Hays PLC

LSE:HAS

Earnings Call Transcript 2019-Q2

[Operator]

Hello, and welcome to Hays Q2 Quarterly Update. My name is Emilia, and I will be your coordinator for today's conference. [Operator Instructions] I am now handing you over to your host, David Phillips, to begin today's conference.

[David Ian Phillips, Head of Investor Relations]

Thanks, Emilia, and good morning, everyone. Welcome to Hays quarterly update conference call for the 3 months ended 31 December, 2018, our second quarter of our financial year. I'm David Phillips, Head of Investor Relations, and I'm here with Paul Venables, Group Finance Director.Before we start, please be aware that this call is being recorded and that the recording may be accessed using the number and code provided in the release. You should be aware that the discussions may contain forward-looking statements that are based on current expectations or beliefs as well as assumptions on our future events. There are risk factors which could cause actual results to differ 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 will now hand over to Paul.

[Paul Venables, Group Finance Director & Executive Director]

Thank you, David. Good morning, everybody, and thanks for joining us. I will summarize the highlights of today's update, cover the key themes and discuss our regional performances before taking any questions. As usual, all net figure percentages that I give for the quarter will be on a like-for-like basis versus prior year.Highlights of the results. I'm pleased to report we've delivered another good quarterly performance with good net fees of 9% against increasingly tough year-on-year comparative. Currency translation continued to have a negative impact and reduced headline net fees by 1% in the quarter.I'd highlight the following key features in the results. First, our performance is again broad-based with 17 of our 33 countries delivering double-digit growth, including 8 all-time quarterly records. Second, growth is 9% in both our Temp and Perm businesses. Third, Australia delivered strong growth in net fees of 10% versus increasingly tough comparative and extended its run of consecutive growth quarters to 18. Fourth, Germany delivered strong growth of 15% or 12% underlying adjusted for working days. Our Temp and Contracting business grew 13%, and we saw continued excellent growth in Perm, up 26%. Five, the U.K. and Ireland delivered another solid performance with growth of 3%. This was driven by 12% growth in our public sector business in part due to easier comparatives. Private sector net fees were flat. Six, performance in the Rest of the World were strong, up 10%. Within this, Asia and Americas were the standouts delivering growth of 18% and 15%, respectively. And Europe ex Germany grew 6%, with Southern and Eastern European countries performing those in Northern Europe. Seven, group consultant headcount rose 2% in the quarter, in line with expectations and 7% year-on-year. We continue to make selective investments in markets where we see strong growth opportunities such as Germany, the U.S.A. and Asia. In line with our long-term plans, we opened a net 3 new offices in the quarter. And eight, our cash performance has been good. After paying GBP 113 million in dividends in November, we ended 2018 with GBP 30 million net cash similar to 2017. I'll now comment on the performance by each division in a little more detail. ANZ. Our ANZ division, which represents 17% of group net fees, delivered another good quarter with net fees of 8% despite tough comparatives. This was our 18th consecutive quarter of growth. Our Temp business was up 11% with Perm continuing to be subdued at 1%. Public sector net fees grew 11% with private sector up 7%. We saw another strong performance in Australia with net fees up 10%. Growth was broad-based across most states. In both New South Wales and Victoria, together 56% of our Australian business, net fees grew 10%. Queensland, our third largest state, delivered growth of 12% and South Australia, 9%. ACT grew by 11%, although Western Australia fell by 2%.At specialism level, net fee growth in IT was again excellent at 30% and Office Support grew by 13%. The Construction & Property, our largest business in Australia, declined by 4%, and Accountancy & Finance by 5%.In New Zealand, which represents about 5% of ANZ, our growth remains below expectations and net fees fell by 21%. As outlined last quarter, we've taken actions to improve our performance. Consultant headcount in ANZ increased 2% in the quarter and by 11% year-on-year.Germany. Our largest business, Germany, which represented 27% of group net fees, grew by 15% or 12% underlying for working days. Given our scale in Germany and an underlying growth comparative of 23% in Q2 last year, this was a strong performance. Our Temp and Contracting, or Flex business, which together represented 84% of German net fees, grew by 13%. Contracting was up 5% while Temp delivered excellent growth of 32%. Perm, which represented 16% of German net fees, continued its run of excellent growth, up 26%. In 12 consecutive quarter, we've delivered growth in excess of 20%. And our strongest, our largest specialisms of IT & Engineering, which represented over 2/3 of net fees, both grew by 11%. Accountancy & Finance was again excellent at 28%, as was Construction & Property, up 21%. Sales & Marketing grew by 17%. Consultant headcount increased by 3% in the quarter and was up 3% year-on-year. As