Hays PLC

LSE:HAS

Earnings Call Transcript 2021-Q2

[Operator]

Hello, and welcome to the Hays Q2 trading update. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, David Phillips, to begin today's call. Thank you.

[David Ian Phillips, Head of Investor Relations]

Thank you, Jess, and good morning, everyone. Welcome to Hays quarterly update call for the 3 months ended 31st December 2020, the second quarter of our 2021 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 discussion may contain forward-looking statements that are based on current expectations or beliefs as well as assumptions on future events. There are risk factors which could cause actual results to differ materially from those expressed in or implied by such statements. Hays disclaims any intentions or obligations 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. Thank you.

[Paul Venables, Group Finance Director & Executive Director]

Thank you, David. Good morning, everybody, and thanks for joining us.I'll present the highlights of today's update, cover key themes and discuss regional performances before taking any questions. And as usual, all net fee growth percentages stated are on a like-for-like basis versus prior year unless stated otherwise.Performance overview. Net fees were down 19%, a significant improvement on the 29% down in Q1. While the pandemic continued to significantly impact performance in Q2, trading improved through the quarter in both temp and perm and in every region. Our underlying exit rate was minus 16%. There were no working day adjustments in the period, but currency translation had a slightly positive impact, increasing headline net fees by 3%. I'd highlight the following key features. One, having entered the quarter with gradually improving markets and a net fee run rate of minus 26% and despite lockdowns of varying degrees of severity in many of our markets, recovery across all of our main markets accelerated, and this delivered a strong underlying end to the quarter. Two, as a result of stronger net fee performance, operating profit for half 1 FY '21 is expected to be circa GBP 25 million. Three, we saw improvements in both temp down 13% and perm down 26%. In October, the recovery continued to be mainly in perm, and in part, helped by the filling of jobs previously frozen during the lockdowns. But encouragingly, from November onwards, we saw the initial signs of an economic recovery with our temp business starting to rebound strongly, especially in the U.K. and Ireland, Germany and the U.S.A. Net fee decline rates were similar in ANZ, Germany and the U.K. and Ireland, each down circa 20%. And within the rest of the world, which is down 16%, the EMEA performance was better and minus 15%, although, of course, it had slightly easier comparatives a year ago with the French general strike. The Americas improved to minus 12%, driven by the U.S.A., down 3%. And Asia remained more subdued and declined by 24%.The rebound in public sector activity continued, with fees in Q2 down 7% versus a 14% decline in Q1. And the rebound in the private sector was stronger, down 21% in Q2 versus 32% in Q1. Six, group consultant headcount was flat in the quarter and decreased 17% year-on-year. Our cost base increased modestly in the quarter to GBP 65 million per period, primarily as consultant commissions increased proportionately with net fees and all of our offices were reopened. As a reminder, we exited all major government support schemes in Q1.And seven, cash performance was strong. We ended the quarter with net cash of GBP 380 million, excluding short-term deferrals of tax payments. I'll now comment on the performance by each division in more detail. ANZ. Our ANZ division, 17% of group fees, declined by 19%. Temp, which represented 73% of ANZ fees, was relatively resilient, down 16%. And while perm was down 27%, we saw sequential improvement across the quarter, particularly in the private sector once lockdown restrictions eased. The private sector, which represents 61% of fees, declined by 22% whilst public sector fell 16%. Australia declined by 20%. And in New South Wales and Victoria, together 49% of our Australian business, net fees decreased by 31% and 26%, respectively. Queensland and ACT were relatively resilient, down 16% and 9%, respectively, whilst Western Australia fared better and was up 1%. At the Australian specialism level, Construction & Property declined by 27%; Office Support, down 35%; and Accountancy & Finance, down 26%, were also tough. IT was less impacted, though, down 14%. And collectively, our smaller specialisms, which represent 20% of the business, were down 5%. And resource and mining was up by 4%. In New Zealand, which is 6% of ANZ fees, this fell by 5%, as activity continued to rebound following the relaxation of lockdown rules. And consultant headcount in ANZ increased by 1% in the quarter, but was down 19% year-on-year. In Germany, conditions in Germany. Our largest business at 26% of group fees remained difficult, although encouragingly, there are clear signs of improving business confidence generally and stabilization in the automotive sector. Our contracting business, which represents 62% of Germany fees, significantly improved through the quarter and fees declined by 8%. Temp remained the weakest subsector, with fees down 36%. And the drivers of this were: first, average tank volume, which is down 30%, in line with the prior year, following reductions in client demand in March to September 2020; and two, a further 124 temps released in the quarter at a cost of GBP 1 million. This further reduced temp net fees by 6%. This said, temp trends improved through the quarter, and we currently do not expect further material negative impacts from temp severance costs or underutilization in half 2 FY '21. Perm, which is 15% of fees, declined by 31%. Our German public sector business, which is 15% of Germany fees, delivered another excellent relative performance, with fees up 7%. With the specialism level, IT, our largest specialism, which is 46% of Germany net fees, fell by 10%. Engineering, our second largest specialism at 22% of the business, improved, but remained tough down 31%. And Accountancy & Finance, down 15%; and Life Sciences, up 3%, both improved through the quarter. Consultant headcount increased by 1% in the quarter and declined by 12% year-on-year. U.K. and Ireland. While conditions in U.K. and Ireland, which 22% of group net fees again remained difficult, activity improved through the quarter, especially in temp, where temp numbers increased by a net 4,000 across the quarter. Overall