Hays PLC

LSE:HAS

Earnings Call Transcript 2020-Q2

[Operator]

Hello and welcome to the Hays Q2 Trading Update Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to David Phillips, Head of Investor Relations, to begin today's conference.

[David Ian Phillips, Head of Investor Relations]

Thank you, Rosie, and good morning, everybody, and welcome to Hays quarterly update call for the 3 months ended December 31, 2019, the second 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 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 the call regardless of whether these statements are affected as a result of new information, future events or otherwise. I will 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 key themes of today's update, discuss regional performances before taking any questions. And as usual, all net fee growth percentages that I give for the quarter will be on a like-for-like basis versus prior year. Key points. Growth in the quarter declined to minus 4%, with December particularly tough, down 6%, impacted by certain specific external events, which I will discuss later. Temp was down by 3% and Perm 6%. Currency translation had a negative impact and reduced like-for-like net fees by 3% in the quarter. I'd highlight the following key features in the results. Firstly, underlying trading in October and November was minus 3% versus the working days adjusted minus 1% in Q1. This decline was driven primarily by 2 factors. First, a deterioration in German trading, which, as you can see, declined by 9% in the quarter from minus 2% underlying in Q1, with broad signs of reduced business confidence and increased level of client cost control. More on this later. Second, growth in our Asia business is heavily impacted by the continuing disturbances in Hong Kong. Outside of Germany and Asia, the rest of our business, whilst remaining subdued, was broadly sequentially stable in line with our expectations. Two, however, as December progressed, group trading was materially impacted by specific external events in 3 countries, which represents circa 45% of our group fees, namely the French general strike, the tragic bushfires in Australia and the U.K. election. These reduced our group growth rate to minus 4% for the quarter and our group fee exit rate for December of minus 6%. Three, these trends and events, combined with our continued investment in strategic long-term growth markets, plus recent adverse FX movements, where we anticipate half 1 FY '20 operating profit will be around GBP 100 million. Four, group consultant headcount declined by 1% in the quarter and 2% year-on-year. Five, during the quarter, we reviewed our overhead cost base in detail. And as a result, overhead costs reduced by GBP 5 million in the second half. Additionally, given the step-down in Germany over the quarter, we are reviewing its cost base. Six, we continue to make selective investments in markets where we see strong growth opportunities, such as IT specialism globally and the U.S.A. And seven, our cash performance has been good. After paying GBP 122 million in dividends in November, GBP 10 million more than November 2018, we ended 2019 with GBP 15 million net cash. I'll now comment on the performances in each detail -- in each region in more detail. ANZ. Net fees in our ANZ division, which represented 17% of group, declined by 7% versus a tough growth comparative. The Perm market slowed materially in December, with bushfires particularly impacting sentiment in the private sector, especially in New South Wales. Temp remained stable and our Temp business decreased overall by 2%, whilst Perm was down 15%. Public sector fees fell by 2%, with private sector down 9%. And our Australia business saw net fees down 7%. In New South Wales and Victoria, together 56% of our Australian business, net fees fell by 7% and 11%, respectively. Queensland, our third largest state, decreased by 6%, whilst Western Australia fell by 5% and ACT by 4%. In the specialism level, Office Support fell by 19%; Construction & Property, our largest business in Australia, declined by 14%; and Accountancy & Finance also by 14%. However, net fee growth in HR was strong at 12% and Sales & Marketing, 4%. New Zealand, which represented about 5% of ANZ, delivered its second consecutive quarter of growth, up a solid 4%. The consultant headcount in ANZ decreased by 1% in the quarter and by 6% year-on-year. Germany. Germany, our largest business at 26% of group net fees, decreased by 9%. We continue to see tough macroeconomic conditions and increasingly broad signs of reduced business confidence. This is most evident in the manufacturing and automotive sectors, and with clear signs of spreading into the Finance & Services sectors. Our Temp & Contracting business, which represented 83% of Germany's net fees, was down 10%. This was driven by a 4% reduction in worker volumes and a 6% reduction in average Temp & Contractor hours per assignment. And increased cost control through the quarter had a direct impact on our fees. This is particularly evident -- prevalent in our largest clients in Engineering, Automotive and financial services sectors. Perm continued to slow and was down 3%. We continue to see growth in our German public sector business, now 11% of net fees, which was up 6% in the quarter, whilst the private sector