Hays PLC

LSE:HAS

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to Hays' Q1 FY '23 Trading Update. Please note that this call is being recorded. [Operator Instructions]

I will now hand you over to your host, Mr. David Phillips, Head of Investor Relations and ESG, to begin today's conference. Thank you.

[David Phillips, executive]

Thank you, Ben, and good morning, everybody. Welcome to Hays' quarterly update call for the 3 months ended 30 September 2022, the first quarter of our 2023 financial year. I'm here with James Hilton, 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 also 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 in 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 James.

[James Hilton, executive]

Thank you, David. Good morning, everyone, and thanks for joining us. I'll present the highlights and key themes of today's update and discuss regional performances before taking questions. As usual, all net fee growth percentage is on a like-for-like basis versus prior year unless otherwise stated.

Performance overview. We've made a good start to our financial year with fees sequentially stable at high levels through the quarter. The quarter produced a fee record overall and September delivered a monthly record performance, both slightly ahead of our previous highs. Fees grew by 15% overall with Perm up 16% and Temp up 14%. Currency translation had a positive impact, increasing headline net fees by 4%. There were no material working day adjustments in the period.

I'd highlight the following key features. Our growth was primarily driven by improved margins with overall volumes in Temp and Perm sequentially stable at high levels. The private sector, up 17%, again outperformed the public sector, up 8%. The group's fee growth exit rate in September was 12%.

We delivered quarterly fee records in 11 countries, including a standout performance in our largest business of Germany, which was up 26%. Our largest global specialism of Technology, 26% of group fees, delivered another record quarter with fees up 15%. Our enterprise solutions business also produced another record quarter with direct outsourcing fees up 18%.

Our consultant headcount increased by 2% in the quarter, which included our seasonal graduate intake in several large markets, albeit at lower-than-normal levels. Consultant productivity remained at good levels overall. And at 30th of September, our net cash position was GBP 185 million, in line with our expectations, and that's after spending GBP 40 million on share buybacks in the quarter and driven by a solid cash performance.

I'll now comment on the performance by each division in a bit more detail. Our ANZ division, which is 16% of group fees, increased by 3%, with fees sequentially stable through the quarter. Perm, 41% of ANZ fees, was up a strong 14%. Temp was tougher and decreased by 3%, with volumes down 8%, partially offset by improved margin and mix of 5%. The private sector, 67% of fees, increased by 5%, with public sector more difficult with fees flat and slowed through the quarter.

Australia fees increased by 1%, led by New South Wales, up 7%. Our 2 largest ANZ industries, Construction & Property and Technology, grew by 19% and 10%, respectively, while HR decreased by 9% and our other smaller specialisms were down 11%. New Zealand, 9% of ANZ fees, continued its strong run and increased by an excellent 23%. Our consultant headcount in ANZ increased by 3% in the quarter and by 14% year-on-year.

Our largest business, Germany, which represented 27% of group fees, delivered another record fee performance, up 26%, with good levels of client demand. We continued to see significant skill shortages, particularly in high-salary technical and professional markets, driven by structural megatrends in Germany.

Contracting, 58% of German fees, delivered a record quarter, up an excellent 29%. This was driven by 25% growth in contractor volumes, again, to record levels. Improved margin and fee mix increased fees by a further 8%, but partially offset by 4% lower average weekly hours per contractor. Temp, which is 24% of Germany fees, increased by 15%. And Perm delivered another record performance, up 35%.

At the specialism level, Technology, our largest specialism, was up 11%; Engineering, 28%; Accountancy & Finance, up 37%; and HR, up an outstanding 186%. Consultant headcount was flat in the quarter and up 21% year-on-year.

The United Kingdom & Ireland, 21% of group fees, increased by 11%, with fees sequentially stable through the quarter. Performance was led by Perm, 47% of U.K. & Ireland fees, which was up 15%. Temp fees grew by 8%, all of which was driven by increased margin and mix. Private sector fees increased by 15% with the public sector up 3%.

Most regions traded broadly in line with the overall business, apart from the South West & Wales and Scotland, which both grew by 15%, and the North West which grew by 5%. Our largest region of London increased by 7%, including London City, up 21%.

At the specialism level, we again saw excellent growth in Technology, a record quarter, up 21%. And Accountancy & Finance, our largest specialism, up 11%, while C&P grew by 3%. Ireland delivered another excellent performance with fees up 34%. And consultant headcount increased by 2% in the quarter and by 22% year-on-year.

