Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2021-Q1

[Stephen J. Ingham]

Good morning, everyone, and welcome to the PageGroup's First Quarter Trading Update. Thank you for joining us at short notice, and apologies for any inconvenience this has caused. I'm Steve Ingham, Chief Executive Officer; and on the call with me is Kelvin Stagg, Chief Financial Officer. Although I will not read it through, I'd like to make a reference to the legal formalities that are covered in the cautionary statement in the appendix to this presentation and which will also be available on our website following the call. The improvement in trading conditions we experienced at the end of Q4 2020 continued into the first quarter. Consequently, the group delivered gross profit of GBP 184.2 million in the quarter, representing constant currency growth of 2%. Given the magnitude of the impact of COVID in 2020, we're also including comparisons against 2019 to ensure the most appropriate representation of our current trading. Compared to 2019, which was also our record year, we were down 9.9% for the quarter. The group's results improved sequentially in each of the 3 months of the quarter, with a decline against 2019 in January of 17%, February of 12% and then a significant improvement in March to minus 2%. Against 2020, where COVID had already started to impact our results, we exited the quarter with a growth of 31% in March. We maintain a strong balance sheet with net cash at the end of March of around GBP 136 million. This was after the purchase of shares into the Employee Benefit Trust to hedge the group's exposure under our share plans of around GBP 10 million and repayment to HMRC of furlough income of GBP 3.4 million. As conditions continue to improve in Q1, we increased our fee earner headcount by a net 122. Our operational support headcount rose by 19. And as such, our ratio of fee earners to operational support staff was maintained at 77 to 23. Overall, the group had 5,267 fee earners and a total headcount of 6,835. Our large high potential markets, representing 36% of the group, grew 10% in the quarter compared to a decline of 17% in Q4 2020. Looking now at each of our regions. In our largest region, Europe, Middle East and Africa, which represented 52% of the group, we grew 3.6%, up from a decline of 18.6% in Q4 2020. However, this was partly as a result of the weak comparator in March 2020, when the region started to be impacted by the pandemic. Against Q1 2019, we were down 8.4%. France, currently our largest market, declined 7% against 2020 and 19% versus 2019. March showed modest improvement exiting the quarter, up 23% or down 15% versus 2019. With a higher proportion of temporary workers, Page Personnel was impacted more significantly by the lockdown. The Netherlands' performance was similar to France. Elsewhere, Germany, the group's third largest market, delivered a record quarter, up 15% with March up 37% against 2020 and up 17% versus 2019. Belgium, Italy and Spain exited the quarter in March, up 17%, 104% and 74%, respectively, versus 2020; and up 11%, 6% and 7% against 2019 with Italy and Spain delivering record ever month in March. In Asia Pacific, representing 19% of the group, gross profit was up 15.3% in the quarter from a decline of 10.2% in Q4 2020. In Asia, 15% of the group, we grew 22%. In Greater China, 8% of the group, we grew 45% for the quarter. Mainland China was up 66%, which was also up 16% on Q1 2019. We exited in March, up 26% on 2019. Whilst Hong Kong was up 25%, this was still down 35% on Q1 2019. Southeast Asia delivered a record ever month in March and was up 12% for the quarter with Singapore flat. Japan was down 2% against a strong comparator of plus 5 in Q1 2020. India delivered a record quarter, growing 15%, up from 3% in Q4 2020 and exited the quarter in March, up 41% compared to 2019. Australia declined 4%, a significant improvement