previously flagged, we expect a much smoother profile of headcount additions throughout FY '19 compared to last year, which show our consultant headcount growth heavily skewed to half 1.U.K. and Ireland. In U.K. and Ireland, which represents 23% of the group, we delivered a solid performance, particularly given economic uncertainty with net fees up 3%. This matched our Q1 growth rate. Our Temp and Perm businesses grew by 4% and 3%, respectively. Growth is led by our public sector, which represents 28% of U.K. and Ireland and rose 12%. Within the Public sector, Temp grew 9% and Perm 18%. Growth in the private sector was flat, with Temp and Perm delivering similar rates. Although underlying public sector activities improved slightly, some of our growth is down to ease the comparatives as markets were artificially low this time last year due to IR35 rule changes.All regions traded broadly in line with our overall business, with the exception of South West & Wales and the North West, up 14% and 9%, respectively. And Scotland and the South East, down 15% and 8%, respectively. Our largest U.K. region of London delivered 3% growth. Our Irish business delivered another good performance with net fees up 6%. And across our 5 larger specialisms, net fees in IT grew strongly at 13%; Accountancy & Finance, 3%; Office Support, 2%; whilst Construction fell by 1%. Education continues to face tough market conditions and declined 10%.Consultant headcount was flat in the quarter and year-on-year as we continue to focus on driving consultant productivity.Rest of the World. Our largest division of Rest of the World, made up by 28 countries and representing 33% of group net fees, delivered strong growth of 10% and 8 country delivered all-time records. Europe ex Germany was up 6% despite increasingly tough comparatives. Our largest Rest of the World market of France grew 3% whilst Spain delivered a strong quarter, up 19% and Poland up 16%. However, Belgium had a tough quarter and declined 14%.Asia delivered strong growth overall of 18%. China, which includes our Hong Kong business and our third largest Rest of the World country, grew by an excellent 33%. Within this, Hong Kong delivered a superb 41%. Elsewhere in Asia, Japan was tougher and fell 6%, but Singapore returned to growth, up 25%.In the Americas, we also saw strong growth with net fees up 15%. U.S.A. our second largest Rest of the World country by fees, grew 10% while Canada delivered an excellent 28%. Brazil declined 2% while Mexico fell 20%. Overall, consultant headcount in the division was up 2% in the quarter and 13% year-on-year.Cash flow and balance sheet. Cash generation in the quarter was good. We ended the period with net cash of GBP 30 million in line with prior year. This was after paying GBP 113 million in core and special dividends in November 2018. We also extended the maturity of our GBP 210 million unsecured revolving credit facility in November at attractive rates of 0.7% to 1.5% over LIBOR. This is in place until November 2023, with potential options to extend by a further 2 years.Current trading and guidance. I'd highlight 6 points. Our group net fee rate was broadly in line -- exit rate was broadly line with the quarter as a whole. Secondly, considering the increased economic uncertainty, temperature levels at the start of the new year and the return-to-work period will be an important driver of the group's second half performance. We'll provide a detailed update at our interims in February. Third, looking ahead, we continue to overlap tough year-on-year growth comparators across our international business. We're also mindful of the like the Australian general election in April/May and the impacts that may have in that market. Fourth, exchange rate movements remain a material sensitivity to the group's reported results. If we retranslate FY '18 profits at current sterling spot rates, we estimate a negative GBP 1 million operating profit currency headwind for FY '19. This represents a negative swing of GBP 4 million since we reported our prelims.Five, some technical guidance. Easter falls entirely in Q4 FY '19. Whereas last year, it was evenly split between our Q3 and Q4. We expect this will have a 1% benefit to our net fees in Q3 with a corresponding 1% negative impact in Q4. Finally, overall, while we're alert to macroeconomic conditions, our outlook is good across most international markets. We will continue to invest in key structural growth markets like Germany, U.S.A. and Asia, and we anticipate sequential growth in group headcount to be broadly similar to the 2% delivered in Q2. In conclusion, this has been another quarter of broad-based growth led by our international businesses, but with a creditable performance from the U.K. Our focus remains on driving profitable net cash-generative growth and leveraging our global platform, the largest and most balanced platform in our industry.I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator]

[Operator Instructions] We have the first one from the line of Rory McKenzie from UBS.

[Rory Edward McKenzie, European Support Services Analyst]

It's Rory here on behalf of Bilal Aziz. Two first please on the kind of European regions. As firstly, within Germany, the Temp business accelerated quite strongly, I think. So can you give any more detail behind that? And then secondly, you mentioned a slowing in Northern Europe. Any verticals in particular you'd call out within that?