fees declined 20%, a 14% improvement versus Q1, and temp with 64% of the business decreased by 14% and perm by 29%. Both our private and especially our public sector businesses showed sequential improvement versus Q1. Fees in the private sector, which is 62% of the business, fell by 27%, with the public sector down 5%. All regions traded broadly in line with the overall business, except for the Northwest, which declined by 9%, and the East, which fell 28%. Our largest U.K. region of London fell 23%. And in Ireland, net fees declined by 28%. At the specialism level, IT continued to be a relative outperformer, up 2%, as was our large corporates accounts business, down 13%. Our education business meanwhile saw a significant sequential rebound with fees down only 6%, although, clearly, the education outlook in Q3 is likely to be severely impacted by the school closures. Construction & Property also rebounded in Q2, down 18%. Our toughest areas remained Accountancy & Finance, down 34%, and Office Support, down 40%. Consultant headcount increased by 1% in the quarter and declined by 20% year-on-year. Rest of the World. Our Rest of the World business, which comprises 28 countries and 35% of group net fees, declined by 16% with perm down 23%, but temp showed improved momentum and fell only 1%. In EMEA ex Germany, fees reduced by 15%, representing a 9% improvement versus Q1. Our largest Rest of the World business country of France declined 22% whilst Belgium and the Netherlands were also tough, down 27% and 21%, respectively. In Spain, trading improved significantly, down 11%, while Switzerland and Poland were standout performers, down 5% and 1%, respectively.The Americas declined by 12%, which represents a 15% improvement versus Q1. In the U.S., our second largest Rest of the World country, showed its resilience and declined 3% with a strong rebound in Construction & Property and Life Sciences, although Canada continued to be tough, down 32%. LatAm fell 11%, including Brazil, down 4%. In Asia, our fees fell by 24%. China, our third largest Rest of the World country, declined by 25%, with Mainland China, again, significantly outperforming Hong Kong. Japan had another tough quarter, down 36%, as our Malaysia continued to perform well and was up a very strong 14%. Consultant headcount was down 1% in the quarter and down 16% year-on-year.Cash flow and balance sheet. Cash collections remained strong, and we delivered a good underlying cash performance in the quarter with net cash at December of GBP 380 million, excluding short-term tax deferrals of GBP 13 million. Current trading and guidance, I'd make the following points. Firstly, the group's underlying net fee exit rate was 16%. Second, it's too early to quantify the negative impacts of the new lockdowns in the U.K. and some of our key European markets. In December, over 95% of our offices were open, although the reintroduction of lockdowns means this percentage is materially lower today. Three, as ever, our new year return to work trends will be a key driver of second half performance. And as previously noted, any material sequential increase in profitability in half 2 FY '21 versus half 1 FY '21 will require a further significant uplift in net fees. This is partially because, as with all prior years, the timing of public holidays mean there are fewer working days in the second half. For example, in half 2 FY '21, Germany has 8 fewer working days than half 1; Australia, 6 fewer; and the U.K., 5 fewer. This has no impact on year-on-year comparatives, but act as a headwind on sequential second half profit growth versus the first half, particularly in our Temp & Contracting business.Additionally, our Return to Growth investment program is well on track, and we continued to expect to incur circa GBP 15 million of additional operating expenditure in FY '21. This will be weighted to the second half with GBP 4 million spend in the first half and GBP 11 million in the second half. This will increase our half 2 cost base by GBP 1 million per period versus current levels.Four, overall, we expect headcount will increase sequentially by 2% to 4% in Q3 FY '21, mainly due to the acceleration in our Return to Growth investment program.Five, as with FY '20, Easter fall highly in our fourth quarter. We, therefore, expect no material working day effect year-on-year in either Q3 or Q4 versus prior year.Finally, some technical guidance on tax. As group operating profits are recovering from a very low base and as the half 1 profits are predominantly in high tax jurisdictions, at this stage, it's very early to accurately predict our ETR for FY '21. Our best estimate is ETR will be broadly similar to FY '20, i.e., about 40%. But going forward, as group profitability returns to GBP 100 million or more, we expect group ETR will be around 30% rate we reported in recent years.In conclusion, despite the ongoing pandemic, we saw an encouraging acceleration in trading through the quarter. Clearly, recent lockdowns in U.K. and Ireland and Europe represent significant near-term pressures. However, the world has now line of sight to the possible exit path from the pandemic for our vaccine programs. Our strong end to Q2, plus signs of improving business confidence prior to the most recent lockdowns, give us increasing confidence on our prospects for substantial profit recovery in FY '22, '23 and beyond. Our experienced management teams are focused on best positioning our business for any recovery, including our Return to Growth program. And whilst our strong balance sheet and leading positions in key sectors, we are confident we will continue to take further market share as clients and candidates look for expert guidance to navigate the pandemic and beyond.I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I've got 3, if I may. Paul, you very -- you said that the schools will obviously have an impact on your education business in the U.K. But outside of that, does the school closure means the temps ability to sort of go to work is impacted, and therefore, the impact would be more meaningful of this lockdown compared to what, let's say, we had in November where the schools were at least open in the U.K.?And then the second question is around with the net cash balance of GBP 380 million. What's the thinking on returning cash to the shareholders? And is the decision now more sort of optical in how the returning dividends to the market will sort of look optically versus this decision, which is more financial?And then finally, if you can give a flavor of the exit rates by region, that would be really helpful.