was down 11%. Our largest specialism of IT, 41% of German net fees, was down 6%. Engineering, our second largest specialism, was down 12%, driven by the weakness in Manufacturing and Automotive sectors. Accounting & Finance was down 9% and Construction & Property was down 17%. However, we saw growth in smaller specialisms, such as Sales & Marketing, up 16%; and Legal, up 7%. The consultant headcount decreased by 2% in the quarter and by 4% versus prior year. U.K. and Ireland. In UK&I, which represented 23% of the group, net fees decreased by 4%. Our Temp and Perm business fell 1% and 7%, respectively, with the private sector perm heavily impacted by the continued economic and political uncertainty, which further increased in the run-up of the U.K. election. Candidate confidence continued to weaken across the quarter and client confidence fell materially in December. Growth in the public sector, 31% of U.K. fees, was good at 8%. Within the public sector, Temp grew by 7% and Perm by 12%. Meanwhile, the private sector declined 8%, with Temp down 5% and Perm down 11%. All regions traded broadly in line with the overall business, except for Northern Ireland, which is up 4%; and the North West, down 12%. Our largest U.K. region of London declined by 1%, while our Irish business decreased by 7%. Across our 5 largest specialisms, net fees in IT grew strongly at 11%, but Accountancy & Finance fell 4%, Office Support 3% and Construction & Property 8%. Finally, Education showed signs of stabilization, with fees down 3%. Consultant headcount decreased by 1% in the quarter but increased by 1% year-on-year, driven by investment in our IT specialism. Rest of the World. Our largest division in the Rest of the World consisting of 28 countries and representing 34% of group net fees delivered net fee growth of 1%, within which 5 countries delivered growth of more than 10%. Europe ex Germany decreased by 1%, with a significant step-down in growth in December, particularly in our largest Rest of the World country, France, which is impacted by the general strike and declined by 3% overall in the quarter. Netherlands was tough, down 12%; and Spain fell by 2%. The growth in Italy and Belgium was good, up 9% and 6%, respectively. In the Americas, net fees increased by 6%. The U.S., our second largest Rest of the World country by fees, delivered a strong quarter, up 13%, and Brazil was up 1%. Canada, however, was tougher, with fees down 5%. Asia was flat overall, driven by a strong 12% growth in Japan, together with an excellent growth of 25% in Malaysia. China, our third largest Rest of the World country, declined by 9%, with our Hong Kong business becoming increasingly difficult with net fees down 10%. Overall, consultant headcount in the division was up 1% in the quarter but decreased by 1% year-on-year. Cash flow and balance sheet. Cash generation in the quarter was good and we ended the period with net cash of GBP 15 million. This is after paying almost GBP 122 million in core and special dividends in November 2019. Current guidance and trading. In addition to the comments I made at the start, I would highlight 3 further points. First, a rebound from the specific events in France, Australia and the U.K., plus the overall new year return to work period will have been an important driver of the group's second half performance. We will provide a detailed update at our interims in February. Second, we expect group headcount will be down modestly in Q3. Third, exchange rate movements will remain a material sensitivity to the group's reported results. If we retranslate FY '19 profits at current sterling spot rates, we estimate a negative GBP 3 million operating profit currency move since our Q1 trading update in October, and this equates to a GBP 9 million currency reduction since we reported our prelims. Then some closing messages. Overall, we expect near-term macro conditions to remain difficult, but we see continued opportunities for growth in key markets like IT. Our task is to balance such investment opportunities with managing our cost base while protecting the infrastructure and market leadership. In conclusion, this has been a tough quarter with a combination of worsening conditions in Germany and specific external events in 3 of the major businesses. This, combined with adverse moves in currency, has negatively impacted the group's first half financial performance by more than we expected when we talked to the end of Q1. However, the combination of our strong global platform, our highly experienced management teams across the world, and our financial strength gives us confidence for the future. I will now hand you back to Rosie, and we are happy to take your questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Bilal Aziz from UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

Just a few questions on Germany from my side. Firstly, after you've started to see volumes decline and hours work per assignment also decline, can you perhaps comment on what impact you've seen, if any, on your fee rates within that region currently? And separately, Paul, you've indicated that you are now assessing the cost base in Germany now as well, can you perhaps highlight some of the plans? Is it largely headcount you're looking at within that region? Or is there other stuff you can do as well?