Rest of World, representing 36% of group fees and comprising 28 countries, grew by 16%, with 10 countries delivering quarterly records. Excluding the fee impact of the closure of our Russia business in March 2022, our Rest of World growth was 22%. Perm, 68% of Rest of World fees, increased by 14%, with Temp up 21%.

In EMEA ex Germany, fees increased by 16%, or 27% if we exclude Russia, with broad-based growth across the region. Our largest Rest of World country of France increased by 24%, with Switzerland up 25%. Poland, Italy and Belgium increased by 36%, 33% and 16%, respectively.

The Americas grew by 17%, with Canada up an excellent 33% and record fees in each LatAm country with LatAm collectively up 34%. Fees in the U.S.A. increased by 7% with growth slowing through the quarter.

Asia grew by 15% with excellent fee growth in Japan, up 48%, and another record performance in Malaysia, up 53%. China decreased by 12%, although Hong Kong significantly outperformed Mainland China where pandemic-related restrictions weighed on performance. We opened an office in Bangkok in August, making Thailand our sixth Asian country. Our consultant headcount was up 4% in the quarter and 18% year-on-year.

Cash flow and balance sheet. We ended the quarter with net cash of GBP 185 million, in line with our expectations. We saw our usual seasonal working capital outflow over the summer, amplified this year by the excellent growth in Germany and EMEA, were our highest salary and, therefore, most working capital-intensive market.

We also purchased and canceled 33 million shares at an average ex-dividend price of 113p, that's an overall cost of GBP 40 million. Our buyback program has a residual balance of GBP 35 million outstanding. And of course, we are scheduled to pay 9.24p in final core and special dividends in respect of the FY '22 year in November.

Current trading and guidance, I'd make the following points. Demand in our core markets continues to be underpinned by skill shortages globally, and we are seeing supportive margin dynamics and rising wage inflation. We expect to remain a net beneficiary of wage inflation through FY '23.

Our forward-looking clients and candidate activity levels remain good overall, particularly in Germany and EMEA, but have reduced modestly in a number of other markets as macroeconomic uncertainties increase. We are also seeing some clients taking slightly longer in their decision-making processes. This is most notable in the U.K. & Ireland, ANZ and the U.S.A.

We expect group consultant headcount will be down slightly in Q2 and broadly flat overall in H1. We are focused on driving productivity while selectively investing in long-term structural growth areas. With circa 600 consultants added in such growth markets in the last 12 months, we remain highly committed to building leadership positions in the highest potential markets globally.

The group's current cost base per period is circa GBP 88 million, in line with the guidance given at our prelims after taking account of recent headcount investment. This is on a constant currency basis before any movements -- recent movements in FX.

As previously stated, due to the timing of public holidays, our German business has 3 fewer trading days in Q2 versus the prior year. We estimate this will have a negative profit impact of circa GBP 5 million in H1. H2 trading days are consistent with prior year.

The weakening of sterling versus our main trading currencies of the euro and Australian dollar is currently a tailwind to the group operating profit in FY '23. If we retranslate FY '22 profits of GBP 210.1 million at the 11th of October '22 exchange rates, our operating profit would increase by circa GBP 9 million.

In conclusion, we've made a good start to our financial year and exited the quarter with fee growth of 12%. Clearly, we are mindful of rising macroeconomic risks, and our highly experienced global management teams are watching all of our lead indicators closely. Our focus is on driving consultant productivity and capitalizing on the significant opportunities we see in the longer term while navigating any shorter-term challenges the macroeconomic environment presents us.

I will now hand you back to the administrator, and we're happy to take your questions.

[Operator]

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

[James Rosenthal, analyst]

I've got 3, please. First is on volumes. Volumes were stable sequentially, but can you tell us what was the volume growth within the 15% constant currency growth you've seen this quarter? And has that contribution from volume been slowing recently?

Secondly, where the KPIs have reduced modestly? What's your outlook on volume in those areas like the U.K. or U.S., for example? And the conversations with clients, how are they -- how do they seem to be behaving this time versus at the start of previous downturns?

And then thirdly, on fee margins, are you still signing high margins on new work through September? And are you still doing it in areas where clients are less confident?

[James Hilton, executive]

Thanks, James. I'll pick each of those up in turn and please remind me if I do miss anything. The first question, I think, was around volume and what are we seeing in terms of our sort of volume versus pricing through the quarter. I think it's probably easiest if we kind of look at both of those in our -- in Temp and Perm individually. In our Temp overall through the quarter, our fees were up 14%. And if I look at the breakdown of that, about 1% of that was volume growth with the balance, a mix -- well, a combination of margin improvement, which is about 5% of that increase, and overall mix was about 9% of that increase. And margin is clearly where we're making a higher percentage on the actual placement.

