Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, everyone, and welcome to the PageGroup Q2 and Half Year 2021 Trading Update. My name is Seb, and I'll be your call operator. [Operator Instructions] I'll now hand the floor over to Steve Ingham, CEO, to begin. Please go ahead.

[Stephen J. Ingham]

Thank you, Seb. Good morning, everyone, and welcome to the PageGroup Second Quarter Trading Update. As a result of the quarterly trading being much stronger than expected, we have bought this call forward by a week. Therefore, 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 just like to make reference to the legal formalities that are covered in the cautionary statement in the appendix for 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 Q1 continued into the second quarter. Consequently, the group delivered gross profit of GBP 219.7 million in the quarter, resulting in gross profit for the first half of GBP 404.1 million. Against 2020, we grew 94.1% for the quarter. Given the magnitude of the impact of COVID-19 in 2020, we are comparing our results in constant currencies throughout this presentation to 2019, which was also a record year. Compared to Q2 2019, we grew 2% in constant currencies. For the first half, we declined 3.7% on 2019, but grew 38.3% on 2020. Trading in April and May was broadly in line with the exit rate in March, down 3% on 2019. As we saw in Q1, conditions improved materially in the last month of the quarter and June grew 11%. We have a strong balance sheet with net cash at the end of June, around GBP 168 million. Reflecting the continued improvement in trading conditions in Q2, we increased our fee earner head count by 176. Our operational support head count rose by 64. And as such, our ratio of fee earners to operational support staff was maintained at 77:23. Overall, the group had 5,443 fee earners and a total head count of 7,075 compared to 6,035 and 7,763 in Q2 2019. Overall, our quarterly growth rate improved 2% compared to 2019, which represented growth of 94.1% on 2020. Our 5 large high-potential markets of Germany, Greater China, Latin America, Southeast Asia and the U.S., now representing 38% of the group, grew 16% with 4 of the 5 delivering record-ever quarter. Looking now at each of our regions. In the largest region, Europe, Middle East and Africa, which represented 49% of the group, we grew 0.4%, up from a decline of 8.4% in Q1. Funds declined 11% against 2019, an improvement on the decline of 19% in Q1. June showed further improvement exiting the quarter, down 6%. Page Personnel with a higher proportion of temporary workers was impacted more significantly by the lockdowns. Germany, the group's third largest market, delivered a record quarter, up 26%, with June up 43%. This continued to be driven by our Michael Page Interim business, which was up 50% for the quarter on 2019. Belgium, Italy and Spain grew 2%, 5% and 7%, respectively, for the quarter versus 2019 and exited in June up 24%, 11% and 13%, with Germany, Italy, Spain, Poland, Portugal and Turkey, all delivering record-ever quarters. In Asia Pacific, representing 21% of the group, gross profit was up 10.5% in the quarter from a decline of 4.2% in Q1 when comparing to 2019. In Asia, 17% of the group, we grew 19%. In Greater China, 9% of the group, we grew 10%. Mainland China was up 29%, and we exited in June strongly up 46% on 2019. Hong Kong remained more challenging, down 16% for the quarter, though this was an improvement on Q1. Southeast Asia delivered a record quarter and was up 35% on 2019, with Singapore up 10% and the remaining countries in the region, up 58% collectively versus 2019. Japan was up 17%, delivering a record quarter and a significant improvement on Q1. India, despite being significantly impacted by the pandemic, also delivered a record quarter, growing 47% versus 