Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, everyone, and welcome to the PageGroup 2021 Q3 Results Call. My name is Seb, and I will be the operator for your call today. [Operator Instructions] I will now hand the floor to Steve Ingham, Chief Executive Officer, to begin. Please go ahead, Steve.

[Stephen J. Ingham]

Good morning, everyone, and welcome to the PageGroup Third Quarter Trading Update. As a result of the quarterly trading being much stronger than expected, we bought this call forward.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'll 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 and which will also be available on our website following the call.The improvement in trading conditions we experienced at the end of Q2 continued into the third quarter. Consequently, the group delivered gross profit of GBP 228.1 million in the quarter. Against 2020, we grew 65.4%. Given the magnitude of the impact of COVID-19 in 2020, we're also comparing our results in constant currencies throughout this presentation to our record gross profit year of 2019.Compared to Q3 2019, we grew 12.9% in constant currencies. This compares to plus 2% in Q2 and minus 10% in Q1. The quieter summer months of July and August were slightly behind the growth we saw in June of 11%, up 4% and 9%, respectively. However, as we saw in Q1 and Q2, conditions improved materially in the last month of the quarter. And in September, we grew 26% versus 2019, our record year.As a result of this improvement in trading conditions, we are today announcing an upgrade in our guidance for the year. We now expect full year operating profit to be in the region of GBP 155 million. Reflecting the continued improvement in trading conditions in Q3, we increased our fee earner headcount by 329. This makes a net 627 to the end of September.And as such, our fee earner headcount is currently down just 4% on the pre-pandemic level at the end of 2019. Our operational support headcount rose by 74, and as such, our ratio of fee earners to operational support staff was maintained at 77 to 23. Overall, the group had 5,772 fee earners, and a total headcount of 7,478. We have a strong balance sheet with net cash at the end of September of around GBP 195 million. This is before the previously announced dividend payment of GBP 100 million payable to shareholders a week today on the 13th of October. As mentioned, we saw a significant improvement in September, which was up 26% from 2019. The growth rate in all of our regions improved in Q3 over Q2. And all regions exited the quarter in September ahead of the Q3 growth rate.Our 5 large high potential markets of Germany, Greater China, Latin America, Southeast Asia and the U.S. delivered the standout results in the quarter, reaching a new milestone of 40% of the group collectively. They grew 27% in the quarter and exited in September, up 45% on 2019.This was ahead of the rest of the group, which was up 15% in the same month. 4 out of these 5 markets delivered record quarters, with Greater China held back by tougher trading conditions in Hong Kong. We now have 2,300 fee earners across these 5 markets compared to around 800 in 2010, coming out of the global financial crisis.Looking now at each of our regions. In our largest region, Europe, Middle East and Africa, which represented 46% of the group, we grew 9.9% on 2019, up from 0.4% in Q2. Against 2020, this represented growth of 45.8%. France declined 8% against 2019, an improvement on the decline of 11% in Q2.September showed further improvement exiting the quarter up 5%. Page Personnel, representing around 60% of France and with a higher proportion of temporary workers, was impacted more significantly by the lockdowns, down 16% for the quarter. Michael Page was more resilient, up 8%.Germany, the group's third largest market, delivered a record quarter, up 33%, with September up 39%. This continues to be driven by our Michael Page Interim business, which was up 57% for the quarter and exited in September, up 73%. Belgium, Italy and Spain grew 8%, 14% and 22%, respectively, for the quarter versus 2019, with Germany, Austria and Turkey delivering record quarters despite the quieter summer months.In Asia Pacific, representing 22% of the group. Gross profit was up 20.4% on 2019, up from 10.5% in Q2, the second consecutive record quarter. Against 2020, this represented growth of 68.2%. In