[Paul Venables, Group Finance Director & Executive Director]

Thank you, Anvesh. I think your first question is the key one. So what do we know so far? The only thing we really know is that if school closures continue across the board, for each period, we lose about GBP 1 million worth of fees. Education has been one of the areas in the U.K. where we've had the strongest rebound.Impacts further more broader on temps. I think we'll see that over the next few weeks. Anvesh, I think it's not possible to hypothesize at this stage. What is clear and positive is we had a lot of momentum going into Christmas, as I tried to explain earlier on. So we added 6,000 temp roles net across the whole of Q3. And it's a combination of additional temp assignments, but also elongation of existing temps. There's definitely a trend in the market today, which is, if you've worked well, specifically in the white-collar space, if you work well, you've been vetted, you've gone through security, IT and everything else, you've worked exceptionally well in this hybrid world of working from home and occasion, working in the office, clients are holding on to those people longer. And I think that's encouraging.I think on the broader issue, the key for us will be Construction & Property because, of course, again, we have a large business in that space. If you take the U.K., a large part of the rebound in our business over the last 6 months has actually been in Construction & Property, where our fees have gone from about GBP 1.5 million a period up to about GBP 3 million a period. So as long as construction sites stay open, I think the additional parts of parents having to home school, I mean a lot of people that work for me are having to look after their kids and educate them, I think that may have an impact. But I think we'll better know when we get to -- we get the return to work statistics and we talk at the interims.On the GBP 380 million cash, I don't think it's as much an optical issue for us. If you remember, last year-end, we had taken government health, relatively minor but we've taken some. We didn't pay any executive bonuses at all. We did take pay cuts for executives, and we didn't pay any dividends. We're now in a new financial year. There is no benefit in these results of -- a benefit from the U.K. schemes. We exited our schemes very early in the financial year. So I think it's much more about a financial standpoint, and we intend to set out our store at the interims with our dividend policy and how we're going to return cash to shareholders. But as I think I said in response to your question last time, we're very clear that dividends are both incredibly important to our shareholders, but also incredibly important both from a management standpoint and from an investment story for Hays. We are highly cash-generative, and these results are another example of that in this quarter where we increased our cash balance by GBP 30 million despite the temp book starting to build. So we'll set that out when we get to the interims.And then on exit rate, as we said, the exit rate itself was minus 16%. That's on underlying basis. So in determining that, we've stripped out the impacts a year ago of the general strikes in France, bushfires in Australia and the U.K. general election. Why have we done that? To make sure that we think this is a credible increase. So 16% is the true underlying rate. And within that, ANZ is 2% better, i.e., it's at 17%. Germany is 5% better, it's at 15%. And U.K. and rest of the world are both 1% better. So it's broadly across the board, but there's no doubt that across the quarter, we saw the biggest improvement by Germany.

