Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the PageGroup's Third Quarter 2019 Results Call. My name is Karen, I'm your operator for today. [Operator Instructions] I'm now going to hand over to your host, Steve Ingham, Chief Executive Officer, to begin. Please, Steve, go ahead.

[Stephen J. Ingham]

Thank you. Good morning, everyone, and welcome to the PageGroup Third Quarter Trading Update. Thank you for joining us at short notice and apologies for any inconvenience this has caused. I'm Steve Ingham, as she said, Chief Executive Officer; and I have with me Kelvin Stagg, Chief Financial Officer. I will now present the headline numbers and then hand over to Kelvin for the financial review. I will then return for the 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 cautionary statement in the Appendix to this presentation, which will also be available on our website following the call.The group delivered gross profit of GBP 216.7 million in the quarter, representing constant currency growth of 2.1%. This was down from growth of 7.4% in quarter 2 with the majority of our regions impacted by heightened macroeconomic and political uncertainty. Foreign exchange had a marginal positive impact during the quarter, which led to a higher reported gross profit growth rate of 4.2%. In monetary terms, foreign exchange movements increased gross profit by around GBP 5 million. For the quarter, Michael Page grew 2.1% with similar growth in Page Personnel, up 2%. With net cash at the end of September of around GBP 92 million, up from GBP 82 million at the end of June, we ended the third quarter in a strong financial position. The combined interim and special dividends of 17.03p per share totaling GBP 54.5 million will be paid out tomorrow. I will now hand you over to Kelvin, who will take you through the financial review.

[Kelvin Stagg]

Thank you, Steve. In the third quarter, permanent recruitment grew 0.1% in constant currency with temporary growing faster, up 8.5%. We saw strong performances in our temporary businesses in Asia Pacific, EMEA and Latin America. This gave a ratio of permanent to temporary gross profit of 75:25 compared to 76:24 the previous year. In Q3, in Michael Page, permanent recruitment represented 83% of gross profit; while in Page Personnel, it was less at 56%. Looking now at our gross profit by the discipline in which we operate. Accounting and Financial Services, which represented 36% of the group, was the strongest-performing discipline category growing 6.1%. Our disciplines outside of Accounting and Financial Services represented 64% of the group collectively in the quarter, reflecting the continuing success of our diversification strategy.Our Professional Services category, representing 24% of the group, grew 3.1%. Our Technical discipline category, which represented 23% of the group, declined by 3.3% due primarily to challenging conditions in Greater China. Finally, our Marketing, Sales and Retail discipline, representing 17% of the group, declined by 0.2%. Having added 619 fee earners in 2018, our fee earner headcount reduced by 81 in the first half. However, during the quarter, we increased our fee earner headcount by 46 as we invested in markets where we saw the greatest growth such as Germany, India and the U.S. In the U.K., fee earner headcount reduced by 75 in the first half but increased slightly in the third quarter by 16 to end September at 945. These increases were partially offset by falls in market where we saw more challenging conditions such as Australia and Greater China.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, focusing on productivity and conversion. By region, our fee earner headcount increased in EMEA by 33, the Americas by 23 and the U.K. by 16. These increases were partially offset by fall in Asia Pacific of 27.Operational support staff headcount decreased by 20 in the quarter as we completed the rollout of our new Global Finance System. This resulted in our fee earner to operational support staff ratio being maintained at 78:22. At the end of September, the group had 6,081 fee earners and 1,708 operational support staff, a total headcount of 7,789.This fee earner headcount and gross profit chart shows the flattening of both our gross profit growth rate and fee earner headcount. The last column on the right shows the quarter in constant currency to enable comparison with Q3 2018. I will now hand you back to Steve for a regional review and summary.

[Stephen J. Ingham]

