Hays PLC

LSE:HAS

Earnings Call Transcript 2022-Q2

[David Ian Phillips, Head of Investor Relations]

Good morning, everyone. Welcome to Hays' quarterly update call for the 3 months ended 31st December 2021, the second quarter of our 2022 financial year. 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 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 during this call regardless of whether these statements are affected as a result of new information, future events or otherwise. I'll now hand you over to Paul.

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

Thank you, David. Good morning, everybody, and thanks for joining us at short notice for this rearranged call. I'll present the highlights and key themes of today's update and discuss regional performances before taking questions. As usual, all net figures and percentages are on a like-for-like basis versus prior year unless stated otherwise.Performance overview. In Q2, we delivered record quarterly fees up 37%, which is ahead of market expectations with excellent growth in all regions. And within that, November delivered an all-time fee record. Currency translation had a significant negative impact, decreasing headline net fees by 5%, and there were no material working days adjustments in the period.I'll highlight the following key features of the results. One, we delivered quarterly fee record in 16 countries, including the strategically important markets of the U.S. and China. And in Germany, our largest business, we delivered record contracting fees. Two, growth was led by Perm, up an excellent 61% and Temp increased by 22% with volumes and margins improving through the quarter. Three, fees in the quarter were 11% above 2 years ago, with Perm up 19% and Temp up 6%. Four, at the specialism level, Technology, our largest global specialism at 25% of group fees, delivered another record quarter with fees up 33%. Technology fees are now 20% above prepandemic levels.Five, consultant productivity remained at near record levels despite increasing consultant head count by 6% and or 480 people in the quarter. Headcount is now up 26% year-on-year as we continue to invest to capitalize on the cyclical recovery and strategic growth opportunities. Six, our net fee exit rate in December was 34% despite a tougher growth comparative. Seven, cash performance was good, and we ended the quarter in a strong financial position with net cash of GBP 235 million, in line with our expectations. And of course, this is after having made dividend payments of GBP 170 million in November. And eight, finally, as a result of the strong fee performance, FY '22 operating profit is expected to be circa GBP 200 million ahead of consensus market expectations.I'll now comment on the performance of each region in more detail. ANZ. Our ANZ division, 16% of group net fees increased by 31% with momentum improving following the lifting of lockdowns in October. Perm, 36% of ANZ fees were up an excellent 75%, while Temp increased by 15% against a relatively resilient performance last year. The private sector, 62% of fees increased by 36%, while public sector grew by 24%. Australia increased by 30%, led by New South Wales at 39%, and our 2 largest specialisms, Construction & Property and Technology grew by 11% and 44%, respectively. New Zealand, which is 8% of ANZ fees, delivered a few record and increased by an excellent 56%. Consultant headcount in ANZ increased by 3% in the quarter and 29% year-on-year.Germany. Germany, our largest business representing 25% of group fees, grew by 37%, with activity improving through the quarter and fees growing sequentially versus Q1 FY '22. November produced a monthly fee record. Overall business confidence continues to improve with clients increasingly investing in new and expanding existing projects. Contracting, 57% of German fees delivered a record quarter. Fees grew by 22%, driven by 27% growth in contractor volumes with average contractor volumes now 11% above prior peak levels. This was partially offset by 5% lower average weekly hours per contractor. Temp, which is mainly in Engineering & Manufacturing continued to recover at 68% or 51%, excluding the effects of Temp severance costs in FY '21. Volumes improved through the quarter, although given slow recovery in the Automotive & Manufacturing sector still remain 18% below prepandemic levels. Perm delivered an excellent performance, up 58% and consultant headcount increased by 5% in the quarter and 12% year-on-year.United Kingdom and Ireland. The U.K. and Ireland division, 23% of group fees increased by 33%, with sequential growth versus Q1 FY '22, led by an excellent Perm performance of 69% and Temp up 13%. Private sector fees increased by 46% with the public sector up 12%. Most regions traded broadly in line with the overall business, except the East of England and Scotland, which grew by 44% and 39%, respectively. Our largest U.K. region of London grew by 34%, including London City, which is predominantly private sector focused, up an excellent 68%. And at the specialism level, we saw excellent growth in Technology at 43% and Accounting & Finance up 48%, whilst the fastest growth in our other larger specialisms is HR, up 105%. Consultant headcount increased by 7% in the quarter and is 23% up year-on-year.Rest of the world. The Rest of World division, representing 36% of group fees and comprising 28 countries grew by 41%, with 15 countries delivering quarterly records. Perm, which is 68% of Rest of World fees increased by 55% with Temp up 20%. In EMEA ex-Germany, fees increased by 33% and activity levels remain high. Our largest Rest of World country is France, was up 33%, and 10 countries delivered record quarterly fees, including Switzerland up 30%; Poland, 45%; and Spain, 28%. The Americas grew by 55%, including records in the U.S., our second largest Rest of World country, up 51%, and Brazil grew by an excellent 79%. Asia fees increased by 53%, both China, our third largest Rest of World country and up 59% and Malaysia up 53% delivered fee records. Consultant head count was up 7% in the quarter and 35% year-on-year.Cash flow and balance sheet. Cash collection was good. We ended the quarter in a strong financial position with net cash of GBP 235 million, in line with our expectations after paying GBP 170 million in dividends in November.Current trading and guidance. As usual, our new year return to work trends will be a key driver of second half performance. It's too early to quantify how the Omicron variant will impact trading.Two, after significant investment in consultant headcount over the last 12 months, we expect investment to moderate to 2% to 4% over the next quarter with headcount growth mainly in Germany and in our Strategic Growth Initiatives, which continue to perform very well. Consultant productivity remains very high and close to record levels, and we expect to increase consultant productivity further with productivity of our newer consultant ramps up in the coming quarters.Through the strengthening of sterling versus the euro and Australian dollar represents a headwind to FY '22 operating profit. If we retranslate our FY '21 operating profit of GBP 95 million, 11th of January 2022 exchange rates, operating profit will decline by GBP 7 million, a GBP 2 million deterioration versus our position at Q1 FY '22 trading update in October. Importantly, as group operating profit will clearly increase materially in FY '22, currency will have a much larger negative impact this year.And four, as I mentioned earlier, as a result of our strong fee performance, FY '22 operating profit is expected to be circa GBP 200 million. And whilst the Omicron variant creates some further uncertainties, recruitment markets are very strong and candidate and client confidence remains at high levels. There are clear and increasing signs of significant skill shortage and wage inflation, particularly at the higher salary levels.Our focus for the second half will be on delivering substantial profit growth whilst continuing to invest in the future. As global economies continue to rebound, I'm confident we'll continue to put further market share as we invest in the cyclical recovery and take advantage of the many structural growth opportunities. We are firmly focused on positioning Hays as the clear market leader in the most attractive long-term sectors and geographies, including Technology and Germany. We look forward to providing a more detailed update of our strategy at our Investor Day on Thursday, the 28th of April.I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator]