Asia, 17% of the group, we grew 29%. In Greater China, 8% of the group, we grew 21%. Mainland China was up 34%, and we exited in September strongly, up 45% on 2019.Hong Kong, where conditions remain more challenging, was up 1% for the quarter, a significant improvement on the decline of 16% in Q2 and returned to growth in September, up 10%. Southeast Asia delivered a record quarter and was up 29% with Singapore up 15%. And the remaining countries in the region up 41% collectively.Japan was up 36%, delivering a record quarter and a significant improvement on the already strong growth of 17% in Q2, exiting in September, up 56%. India, where we have around 200 people, despite being significantly impacted by the pandemic also delivered a record quarter, growing 72% and exited the quarter in September, up over 100% on 2019. Australia continues to be impacted by state lockdowns and declined 3% for the quarter, although we saw an improvement in September exiting up 7%.The Americas, representing 17% of the group has been one of the worst effective regions by COVID, but despite this, was our strongest performing region. Gross profit in Q3 was up 24.6% on 2019, a record quarter and a significant improvement on the growth of 7.7% in Q2. This represented growth of 113.4% on 2020. The U.S. delivered a record quarter and grew 28% and with a material improvement in September, which was up 61% on 2019.In Latin America, gross profit grew 22%, a record quarter after the growth of 11% in Q2. Mexico was up 18%, a record quarter and exited September strongly, up 38%. Brazil was up 27% for the quarter and exited in September, up 36%. Elsewhere in Latin America, the remaining countries were up 23% collectively for the quarter.In the U.K., representing 15% of the group, gross profit grew 1.3%, a significant improvement from the decline of 9% in Q2. Against 2020, this represented growth of 94.3%. Conditions improved as the quarter progressed, and we exited the quarter up 15% in September. Our Michael Page business was more resilient, up 6% in the quarter compared to a decline of 13% in Page Personnel. Performance was stronger in our regional offices outside of London.I'm pleased to report that the improvement in results we saw in Q2 continued into Q3 with the group reporting growth of 65.4% versus 2020 and 12.9% versus 2019. We exited the quarter strongly with September up 26% on 2019 compared with July and August up 4% and 9%, respectively. This noticeable improvement and record performance in Q3 was seen throughout the group with 12 countries delivering record quarters, and was achieved despite the backdrop of continuing restrictions and lockdowns in many of our markets.We believe our strategy of maintaining and investing in our platform throughout the pandemic is helping us to achieve these results. Our investments include hiring around 1,000 experienced fee earners since July 2020. Rolling out new technologies globally, such as Customer Connect, our new sales force-based CRM system.New innovations such as our Page Insights data intelligence tool, as well as diversity and inclusion and strategic engagement tools to ensure our culture resonates and is attractive to our people and potential new employees.Reflecting the continued improvement in trading conditions in Q3, we added a net 329 fee earners in the quarter, making a net 627 this year. We've added around 600 experienced hires so far in 2021, which complements the around 400 experienced hires we added in the second half of 2020. Our fee earner headcount is currently down just 4% on the pre-pandemic level at the end of 2019.We're the clear leader in many of our markets with a highly experienced senior management team, which we retained in 2020, and 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-19 remains a significant issue and restrictions remain in a number of the group's markets. Additionally, there is further uncertainty regarding the pace of clients' offices reopening, challenges in global supply chains and the inflation outlook. However, the strength of our performance in Q3 and noticeably in September, notably has further increased our confidence in the outlook for the year, and therefore, we now expect full year operating profit to be in the region of GBP 155 million. Kelvin and I will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] Our first question comes from James Rose of Barclays.