from a decline of 26% in Q4, with March, up 4% from 2019. The Americas, representing 15% of the group, has being one of the worst affected regions by COVID, and gross profit for Q1 was down 4.3%. However, this was a significant improvement on Q4 2020, which was down 23.2%. The U.S. declined 9%. Having been down 27% in both January and February, the performance in March improved significantly, up 22, which also represented growth of 8% on 2019. In Latin America, gross profit grew 4%, which was down 2% compared to 2019. Brazil was up 15%. And Mexico, our largest country in the region, was flat to the quarter exiting in March, up 19% and down to 12%, respectively, compared to 2019. Elsewhere in Latin America, the remaining countries were flat for the quarter, collectively. In the U.K., representing 14% of the group, gross profit declined 11% in Q1, improving from a decline of minus 34.2% in Q4 2020. Conditions remain challenging with a nationwide lockdown imposed for the majority of the quarter. Our Michael Page business was more resilient than Page Personnel, with declines of 5% and 27%, respectively. Having been down 29% in January and February combined versus 2019, our performance in March improved to minus 19%. Throughout the pandemic, we've continued to focus on the protection and well-being of our employees, candidates and clients, whilst progressing strategic investments in our platform to take advantage of the recovery.I'm pleased to report that year-on-year results in each of the 3 months of the first quarter improved sequentially, continuing the monthly trend since may last year. January and February were down 13% and 10%, respectively, compared to 2020, with March growing 31%. Significantly, our performance in March was down just 2% on 2019. This noticeable improvement in March was seen throughout the group and was achieved despite the backdrop of continued and increasing restrictions or lockdowns in many of our markets. We delivered record ever month in March in markets such as Germany, Italy, Spain and Southeast Asia. At this stage of the recovery, it's not easy to determine whether the improved performance is the result of pent-up supply and demand or the beginning of a sustainable trend. Our fee earner headcount is currently down 12.6% from the prepandemic levels in 2019. As visibility develops, our fee earner headcount will react accordingly. We remain confident in our strategy of maintaining and investing in our platform by continuing to invest carefully in headcount, exemplified by the 400 experienced hires we added in 2020 and a further 200 added in Q1 2021 as well as rolling out new technology and innovation. We remain confident that the strategy we adopted in 2020 will allow the group to take advantage of the recovery as it emerges. We returned everyone full pay from the 1st of July 2020, providing confidence and visibility to our employee. The early adoption of this strategy allowed us to invest in the market in advance of the competition. We're the clear leader in many of our markets, with a highly experienced senior management team, which we believe positions us well to take advantage of opportunities to grow and improve our business. We have maintained our focus on driving progress towards our long-term strategic goals. Looking ahead, there continues to be a high degree of global macroeconomic uncertainty as COVID remains a significant issue and lockdowns have returned in a number of the group's markets. However, and notwithstanding the early stage of the year, the strength of our performance in Q1 and notably in March has increased confidence in our outlook for the year. Subject to other unexpected events, we now expect full year operating profit to be within the range of GBP 90 million to GBP 100 million. Kelvin and I will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] Our first question today comes from Matthew Lloyd at HSBC.