Mix is a combination of several things. It's -- there's certainly a mix impact of a higher level of volume in Germany where, clearly, we have very high-value, high-salary contractors and temps out on placement and also a bit of mix where this time last year, for a good example, in the U.K., we had a number of temps who were working on the test and trace projects, they were relatively lower-value temps. So there's a bit of mix shift towards higher-value temps within that. So that's a sort of breakdown in our Temp side. On our Perm side, we're still seeing volume growth versus prior year. So if I break down that increase overall, it's about 7% on volume and about 10% on average Perm fee increase.

I think the second question was around KPIs and outlook on what we're seeing in our business and kind of where is that driving volume overall. I kind of say we put some wording on our forward-looking indicators in the statement. And what are those and why? So when we're looking at forward activity, I'm talking about the number of job registrations that have come into the business, the interviews levels that we're doing on those jobs and, importantly, for us, the number of temp and contractor starters that we're seeing in the business.

And overall, we're still seeing good levels of activity in each of those areas. But clearly, we've highlighted that Germany and EMEA remains good. We're still seeing good levels of activity across those businesses. But in September in the U.K., ANZ and the U.S.A., we've seen a modest reduction in activity levels in those activity indicators. And I guess, what do I mean by that? We normally see a reduction in activity, as you know, through the summer in July and August, these holiday season impacts and people aren't available and job flow just tends to tick down a little bit. And then we see a normal pickup in September, as you'd expect, as people come back to work.

I think that pickup in September wasn't as high as we would normally expect. So if we compare sort of levels in September versus June, i.e., before the summer, we're probably at about a 5% lower level overall of activity. And our clients -- it's largely a client-led thing. I mean that's -- clearly, the job flow that comes from our clients is that bit lower.

In terms of the conversations we're having with our clients, we are seeing a modest increase in the overall decision-making process time, which kind of leading that increasing time to hire and just the general elongation of the process. So I don't think that's a surprise to anyone that we're seeing that in those markets.

And James, just remind me of the last question. Was that on -- was it fee margin?

[James Rosenthal, analyst]

Yes, just on fee margins. So you clearly benefited from higher margins across Perm and Temp. Are you still signing comparable high margins on new work through September?

[James Hilton, executive]

Yes, we are indeed. I think it really goes down to the heart of skill shortages and where the skill shortages are most prevalent. And that's where we're continuing to see the most demand from our clients and obviously gives us the most opportunity for pricing dynamically. And a good example is in Germany, we're having a good track record of not just new starters who are increasing the margin rate, but also when we're seeing temps and contractors being retained by our clients, it gives us an opportunity to negotiate higher margins again.

So it's -- we are continuing to see that. And therefore, we expect to see wage inflation and pricing generally benefit our business going forward. We don't see this as something that's going to peter out in the short term. I think it's more of a longer-term impact.

[Operator]

The next question comes from the line of Tom Callan calling from Investec.

[Tom Callan, analyst]

I've got a couple. Just picking up on James' question actually in terms of those sort of forward-looking activity levels. Could you maybe just touch on sort of Germany and EMEA? Obviously, you've said that they've held up well. But is it potentially moving into Q2 and into the second half of the year? Do you think there's the potential for sort of activity levels to be impacted there as well? How comfortably above were the U.S., the U.K. and ANZ is Germany and EMEA, for example, I guess, is what I'm driving at.

And then just in terms of hiring in the first quarter, where did these new hires primarily come from? I'm assuming they were graduates, but just sort of keen to understand the mix and if you've been able to find any sort of more experienced hires and what your experience has been like at trying to recruit more experienced consultants given how tight the market is.

And then just on that point as well, on headcount in Q2, obviously, there needs to be a bit of churn there to sort of get to flat headcount for the half. Just sort of keen to get your thoughts on this. I assume it's going to be sort of natural churn as opposed to redundancies. But again, just wanted a bit of clarity on that, if possible, please.

[James Hilton, executive]

Thanks, Tom. I'll start with the first question, which was your question around Germany and Europe and kind of what we're seeing there versus the other markets. I mean I'd start by highlighting that both Germany and Europe more broadly both hit a record level of business in September, which was clearly encouraging and we're pleased with that. And I think we're still seeing good levels of underlying demand in those markets. Germany is our biggest business, and about 85% of the business there is Temp & Contracting. And we look in a lot of detail at the number of starters that are being placed every week across all -- across that business.