[James Steven Rosenthal, Research Analyst]

I've got 3, please. The first is on the really strong growth rate you've seen in September. What do you think explains that? Is there any particular work or specialism? Or what's your view on what explains it? And do you think it's sustainable for going into the fourth quarter? And second is on supply chain shortages and the manufacturing disruptions. How has that impacted the group? And then thirdly, are there any differences between the temp side and the perm side, which particularly stand out to you?

[Stephen J. Ingham]

Okay. Well, the sustainable one is a difficult question to answer, isn't it? Because clearly, I'd have to predict various economic factors and that's quite challenging. But at the moment, it feels like it's certainly sustainable in the short to medium term as our forward-looking KPIs still remain positive as we go into the fourth quarter.How do I explain September? Well, I mean, obviously, we think we've invested well and I've just said that in hiring a lot of experienced people, which we took advantage of literally from July of 2020. And I think that probably was looking back a smart move.What's happening is that a lot of candidates are definitely reflected on their organizations, the culture of the organizations they're working for, how their organizations reacted to COVID. Did they keep in touch, didn't they, did they make them feel secure, insecure. Are they doing the right strategic things? Are they -- do they have the right approach to diversity and inclusion, CSR, ESG, et cetera. And if they didn't, then they're doing something about it. And -- so there are a large number of candidates on the move, and there is high demand from clients as they recover from the pandemic. And so there's a huge supply and demand, which benefits us. And why, in particular, of course, we'd love to think we're taking market share from the obvious competitors.Some of which I'm sure are doing well as well. But the main competitor, we are definitely taking market share from our -- the clients themselves. So clients and their resourcing departments, talent acquisition, whatever they call it, are definitely our biggest competitor and they are struggling to hire people. And as yet, I've struggled to come across a company either in or outside of work that hasn't told me they've got staffing issues at the moment, and that they're struggling to fill jobs.And so that is playing to our strengths. While they're focused on doing whatever they do, we're focused on making sure that we can find necessary candidates to fill roles and we're largely better than our clients are doing it. And so we're successfully filling jobs they can't.That helps as well because we are seeing some wage inflation where there are particular hot points of candidate shortages, so that we're definitely seeing a bigger gap between the salary that candidate comes to us with and the salary that they're offered by a client. So that bigger gap, obviously, is -- we bill on the salary offered, obviously, and or the one that's accepted. And so that's benefiting us. And we're starting in some places to see as well a bit of fee inflation.In other words, we will -- you could imagine during 2020 when clients -- no doubt, are negotiating with us. They were probably tougher than they can afford to be today with candidate shortages. So all of those things, I suppose, explain September. Why does September look so remarkable against the other 2 months in the quarter?Well, I'd largely put that down to the summer and September is notoriously 1 of our biggest months of the year. It really follows June and it's always a competition in most years as to whether March, June or September will be the biggest. And that's to do with a lot of holidays and all sorts of things around what we've got, which is a very global business. So yes, it looks good going into Q4 and KPIs support it being reasonably sustainable.Regarding the supply chain, again, that tends to create more demand for candidates. As yet, I mean, what we're seeing is certainly some issues in the heavy manufacturing, engineering fields. I was talking to the leader in our German business, and they can see that some of the bigger, heavier industries are definitely seeing some issues with supply chain and therefore, those businesses are struggling to perform in the level they would want to.And certainly, if you're going to order a new car right now, then be prepared for a wait because you're probably where we get a supply for at least 6 months. So that must be impacting their demand. Unfortunately, for us in Germany, we're very much technology-driven. And certainly also, we have a specialist business or businesses that do logistics and supply chain. And at the moment, those businesses are thriving, as you can imagine.Temp versus perm, I think in the largest temp businesses that we've got, which would be France and the U.K, yes, our temp businesses are not performing. Our lower end temp businesses are not performing like our perm businesses, and they reflect where offices are open or not open. The more people get back to the office, the more clients are likely to hire junior temps. This is in contrary to how we're performing at the high end for contractors or temps depending on the terminology in different markets because at the high end, particularly in technology, actually, we're doing very well, and it would match or even in some cases outstrip our performance in perm.But low end temp, particularly in the large business we have in France, the U.K., whilst growing and are starting to pick up because more and more client offices are opening, they are still -- you can see in the numbers that I've just given you, they're still comfortably behind the perm businesses.

[Operator]

The next question is from Hans Pluijgers with Kepler.