2019. Australia declined 13%, though exited the quarter in June, down only 2%. The Americas, representing 16% of the group has been one of the worst affected regions by COVID. However, gross profit in Q2 was up 7.7% on 2019, a record quarter and a significant improvement on Q1, which was down 5.6%. U.S. delivered a record quarter and grew 8% with a significant improvement in June, which was up 19% on 2019. In Latin America, gross profit grew 11%, a record quarter up from a decline of minus 2% in Q1. Brazil was up 27% versus 2019, and the other large market in the region, Mexico, was down just 4%. They exited the quarter up 31% and 3%, respectively. Elsewhere in Latin America, the remaining countries were up 15% for the quarter collectively with record quarters in Argentina, Colombia and Panama. In the U.K., representing 14% of the group, gross profit declined 9% in Q2, a significant improvement on the decline of 25.1% in Q1. Conditions improved as the quarter progressed, and we exited the quarter down just 1.7% in June, with Michael Page growing 7%. Our Michael Page business was more resilient than Page Personnel throughout the quarter with declines of 4% and 24%, respectively, against 2019. 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. The tough and challenging year in 2020 has strengthened our culture, diversity and the values in the business, which are now reaffirmed at the forefronts of our operations. I'm immensely proud of the spirit, resilience and commitment of all of our people. This, I believe, is reflected in these results. The improvement in results we saw in Q1 continued into April and May, both of which were down 3% on 2019, broadly in line with the exit rate in March. We then saw a significant improvement in June, which was up 11% on 2019. Overall, this meant the group was up 2% for the quarter compared to 2019. In constant currencies, this was a record for the group. This noticeable improvement in Q2 was seen throughout the group and was achieved despite the backdrop of continued restrictions or lockdowns in many of our markets. We delivered record quarters in 4 of our 5 large high-potential markets and in 17 countries. We remain confident in our strategy of maintaining and investing in our platform by continuing to invest carefully in head count, demonstrated by the circa 400 experienced hires we added in 2020, which continued in 2021 and is now approaching 800, as well as rolling out new technology and innovation. Our head count is currently down 8% on the pre-pandemic level at the end of 2019. As a result of the more favorable trading conditions in Q2 as well as this reduction in fee earner head count, our gross profit per fee earner is up 15% on Q2 2019 and 86% on Q2 2020. 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. Given the lower head count as well as reduced spending on travel and entertainment due to the pandemic, our underlying pre-bonus cost base is currently circa 5% below 2019 levels. However, bonus levels have been higher given the increase in pre-bonus profit. And if visibility continues to improve, we will further invest in our fee earner head count in H2. As a result, our underlying cost base will increase. Looking ahead, there continues to be a high degree of global macroeconomic uncertainty as COVID-19 remains a significant issue and restrictions remain in a number of the group's markets. Additionally, at this stage of the recovery, it's not easy to determine whether the improved performance is still the result of pent-up supply and demand or a sustainable trend. However, and notwithstanding the early stage in the year, the strength of our performance in H1, and notably in June, has further 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 125 million to GBP 235 million. I will now be happy to take any questions you may have.