Thank you, Kelvin. I'll now give a brief overview of our regional performances before presenting each region in more detail.Gross profit growth in the third quarter slowed to 2.1% in constant currencies, impacted by heightened macroeconomic and political uncertainty in the majority of our regions. Our Large, High Potential markets, representing 37% of the group, grew 4% collectively with the challenging trading conditions in Greater China decreasing the overall growth rate. In our largest region, Europe, Middle East and Africa, which represented 47% of the group, we grew 5.6%, below our Q2 growth rate of 9%. Across EMEA, macroeconomic and political uncertainty increased during the quarter, impacting confidence. Despite this, Germany delivered a record performance. Asia Pacific, representing 20% of the group, declined by 8.1% with confidence continuing to be affected by trade tariff uncertainty in Mainland China and increasing social unrest in Hong Kong. The Americas, representing 17% of the group, continued to be our fastest-growing region and grew 13%. Finally, in the U.K., with heightened Brexit-related uncertainty, market sentiment deteriorated further with gross profit declining by 4.1%. Moving to each of our core 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 3,000, we delivered growth of 5.6% in constant currency. Michael Page, which represented 56% of EMEA, grew 9%, while Page Personnel grew 2%.In France, our largest country in EMEA, representing around 1/3 of the region and 15% of the group, growth slowed to 2% with confidence impacted by macroeconomic uncertainty. Growth in Page Personnel was slightly stronger, up 3%, with Michael Page growing 1%. Germany, 9% of the group, grew 16% with our technology-focused contracting business, Michael Page Interim, driving another record quarter with growth of 28%. Benelux grew 7% with Belgium, the Netherlands delivering growth of 7% and 5%, respectively. Southern Europe, while also impacted by political and macroeconomic uncertainty, grew 7% with Italy and Spain delivering growth of 11% and 3%, respectively. However, Portugal delivered a standout performance with growth of 25%. The Middle East and Africa, which represented 2% of the group, declined 10% with tough trading conditions in South Africa and a particularly tough comparator in the U.A.E. Fee earner headcount in the region increased by 33 in the quarter mainly in Germany.Our Asia Pacific region, which represented 20% of group gross profit, declined by 8.1%. In Asia, 76% of the region and 15% of the group, we declined 11%. Greater China declined 24%, albeit against a particularly tough comparator of 31%. Trade tariff uncertainty continue to impact Mainland China, particularly among our larger international clients, while increasing social unrest also impacted our Hong Kong office. Southeast Asia grew 11%, a record quarter. Strong growth in some of our newer countries, namely Indonesia, Thailand and Vietnam, was partially offset by a decline in Singapore at 4%, which was impacted by wider trade tariff concerns. Elsewhere in Japan where we continue to focus on both the Gaishikei and Nikkei markets, we grew 5%, down from 13% in Q2 with weaker growth in the Gaishikei market from multinational clients. In India where we've invested heavily in fee earners, up 33% year-on-year to over 150, we delivered a standout performance, up 23%, a record quarter. Australasia, which represented 24% of Asia Pacific and 5% of the group, grew 1%. Australia grew 2% with a stronger performance in our Page Personnel brand delivering growth of 5%. Overall fee earner headcount in the region declined by 27, mainly in Australia and Greater China.The Americas, which represented 17% of group gross profit with a headcount of over 1,300, was our fastest-growing region, up 13% despite a tough prior year comparator of 30.1%. In North America, representing 10% of the group and 59% of the region, we grew 10%. In the U.S., 93% of North America, we grew 14%. Growth was strongest in our offices outside of New York, which was impacted by a slowing Financial Services. Latin America, 7% of the group and 41% of the region with a headcount of over 750, grew 17%. Mexico, the largest country in Latin America, grew 13%. Brazil continued to perform well and grew 25%, driven by Page Personnel. The other 4 countries, with a combined headcount of over 350, grew 15% collectively with record performances from Argentina, Colombia and Peru. Our fee earner headcount increased by 23, mainly into the U.S.Finally, the U.K., 16% of the group, declined by 4.1% as heightened Brexit-related uncertainty continue to impact growth. Both Page Personnel, which represented 1/4 of the U.K., and Michael Page, which is focused on more senior opportunities, declined by 4%. Most disciplines across both brands experienced difficult trading conditions, although there were some areas of growth such as Secretarial and Technology. Having started the year with around 1,000 fee earners, this had declined to 929 at the end of June. During Q3, we replaced some of these levers, adding 16 to end the quarter with 945.I will now finish with a brief summary of our third quarter results and outlook for the full year. Despite the majority of our regions being impacted by heightened macroeconomic and political uncertainty, the group delivered gross profit growth of 2.1% in constant currency. During the quarter, we increased our fee earner headcount by 46, investing in markets where we saw the greatest growth such as Germany, India and the U.S. These increases were partially offset by falls in markets where we saw more challenging conditions such as Australia and Greater China. Our operational support headcount decreased by 20 in the quarter as we completed the rollout of our new Global Finance System.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 to focus on productivity and conversion. Our financial position remains strong with net cash of around GBP 92 million. The combined interim and special dividends of 17.03p per share, totaling GBP 54.5 million, will be paid out tomorrow.Turning to our outlook. The deterioration in trading conditions seen during Q3 across the majority of our regions is anticipated to continue. In the U.K., heightened Brexit-related uncertainty is expected to remain as we approach and go beyond the 31st of October. With worsening macroeconomic indicators in Continental Europe, particularly in Germany and in the U.S., there are signs that growth in these markets may slow.In Greater China, confidence in Mainland China continues to be affected by trade tariff uncertainty, and the social unrest in Hong Kong is increasing. Given these heightened political and macroeconomic challenges, together with our limited forward visibility, we currently expect 2019 operating profit to be in the range of GBP 140 million to GBP 150 million. However, 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. Kelvin and I will now be happy to take any questions you may have. Thank you.

[Operator]

[Operator Instructions] So our first question today is from Chirag Vadhia from HSBC.

[Chirag Vadhia, Research Analyst]

Just in terms of next year, how are you looking at the range of potential outcomes or scenarios going forward into 2020? And secondly, what are you seeing in the U.S.? Like -- I mean you have said that the Financial Services could be slowing a bit.And finally, in how many countries do you see that demand is a problem? And how many are you seeing that supply is a problem of candidates?

