Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to the PageGroup Q2 2019 Trading Update Conference Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to your host, Steve Ingham, to begin. Steve, please go ahead.

[Stephen J. Ingham]

Thank you, Jordan. Good morning, everyone, and welcome to the PageGroup Second Quarter and First Half of 2019 Trading Update. I am Steve Ingham, and I have with me Kelvin Stagg, our CFO and Interim CEO. You may recall I had a pretty serious skiing accident in March and I managed to break my back, and I thought I'd take this opportunity to provide you with a brief update on my recovery. I'm pleased to say things are going very well, and I'm approaching the end of my stay, now 10 days away, in the hospital. It's been a fairly intense period of physio and occupational therapy, as you can imagine. But those of you who know me well will know -- will not be surprised to learn that I've not been far from the business. I've had a steady stream of Page visitors, directors who I've known for a long time, and have now attended several board meetings over multiple days, and as you'd expect, are involved in all of the major decisions. [ Once out ] of the hospital. In 10 days' time, I'll be working my way back into full-time work, and I'm very excited about the prospect. I'd also like to thank you all for your messages and support since my accident. I'll now hand you back to Kelvin who will take you through the call today, but I'll also be available for the Q&A at the end of today's call.

[Kelvin Stagg]

Thank you, Steve. I'll now present the headline numbers and financial review before taking you through a regional review and a summary. Although I will not read it through, I'd just like to make reference to the legal formalities that are covered in the quarterly statement in the appendix to this presentation and which will also be available on our website following the presentation. The group delivered another record quarter with gross profit of GBP 224.6 million, representing constant currency growth of 7.4%. This was achieved against a strong prior year comparator, which is up around 4% on Q1 2018. All regions, other than the U.K., delivered growth with 16 countries delivering growth of over 10%. Foreign exchange had a minimal positive impact during the quarter, which led to a higher reported gross profit growth rate of 7.9%. In monetary terms, foreign exchange movements increased gross profit by around GBP 1 million. For the first half, the group grew 9.5% in both constant currencies and reported rates with gross profit of GBP 433.5 million. For the quarter, Michael Page grew 6.2% with stronger growth in Page Personnel, up 10.3%. Following an outflow of GBP 29 million at the end of June to pay out 2018 final dividend, we closed the quarter in a strong financial position with net cash of around GBP 81 million. I will now provide a more detailed financial review. In the second quarter, permanent recruitment grew 5.1% in constant currencies with temporary growing faster, up 15.4%. We saw particularly strong performances in our temporary businesses in Asia Pacific, EMEA and Latin America. This gave a ratio of permanent-to-temporary gross profit of 76:24, down on the 78:22 the previous year. In Michael Page, in Q2, permanent recruitment represented 85% of gross profit, but in Page Personnel, it was less at 58%. Looking now at our gross profit by the disciplines in which we operate. Accounting and Financial Services, which represented 35% of the group grew 8%. Disciplines outside of Accounting and Financial Services represented 65% of the group collectively, reflecting the continuing success of our diversification strategy. Of these, our Professional Services category was our strongest performing, representing 25% of the group and growing 11.7%. Our Technical discipline category, which represented 24% of the group, grew 7.8%. Finally, our Marketing, Sales and Retail disciplines, representing 16% of the group, were essentially flat with particularly challenging conditions in retail. Having added 619 fee earners in 2018 and 41 in Q1, our fee earner headcount reduced by 122 in the second quarter. Fee earner headcount fell in markets where we saw more challenging conditions such as France, Greater China and the U.K. Our headcount also reduced in response to the weaker macroeconomic conditions seen in Continental Europe. By region, our fee earner headcount reduced in EMEA by 28, Asia Pacific by 37, the Americas by 17 and in the U.K. by 40. Our flexible business model enables us to react quickly to changes in market conditions and adjust our headcount accordingly. Operational support staff headcount increased by 43 in the quarter. These additions were mainly temporary in nature to support the implementation of our new Global Finance System with rollouts in Latin America and Central and Northern Europe during the first half and the rest of Europe going live last weekend. Following the reduction in our fee earner headcount and our increase in support staff, our fee earner-to-operational support staff ratio reduced from 79:21 in Q1 to 78:22. At the end of June, the group had 6,035 fee earners and 1,728 operational support staff, a total headcount of 7,763. This fee earner headcount and gross profit chart illustrates both our record second quarter gross profit at reported rates and also the reduction in our fee earner headcount. The last column on the right shows the quarter in constant currencies to enable comparison with Q2 2018. I will now give a quick overview of our regional performances before presenting each region in more detail. Gross profit in the second quarter grew 7.4% in constant currencies with 16 countries achieving growth of over 10% and 14 countries delivering record quarters. Our Large, High Potential markets, representing 35% of the group, grew 14% collectively with Germany, Latin America, Southeast Asia and the U.S. all delivering record quarters. In our largest region, Europe, Middle East and Africa, which represented 48% of the group, we grew 9%, moderately below our Q1 growth rate of 11.4%. We