[Kelvin Stagg]

Sorry, can I just confirm, GBP 125 million to GBP 135 million.

[Operator]

[Operator Instructions] The first question comes from Hans Pluijgers from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

A few questions from my side. First of all, can you give me some feeling how, let's say, the developments with temp versus perm? So actually, let's say, seen a stronger development in 1 of the 2 segments. Secondly, if you talk to your clients, the strong improvement and especially also in June, do you have the feeling that there is, let's say, a sort of catch-up also in demand? Or do you believe, let's say, it's also more, let's say, a little bit more looking sustainable also into Q3? And thirdly, on the productivity, of course, a very strong performance there. You invested in more experienced people. But how do you see, let's say, going forward, do you believe this productivity level is sustainable? Or do you believe, let's say, maybe there could be some pressure on? And is it only, let's say, for a very short period due to, let's say, yes, the low level of people compared to last year? So can you give me some feeling on what you see on productivity going forward? And my last question is on cash distribution. Of course, you have now a very strong cash balance, further improved. Could you give maybe some feeling on how do you see, let's say, cash distribution going forward? And when do you expect to be back at, let's say, your old distribution policy?

[Stephen J. Ingham]

I think I can remember all of those, Hans. I'll try the first 3 and then Kelvin can answer the fourth. Temp versus perm, largely speaking, throughout the world, but particularly reflected in France, our biggest end market and then the U.K., it's been perm that's recovered fast. And it's fair to say you can see that in the Michael Page performance is way stronger than Page Personnel's performance at the lower levels. And that's also because the perm element has done a lot better than the temp element. So we probably, I would guess, Hans, need more offices to open and life at work to get more back to normal than it currently is. At the moment, we have 48% of our fee earners, roughly, around the world working in an office, and that ranges from 0, where we've got complete lockdown and no one is allowed to go to the office, through to 95% in Mainland China, where everybody has chosen to go back to the office. However, China is not a big temp market for us compared to the U.K. and France, where we've had lockdowns and limited numbers in the office, and I think that's the same for our clients. So the demand for temp has been lower. It's just starting to improve. But -- so our success is largely perm-driven. That's good because, obviously, to grow in perm doesn't require capital injection in the same way that temp would, that's to come. But with the growth we're seeing in perm, that's more than enough to sustain. In terms of what clients are saying? Is it catch-up versus sustainable? Difficult to tell. I mean they don't usually tell us when they get a vacancy exactly whether it's catch-up or something that they see as part of the growth. But I mean, certainly, we're talking to a large number of multinationals in a number of the countries which we operate and they seem to be strategically investing rather than just dealing with churn. And in fact, candidate flow has been quite challenging because I'm sure in a lot of markets, there's a lot of uncertainty that remains with candidates about whether they should or shouldn't -- is now the perfect time to change jobs? So actually, that helps us clearly. But in terms of candidate shortages, because it makes more clients -- it makes it more difficult for the clients to do it direct themselves. But you'd like to think that if candidate confidence continues to improve and if you take the U.K., where supposedly lockdowns are going to finish and we're all going to go back to normal in a couple of weeks, you'd like to think that will help confidence and perhaps that will accelerate candidates coming on to the market, which will also improve churn. In terms of productivity and is it sustainable, I think there's 2 things I'd point to that are helping us significantly. 800 experienced hires clearly land in the business and are productive far quicker than if we've done the equivalent, which we would have needed to have done, a number of hires of people that have never worked in recruitment before. Now some of the people amongst those 800 have literally just joined in the last few weeks. So clearly, probably haven't as yet made revenue for us. But if you total up what those 800 are produced in the first half is GBP 25 million. And that would have never been possible if we've recruited engineers, accountants and lawyers and tried to retrain them in recruitment. So that experience is definitely helping our productivity, and I think we'll continue to do so. The second thing that's significant is the times are higher. And this is from the time we get a job from a client to the time the job is expected by a candidate. The key reason for that reduction, apart from the competitive nature of the market as we have moved back into growth and therefore clients are moving fast and making more decisions quicker and so on, is that we're now doing a lot of video interviewing instead of face-to-face. The speed and efficiency of arranging video interviews versus arranging a mutually convenient time between a candidate and a client to get across town and go for an interview typically during work hours is quite remarkable. So in Germany, for example, our time to hire has reduced by 6 days. That makes our consultants more efficient. And therefore, I would like to think productivity is sustainable. I would also like to think -- sorry, there was a third one. But some of the innovations and some of the -- new CRM system, which is now available to comfortably over 50% of the group. We've gone live in Australia in the last quarter and are on the verge of going live in the rest of Asia Pacific, is also helping the efficiency of our consultants by reducing the time, the proportion of time spent on administrative tasks allowing them to focus more on clients and candidate relationships. So we would like to think productivity will be sustainable. However, if we continue to move into growth versus what was a record year, our head count will have to go up, and therefore, we will be retraining. Particularly in markets where we don't have competition, we will be training people to do recruitment and that will take longer. Kelvin will answer the fourth question on cash.

[Kelvin Stagg]

