perm activity will end up being over the next 1 to 2 years. But I think we're happy with the start to the year. We gave very clear guidance, and we set out a stall in the prelims, and we think we can both invest and drive significant profit growth certainly this year and next. And now we've got more than enough productive headroom to drive growth this year. So further headcount investment is more about the following year than it is now. You asked how much of that is sustained? That's a crystal ball. So you've got to get a great crystal ball and make a lot of judgment. And I've only been doing this job 15 years, Andy. You've been -- probably been around slightly longer.

[Andrew Charles Grobler, Analyst]

Yes, I'm afraid.

[Paul Venables, CFO, Group Finance Director & Executive Director]

And therefore, I think that's hard. I think you're back to -- I think skill shortage is here to stay. The opportunity for a lot of countries to fix that via immigration and whatnot as its way is clearly more restricted at some point. That may change in certain markets. Certainly, Australia is an interesting 1 at the moment because historically, they increase their population by about 1.5% a year, predominantly through immigration. There's been none that over the last couple of years. But I think and what we're also confident in is a lot of the technology changes we're doing behind the scenes will drive significant productivity. And then finally, that's why I gave the answer to the earlier question there in addition to focusing on maximizing and riding Perm, will continue to drive Temp and contracting because of the stickability that will give us for the longer term. And then finally, on wage inflation, I think you need a bit more than a quarter to drive real conclusions, but there's no doubt that technology and marketing are the hottest market areas. But I think to an extent, there's a virtuous circle at the moment isn't there?It's not just that client confidence is more -- client confidence has increased, and they are focused on growth, and therefore, they don't want to be left short of skilled headcount. But I think there's also a strong candidate confidence. And that's both remarkable 18 months after the pandemic, but that's what's increased the most over the last quarter, Andy. For us, I said we had a good July, we had a superb end to August. It continued into September. And within that, there's no doubt that Perm picked up further. So I think that's a sign of strong candidate confidence and off itself, that will drive increases in wages because you have to pay a little bit more to get somebody good to leave somewhere and join you. And then companies will turn around, and they're likely to start to do modest increases in wage increases, i.e., that 2% that we've seen over the last few years, may well be 3% to 4% in a year's time as companies focused on retaining skilled staff.

[Operator]

[Operator Instructions] The next question comes from the line of Anvesh Agrawal calling from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I just got 1 question and slightly sort of longer term on this entire wage inflation labor shortage dynamic and the impact probably it will have on the Temp business. I mean like if we have sort of very acute shortage and high wage inflation that probably we are seeing in some areas now, is that really -- will that really sort of impact the Temp business in the longer term? Because yes, the fee rates will go up, but the volumes then start to come under pressure. And therefore, as a business, would you prefer more normalized wage inflation and a bit more labor supply? Or do you think then the opportunity in the Perm side will be immense, so there's an natural offset in your business? Just trying to understand if we ended in structural labor short market, how it could impact your business?

[Paul Venables, CFO, Group Finance Director & Executive Director]

Anvesh, the line was quite weak. So I was getting about 2 out of 3 words. So if I miss the essence of this, please do come back. The main part of the question was around the impact of wage inflation on Temp and if the jobs becomes very skill short, very people short, will there be a constraint on Temp growth? Of course, how we will see that is we'll get an increased margin per hour worked because if Temps are getting higher pay, which certainly in Construction & Property, we've certainly started to see already around the world, and we're seeing that in the Temp part, we'll get a higher margin per hour worked, that will improve our fee level and our profitability. I think you've heard me over the years talk about wage inflation being the icing on the cake. We didn't have a lot of icing from 2010 to 2020. I think what we're seeing now is clear signs that the icing bag is being ready to be piked. And I think we're going to see some more over the next 2 years. I think then where you went to was if it becomes very skill short, does Temp lose out to Perm? I don't think so, Anvesh. Clearly, in the lower end of certain professional specialisms, there will be temps doing Temp work, but in many respects as well because of the pandemic and the issues that may have had on them, not having the security of a permanent role, some of those may want to move more into the Perm space. But you know what, that's fine, and we'll place them into Perm jobs. We've got a great business in Perm. We've got a great business in Temp. We can do both. We can meet all of our candidates' needs whatever is the case. But when you come to the IT space, without a doubt, most IT candidates prefer to be contractors. They prefer to be interims to have that flexibility. A lot of them are project-based roles. They want to gain different skills. They like the security of a contract for 12 to 18 months, and they tend to secure contracts well ahead of the end of those terms. So I think we will have both of those markets. And without a doubt, that's the case in IT, it's the case in life sciences. And I have said early on, I actually think higher-end contracting is kind of quasi Perm. So I think at the moment, clearly, we've had this unique set of circumstances where International markets have been frozen. You haven't had opportunity for people to change countries and everything else. That will start to change over the next few years. Clearly, the U.K. may have some different circumstances. But without a doubt in Germany, the call of highly skilled, very hungry Eastern Europeans looking to work large German companies and get skills and advance their careers and earn more money and take the standard living better for them and their families, that will continue forever. And again, that's the beauty of having a global network in that you can meet those supplies. So I think at the moment, this is very skilled-short market, and there's some unique features that make it that greater. But I've certainly, at the moment, we are set for, in the Perm part of it, another strong quarter to 2 quarters beyond. But I think we're also very encouraged by the continued growth we're achieving in Contracting and Temp. And I think it's a pretty good market. So I hope I answered the question. As I said it was quite hard to pick up all the points.

[Anvesh Agrawal, Equity Analyst]

No, that's fair. I mean it's just trying to understand the dynamic of a structurally labor-short market on the Perm business, but that's really helpful.

[Operator]

We have no further questions in the queue at the moment. So I'll hand the call back over to your host. Thank you.

[Paul Venables, CFO, Group Finance Director & Executive Director]

So if that's all the questions for today, we'd like to thank you all again for joining the call. I look forward to speaking to our next Q2 trading update on the January 18, 2022. Should anybody have any follow-up questions, David, Charles and myself will be available to take calls for the rest of the day. Thank you very much for joining us.

[Operator]

Thank you for joining today's call. You may now disconnect your lines. Hosts, please stay connected.