experienced a slowing in growth towards the end of the quarter as macroeconomic uncertainty increased. Despite this, France and Germany both delivered record performances. Asia Pacific, representing 20% of the group, delivered growth of 4.7% with confidence continuing to be affected by trade tariff uncertainty. The Americas, representing 16% of the group, continued to be our fastest-growing region and grew 17.4% despite a tougher comparator with record performances from both North and Latin America. Finally, in the U.K., where market sentiment remained weak, gross profit declined by 2.4%. Moving to each of our 4 regions and starting with the largest, Europe, Middle East and Africa, which represented nearly half of group gross profit and with a headcount of over 3,300, we delivered growth of 9%. Michael Page, which represented 55% of EMEA, grew 8%, while Page Personnel grew 10%. In France, our largest country in EMEA, representing around 1/3 of the region and 16% of the group with around 700 fee earners, growth slowed to 6% with confidence impacted by macroeconomic uncertainty. Growth in Page Personnel was slightly stronger, up 7%, with Michael Page growing 4%. Germany, 8% of the group, grew 24% with record performance and a sixth consecutive quarter with growth of over 20%. In our technology-focused contracting business, Michael Page Interim, a sustained investment in fee earner headcount, up 20%, year-on-year drove growth at 47%. Benelux grew 13% with strong performances from Belgium and the Netherlands, delivering growth of 13% and 12%, respectively. Southern Europe was impacted by macroeconomic uncertainty, but still grew 6% with Italy and Spain delivering growth of 7% and 3%, respectively. However, Portugal delivered a standout performance with growth of 33%. The Middle East and Africa, which represented 2% of the group, grew 4% with growth in the U.A.E. of 3% despite a particularly tough comparator. In response to these changing market conditions, our fee earner headcount reduced by 28 in the quarter, mainly in France. Our Asia Pacific region, which represented 20% of the group gross profit, grew by 4.7%. In Asia, 76% of the region and 15% of the group, we grew 6%. Greater China, one of our Large, High Potential markets, declined 1% due to the continuing impact of trade tariff uncertainty in Mainland China particularly affecting our large international clients, and more recently, social unrest in Hong Kong. Southeast Asia, another of our Large, High Potential markets, grew 8% with strong growth in Indonesia and Thailand, partially offset by a decline in Singapore at 3%, which was impacted by wider trade tariff concerns. Elsewhere, Japan grew 13%. India, where we have invested heavily in fee earners, up 24% year-on-year to over 140, delivered a standout performance, up 52%, a record quarter. Australasia, which represented 24% of Asia Pacific and 5% of the group, grew 1%. Australia grew 4%, driven by our Page Personnel brand. On a regional basis, we saw strong growth in Victoria, offset by more challenging trading in New South Wales. Overall fee earner headcount in the region declined by 37, mainly in Mainland China. The Americas, which represented 16% of group gross profits with a headcount of over 1,300, was our fastest-growing region, up 17.4%. While this was lower than the Q1 growth rate of 21.4%, we had a particularly tough comparator, which was around 9 percentage points higher than Q1 2018. In North America, representing 10% of the group and 60% of the region, we grew 19%. The U.S., 93% of North America, grew 22% and delivered a record quarter. Our Technical discipline was the strongest performing with standout results from Boston, Chicago, Houston and Los Angeles. Latin America, 6% of the group and 14% of the region with a headcount of over 800, grew 15%. Mexico, the largest country in the region, grew 30%, delivering another record quarter. Brazil continued to perform well and grew 9%, driven by Page Personnel. The other 4 countries with a combined headcount of over 300 grew 9% collectively. Our fee earner headcount reduced by 17 across the Americas with an increase in the U.S. offset by decreases in Latin America. Finally, the U.K., 16% of the group, declined by 2.4% as Brexit-related uncertainty continued to impact growth. In Page Personnel, which represented 1/4 of the U.K. and operates primarily in finance and business support, we delivered growth of 8%. However, Michael Page, which is focused on more senior opportunities, declined by 6%. Most disciplines experienced difficult trading conditions although there were some areas of growth such as Engineering and Technology. Reflecting these challenging trading conditions, fee earner headcount fell by 40 in the quarter, all within Michael Page. I will now finish with a brief summary of our second quarter results. The group delivered another record gross profit performance with growth of 7.4% in constant currencies, 14 currencies had record quarters and 16 countries achieved gross profit growth of over 10%. In response to more challenging market conditions, our fee earner headcount reduced by 122 in the quarter to 6,035. Our flexible business model enables us to react quickly to changes in market conditions. We can grow our headcount rapidly in a strong market, or in more challenging conditions, use our staff attrition to adjust our headcount lower. Our financial position remained strong with net cash of around GBP 81 million. We will continue to focus on driving profitable growth while progressing our strategic investments towards our vision of 10,000 headcount, GBP 1 billion of gross profit and GBP 200 million to GBP 250 million of operating profit. Looking forward, it is worth noting that we have a tough Q3 comparator and it's clear that macroeconomic conditions in a number of our markets are becoming more challenging. As such, we currently expect 2019 operating profit to be towards the lower end of the range of current market forecast. Steve and I will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] We now have a question from Steve Woolf of Numis Securities.