Sure. We suspended our dividend policy last year, but we didn't change it. So it is sort of fully our intention to go back to our capital allocation policy this year. To remind you, historically, we -- our first use of cash is always with the business, providing working capital and ensuring that we've got whatever CapEx requirements covered. As you know, that's pretty small on the basis that it's leasehold fit-outs on some of the software improvements that we're currently rolling out. After that, we would buy back shares and place those into the trust, and we spend about GBP 10 million doing that back in Q1. And then following that, we pay an ordinary dividend that historically, that would have been an interim of around GBP 15 million and a final of about GBP 30 million the last time we paid each of those. We tend to always make that decision at the interims and the interim of this year is on the 9th of August. As I said, we paid an interim last time about GBP 15 million. I currently would expect that we would reinstate that and possibly increase it slightly. Historically, we've increased that between 4% and 5% per year. And then we look at the remainder of the cash that we've got and normally return it to shareholders more recently by way of a special dividend, historically by way of share buyback and cancellation given where the share price is at the moment and conversations that we've had with shareholders. I suspect that the preference at the moment is probably a special dividend. We've always said that we prefer to have about GBP 50 million of net cash as the low point for the group during the year, and that low point is normally at the end of January, and we pay out bonuses to all of our senior staff in January. And in a good year, I'd expect that to be somewhere around GBP 30 million. So ideally, we turn the year somewhere around GBP 80 million, plus/minus any cash that we feel that we need in order to ensure that we can reinflate the business from working capital purposes. We've had a very strong last quarter and part of the first quarter, really, but driven mainly by perm. And so actually, the cash conversion from that perm recruitment revenue has been extremely strong. So I would expect fully that when we're out on the 9th of August, we will be confirming an interim and a special dividend, but I couldn't give you the magnitude of either of them today.

[Hans Pluijgers, Head of Research of Benelux]

But maybe it's logical to assume that maybe because also you had said that you reset the temp maybe is, let's say, somewhat delayed the growth there that you want to have some cautiousness that you maybe need some additional cash to support the temp growth in second half. Is that maybe also logical to assume from a cash distribution perspective?

[Kelvin Stagg]

Maybe a small amount. I think in total, the working capital unwind was something of the order of about GBP 75 million, of which we've seen probably about GBP 40 million of that go back into the business already. So there's a small amount that we could argue could be needed for that. I think we tend to find that we underestimate the cash generation in the latter part of the year anyway. And over recent years, when we've tried to aim for the GBP 80 million, we've tended to close the year at about GBP 95 million, GBP 96 million. So I don't think there will be a huge amount that we would need to hold back. But we will have that in mind when we work out what the number is.

[Operator]

Our next one comes from Edward Donahue from One Investments.

[Edward Donahue]

I'm not at all disappointed. Just looking at the -- actually, most of my questions have been actually asked by Hans. But could you just maybe talk about Germany with regard to exit rates? What are you actually seeing there across the various business verticals? And then when you talk about the potential hiring into the second half, where will the emphasis be and the potential magnitude of that as you're running roughly 10% below where you were in '19 to get an idea of sort of where we might be exiting? And I remember, and it's a bit of a rerun of a previous question, when you hired the original 400, you were talking a profit pool of around GBP 45 million to GBP 50 million, I think. How is that tracking versus that original pool figure, just as a matter of interest?

[Stephen J. Ingham]

Yes. Just -- well, first of all, in Germany, you're right, the numbers were quite remarkable. As we came into the end of the quarter. And I would remind you as well, actually, they've been pretty remarkable throughout 2020 as well as the first quarter of this year as well in that we've constantly -- apart from 1 quarter grown. And last year was a record year for Germany for us, largely driven by a 5-or-so-year investments in the interim business, which was us focusing specifically on contracting. And the focus that we have on contracting is particularly geared towards technology. And finance, of course, covers a strong discipline for the group. And that has continued to grow throughout 2020 and it is now accelerating. There's a high demand for candidates, which is making it challenging, but clearly, not so challenging they couldn't grow 50% in June. So we expect that to continue. It takes quite a long time for consultants to become fully productive when they join us in contracting, and we are now at a record level of head count in Germany. And we're hiring, and we've got a number of planned hires that are landing in the business in the next 3 months in Germany. So we suspect or think it's sustainable with existing people and people that will join us over the next 3 months, and I suspect 6 months. So where are we seeing it with verticals at pretty well most except for large manufacturing, which has proved to be quite difficult. We are fortunate in that we are not very exposed to the very large clients, partly because we didn't have the capacity to take them on in the first place. So others do. So most of our business tends to be the sort of smaller- to medium-sized enterprises. And that seems to be sustainable growth that we can continue. We still have a tiny market share in what is a huge market. And so the opportunity seem to be numerous. We also -- I'm trying to give you a flavor of our German business, we're about 1/3 contracting, about 1/3 perm and about 1/3 lower-level perm and temp in Page Personnel. And so we do have all of those streams as well to be benefiting from. And our perm business is not far off the same performance as our interim business, but the Page Personnel business, and particularly the temp side, is a slower burn and is yet to come fully on stream. So yes, it's -- we're in very, very good shape there. In terms of the second question, and Kelvin can come back to you, but on the third, around the generation of revenue, I mean, look, we did, as you say, when we totaled up what the people, the 400 that joined us could prove they did in a previous slide elsewhere, it totaled GBP 40 million or GBP 50 million of gross profit. We've doubled that number of hires. So clearly, you'd like to think we could double that number as well. And there's no reason why not. We're only hiring people who've got a very good track record as well as a very good reputation in the industry. We check that out against candidates and clients and what they think of them before we hire them. We're going to make the odd mistake and that's fearless reality. But they've landed well. Not all of them, of course, have landed in the offices yet. But we have a very low level of attrition compared to the group from those 800. So it's early days, but everything points to it being a successful level of investment. So yes, we're very excited. It didn't cost us an acquisition cost. But obviously, if we were buying a business, that 800 proven fee earners in it, it would have been very expensive. So we do view that so far as success. And I think that's the reason -- one of the good reasons why we've done well so far this year.