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

I just wanted to really, I suppose, ask about the productivity levels you must have been running at in March because if you had an awful lot of that kind of acceleration in demand and placement, I wondered what happened to things like time to hire and the fill rate and whether they tell you anything this early stage about how efficient the business could be going forward?

[Stephen J. Ingham]

Yes. I mean, look, productivity was at its highest ever for the group in March, which was great to see. I mean if you think of our headcount strategy last year, in an effort to minimize our costs in Q2, we, in effect, lost those people that had barely landed in Page and landed in the recruitment industry, and therefore, we felt would be exposed if they were working from home with limited experience of how to make placement. And so if you like, we lost those that frankly had very, very low, if any, productivity and kept the long-serving platform of experienced people that we've got who are highly productive. So that's helped us enormously with obviously what's the market recovery we've seen in March. In addition, the adding of 400 experienced people, although some of them landed very late in the year, they have picked up productivity very quickly, which has been good to see. And you'd expect that because, on average, they had over 4 years experience, you'd expect them to land. They know how it works, they know what they're doing and require little training, more just cultural induction to make sure they fit the business. In terms of time to hire and the KPI, yes, things got quicker. The number of meetings required, the acceptance of using media technology, so obviously not available to see people face-to-face, which slows the process down. And what we've started to see in some cases in certain areas that were particularly hot, we saw shortlist of 2 candidates that final interview both getting an offer. We saw some wage inflation, where clients were very keen to get it over the line. We did see buyback, which is always a healthy sign, although it's annoying, because sometimes, obviously, it's successful. But we saw some clients trying to persuade the candidates that have got an offer not to resign and stay with increased offers where they were. So when that starts to happen, it feels very good, and it's a good indication of hopefully more to come.And certainly, we ended the month with good KPIs. That all said, and we put this in the same, I mean, we can't tell whether this is the pent-up frustration caused by a year of lockdown, where, clearly, a lot of people will have been reflecting. They will have looked at the sector they're in, the job they're in, the geography they're in, the boss they have, the vision their business has, the approach, the DNI, CSR, sustainability, all of these things will be enough to persuade during that period of reflection, candidates to decide to move jobs or not. And when they do, because a lot of what we do are critical jobs, they create a vacancy that has to be filled. I read a Microsoft report early this morning. And it said that 41% of all people in work are considering a career move this year. And that was even higher in the Z generation, which we are supporting with their career goals. So look, it bodes well. One swallow doesn't make a summer, which is a safe say we've always said in Page. We've had a great month with high productivity, it could just be pent-up frustration, and therefore, it could be that we have a bubble of a few months. And then it resumes to normal behavior, I don't know. That is very, very difficult to predict. But yes, productivity was high. We continued in this year with net fee earner growth of 122. But that was a combination of, again, weaker consultants leaving, having had a pretty tough year last year and us hiring another 200 experienced people into the group. So again, that should help productivity and gives us -- although we will add more heads, I'm sure, going into the second quarter in a fairly conservative manner because I think it's good for the consultants who've paid profit share. It's good for them after a very difficult year last year, frankly, to be feeling the bonuses, which they get quarterly, and they get that based on productivity, of course, because the gearing then on their profit share bonuses that are available is good. So we will probably add in the second quarter. But once those 200 experience hires land and become fully productive and including the ones that joined in Q4 of last year, we've still got some capacity to take us forward in the next few months. Long answer, sorry, Mark -- Matthew.

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

One quick follow-up question, probably a shorter answer, but are you seeing clients say, look, show me the good candidates and if they happen to be a 100 miles away, show me anyway because I might be able to figure it with work from home or partial work from home? Are you starting to see that? I was wondering whether that helps you take market share from some of the smaller boutique?

[Stephen J. Ingham]

Yes. I mean we see a certain discipline, as you would imagine. I mean not all jobs are that flexible. We place engineers in factories, and they need to be there every day. But then on the other hand, at the other end of the scale and our fastest-growing discipline, we place people in technology where they could be anywhere. And definitely, we're seeing clients showing more flexibility after their experiences last year. So yes, you're rightly saying it. I mean are they in other countries? Occasionally, but generally speaking, yes, they're being more flexible nationally, and that does help us against boutiques.

[Operator]

The next question is from Hans Pluijgers at Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

Two questions from my side. First of all, a follow-up on the hiring. Looking -- going forward, will you continue to focus on hiring of more experienced people? And over that, have you seen some changes with respect to that? Is it becoming more difficult to find experience people as probably also at your competition, the recovery is visible, and they also, let's say, also trying to hold on more sort of experienced people? And secondly, could you give maybe some breakdown of feeling how development went through the quarter and compared to Q4 with respect to the segment's temp and perm, so where do you see the strongest recovery?