[Steven John Woolf, Analyst]

The cut in headcount during the period in various regions, is it possible to get an idea of what was sort of proactive cuts by yourself and what was the sort of normal attrition rates during that period?

[Kelvin Stagg]

Sure. Well, first of all, it wasn't proactive in terms of cuts in that we didn't make redundants or fire a bunch of people. This is where we let the normal attrition, which we get, which are basically people from outside of our industry learning to do recruitment where they find that after 6 months, 9 months, 12 months, they're not enjoying it, they're not proving to be successful, they choose to leave and do something else. So these are people typically in their early to mid-20s who thought recruitment was going to be a great opportunity and it's not turning out quite that way and they've chosen to leave. What we've done is chosen not to instantly replace them. It's a combination between a bit of caution, clearly in 1 or 2 markets in Europe we've seen a slowdown between Q1 and Q2, and it's also a conscious decision where we remain very focused on increasing our productivity within the business. So it's a combination of those 2 factors. But we haven't consciously sort of set out at the beginning of the quarter and said, right, we'll lose x number of people. It's just where the local regional managing director has chosen not to replace the natural attrition that always exists. In terms of the percentage of attrition, which we think is probably leading in our industry, it hasn't significantly changed and it's usually in the 30%. And frankly, it's been that number for a long time and only tends to go up from that number in really difficult situations like the global financial crisis or so on. So this is just normal process, Steve.

[Operator]

Our next question comes from Kean Marden of Jefferies.

[Kean Marden, Equity Analyst]

I've got one for Kelvin. So would you just mind reminding us of your special dividend policy, please, and in particular, whether you need to see meaningful net fee growth in order to feel comfortable with that policy?