[Kelvin Stagg]

Yes. In total, we now have 804 people on board. They came on, as you know, from sort of halfway through last year and progressively right the way through until the last week. They currently, in 2021, delivered GBP 25 million of gross profit. I think they are on target. And as Steve mentioned, the attrition rate is extremely low. It's about 15%, which is less than half of where we would normally be in terms of new people into the group, particularly in that first sort of 6 to 12 months. The -- a number of these people have come on board to help us in disciplines such as technology contracting in parts of the world we're not great at it; in health care, life sciences, contracting. And so whilst the 25 to 26 months is not at the level that we sort of mentioned 400 people could deliver GBP 50 million, you have to mind that in contracting, it takes some time to build the revenue streams up. So individually, and when you work it back against the comps they came in, they're fully on track to deliver against that original target.

[Stephen J. Ingham]

Your other question [indiscernible] were higher in the future and where we will need to. I mean there are a number of pinch points, which we can mostly through the productivity that we've got. To give you one example, our productivity in the States is incredibly high. I don't think I've seen productivity from a whole country on average as being as high as it is at the moment. So for us to sustain what we're achieving at the moment in the States and June was a record ever month for us by some $2 million. So it just gives you an idea of where we're at and the head count is lower. That isn't sustainable if we're going to continue to grow it in that way. So we have to accept that we're going to be hiring into that market. It's the same in Latin America. Now we've seen a couple of quarters of growth. Our productivity is extremely high for that part of the world. Again, we're going to have to hire, in particular, into Brazil, where over 40% growth on our exit rate in Mainland China, again, going to have to hire. So look, do I expect we hired just under 300 net in the first half? It will probably be a bit more than that in the second half. But obviously, every month is another month and it tells us a bit more about the year, and therefore, also the trajectory we're imagining next year could look like. So we will literally keep moving that hunter, if you like, specifically just to what we actually see. And yes, it's good.

[Edward Donahue]

Great. And if I may just follow up with one last question on that point? The -- Kelvin, you've guided on the OpEx before roughly GBP 53 million to GBP 54 million per month. And you did indicate previously that, that would step up. I mean if you go back to '19, simplistically, you were running around about GBP 59 million, GBP 60 million a month. Is that the kind of figure we should be looking for, for the second half and exiting into next year? Or is there still some headroom within that?

[Kelvin Stagg]

I think there's still some headroom within that. So we're currently traveling with our [ underlying ] pre-bonus cost base, about 5% below where we were in 2019. So that would imply that we're going to be somewhere around the 57% mark. I think we're still not really traveling. Our travel in 2019 was about GBP 1 million a month. I can't see it realistically ever going back to that because I just don't think people will travel as much, whether it's for interviewing purposes or just purely for managing the business. But it will come back to a certain extent. So there's still a degree of that that's not in the business. There's a degree of clients and staff entertaining that's not in the business. And we're still slightly lower on head count than we were back then. So I would look for an underlying of somewhere around 57%, and I think that's probably good for an average for the second half, unless things really take off and therefore, maybe we would put a little bit more cost into some of those large high-potential markets that Steve was talking about. But the other main driver is that profit-related bonuses that we would pay. They're about 30% of the profit after that cost base.