[Paul Venables, Group Finance Director & Executive Director]

Yes, if I take Germany first, I think first of all, we are very pleased with the German results. It's pleasing on several aspects. One, after a week of September, we saw a very strong Perm growth across the quarter. So I think that's removed one uncertainty. And secondly, within the Contracting and Temp business, actually our volume growth improved across the quarter. So very happy with the German results. Clearly, Temp gets a disproportionate benefit of the increasing working days, Rory, because not only do we get a pickup in more margin, but we also, of course, don't -- it's when we have reduced days, we have to pay for the Temps so we get a double whammy. So in combination, I think the more important statistic is overall Temp and Contracting is up 13%, and we're really happy with that. And then on Northern Europe, I think, generally, we've seen more of a weakness in the industrial manufacturing heartland across Northern Europe, and that was a point that we discussed on the last quarter, and it continued into this. And then within places like France where we still think on the background of having more than doubled the business over the last 4 years and outperformed our competitors, growth of 3% is less than we had before, but a pretty creditable result. We've seen a specific weaknesses within Life Sciences and a reduction in Temp numbers. But overall, still growing and sort of pretty good performance.

[Rory Edward McKenzie, European Support Services Analyst]

And then just on Australia, you still described favorable conditions today. I'm just wondering if you're worried yet about any of the lead indicators or just kind of worried ahead of the potential election impact. Your thoughts on the market there.

[Paul Venables, Group Finance Director & Executive Director]

Well, I think one of the key parts there, Rory, is that our Construction & Property business, which is 28% of ANZ, was down by 4%, and that's the second quarter where we've been down. So the best way of looking at that backdrop is after a very strong acceleration in activity over the last 3 to 4 years. We've seen a weakening in the residential space. The good parts is that we're seeing an increase in activity in commercial construction infrastructure, but there's no doubt there's a little bit less activity than we had 6 or 12 months ago. And we're mindful. We read the industry statistics such as you do. So there's a bit greater uncertainty in Construction & Property. Outside of that, I think it's all about the run up to the election. So strong performance in Australia, growth of 10%. We've been growing 2x the growth of our basket of competitors now for the last 3 to 4 years, so very strong comparatives we're up against. Good solid performance, but there's no doubt it's slowing slightly.

[Operator]

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

[Anvesh Agrawal, Research Associate]

Just a couple of questions. So just following on Germany, obviously the mix of growth shifted from Contract and Perm. Can you just say [Audio Gap] put the business similar? And can you manage it with your existing headcount, i.e. the headcount that you put in the business manage -- can manage both Contracting and Temp businesses? And second again on the headcount perspective, obviously there are few headwinds to the growth and from a macroeconomic perspective, but at the same time, you look to continue to invest into this structural growth markets. So how do you balance that from a productivity perspective? Or how should we think about the conversion margins this year?

[Paul Venables, Group Finance Director & Executive Director]

Well, the 2 parts, I might have missed part of your question on the headcount and Temp and Contracting, but I think the better way of looking at it is we increased headcount by 3% in the quarter. So that's the increase in productive capacity we have put in, and that gives us enough capacity to be growing this business at about 10%. And we really expect to continue that sort of trend if we go into Q3 and Q4. I think on a headcount growth, we've always been very explicit about which of the key countries that drive the profitability of the group and where we have supported conditions in those markets. Germany is one of those, and U.S. is one of those and parts of Asia are one of those, then we've always been on the front foot in putting investment in. France is another good example. France is a key country for us. We've driven significant profitability growth over the last few years. But clearly, growth is slower at the moment. And therefore, we are more mindful to be very modest in any headcount growth and focus on cost control. So we're always trying to do the right thing for the long term of the business, but we've also been a business that's believed in driving profitability as we go along. And then the overall question about drop-throughs, all I can really give at this stage is where we are for the first half. And the context for this is 3 or 4 factors. First of all, of course, as we've outlined over the last year, we opened -- we've expanded a number of properties over the last year. And when we do that in our major markets, we look to give productive capacity from between 10% to 20% in any expansion. So we've had an increase in property cost. We've got a number of system projects on the go at the moment, both front and back office. And when you add that together with, of course, within the Rest of the World where we have had slightly weaker growth in Europe, and therefore, we've got headcount growth ahead of fee growth, we would expect drop-through in the first 6 months to be something like 20%. Coming to the second 6 months, that's really all driven by the return to work. We're in a very good position. We've got very tight cost control. Very happy with the headcount we've got for the business. But like every other year at this point, the return to work is important. We will have an internal clear view on that by the end of January, and of course, we'll give you detailed color on that when we do the interims at the end of Feb.