[Hans Pluijgers, Head of Research of Benelux]

I've got 2 questions from my side. First of all, coming back on wage inflation, you already mentioned, you give maybe some more flavor on which areas you're really seeing it and which regions? And secondly, 2 questions on productivity and fee earners increase. You've hired quite somewhat more experienced persons. So what's your strategy going forward there? Are you still, let's say, focused mainly in the hiring in the coming quarters for more experienced personnel. And could you give maybe some guidance on what you expect for Q4 to higher?And secondly, on that, on productivity, 20%, yes, increase in productivity compared to 2019. Do you believe that's sustainable that level from all the investments you have been doing? Or let's say, do you expect that, that may be gain will a little bit level off or maybe there's still some additional benefits you can see. Could you give maybe some indication on that?

[Stephen J. Ingham]

Well, wage inflation. Really, it reflects where we're performing highest I mean you can imagine that -- we're seeing wage inflation, first of all, the way we measure it is what a candidate who comes to us looking for a job is currently earning and what they get offered by a client.So that isn't -- I don't think what really economists would call wage inflation. We can't really measure that because clearly, there are a lot of people that aren't looking for jobs at the moment. We don't see their salaries change. We can't measure that.What we're seeing is a bigger gap. And wherever you see us growing strongest, you can assume that the wage inflation is greatest. So I'm sure I haven't spoken recently about this specific subject, but I'm sure in India where we're growing at 100% versus 2019, there's a bigger gap between what a candidate is earning when they come to us and what the candidate gets offered by a client.I can tell you that certainly in the field of technology, which is our second biggest specialism outside of accounting, we are seeing, particularly in that area in digital, any specific jobs that are really hard to find the candidates, we're seeing that bigger gap. And we're certainly seeing candidates getting more than 1 offer, which we hope that both offers or more through us. But typically then a client may be forced into a position of offering a bit more as well to attract them and temp them.And we're also seeing what we call buyback, which is where our clients who sort of regret somebody resigning then desperately tries to keep them and pushes their salary up. And then obviously, the client who's offering and the job has an opportunity to offer higher that's sometimes happening as well. So these things cause that wage inflation, which, of course, we like. On productivity, is it sustainable? Yes. I think amongst the people, the existing people, it definitely is. I mean, for example, the 600 experienced hires that we've taken on this year. They won't be fully productive yet. Clearly, the 200 we've just taken in the third quarter won't be. And so there's still room, we believe, for that productivity to continue.The attrition rate, and we do intend really for everyone, not just new hires, but we do intend to do a sort of strategic update to the market later in the year. We haven't organized a specific date, but it could well be early December, where we'll go into this in a bit more depth, but -- and many other things in terms of our strategic moves and so on. But there is certainly a gap between what those experienced people could be offering in productivity and are currently.So with the existing people, yes, we do believe it's sustainable. However, for us to continue to grow, and we're obviously going to look at October, November and December. But if growth rates continue, then we are going to have to hire more heads in.And this really plays into the second part of your question is will you continue to hire experienced people? Yes, of course, we will if we can find them. And going back to India again, where we saw extreme growth. We don't really have much competition, which is nice, an economy the size of India, but it does mean that we are restricted in the number of people we can find now with competitors that haven't already joined us.In addition to that, not only are they more difficult to find, clearly, the recruitment market is improving. And therefore, those that are working for competitors and have experience, will be doing a lot better. So the chances are if they're doing a lot better. They own a pipeline of either temps, contractors or perm placement and that pipeline is now delivering them bonuses or commissions if they're any competitors, and therefore, they're going to be more difficult to attract.So you can assume, and you've seen that in the third quarter. The proportion of experienced people is coming down slightly, and I think it will continue to do so. So that's something that will dilute the productivity when you look at the total headcount but with an improving market, productivity also goes up. So if we continue to improve, and I can't predict that, but if we do continue to improve, and we have improved by roughly speaking, 12% growth upon 2019 each quarter of this year. And if we continue to improve, then obviously, productivity will continue to go up. I hope that answers your question, Hans?