[Operator Instructions] Our first question today is from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

Just one question for me really. On the headcount investment, which have been about your guidance in Q2. Is that purely a catch-up on the cyclical recovery? Or there is an intention to increase the SCI investment compared to what you have guided before?

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

I think in part, Anvesh, it's a clear sign of our confidence on the markets we're operating in and our trading position. I think one of the real positive -- the 2 kind of in my mind, positive material, positive points in this set of results. Firstly, we're starting to see real acceleration in our German business and specifically with contracting within that. And as you will know, Anvesh, the average length of a contactor is 9 months, and therefore, we have an increasingly secure revenue stream looking into the near future.And second, of course, our Temp business. Now we're starting to accelerate. So we haven't just got strong Perm performance, but we've also got strong Temp performance across a number of markets. And therefore, to an extent, I think it's bringing in some of the cyclical investment industry slightly earlier than we originally have intended. And of course, it's always going to be a little bit of phasing on this.I think importantly, the guidance we've given for the next quarter, and I think that will continue for the second half of the year, is less headcount investment because we've now got sufficient capacity to grow our business at these sort of levels of confidence in the market by a good 10% to 20% versus where we are today as we drive productivity of the newer consultants. And therefore, that investment going forward will be predominantly in Germany and in the SGI markets, whereas in some of the other markets, I think we put a lot of headcount in, we're now going to focus on driving productivity and profitability. But I think you should take it as this quarter has been better than our expectations within that, the major markets have been better and a clear sign of our confidence, not just for FY '22 for FY '23 and beyond.

[Anvesh Agrawal, Equity Analyst]

Okay. So yes, I mean, so we essentially should not -- I mean this is -- some of it is phasing, as you say, but we should not expect an increase in the OpEx investment compared to what you have guided before net-net on SGI.

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

No. On SGI, the investment will be the same. And on overall, I kind of answer it in another way, I gave guidance both 6 months ago and 3 months ago of an expectation of drop-through of 40% to 50% this year and significantly above 50% in FY '23. That guidance still holds today.

[Operator]

Our next question is from Rory McKenzie from UBS.

[Rory Edward McKenzie, European Support Services Analyst]

Firstly, on Germany, with that good step up in the demand level. Can you talk about what happens to the contractor book in your run up to Christmas and what that means for the signs on projects being extended or [ parried ] over? And then secondly, more generally across Temp and contractor, can you comment on what rate of wage inflation you're seeing? And were you're also seeing expansion in your own fee rates?