[Kelvin Stagg]

Yes. Sure. Our special dividend policy or our overall capital allocation policy is we will use what cash we need within the business to fund working capital and CapEx. I don't expect that CapEx to be as much as last year. We had some fairly sizable office fit-outs that all happened to coincide last year. And therefore, while we were at GBP 24 million last year, I expect this year we'll be nearer GBP 20 million. I think the main difference in cash flows this year compared to last is that we have about GBP 15 million of cash from share option exercises in the first half of last year that we didn't get in the first half of this year. But we will use what cash we need to satisfy those. We will also then buy back any shares that we require within the trust to hedge our share option exercises and we're fairly well covered at the moment with regards to those. We will then return cash to shareholders through an ordinary dividend, and we've been increasing that between 4.5% and 5% over recent years. I'd expect that we'll continue to do that. I could remind you, during the particularly tough times in the past, we did freeze it for a period of time. We'd never cut the ordinary dividend. And then we really try and work out what cash we'll likely to end up with at the end of the January. And I pick January because we have a fairly sizable outflow for annual bonuses for our more senior staff and the Q4 bonuses for consultants that goes out in Jan, that's typically about GBP 30 million. So if we try and hit the end of January with around GBP 50 million and therefore we turn the year around GBP 80 million, we'll try and work out what we've got in excess of that and we would return that in October through a special dividend in excess of the ordinary.

[Kean Marden, Equity Analyst]

Okay. And you do that even if net fee growth was negative?

[Kelvin Stagg]

Yes. I don't think the two are the same. I mean from a cash dynamics perspective, I'm sure you know, if we go into a downturn, our working capital unwinds and we end up fairly rich in cash as things tend to slow down. So certainly, for the time being, I don't see the two being linked, not in this year anyway.

[Kean Marden, Equity Analyst]

Yes. Very clear. Welcome back, Steve. Good to hear from you again.

[Stephen J. Ingham]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from Chirag Vadhia of HSBC.

[Chirag Vadhia, Research Analyst]

Two from me. Firstly, is there any evidence of the number of interviews picking up in July? And secondly, do you see any compression of fee rates or the temp gross margin?

[Stephen J. Ingham]

In terms of numbers of interviews, clearly, it's our most forward-looking KPI, along with job counts. I have to say, around the world, that's pretty stable. It's not -- I mean there are exceptions like India, but generally speaking, it's not improving globally, but it's equally not going down by anything more than we'd expect as we move towards the summer months. The challenge, I think, that we saw in Europe was just decision-making was taking longer. Clients were taking longer to decide and therefore may be adding an interview to the process. And candidates, in some cases, were taking longer to make decisions or even being persuaded to reject an offer and stay where they are. So that's really the only dynamic, and that hasn't changed going into July. And I have to say, activity levels still remain very good. And we have to remember, for the majority of our business, this was a record quarter for us. It's just the growth rate clearly has slowed significantly. In terms of pressure on fee rate, well, we're always under pressure. But the fee rates remained stable and it's still temp, particularly in Page Personnel, has remained the strongest part of our business. Two reasons: in the mature markets, it's reflecting the fact that caution has crept into one or two of our markets, clearly like the U.K. and France and so on, and therefore, temp is a more flexible option for clients and they're taking that option. And temp continues to grow well for us because in less mature markets, such as Hong Kong, Asia, Latin America, it's a new dynamic, it's a new structural change that's happening within the white-collar space where temps are starting to be accepted by clients and candidates alike. And so structurally, we continue to grow well there, and as result, we were able to charge high fee rates.

[Operator]

Our next question comes from Hans Pluijgers of Kepler.

[Hans Pluijgers, Head of Research of Benelux]

Steve, good to have you back, hear from you. One question, first of all, on let's say the trends for the quarter, you already indicated that you saw a slowing towards the end of the quarter, especially in some countries in Europe. But how should we, let's say, on a group level think about the trends for the quarter? Should we say, let's say, assume that June was, let's say, 2 percentage points below at the beginning of the quarter, that, let's say, the magnitude we should think about? Secondly, also a little bit looking at your reduction in personnel, especially looking at France, if you're pointing out, let's say, that mainly the slowdown was visible in June, I'm a little bit surprised that, still, the number of personnel is quite significantly down in France. So probably, you have not always seen it unless it's happening a little bit more early in the quarter, that was more, let's say, reluctance by clients. And thirdly, if you're also looking at the KPIs with respect to job vacancies, new jobs coming in, what are you seeing there?