[Hans Pluijgers, Head of Research of Benelux]

Yes, that does indeed. One last question on that one. Could you give some indication on your hiring plans for Q4?

[Stephen J. Ingham]

Sure. Sorry, you did say -- so what you see is a fairly seen -- so far this year is a fairly typical pattern. What happens is in the first half of the year, we largely are reflecting on what's happening in terms of performance. We have hired quite aggressively in the second half of last year. So we react to that and induct those people. And hopefully, they get productive in the first half of the year. We take a view on the second half and how we're performing. Is it improving? Is it not? It was definitely improving. We clearly, in large parts of our market, are less successful hiring people in July and August. And then September tends to be a big intake, particularly as we start thinking about getting towards the end of the year and preparing for next year, we have to have the firepower to react to the market conditions we're hoping for next year.Clearly, with things improving you'd expect us to make sure we're prepared for Q1, Q2 of next year by making sure we've got that firepower and therefore, bringing on less fee earners. So you can assume with the growth that we've just seen in September that our hiring will increase over Q3, not significantly because it's difficult to find candidates. So don't assume it's totally easy, we are a recruitment company, so I think we'll find them, but we will hire more fee earners into the business than Q3, but not dramatically.

[Operator]

Our next question is from Karl Green, RBC.

[Karl Green, Analyst]

Just a couple of questions, one of mine has been largely answered. Just in terms of where you're seeing your own pricing power increase the most, I'm not necessarily expecting you to quantify it, but can you indicate how that feels versus recycles in terms of the extent to which you're pushing up your own fee rates? And then the second question, it might be a little bit early, but just in terms of the expanding energy crisis in Asia and Europe, are you seeing any glimmers of opportunities or indeed threats to your business as we see that evolving?

[Stephen J. Ingham]

I'll answer the first one, and I'll leave the second one to Kel, who's cleverer than me. So in terms of pricing power, look, it is -- again, it comes to wherever the hotspots exist and also where we are spot pricing. So what I mean by that is that clearly, we have some arrangements with clients either because it's large projects or large campaigns or even RPO, the fee rates are fixed. So there's little we can do about that just because we're busier.But where we're spot priced, which is where a client gives us 1 or 2 or 5 or 10 vacancies for the first time or for a while, then we're obviously now negotiating with them what the rate would be. And we will always look at the demand for those candidates.So if it's easy to find a candidate and there's no one else that wants them, then clearly, we're unlikely to be able to insist that we have high fee rates, whereas if we know the demand is very high and there's a lot of companies out there for the same candidate, then we can say, this is our fee rate, if you're not comfortable with it or if you're going to try and negotiate a stand considerably, then we're just not going to work with you. We'll work with those that will.And we do that in a sort of non-arrogant way, which is obviously difficult. But it is about supply and demand. And so we are effectively starting to see our fee rates harden. We always say in response to previous cycles, but roughly speaking, our fee rates go up or down by about 10%. I don't mean 10 percentage points of the salary we charge on, but actually 10% of the fee rate.So if the fee rate was, let's say, 20% as it is roughly in the U.K. then it could go down to 18% in a crisis, and it typically goes very quickly back up to 20. The interesting thing, I think, when you look over 35 years, as I obviously can, I mean, our fee rate back 35 years ago, any technology or innovations was slightly lower than it is today. The answer to that is mix.So we charge very different fee rates in different geographies, ranging from mid-teens in our lowest market, which would probably be somewhere in Southern Europe, through to 30% in Japan. So clearly, if certain businesses with higher fee rates like Germany and the U.S. are becoming a bigger proportion of the group then that can also impact where we're averaging on a fee rate.So again, maybe in our strategy update later in the year, we can go into that in a bit more depth and give you actual numbers. But to show where we're at in that cycle. But we're seeing them harden and it's typically in the geographies we're doing particularly well. And in the disciplines, we're doing particularly well.Kelvin, you've had time to prepare.