And actually, those trends have held up well. And not just that, we're actually seeing lower levels of finishers, which is, again, an encouraging trend. So that's again supportive of volumes. I think we're seeing clients very, very keen to keep hold of talented temps and contractors in a skill-short market where if they leave, it's very difficult to replace them and find someone else. So we are seeing a higher level of retentions than we would normally do as well, and that's pretty supportive of volumes there.

And more broadly, in EMEA, we have more of a mix towards perm across the broader European business. But at this point, trends are good. We're seeing good levels of job flow coming through, interview numbers are solid. So at this stage, look, I mean, like all these things, things could change. And we'll just have to see as we go through the next quarter, but at this point in time, we're reasonably pleased with it.

I think your second question was around Q1 and hiring in Q1 and whether that was grads or experienced hires. We increased our overall headcount by 2% in the first quarter, which was kind of where we expected it to be when we gave the guidance a few weeks ago. When we look at that, our vast majority of starters in our business are grads or inexperienced or rookies, if you might want to say, who haven't done recruitment before. And normally, in this quarter as well, we also have our graduate intake, which not all countries, but a number of our countries around the world have a sort of seasonal intake in this quarter anyway, which tends to be focused on the grad level.

So our mix is heavily towards graduates rather than experienced hires anyway. We have had a few experienced hires in the business, not a huge number because we've been relatively low volumes of additions. Those tend to be more in the investment specialisms areas anyway. And we've made a few selective hires, and we'll continue to make a few selective hires in that area in the next quarter.

I think just looking ahead to your final question to Q2 and where we might be, I think, clearly, you've seen, we've guided to flat overall headcount across the half. Yes, I expect headcount to come down a little bit in the next quarter largely in the U.K. and ANZ, where we've spoken about the outlook and the current trading there. It softened slightly, and we'll take action to align our headcount in those markets to the level of demand, as you would expect us to.

How do we do that? Via natural attrition. We'll have people leave the business as we normally do, and we'll be pretty selective on who we replace. So where someone is on a really hot desk and we're seeing good levels of demand, yes, we'll replace them because not doing, we'll lose fees. But where we've seen that the market has cooled in certain areas, we'll allow that natural attrition to take place.

[Operator]

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

[Anvesh Agrawal, analyst]

I got 2 questions. First, just on the Australian temp market really. The softness in volume in temp, is that more structural given the change in government there and sort of their outlook around the labor market? Or do you see it to be cyclical?

And then the second is, while Germany looks like pretty strong, but we have seen a reduction in the average weekly hours, I'm just wondering what has driven that given the market is so strong.

[James Hilton, executive]

Thanks, Anvesh. Regarding the Australia question, I think there's 2 or 3 parts to what we've seen in Australia over the last 6 months or so. I think the first I'd highlight was largely around the public sector where following the election in May, we've seen a step down in public sector recruitment more generally in Australia, and that's kind of largely sort of dictated by the new government there who have come out and said they're going to really cut back on contingent labor in the public sector. So that's definitely contributed to that.

The public sector for us in Australia is weighted towards temp. So you can see from our statement, public sector was flat in Australia in the quarter, and that was a core part of why the Temp business overall was down. I think there's 1 or 2 other sort of areas that I've highlighted as well where I think in Australia, we're seeing more stability and overall strength in more technical areas versus more professional areas and certainly more at the senior end of market than in the junior end of the market.

The other bit I'd highlight as well is around financial services. We have seen a number of our financial services clients pull back in the temp area in the last quarter as well. So not -- relatively small pocket of our business overall, but we definitely see that trend in some of the banking and financial services areas.

I think your second question was on Germany and I guess what we're seeing, I think it was relating to the hours worked on our contractors where it was down 4% in the quarter. We've actually -- Anvesh, we've actually been seeing that trend now for, I'd say, 12, 15 months. It's not a new trend. And actually, probably really post-pandemic recovery, we've continued to see a modest reduction in working hours year-on-year.

So I think in Q4, we said it was 6% down and 4% down this quarter. I think there's probably a number of reasons why we're seeing that. I think we're seeing people wanting to be a bit more flexible with their time, maybe kind of splitting their time maybe between 1 or maybe even 1 or 2 projects working on simultaneously. I think perhaps working from home and then being more flexible on where they do their work allows people to do that a little bit.