[Paul Venables, Group Finance Director & Executive Director]

Well, look, the reduction in the quarter, I think I've tried to set out very clearly early on, and within my standpoint, the fact that hours reduced by 6% is the key part here. That really shows that our clients have moved from modest cost control with adjustments around the edges to a much more concerted reduction in cost base, and that's what really drove the reduction in fees. Moving on to fee rates, we've seen little or no impact so far on fee rates. Of course, that will always come in any weaker period of time. The backdrop to Germany is we've seen GDP growth, which was almost 2.5% 2 years ago, fall to a very modest level at the moment. So I think we'd see -- expect to see our clients focused on costs. But at the moment, it is much more around -- rather than what we do for them, it's around the hours per assignment and the level of assignments. And then moving on to the cost base. Look, this is just normal housekeeping at this stage. We've already done quite a bit of housekeeping around the overhead cost base over the last year. But clearly, we were 2%, minus 2% working days adjusted a quarter ago. We'd expect it to be in the minus 4% or minus 5% across this quarter, and we're sitting here at minus 9%. So all we're doing is just a final review of the cost base and nothing radical. We've got fantastic long-term opportunities in Germany. The structural opportunities are undiminished. But it's clear that we're going to have a more difficult period of time for the next year or 2.

[Operator]

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

[Paul Daniel Alasdair Checketts, Director]

I've got 3, please. Just continuing the theme of Germany, the reduction in hours worked. Do you think potentially the next step -- is this how it will unfold that originally the clients reduce the number of hours of people over there that they have in, and then they subsequently reduce the number of people if they want to address their cost base a bit more? And if you looked at this, is it just really a phenomenon in the Manufacturing and Automotive sectors? Or have you seen it elsewhere? The second is, can you give us a reminder of the year-on-year changes to the cost base? I know we've got the ring-fenced amount and depreciation, et cetera, but could you just give us an update?And then lastly, if I step back some of -- I appreciate it must be quite difficult to deal with when the end of the period is so weak, but it feels like some of the factors are temporary, the strikes in France; bushfires, hopefully; U.K. election now rearview mirror. Is there a sense in the business that actually that's temporary and things will start to improve?

[Paul Venables, Group Finance Director & Executive Director]