[Anvesh Agrawal, Equity Analyst]

Just to be clear. So when you say you stripped out the impact of, let's say, the strikes in France, does it mean that on the actual basis, that exit rate is even higher?

[Paul Venables, Group Finance Director & Executive Director]

Correct, but it's meaningless. If you think it this way around, Anvesh, I've been doing this job for almost 15 years. Actually, when you talk about an exit rate, we fully understand the importance of that number and the sensitivity of it. Therefore, it is appropriate that we make sure it is meaningful. That minus 16% is a meaningful comparison versus an adjusted number a year ago. And therefore, what are we really saying? A little bit like in the previous quarter, where we've been 29% for the quarter and we exited at 26%. This time, we're at 19%, exiting at 16%. And the only fly in the ointment is where you, in part, started this discussion. Clearly, in January, we've now got lockdowns, a harder one in the U.K. We've got lockdowns across many parts of Europe. They may well elongate. None of us knows the impact to that. But there's no doubt that the sequential trading across this quarter was encouraging. And as I said in my intro, the November and December trading showed the start to a kind of classic hallmark, the initial stages of economic recovery.

[Operator]

Your next question comes from the line of Rory McKenzie from UBS.

[Rory Edward McKenzie, European Support Services Analyst]

It's Rory here. Firstly, on the temp trends, which, of course, did notably look a lot better this quarter. You made a few comments about adding 6,000 temps, about being past the drags of severance costs and low utilization. Can you talk about the, I guess the overall temp book shape and what happened current November through to December? And also then, secondly, looking ahead to the return to work in January, February, as always, is key. Aren't you worried about businesses being impacted in lockdowns and decisions being delayed that might make that kind of key periods not usual, I guess, for the kind of return to work rates?

[Paul Venables, Group Finance Director & Executive Director]

Yes. Look, they're both good comments. I think on the temp part of it, Rory, if we kind of stand back, the biggest surprise in these results was the improvement in the U.K., to go from minus 34% to minus 20%. And a large element of that is temp related. So the net 6,000 increase in temps across the quarter, 3,800 are in the U.K. So that I think is encouraging. 800 is in Germany, 400 is in Australia and 1,000 is in the rest of the world.And as I said earlier, it's a combination. We're seeing increased temp length of assignments. We are seeing being very selective where a client add new temps. But the fact that we've got slightly longer assignments, we're not getting the normal churn. It means, of course, the activity in new temp assignments tend to lead the overall increase. And I don't have a number how much of that was in November and December off the top of my head, but I think a good 2/3 of that was in the last few periods.Your point -- your second point is absolutely critical, and you're completely right. So how could that manifest in our results? Well, I think the obvious one is we might well find that the temp book comes back a bit slower than previous years. Sitting here today on the 14th of January, I have no information. I don't have last week's temp numbers or -- that's dependent on when the time sheets come in. So it's far too early to have a view. I think the positive on all of this is that the trading in the first half and the fact that we've made a much higher level of profitability than we expected, certainly, whether it was when I did the Q4 trading update or the prelims or Q1, we've made more money. And that puts us in a in a slightly stronger position going into the second half. It certainly doesn't mean we have as much of a ramp we want to try to achieve. We set out in these results that we've got some headwinds in the second half. Some of which are like trading days we never normally discuss, but it's important at these lower levels of profitability.But I think there is a possibility that we find, one, the return to work is perhaps a week later than normal. And then secondly, with your point and Anvesh point, we all know weren't we, certainly for us, by the time of the -- when we get to the 10th of February, we'll know the shape of that recovery. My initial instinct is that the area I've got the least concern is probably Germany. So I think so far, with what we see at the end of the year and the discussions we've had with our clients, I think that one is probably the most secure. But we need to see the trends over the next few weeks to see how the return comes into U.K. and Australia. But at least we were exiting November and December with some momentum. So hopefully, that will offset any delays that we get in return to work.

[Rory Edward McKenzie, European Support Services Analyst]

Okay. And then just on bridging the GBP 25 million profits in H1 to whatever happens in H2. Just to be clear on the cost headwinds, your headcount, you said might increase 2% to 4% sequentially into the next quarter. Is that in addition to the strategic investment going from GBP 4 million to GBP 11 million? Or are they kind of mixed together a bit?