[Stephen J. Ingham]

Yes. First of all, yes, of course, it will get more difficult hiring experienced people in. I guess, if our results are good this quarter and others are less good, then I suppose a few more maybe just lodged from boutiques and different recruiters. So if, and we haven't seen results of others yet, and obviously, many of our competitors so small will never see their results, but if somebody is sitting in a company that's not performing as well as the results that we've just presented, then of course, there will be others dislodged who potentially we could hire. We will continue to hire a blend of people that are experienced and those that are inexperienced because, of course, in many of the geographies that we're in, we don't really have much competition. So it's difficult there anyway, and we're doing particularly well in some of those markets like Latin America, like Asia, Southeast Asia and so on. We don't have a lot of competition in those markets. So there's a very limited supply. So I think it will be a blend of the 2. Look, if the market is hotting up generally for everyone, if that's the case, then everybody will be doing the same. So I'm not naive to think that whilst we will be trying to attract people from the competition, they'll probably be trying to attract people from us as well. Our staff turnover is way lower at the moment than it normally or typically is. We just had a pretty good quarter with high productivity, which will benefit people's bonuses. So hopefully, that will help continued retention. We've not lost anybody that we didn't want to lose over that significant anyway over the last quarter, so that's good. But we're not naive to think that a competitive market will create competition, of course, and therefore, people will be after our people as much as ourselves to theirs. But if results are good and stand out, then it will definitely help us with the ongoing hiring campaign. Kelvin, do you want to answer the other one on the temp thing?

[Kelvin Stagg]

Sure. We started the quarter really in the same fashion as we'd had in terms of a steady improvement, much the same as we saw in Q3, the beginning of Q4 last year. So against 2019, during Q3, beginning of Q4, we've been improving at about 5% a month. And then things slowed a bit in sort of November-December time as the lockdowns came and things started to improve, still improve, but improve slightly less. So actually, in January, we were off about 17% on January 2019. That improved to about 12.5% in February. So a steady improvement. And then all of a sudden, we went to minus 2% in March. So the improvement really did come in, in March, but March is actually a much bigger month than January and February. So it was really very much a big movement towards the second half as much as well. And some of that, we always tend to see towards the end of our quarters that our people are incentivized on quarterly trading profit.But some of it was definitely market movement, and the market is definitely warmed up towards the end of that period. When I look at where it came from, I mean, primarily, it was perm, just perm. Because of the way that we booked ample contracting and it's booked really sort of a week in arrears, most of it, that actually it's not going to creep up on you and then suddenly appear. That tends to be a steady buildup, whereas perm comes through in one go. So certainly, in some of those countries, for example, Germany, where we had an all-time record in March, that was really the Michael Page perm business that was delivering. If I look at the businesses that were more challenging, primarily, it was in the lower level temp businesses. So where we were particularly challenging in the U.K. in Page Personnel and France in Page Personnel, low level temps.If the offices are stocked, if you're in lockdown, they're the people that you're less likely to need and they're the people that are therefore less likely to be working. Whereas, actually in Michael Page, you tend to be recruiting the roles that you absolutely need to fill. You're also recruiting people that have a extended notice period. So for our clients, they might be going through the recruitment process during March, but these people may not arrive until June.

[Hans Pluijgers, Head of Research of Benelux]

And looking, let's say, at client industries, is there, let's say, anything interesting you maybe want to notice or to point out compared to...

[Stephen J. Ingham]

Yes. I mean the best-performing industry was the technology industry, along with health care, obviously, which you'd sort of expect. But I have to say, having asked the various business leaders around the world, what was the hottest and so on. Actually, the performance in March came from everywhere. If you take the States, which has gone back to growth against 2019, a record year for them, I thought it could be driven by construction. And construction was very strong. It's our biggest discipline in the U.S. I mean, obviously, construction sites have opened. They've got deadlines to meet, project directors, project managers and so on they need quickly. And they don't want recruitment to delay them. But actually, the hottest area for us with sales and marketing jobs going into all industries. So we had our highest ever level of retained business in sales and marketing in the U.S. And again, it's a similar picture elsewhere. It really isn't 1 industry. It was strong across most industries.

[Operator]

Our next question comes from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I got 3 questions, if I may. First, you alluded that obviously, Page Personnel has been slower to pick up than Michael Page. But is it natural to expect that Page Personnel will follow? Or there could be some difference in this cycle and therefore, Page Personnel recovery can be further delayed? And then any impact from IR35 in the U.K. or we need to think about? And then finally, I think your cost base, trading cost was running 10% below the Q1 '20 last year, and we were expecting something similar for the current quarter. Within your guidance of GBP 90 million to GBP 100 million, what's the sort of ramp up you have baked in for the year?