[Anvesh Agrawal, Research Associate]

Yes, but assuming, let's say, a normal return to work, is it fair to assume the drop between second half which is somewhere around 30% or so?

[Paul Venables, Group Finance Director & Executive Director]

I said 20% for the first 6 months. Yes, we'd expect to see a slight -- if we get a normal return to work with growth levels at this or slightly higher, we'd expect to see a slightly improved drop-through in the second half of the year. But as we've always discussed, that in part is dependent on where the mix of growth comes from. So for example, we are very happy with our U.K. performance in the first 6 months, 3% growth with the backdrop we've got. And of course, with that, we can drive good profit growth. So it's a combination of where the mix of growth will come from in the second half and where the absolute growth level will be. We'll be in a much better position to give you some guidance when we get to the end of February. But for the purpose of today, we've had about 20% drop-through in the first 6 months.

[Operator]

Your next question comes from the line of [ Sanjam Sriram ] from Reuters.

[Unknown Analyst]

I had a question specifically in regard with the U.K. market and Ireland and regard with the Brexit and how that is affecting hiring as such. Has it slowed? Has it frozen at companies? What locked into [ higher ]? I wanted to know on this perspective.

[Paul Venables, Group Finance Director & Executive Director]

Well, I think, look, we're happy with the performance of our U.K. business. And at the moment, the business remains in very stable conditions. We delivered 3% growth in Q1. We've delivered 4% -- delivered a 3% growth again in Q2, and we're very happy with that performance. But clearly, we are at lower levels of absolute fees than we were a couple of years ago. So there is good enough stability in the moment for us to drive fee growth and profit growth, but clearly, we all look to see what will happen in the next 3 to 6 months.

[Unknown Analyst]

All right. And a follow-up one. Are you specifically seeing jobs moving out of London to other EU countries, especially with the finance roles or anything of that sort? Anything...

[Paul Venables, Group Finance Director & Executive Director]

If anything, it's very minor. So again this is a question we've covered mainly on the press side, which is where you're from. And over the last few years, anything we've seen is really around the edges.

[Operator]

Your next question comes from the line of Steve Woolf from Numis Securities.

[Steven John Woolf, Analyst]

Just in trying to solve, put the jigsaw together in a sort of compare-and-contrast way, there's 3 markets which I'm sort of getting a little bit stuck on at the moment, and there's Japan, China and Mexico and the performances across that with peers. I was wondering, could you provide any color on trading conditions there that you might be seeing versus others and maybe even market positioning that you think where you are different to others, if that's possible?

[Paul Venables, Group Finance Director & Executive Director]

I think Mexico is easy, Steve, we've got a relatively small business. And when you've got a relatively small business, any change, any small changes can have quite an impact on net fees. It's not significant in our overall group position. Japan, after again a few good years’ worth of growth, this was just a poor quarter, and we'll take all the actions to try to drive fee growth, but there's nothing fundamentally wrong with the Japanese economy. And I think the China performance was absolutely superb. It is our third largest country within the Rest of the World. And the really pleasing part of it, we had strong growth across Mainland China, which, of course, as an industrial base as well as finance, legal, et cetera. But we also had very strong growth in Hong Kong, which is more on financial services. So really pleased, very much in line with the strategy we've set out supported by headcount investment, and it's becoming a meaningful part of our group. So I think the most important of those certainly from profit perspective are Japan and China, and the upsize in China more than offset any weakness in Japan.

[Steven John Woolf, Analyst]

And within China, it's still multinationals in and out from -- it's more sort of multinationals in rather than the Chinese multinationals as it were or Chinese international out, if that makes sense.

[Paul Venables, Group Finance Director & Executive Director]

Well, we continue to -- we're increasingly diversifying our business as we go across a period of time. So for example, Alibaba is a really good customer of ours. So we started off like most companies going into China with predominantly Western companies and bilingual Chinese nationals. But as you build a business over a long period of time and we've been in China now for almost 10 years, we are now increasingly growing the Chinese elements of that business. So -- and that's an important part of our growth going forward.

[Operator]

There are no further questions. I will hand you back to Paul Venables for any concluding remarks.

[Paul Venables, Group Finance Director & Executive Director]

If that's all the questions today, I would like to thank you all again for joining the call. I look forward to speaking to you at our next -- at our Half 1 FY '19 results on 21st of February. And should anyone have any follow-up questions, David, Charles and I, we're available to take calls for the rest of day. Thank you very much.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.