[Paul Venables, Group Finance Director & Executive Director]

Most of that is in there, Rory. That's correct. So most of the 2% to 4% is in the return to growth. Clearly, because trading is better across the patch, we'll also be increasing headcount in some other areas as well, because you increase headcount, not for trading in the next 3 to 6 months. I think there's been enough -- this rebound has been stronger than we would have expected. And therefore, we need to make sure we have sufficient productive headcount in all of our specialisms 9 and 12 months down the line. And that includes areas such as Construction & Property, whether it's in the U.S., where we've had a strong rebound or whether it's in the U.K. But really, you're talking about GBP 10 million headwind on the working days. You're talking about GBP 7 million on the Return to Growth. We also got some government support in countries around the world in the first half. We expect to get minimum in the second half. So that's maybe all collectively about GBP 20 million. But the positive, I think, is that we've at least made GBP 25 million in the first half. And therefore, whilst we never talk about consensus, really with 3 to 5 weeks visibility on the business at the best of times, a little bit less at the moment, and outside of Germany, not a lot of forward secured revenue stream certainly at this point of year, we haven't talked about consensus. But at least now with GBP 25 million in the bank, at least some of the numbers in the market kind of make more sense. So we certainly -- we don't express a view on it, but it has some logic to it with where it is at the moment in the kind of GBP 55 million, GBP 60 million range.

[Operator]

There are currently no questions in the queue. [Operator Instructions] The next question comes from the line of Andy Grobler from Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Paul, happy new year. Can I just ask on market share gains, where we can see you again some of your biggest competitors? But in your main end markets, how do you think you're doing against the smaller players? Are they struggling in this environment? And is your kind of brand and massive balance sheet really helping to change the -- change that market share environment for you?

[Paul Venables, Group Finance Director & Executive Director]

I think I'd make 2 or 3 comments on it. Look, I think at a group level, the best performing part of our business is the large corporate accounts business. And of course, that's a combination of a large number of those companies are in secure financial position. And therefore, they can continue with -- they have returned to growth quicker. And we're only 4% down in that space. And if I give you an example of that within the broader Americas business, our large corporate accounts business was up about -- I think it was about 60%. It's still a relatively small business. As you know, it's something we're trying to grow. It's an important part the Return to Growth is putting more account managers into that to coordinate better across a number of the global accounts and make sure that we're really targeting in the U.S. So I think corporates accounts has been the biggest part. Without a doubt, if you did a spectrum of how the market feels at the moment, most larger corporates outside of travel, outside of hospitality know the financial position they're in today, have a good view on the end markets. It's a little bit like us. They've seen it over the last 6 months. And where they are shorter people or where they need to do IT investments, they are returning to invest. So I think the upper end of town is the strongest market at the moment. From new business wins, what is absolutely clear is after a really flush of wins that we achieved in the March-April time frame. A lot of companies, unless they have to change, let's say, we're worried about the financial position of one of their suppliers, they have bigger issues on their mine, which is who their supplier was for recruitment because if we're all honest, some in our own businesses from March, April, May, June, et cetera, most people were focused on their own business and making sure that they survive and they're best positioned for growth.What we're now starting to see as we've exited the calendar year is the pipeline of new business is much greater. So we've had some good wins, and Alistair set that out at the results part of it. And there's no doubt that the financial position we're in, but also the skill set we've got across our group positions us very well for that business, certainly in the specialist space. We're the largest player in kind of larger corporate accounts. And then I think at the specialism level, there is no doubt that IT and Life Sciences continue to be very strong. And in our IT, our business fell by 8%. And in Life Sciences, we had good results. I think we were up 2% or up 3% overall. And I think those markets remain encouraging. So I think when you play in the bigger corporate part, you're predominantly up and get some very large organizations. And I think the strength of our balance sheet has helped. But I think, actually, the skill set that we've developed over the last 10 years also helps. And the nice balance between MSP contracts and RPO, because without a doubt at the moment, RPO, which is more perm related, of course, is a harder market where MSP stayed pretty resilient.

[Operator]

There are currently no questions in the queue. [Operator Instructions]

[Paul Venables, Group Finance Director & Executive Director]

Jess, I suggest that I'll wrap it up rather than us trying to force any more questions from people. 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 you next at our half 1 FY '21 results on the 18th of February 2021. Should anyone 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, and happy new year to all of you.

[Operator]

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