[Stephen J. Ingham]

Okay. On 2020, I mean we are about to go into a sort of budgeting season, and we'll be trying to look at how we think the economies will play out in the different markets we're in. That's going to be clearly challenging. And I have to say, every month that we go through this year will help us give some sort of direction as to perhaps the outcome in 2020. The only thing I would say is we're a very diverse business, and I think that diversity will protect us enormously going into next year. I'm sure there'll be some challenges, but that diversity hopefully will improve things for us. In terms of what we're seeing in the U.S., outside of New York, things have continued to grow strongly. I think we've had a strategic objective over the last few years to diversify our business away from Financial Services and New York, and that's been very successful. And over consistent quarters, we've seen our strongest growth coming from Los Angeles, Chicago, Houston, Boston, and that's played well now. So yes, we are seeing some softening in Financial Services in New York, but beyond that, KPIs and so on are good. But we are mindful that the macroeconomic data and the headlines in newspapers and so on are quite negative about a possible recession in the U.S. We're not seeing it yet. So at the moment, it is just within Financial Services in New York.In terms of demand, I mean yes, we have an unusual situation where, clearly, in many of our markets, there are candidate shortages, and that still exist. But of course, what we're also now seeing is caution from clients as to when they hire. And that's also flowed through to some caution within candidates who now have a reluctance to move. So we do need churn. And so although it's generally a supply issue with candidates and for many of the jobs that we try to fill being very specialist roles, it's difficult to find candidates at the moment. I think the cautionary state of the market in many of the markets we operate means that there is a challenge in terms of job flow as well as candidate flow as both parties are being cautious because of the outlook.I would prefer an environment where we've got almost full employment in the white-collar market so that when perhaps clients are feeling slightly more positive and maybe some of the lack of clarity we've got in certain markets clears up, then I would like to think it bounces back quite quickly as that pent-up demand from clients flows through and then the shortage of candidates plays well to our strength. But at the moment, I think the cautionary nature is that we've got a lower number of jobs and a lower number of candidates prepared to make a move.

[Operator]

Our next question today is from Anvesh Agrawal of Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I've got a couple of questions. First, during the call, in your comments, you touched upon the flexibility of the cost base. So I was just trying to think around what's the sort of floor for organic growth you see where you will be able to protect your profitability Y-o-Y? Let's say, if the growth kind of turns negative to minus 2%, minus 3%, should we still expect like flat operating profit year-on-year in FY '20? And the second is, does the recent kind of development in the macro environment in any way impact the Technology restructuring savings that you're targeting for next year? And if you can just remind us of what the number is on that.

[Stephen J. Ingham]

Okay. I'll let Kelvin come back to the second half of your question. On the first half, I mean look, we can be very flexible in terms of our cost base as a very large proportion, roughly 75% of our cost base is people-related. And if I look back at previous downturns such as 2009, which clearly was a very difficult economic situation, in the first quarter of 2009, we lost over 800 headcount in 3 months. And that clearly lowered our cost base to suit the macroeconomic environment at the time. Now we're not in that situation. This year, we're currently guiding between 150 and -- 140 and 150. That would be one of our best year performances in our history. So we're not in that environment yet. But if we were at the lower end of that 140 to 150, because we're probably flat to very marginally negative in the fourth quarter in terms of growth rate, that will start to impact our profitability because although we can reduce our headcount, what also happens is of the headcount that we have remaining in the business, they will have higher -- or lower productivity. And then that's caused by clients taking their time over decisions, candidates taking their time over decisions, recruitment processes that might have been a couple of months becoming 3 months, a 2-interview process to make a decision might become a 3-interview process, jobs might go on hold, jobs might get withdrawn.So all of those scenarios ends up leading to the headcount that we have in the business being less productive, i.e., making less placements per head than they did before. And so that would lead to a lower profitability, and I think that's why we've given a range. It's too difficult to predict the outcomes of the different macroeconomic scenarios we've got in different markets. They're all very different. The issues we've got in Hong Kong are very different to the issues that we have here in the U.K. And so it's difficult to predict how these things will play out, and therefore it's difficult to predict the impact exactly on our revenue. But assuming that we -- if you look at the lower end of that range, if we were to get to flat growth or even very small single-digit negative growth, our profitability, I mean you can do the sums, would be slightly lower.

[Kelvin Stagg]

If I come back to you on the Technology transition. So this was a transition coming out of our own data centers moving into the cloud. It was really also involved rolling out consistent technology both in terms of the Global Finance System but also in terms of our BI and reporting technologies across the group. We're a fair way through that transition process. So from what was originally 17 data centers, we're down to 6. We intend to close 2 of those later on this year, and we will then have 4 to close next year. We're in the process of rolling out a new desktop image across the group, and we're about sort of 2/3 the way through that.So the total savings that we flagged previously were GBP 10 million. I think probably a couple of those we probably already realized, but the incremental GBP 8 million should be next year and probably towards the end of next year by the time we finish. So you may get another couple next year and probably the full GBP 10 million effectively in the run rate by the time you get into 2021.

[Operator]

[Operator Instructions] We have no further questions, so I'll hand back to you for any further remarks.

[Stephen J. Ingham]

Thank you. As there are no further questions, thank you all for joining us this morning. The next date for your calendar is our fourth quarter trading update on the 14th of January. Thank you.

[Operator]

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