So overall, though, in Germany, you can see our volumes are strong. Margin trends are supportive and those margin trends will continue because, quite frankly, we don't get the new -- most of the margin effect until we put a new temp in and that most of our temps' and contractors' work are 9-, 12-month placements. It takes time for that margin to come through, but we are seeing it come through quite well. So overall, a good dynamic in Germany. The hours thing has softened slightly from the last quarter, and we'll just have to see how that goes over the next quarter or 2.

[Operator]

We currently have no questions coming through. [Operator Instructions] The next question comes from the line of Kean Marden calling from Jefferies.

[Kean Marden, analyst]

I've got a few, if you wouldn't mind. Just first of all, just looking at the IT discipline, so I think some of the fraught things have been coming out of that market over the last sort of couple of months. Just wondering how you'd characterize that space at the moment. So is it sort of fraught, particularly in the States, they're sort of ebbing away, but the core sort of structural tailwinds remain intact?

Then secondly, on enterprise, more strong growth there. And I think -- are we seeing market share move around within this industry at the moment? Or are we seeing sort of freshly outsourced new business coming to market and that's helping your business?

And then thirdly, on pension. So have recent developments influenced your ability, James, to address that DB deficit either in a helpful or unhelpful way?

[James Hilton, executive]

Okay, Kean, I'll pick them up in turn. IT, I think, overall, we've had a good quarter, another good quarter. We grew well across the business. We're up 15%, and that was another record for us. So again, it's a pretty tough growth comparator from prior year as well. So we're pleased with how we're getting on in tech. We've had broad-based growth as well, so all of our regions grew strongly in this area. And I think we said well, I mean, clearly, it's an area of significant investment for us, and we put plenty of investment into there because of the longer-term opportunities.

I think we have seen a little bit of softness in the U.S. I think we talked about that at our prelims that we've seen that cool a little bit. I'd say it's been fairly stable since then. I don't think it's deteriorated any significant amount further. But elsewhere, I think we're still seeing good job flow in technology overall, both in the perm side and on the temp side. So, so far, so good this year on the technology side of things.

Enterprise, look, as you say, Kean, we've had a good quarter. We were up 18% overall, another record for us. And whether that's we're taking share from the market, but I do think that structurally, the market is still opening up, and we are seeing more contracts come into -- perhaps slightly more into the mid-market size of our client base. And I think that's a key strategy of ours. We've got great client relationships. And then we're looking to convert those into RPO and MSP opportunities, and that's really feeding a good pipeline that we've got now looking forward.

So I think we're pretty pleased with how we're getting on there. We've invested around our account management, as you know, and our kind of delivery capability into the enterprise world. We look at that through a slightly different lens, as you know, in terms of how we run that business. But I think looking forward, lots of opportunities there for us.

And on the pension side of things, that's, yes, I mean, as you said, an interesting 2 or 3 weeks on pensions. We have an LDI-driven investment strategy, which is part of our journey to buy out because of the stability that, that gives us or the theoretical stability that it gives us. And clearly, the last couple of weeks have been an unusual train of events.

What I would highlight is that we have a conservatively run pension scheme, and we've had significant liquidity headroom around interest rate volatility. And actually, we've been -- in terms of our own collateral, we've had significant headroom on that and we put measures in place to make sure that, that continues.

[Kean Marden, analyst]

Sorry to expand on that, and this is probably not -- one of the least interesting areas probably for today's call. But is that a hint that you've maybe put some temporary collateral in...

[James Hilton, executive]

No, no, that's the scheme itself, Kean. We've always -- they've run it conservatively. So they've got significant liquidity in the scheme and haven't had to call on any other asset classes or any kind of cashing in of other assets in order to create liquidity. So it's been well positioned coming into this, and we've got a good liquidity in the pension scheme.

[Kean Marden, analyst]

Great. Okay. That's a slightly different -- that's a slightly better position than some other companies at the moment, so thanks for the clarity. I appreciate it.

[James Hilton, executive]

Thanks.

[Operator]

There are no further questions, so I will hand you back to conclude today's conference. Thank you.

[James Hilton, executive]

Thanks, everyone. That's all for the questions for today. We'd like to thank you all again for joining the call. I look forward to speaking to you at our Q2 trading update on the 17th of January 2023. Should anyone have any follow-up questions, David, Charles and I will be available to take calls for the rest of the day.

[David Phillips, executive]

Thanks.

[Operator]

Thank you for joining today's call. You may now disconnect. Hosts, please stay connected on the line and wait further instructions. Thank you.