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

Thanks, Rory. On Germany, contractor acquisitions, which I guess is the way we look at it on a weekly basis, accelerated as we went into November. That continued into December right way up to the pre-Christmas week. And in fact, in the 2 last major weeks in December, we had all-time record acquisition numbers and well above what we were achieving in FY '19 or even FY '18. So again, a clear confident sign. I have no view at the moment, Rory, on kind of terminations. We normally have a termination rate in contract of about 18% at December. Far too early to have a view on that at this stage. We would generally have clear observation somewhere between the 21st of Jan and the 28th of Jan is when we get clear. That kind of tends to settle down.But I think just kind of standing back and looking at it, the confidence of our clients coming into Christmas, our ability to meet that demand in either rolling contractors from one assignment into a new one is very high. And therefore, I wouldn't expect the termination to be any worse from previous years. But I have no data to support that either way at the moment. So I think the way to look at Germany is it's our largest profit generator by some way now. It has returned to that position. As you guys know, we've set out our strategy when we did the 2017 Investor Day of doubling the profitability of our German business from GBP 100 million up to GBP 200 million.And when we come to our Investor Day in April, surprise, surprise, that's clearly still a very achievable target, and I actually think we're in a much better position to deliver that today than we were in hindsight 4 years ago because what could well be a longer-term weakness in areas such as Automotive, that's in these numbers today. And Automotive is a growth opportunity versus where we are today as well as all the additional markets. And if you remember in Germany, we'd also, just going into the pandemic, put in place a reorganization, which means we've got much greater focus on the regional markets as well. So we really are opening up those regional markets in second and third tier cities to professional recruitment. So that positions us very well for the next 5 years.And on Temp and Contracting and Perm, right, clearly, we'll give greater detail on this when we get to the interims. On Perm, we saw in this quarter a clear increase now in our average Perm fee and a greater level in this quarter than we did in the previous one. Clearly, what we are seeing like a lot of other recruiters is candidates getting 15% to 20% pay rises for changing jobs. But of course, they've always got greater than 10%. But what I think we're starting to see now is just that increasing, and therefore, wage inflation being a benefit for us.And secondly, in the Temp part of it, this is really quite exciting. We've got -- there's a broad gap between where we are in fee growth and the volume growth of 8% to 10%. And that 8% to 10% is all about margin improvement. About half of that is, of course, the lack of one-offs in places like Germany in the previous year. But the other half is absolutely an increase in the average margin we get per week per Temp. And the only way you can kind of conclude on that is that's wage inflation because, of course, outside of Germany, we've got a lot of Temps, which are more in the kind of 8- to 12-week assignments, and therefore, there's greater churn. And absolutely, we're being able to increase both our margin but also the rate we're getting for those Temps.And taking all of those points together, that's the first time I've ever seen all of those in any quarter in my almost 16 years as Group Finance Director of Hays. We all know that between 2010 and 2020, there was little or no wage inflation and margin improvement. We are now beginning to see both of those. And I think that bodes well for the rest of FY '22 and FY '23 and beyond.

[Operator]

[Operator Instructions] The next question is from Andy Grobler from Credit Suisse.

[Andrew Charles Grobler, Analyst]

Three for me, if I may. Firstly, and Paul, you probably talked to this earlier, for Perm and Temp, Perm continues to grow more quickly. Do you think it's just a matter of time now before Temp catching or Temp and Contracting catches up? Secondly, on Germany, this might be a bit too early to ask the question, but you talked about doubling the profitability. When that target was initially set, for a variety of reasons, profits declined. What kind of time period would you think about getting to that GBP 200 million in Germany? And then thirdly, with growth across the industry so strong, are you beginning to see your consultant attrition go up? And how confident are you that you can hold on to all of these people to drive that growth over the next 18 months?