Yes. Quite wide-ranging questions there, Paul. So if I don't answer them all, please come back to me. Look, I think in Germany, we've had both parts of it. So the volume reductions have been primarily in the manufacturing space. But what is clear is we've gone across this quarter, and fairly early in this quarter, is that this has now moved into the more broader German economy. I think you're back to several factors really. There's been a lot of discussion in both the German press about technical recessions, et cetera, and I covered that on the call last time. So Germany was always the one I was nervous about coming into this quarter. I think what we've seen is a complete overtime ban being put in place pretty much across most of the clients we deal, with a much more focus on detailed cost control. And then what we've also seen both in the Manufacturing space but also within the financial services space because it's easier within the contractor part of it to reduce hours further if you want to. And we've seen a situation where newer assignments have been -- have a clear expectation and delivery of more 4, 4.5 days a week working rather than full. Secondly, overtime ban. And thirdly, reduced hours. So I think this is a real notch up in cost control. And it's difficult at this stage to see where this might go. Quite measured. No real drama, if you like, within the business. Good discussions we're having with our clients. And it is all in the higher-end companies that we deal with. It's the large companies we deal with. What's been interesting is, if I look at the Mittelstand that we've opened into over the last period of time, we've seen continued growth in that space. And therefore, if anything, for me, it leads to, in the strategy, accelerating the additional offices and the rollout because I think the long-term opportunities are undiminished. Secondly, on the year-on-year changes in the cost base. Clearly, this is kind of early. I felt the need to talk to a half-year profit because, overall, I've got 3 facts. I've got a 3% underlying for the quarter, which went to 4% because of what happened in December and the 3 specific events. And as a result, worth a GBP 100 million. I think when you look at it, the biggest part of it is fee reduction, because fees overall are down by 2% and that's certainly going to be an GBP 11 million reduction in fees. That comes straight off the bottom line because, really, we're in that phase where productivity is reversing. When decision-making gets a bit slower, things like hour reduction, that doesn't lead you to do anything to your headcount at all. So if hours per assignment reduced, you would still need the same amount of consultants to deal with those clients. So the fees has fallen to the bottom line. We talked about some ring-fenced investment. I talked on the last conference call to GBP 5 million, and we've certainly had a good GBP 3 million in here. There is GBP 3 million of property and depreciation. If we remember, we gave some numbers out when we did the results, so it's 3 -- sorry, actually, it's GBP 5 million worth of property and depreciation. Then on the flip side of that, you get a GBP 1 million pickup in IFRS 16, GBP 2 million for the overhead reductions we did in Europe. And then finally, I think it was George who asked on the last conference call about underlying inflation in the business, and I talked about 1.5% cost inflation, and that would be about kind of GBP 5 million. If you add all those together and a bit of exchange, it gets you to nearly where we are today. And then finally, I think when we think about the factors. First of all, look, the Australia events are really quite troubling. Forget business, that's kind of irrelevant. But we'll have all seen the fires, the deaths. Our focus at the moment is on the 1,000 employees that we have there and the 20,000 temps and contractors that we have in that business. And so far, there's been no injuries to our own people, but we continue to be focused on that and supporting them. And on Australia, I really don't have a view at this stage, Paul, I think that's a hard one to call. I think on the other 2, I think on the U.K., really what happened in hindsight was any engagement and activity stopped fully in Perm from about the fourth or the fifth of December. And our clients didn't want to engage. And interview numbers were heavily reduced, candidates were very slow in coming back and going for second interviews, et cetera. And therefore, we go into every period with an amount [ that's ] secured. As you guys know, we only book permanent people starting the month or the first day after the month. We went in with a level of secured Perm. That normally goes up by predictable amounts across the month. That simply did not happen. And in many respects, it was, as I said, like the shutters being pulled up on Perm from our clients. I think the fact that we've got -- we've had massive uncertainty in the U.K. for a long period of time now with Brexit, tariffs and everything else, we then have the added political uncertainty. And I think the positive for all of us on this call for all the businesses, we now have certainty. We have a government with a large majority with a clear plan. And I think what that would do is it will help candidate confidence the most in the short term. Because if you remember, on the previous call, I talked to weakening candidate confidence, I think we'll see an improvement in candidate confidence. I think for clients, they now have certainty. They know what the final tariff agreement is going to be. And in the service sector, they don't know how that will work. However, they know that there is a government with a clear plan. And therefore, I think what we probably had in December is a blip in the U.K. And the really interesting thing is I actually think our U.K. business had a really good performance across this quarter other than the last 3 or 4 weeks. We were trading at minus 2%, minus 3%. I think that was really good. And therefore, I think that we'll -- January -- clearly, that weakness in December has moved a bit to January because, of course, you've got a reduced activity level, so you don't catch that back immediately. I think the fees, you just have a one-off loss of fees. But I think, certainly, by the time we get into February, we'll have returned to a more normal level. And then finally, in France, I think the reason -- let me give you some -- an example in France. We expected to be plus 3% in this quarter. France in December, for which the business is 70%, 80% Perm, was minus 13%. So that turned a plus 3% to a minus 3%. And again, I think it was much greater in December because it was easy for activity to slow down because you had a Christmas period coming, and with the massive transport disruption, it was easier, things just kind of stopped, got to a point and stopped. I think you don't get hit for the same thing twice. And whilst the general strike is still continuing, and therefore we don't know when it will end, but I don't see anywhere near the same impact when we come even into January. Because I think we're back into -- we're into January, Christmas is gone, there'll be a normal return to work. You know what, if the general strike is going to go on for another 10 days, 30 days, 50 days, people are going to get on with their lives. So what we were trying to do in these results to say, look, across France, across the U.K. and across Australia, we've taken a hit of not far off GBP 5 million, and hence why we've done the announcement as we've done it. I think France, there'll be -- I think you just lose the fees, it goes across. I think the U.K., in the end is a good path. And then Australia, it's far too early to tell. So what we've tried to do today is set up the first half profitability. Clearly, on the cost part of it, you asked me about, Paul, roll into the second half, clearly, we've got the currency move, which reduces the second half. And January is going to be a little bit more difficult than it would otherwise have been. But otherwise, we've got a great business and we're going to continue doing all the good things that we're focused on.