[Operator]

Our next question comes from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

Just one question for me. And Steve, you mentioned at the beginning of your presentation that it's really not clear whether it's a sort of pent-up demand or underlying improvement. Just sort of going forward, what are the things you are clearly watching to gauge that? And let's say, if this momentum sort of continues for another 2, 3 months, does this then give you further confidence that we are in the cycle which can be a lot stronger going forward? Or like what's the time frame kind of we can judge that on?

[Stephen J. Ingham]

There's no specific time frame. I think every month gives you more confidence it's sustainable. Every month we see growth like this anyway. So it's a difficult one. I mean we look at anecdotal evidence. So what clients are telling us. We look at the type of recruitment they're doing. Is it projects? Is it large numbers of people because of strategic initiatives? So therefore, clearly, their confidence is going back to perhaps seeing a brighter future, and therefore, they're laying down bigger foundations to try to maximize their performance. So we look at that, and we have had a really good start to our Page Outsourcing business and drive our investment there. We have landed a lot of very large projects, and we -- or in the process of landing them and -- so we're very happy with that. That clearly gives us a bit more hard evidence as well. It's fair to say that there's a lot of markets currently impacted by COVID at the moment. You would like to think, but we've been saying this for a while, haven't we? You would like to think that the situation with COVID will eventually get a bit better. And therefore, more and more offices will open and life will get back to some sort of normal, albeit not exactly the same as it was before. And so the reality then is you'd like to think more confidence comes back into the climate and candidate market, and therefore, we will see more churn as well. But in answer to your question, when -- what month does it suddenly stop being the result of a pent-up demand and it become [ enduring ]? I think every month is the answer to that. Every month gives us a bit more confidence that this is sustainable. So -- and at the moment, it's difficult when you just finished with your best month of the year, a record month for the group, it's difficult to see why that would change just now. But I am wary that a hell of a lot can change very quickly with what -- the virus and what's happened over the last 18 months.

[Anvesh Agrawal, Equity Analyst]

Okay. And just sort of following from that, do you think these things like furlough and everything has sort of made the difference in this cycle, bringing some of that perm demand forward? Or that's not really is what's playing out there?

[Kelvin Stagg]

I'm not sure that -- I think that furlough in certain places helps to support businesses and just support them to carry on. But I think the majority of the people that were in the furlough schemes and [indiscernible] apart from the U.K., which had a full sort of on-off furlough scheme, there weren't that many. There were partial furlough schemes in Europe. But the majority of the people that bought furlough schemes in the U.K. were probably more blue collar or in health -- in leisure and travel and those sort of sectors. So did it make a huge amount of difference to us? I'm not sure that it did massively. And certainly, in terms of the industries where you still have people on furlough now, they're not really industries that we would have been doing much work with. So I'm sure it probably was very good at supporting people through Q2 last year when it was really, really acute. But after that, we've not really seen a huge amount of difference coming out of the back of the furlough scheme.

[Stephen J. Ingham]

And to confirm, I asked the U.K. business how many of our candidates are currently on furlough? And he said, next to 0. Very, very small number indeed. So there is no September impact we need to be concerned about, where suddenly candidates either made redundant or go back to work again. So it really isn't impactful.

[Operator]

[Operator Instructions] It looks like we have no further questions. So I'll hand the floor back to Steve and Kelvin.

[Stephen J. Ingham]

Thank you, everyone. Well, like I say, apologies for bringing this statement forward. I'm delighted to say with some good reasons and a profit warning up, if you like, which is clearly a nice place to be in. Thank you for dialing in this morning. Cheers, everyone.

[Operator]

This concludes today's conference call. You may now disconnect. Have a great day ahead.