[Stephen J. Ingham]

Yes. Okay. Well, through the course, first of all, when you've got 48% of the business, which is EMEA, seeing a slowdown towards the end of the quarter, obviously that impacts the overall group member. So yes, it got tougher through the quarter because we saw a bit of a slowdown in several countries like Italy, Spain, France in Europe. And I would, again, remind people that there were parts of Europe like Germany, Benelux and so on that actually their growth was stronger in Q2 than Q1 so I think we have to remind ourselves about. But there were some big markets, France being the biggest, that did see a slowdown through the quarter and that's impacted our global number, which says therefore the growth rate in June was slower than the growth rate in May. That said, June last year was also our slowest growth month of the year as well. It's also our biggest month of the year. So difficult one to take from that what sort of trend are we going to see going into July. I think your third question was around interviews and activity and so on. I had a European Board meeting at the beginning of last week and it really ranges. I have the 4 regional managing directors in front of me, and it really ranges the sort of response you get in terms of how activity is looking going into the quarter from: no different, Steve, positive; it's looking good across our markets, we have no issues; Germany still feeling positive. Now we're mindful that the newspapers and what we're reading and we're also mindful of our peers' results as well where clearly it's not plain sailing in these markets. But if we only look at our own results, things look as good as they have been and the same in Benelux. I listened to the news this morning and it doesn't sound very positive in Italy and we have seen a slowdown this quarter. And the same in Spain with the political mayhem they've got not being able to form a government, that doesn't help us there either. And so you got a mixed bag in Europe. Generally speaking, outside of Europe though, things have been fairly consistent through the quarter. Odd exceptions here and there with different countries, but largely consistent throughout. In terms of headcount, yes. I don't think that you should read too much into the fact that we said the majority of the small decrease in headcount in Europe was in France. You have to remember it's not totally within our control because, of course, we don't define who resigns on a Monday. And so at times, for example, in 1 month, you'll get no resignations even from a big country, and then the following month, you might get 30 or 40. And so managing the pipeline, which says you've offered enough people to cover that such that your headcount grows or goes down, it's a difficult task and one that we're very good on a macro -- global level to manage, but it sometimes means that you have an indication like we have this quarter where France's headcount dropped. I wouldn't expect that to be significantly the case in July. And like I said, I wouldn't read too much into it. It's a difficult balance of us trying to make sure that we're hiring enough people to create the headcount growth percentage that we want when we don't know how many people exactly are going to resign on a Monday throughout a month. I think I answered the third question, but you can repeat it if I haven't.

[Hans Pluijgers, Head of Research of Benelux]

No, no, no. Two follow-up questions, first of all, on Australia and one on China. First of all, on Australia, it also shows a slowdown, but also, Steve, you had so much, let's say, some changes within the company in Australia. Could you maybe walk us through that and what you would expect as you go into Q3? Of course, the election has had an impact, so what do you expect there? And a more detailed question on Greater China. What's now the, let's say, the international part of the business? How much of that is -- how much of the total business is in the international part?

[Stephen J. Ingham]