[Operator]

The next question comes from the line of Matthew Lloyd from HSBC.

[Matthew Lloyd, Head of United Kingdom Small and Mid]

Just one question really, I suppose a similar vein to everybody else. It's very early in the year to know what's going on and the tone seems from you to being more bearish than perhaps from some of the other businesses. And some of that will be mix and various other things. Is there anything specific that we should be aware of? Have you lost a big MSP RPO that will affect the first half of this year or something like that, that we should perhaps think through?

[Paul Venables, Group Finance Director & Executive Director]

Well, I mean, first of all, MSP RPO is about 15% of our group; and secondly, that business grew across the first 6 months of the year. So there's [ no sink ] in that [ place ]. I think -- we're on the 16th of January, and so I'm kind of confident on U.K. because I think the election result helps, if I had to say that. But Australia, it's far too early to have any view on that.And I think we're still in an uncertain world. We come back to the discussions we've had on previous calls. A trade deal between the U.S. and China that sticks, which then leads to a reduction in further tariffs, and let's hope there are no other kind of political or military-type events. All of those are important in putting in underpinning and the confidence. But I think the positive, there's a lot of uncertainty in these results already and I'm not seeing that uncertainty increasing at the moment.Equally, I don't think anything's happened in the world over the next 1 month, 2 months, 3 months outside of the U.K. which is going to lead to any sort of real pickup. I think we're going to be in for a cautious next 6 to 12 months. And for us, the nice thing is you only get hit by a weakness first, and therefore the minute it gets into the underlying data and sentiment, you stabilize. And actually, Matthew, if I could put this in another way around, I had expected to be covering an IMS today, where I talked to minus 1% going to minus 3%, why I talked to the weakness being Germany related and why I made a statement which said 70% of our business is sequentially stable. And I've tried to get that over in the way I've done this presentation. But I do think that's important. So we've had 3 events in those 3 countries: France, U.K. and Australia. But otherwise, up until that point, I think we were seeing the natural part of some stabilization and some of our growth -- some of our clients returning to focus on growth. So I remain confident but, clearly, we've got some uncertainty to deal with in the near term.

[Operator]

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

[Anvesh Agrawal, Equity Analyst]

This is Anvesh Agrawal from Morgan Stanley. Just a quick one, really. I know it's kind of too early to comment and, in part, you've answered that question. But how should we kind of think about the profitability in total in the second half, really, assuming that some of these one-off events mean that fee growth kind of remains in line with what you're guiding to in terms of exit rate?

[Paul Venables, Group Finance Director & Executive Director]

Yes. Look, I've only been doing this job for almost 14 years, and I don't talk to full year numbers. Because I think in a business where you've got 3 to 5 weeks' visibility and minimum secured forward revenue stream, you're kind of using a crystal ball. What we can say is if we strip out those events, our underlying fee decline was 3% in this quarter. And that's kind of a factor we've got today. We haven't got distress in any -- somebody's tapping on their table, [ if they can stop ] for a second. We don't have distress in any of the major markets. But clearly, there's an uncertainty in Germany. So underlying is minus 3%. The real question in the second half of the year is what now happens to Germany? Do we stabilize at this level, and therefore get in -- start to get into some easier comps? Do we see a further squeeze on cost control from our clients? And 16 days into this quarter, I don't have a view on that. By the time we do the interims -- Alistair and myself were in Germany. I mean I'm in Australia in the last week in January, start of Feb, we're both in Germany in the second week -- end of the first week in February, so we'll have a much better view that we can give you. And therefore, what we've tried to do, what I tried to do in a way today is to say underlying fee decline was 3%. And that's the thing we know. What I can't tell you is where it will go from there.

[Operator]

We have no further questions coming through, so I'll now hand the call back to yourself, Paul, for any concluding remarks.

[Paul Venables, Group Finance Director & Executive Director]

If that's all the questions for today, we'd like to thank you very much for joining the call. I look forward to speaking to you at our next half 1 FY '20 results on 20th of February, 2020. And should anybody have any follow-up questions, David, Charles and I will be available to take calls for the rest of the day. Thank you very much for joining, and thank you for your questions. Bye.

[Operator]

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