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

Yes. Thanks for that, Andy. And again, if I don't pick up all of the parts, I do apologize. Absolutely, in the first part of it. Look, we've got a phenomenally strong Perm market now, and none of us could have expected that 18 months ago when we were in the teeth of the pandemic. But equally, I think what we're now starting to see and it started at the bigger corporate end of plan, and it's now beginning to work its way through is that clients need professional staffing. And they're now also returning in large volumes to looking for contractors interims and temps.Look, what's not going to happen is Temp growth go from 22% up to 60%, that can never happen in a Temp market because, of course, the very nature is, and if you use Germany as an example, all of those additional contactors that we brought in, those fees are going to be recognized over the next 9, 12, 15 months. So it's not that you book all of that immediately, whereas clearly in Perm that fee is booked immediately. And that's my point about we now have greater confidence in the forward secured revenue stream that we've got for the next kind of 3, 6, 9, 12 months.So Temp will catch up because, of course, I do think the Perm market is going to stay strong across calendar year 2022. I think all of the reasons that they're leading to a lot of people changing jobs are going to continue for a period of time. But at some point, of course, those workers that they're more likely to change labor that will have -- they will have worked their way through. The Temp percentages will start to come down with [ greater ] comps. But I think -- the Perm, sorry, but I think Temp has got some runway to go. So we're very excited by what we're seeing in that market. In Germany, look, I don't want to steal Alistair's thunder for the Investment Day -- the Investor Day. But I think that's well achievable over the next 5 years, if not slightly earlier. I think we're in such a stronger position now versus 4 or 5 years ago. We've got greater diversity of our fees across client base. We've now got some other really quite exciting specialisms. So traditionally, it was all IT and engineering. But now we've got a very big Accounting & finance business. We've got a big Legal business, a big Marketing business, a big HR business. And therefore, I think we're well placed. And we are starting to see acceleration not just in the larger corporates, but also in the SME market and it's exciting. So 5 years, but Andy, Alistair will take everybody through that when we do the Investor Day. And then growth in the industry, consultant attrition can we hold on to them? I think that actually some of the worst of that is over because if you think it through, it is not that people are leaving Hays to go to other recruitment agencies. It's all about in-house recruitment. And a lot of the companies in March 2020 just decided to slash their internal recruitment teams because they were fearful that, of course, there will be a little or no the recruitment for 6, 12, 18 months, and that has proved to be wrong as we all now know. And a lot of those companies are in the tech space and got great branded names, et cetera. They are coming back and it is those people that have been attacking certainly a number of the consultants in our own business over the last 12 months.So I actually think we're in a stronger position. It is slightly easier today than it was 3 or 6 months ago. We're not complacent in any way. And equally, of course, we've also brought a lot of new people in ourselves over the last year. And as we take those individuals' activity curve over the next 1 to 2 years, we've got more than enough productive capacity to have a much bigger business than we got today. And there will be a point somewhere across the next 12 to 18 months, of course, that we'll start to decelerate headcount investment and really monetize what we've got. But at the moment, we are still absolutely determined to dominate technology, to double the size of our technology business from GBP 250 million to GBP 500 million over the next 5 years. And you can see in here, we're already 20% above where we were prepandemic. And we're also determined to attack not just Germany, but also a lot of the kind of green economy markets that we're incredibly well positioned through our specialisms in Engineering and Construction & Property.

[Operator]

The next question is from James Rose from Barclays.

[James Steven Rosenthal, Research Analyst]

Just got one, please, and it's on productivity. So in the second half, you said that's going to be less about headcount and more about productivity of those new hires. When a new hire is ramped up, what would you expect their productivity levels to be versus prepandemic?

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

Well, I think prepandemic when we've got though is if we have a Perm market, which is as strong as we are today, we are shooting for productivity of a good 10%, 20% higher than we were prepandemic. Of course, what we've got at the moment is a very strong Permanent market. And within that, we've got quicker decision-making from clients, which is the secret sauce in all of this because, of course, it enables you to have greater security on an assignment, getting that assignment closed, getting that fee booked. And I think this talent warpath is going to go on for some time.If we just think through one of the reasons for it because I think that comes back to productivity, James. There was massive school shortage prepandemic. And that's been exacerbated by continuing demographic issues, minimal integration globally with a Board of [ effectively shock ] thinking about Australia, the U.K., the U.S. In the case of the U.K., Europeans going home. People were drawing from the workplace looking for new challenges, purposes in jobs, work-from-home for 2 years, weakening [ culture buying ]. It was more likely more employees will look to change. And the cost on people -- also a greater number of people in their 20s and 30s who are looking for one full-time job doing a number of kind of part-time jobs almost [ going two ].So when you've got a massive skill shortage and a war for talent, that leads to the wage inflation. It leads to clients making faster decisions. And all of that, of course, helps the productivity of consultants. So what we're seeing in our experienced consultants today is that they're generating fees 30%, 40% higher than they were kind of prepandemic. We've clearly got a number of about 10% to 15% of the consultants we've brought in over the last year, our experience. The rest, of course, has been through the Hays Academy. And they're now starting to come up with productivity curve. That will take us a good year to 18 months for them to be fully productive. But I think we're really well placed for that. And I do think we're going to have this period of time with higher productivity and also part of that is wage inflation because that, if you like, go straight through to the bottom line.

[Operator]

[Operator Instructions]

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

Brilliant. So if that's all the questions for today, we'd like to thank you all again for joining the call. I look forward to speaking to you at our Half 1 FY '22 results on the 24th of February 2022. And of course, 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 us on short notice, and have a great day.