Okay. Yes. Look, in Australia, we saw a very slight slowdown. I have to say, talking to the regional managing director for the region, we're still optimistic going into this quarter. Activity levels are reasonably okay and we don't see a significant change. I think the comps, if I remember rightly, were quite tough on Australia in the second quarter this year, but activity levels look good. Because of the cities being quite far apart in Australia, we often find that a sort of range, a diversity in the results that we achieve. And we had a strong performance in Victoria, pretty good one in Western Australia and also Brisbane. We didn't do so well in New South Wales. And we've actually got a couple of returning managing directors through Australia, which is we're used to, a couple of people who after a long spell abroad with Page, have wanted to go home. So we're rich in management, and as a result, we've taken the opportunity to restructure slightly to give New South Wales, where we didn't perform as well, a bit more focus. So outlook seems okay and we've just restructured with a couple of returning people to Australia to make sure that we've got the right coverage and the right strength in different cities. In terms of Greater China, I spoke to both the regional managing director this morning that runs in China. I also spoke to the Asia regional managing director, so his boss. And a very consistent story in terms of how we're traveling. There's no doubt about it. The international companies are impacted more than the local ones. The local ones are still very busy. That said, we've picked up a number of very large projects in Shanghai, in Southern China as well. So it's certainly not all doom and gloom. We're a big business there, as you'll appreciate. And generally speaking, activity is okay. But it has come off with the confidence of some of the international clients not feeling as good as they have in the past. And so perhaps where we've benefited from a booming Chinese economy that's been very positive and we've been able to grow, I have to say our growth rate in Q3 last year was in excess of 30%. So we've got a pretty challenging comp going into Q3. But I would say, 70% of the business, which is international has been wrought by the tariff wars that are going on at the moment. And if they were to settle down, then so might our activity. We have a business in Shenzhen. Clearly, that's the headquarters of Huawei. You'll appreciate at the moment with all the headlines, that doesn't help the sort of recruitment volumes we're getting asked of what is our largest client. Whether that settles down or not, who knows and I certainly can't predict. Anything else?

[Hans Pluijgers, Head of Research of Benelux]

No. Thank you very much.

[Operator]

Our next question comes from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Research Associate]

I just have one question. First, on the U.K. actually, so obviously, the Brexit is kind of impacting the growth rate there. But do you think also the market, in general, is now starting to follow rest of the Europe in terms of patterns like even if you don't have this uncertainty, the slowdown kind of continues, any sense there?

[Kelvin Stagg]

I haven't seen one, no. I mean I think, in the U.K., we had a pattern that was slightly less extreme than Europe. It was a bit slower in June. Actually, it was a bit slower in June last year. I think if the absolute number is such a big number for most of the group, but particularly the U.K., the June number will be the biggest month in the year, so they were a little bit slower. No, I think the politics and particularly the delay to Brexit and the final outcome is what's really driving issues in the U.K. where we had a fairly typical pattern whereby Page Personnel has been stronger growing than Michael Page for some time now and that's driven by senior candidates and confidence to make moves. And right now, you've got to make fairly sizable offers as a client if you want a [ fee-earning ] candidate to move. And even then, you're still having buybacks in the U.K. where actually the candidates are not that taken anyway. And therefore, they might just use this as an opportunity to try and get an increase. I don't think that's going to change until such time as we get some certainty. And you're almost now, if we are in the final stages, you're almost in the position where senior candidates have got less incentive to move than they had some time back. So now unfortunately, it's all linked to that. I don't see any link across particularly into any economic issues in Europe.

[Anvesh Agrawal, Research Associate]

So just following up on that then. Is it kind of fair to assume that in case we do get some clarity, there should be some reasonable churn into the U.K. labor market and we should see activity level kind of pickup dealing to the European market or...

[Kelvin Stagg]

Yes. I think, within Europe -- within the U.K., there would be likely some pent-up supply that will come to market in terms of candidates who are then clearer about what that market looks like and what their job opportunities look like who haven't been able to move for the last 3-or-so years. I suspect you will also get, as we often see when you get regulatory or political changes in the U.K., you often get a pickup in short-term resources, temps, high-level interim, looking to try and implement whatever the plans might be. So I could see both of those picking up. How that then plays out and what that then looks like for the rest of Europe or the like, I don't know. We don't have a lot of cross-border traffic in terms of jobs in the U.K. into Europe or the other way around or candidates. So I think it's more of a domestic U.K. thing in a slightly more certain market that would probably pick up any sort of bounce to the extent that, that's sustainable either.

[Anvesh Agrawal, Research Associate]

Well, that's very clear. Welcome back, Steve. Good to hear from you.

[Stephen J. Ingham]

Thank you.

[Operator]

[Operator Instructions] We currently have no further questions.

[Stephen J. Ingham]

Okay. Well, as there are no further questions, thank you all for joining us this morning. The next 2 dates in your calendar are the interim results on the 7th of August and the third quarter trading update on the 9th of October. Thank you very much.

[Kelvin Stagg]

Thanks.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.