[Stephen J. Ingham]

Well, I'll ask the first -- answer the first for you, and Kelvin can come back on the second too. Yes, it's logical, Page Personnel will follow. But as Kelvin just said, what would help that is lockdowns to come to an end. A larger proportion of Page Personnel is temp. That's been hit harder as a result of offices closed. If offices open and people are back in the office and companies are recovering and trying to take market share and recover their positions, then they will need temps.And so we'll see Page Personnel pick up. Again, it's logical, Michael Page does more senior appointments; Page Executive even more senior, and they are -- they tend to be critical hires, and if somebody resigns, they've got to be replaced straight away. As you get into lower level jobs in Page Personnel, that's less the case. And then finally, it is also I'd echo Kelvin's words, when we build for a perm placement, we take a percentage of that year's salary. And we send an invoice to the client and get paid. When we place a temp, which is, as I say, a larger proportion of Page Personnel, when we place a temp and he or she works a month, we built a 1/12 of that fee in that month. So the buildup of revenue is slower. So even as Page Personnel, hopefully, its growth rate closes in on Michael Page, the revenue buildup will be naturally slower. Kelvin?

[Kelvin Stagg]

Yes, I'll pick up the other 2. I think on IR35, probably not a big impact. I think most of the people who were going to do something about that, did that a year ago on the understanding it was coming in, and then it was pulled obviously at the last minute. I think most of the big companies that put a policy out in terms of what they were going to do, didn't then withdraw that to then bring it back in. So I don't expect that will have a big impact. I think in certain cases, as we've seen it in IT, there have been some contractors that have been quite entrepreneurial and join together and try to find a way of offering their services that can work within the rules of IR35, but I think that's a minority and it's purely within IT. So no, I don't think I see that as being a plus or a minus, to be honest, as we go forward. On the cost base, we're currently running somewhere between GBP 53 million, GBP 54 million a month. That sort of includes all of the trading items and some of the nontrading items. There are a few moving parts in there and one of which is share plan charges. And as the share price hopefully moves up, that will increase the cost slightly, possibly sort of 3 or 4 for the half year, assuming that it moves in the first half of the year. But if you run somewhere between GBP 53 million and GBP 54 million, that will probably be the right for the first half of the year. If indeed this carries on and it turns out to be a sustained recovery, then we're likely to start adding in headcount, and I would assume that, that will start arriving probably at the beginning of the second half, somewhere around there, and therefore, the cost might go up from there.

[Anvesh Agrawal, Equity Analyst]

And within that, we can sort of assume now the trading costs, which were sort of GBP 50 million roughly, I mean, in a normalized quarter, so you're running pretty close to that now within that GBP 53 million guidance?

[Kelvin Stagg]

Yes, yes, yes. I guess so, yes. It's gone up a little bit on that, and some of that is wage inflation that we paid. We obviously asked everybody to sacrifice 20% of their wages broadly last year in Q2. We didn't pay any bonuses. And therefore, we felt it was right to pay inflationary salary increases, which came into effect from the beginning of January. So that's moved that cost base up a little bit. And we also added a net 122 fee earners in Q1. So that's where we've gone really from GBP 50 million to around sort of GBP 53 million, GBP 54 million, but I think it will hold there now for a period of time. It's subject to us then adding in additional headcount. And as I say that, probably won't come on stream until the beginning of Q3, assuming that we decide to move that way.

[Operator]

[Operator Instructions] As we have no further questions on the line, I'll hand the floor back to the team at PageGroup to wrap up.

[Stephen J. Ingham]

Great. Well, look, I'd like to thank you all for joining us at the last minute and suddenly this morning. Our next update to the market will be our second quarter results on the 14th of July. Thank you.