[Kelvin Stagg]

Yes, sure. I mean with regard to the short-term energy prices we're seeing today, I think the short answer is no, we're not seeing any material change to any of the activities we've got going on. However, if I sort of look at that question, it's slightly more of a medium-term question. Certainly, the move into electrical energy into renewables is something that we are seeing come out of sort of niche recruitment factors.And you could sort of extend that back out into the overall discussion around ESG. And we've got a small business in ESG recruitment. We're building that out now and running it as a global discipline. And within that the environmental part of it and certainly the renewal of the energy space is an area that is very sort of specific skills that are short-term supply and therefore, is something that is pretty attractive to the specialized recruitment area that we deal in.So I think there's opportunity there coming down the track. I think there's some -- an ability to leverage our scale and our ability to find candidates, I believe that may go into some of these hard-to-find roles. But very specifically on the short-term energy crisis, no, I don't think that's having any real impact.

[Operator]

[Operator Instructions] We have a question from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

Just 1 question for me and sort of slightly longer term but if you sort of look at this cycle, clearly perm has proven to be a lot stronger than certainly I would have expected at the beginning of the cycle. And then this is against the backdrop of this labor market shortages, wage inflation.Is there a feeling like the next sort of cycle turns out to be similar to this, what you've seen over the last 6 months in terms of like the perm can be a lot stronger if we are in this structurally labor short market. And then sort of what are the signs you would see to sort of confirm that going forward, probably.

[Stephen J. Ingham]

Well, a tricky question, I think, and probably not one I can -- so I can't give you the answer because there are so many things that can clearly impact the answer from inflationary increases to all sorts of other different challenges, political or whatever around the world.Look, if this is the start of a longer cycle, of course, as a perm business, our revenues would go up faster than temp competitors because clearly, we build on an entire year, the way that we build is that we will a percentage of the year's salary, whereas with temps, it's based on a week or a month that the temp contractor works. So naturally, we would continue to increase faster.I don't know if it's the answer. I don't know what economic factors are going to influence this cycle. What I can tell you is that we have a track record in many years, and in fact, in the first few years of my tenure as CEO and also in fact prior to that, I remember where we grew every year 30% and for a number of years. Can we grow that rate again, who knows? I mean there's just too many factors that can incur. But what I would say is this, -- we invested -- we highlighted a strategic move to focus our investment into high potential markets in 2010. At the time, they represented about 10% of the group. Today, they represent 40% of the group.When I look back into 2010, our third, fourth, fifth, et cetera, largest markets outside of the U.K. and France were Holland, Spain, Italy and Australia. Today, our third biggest market is Germany. Our fourth biggest market is the U.S. Our fifth biggest market is China. And coming up on the outside or markets like Japan and India and when I last looked, they are pretty big economies as well. So to me, we've positioned ourselves well in discipline terms, we've also been focused since 2010, where we were very focused on financial services as well as accounting. Today, our second largest specialism is technology, and that's growing the fastest of all of our specialisms which is great to see. And I believe that we have a huge future in that market. And then finally, back in 2010, we did very little in the area of contracting. And that's been a big investment in Germany, where we've clearly just put some pretty impressive results in Latin America, where it's 1 of the fastest-growing contracting markets and fastest-growing parts of our business in Latin America and in China and wherever else we can do contracts, and we're not able to do it everywhere.So the investments that we've made, we believe, position us well to whatever length of time this cycle gives us and however impressive the cycle is in terms of growth because of candidate shortages. So I've told you why I think we're well positioned, but I haven't told you the prediction for the future because I know that.

[Anvesh Agrawal, Equity Analyst]

No it's more of a question, like, if you see this wage inflation and sort of supply chain shortages, labor shortages becoming more structural then you would imagine sort of it favors perm more than temp. Is that like -- would be a wrong hypothesis to have? Just what -- based on what you have seen so far really? Not asking you to predict.

[Stephen J. Ingham]

No, no. The really good demand is definitely in specialist roles. A lot of those specialist roles are perm -- so yes, the answer is yes.

[Operator]

At this point, there are no further questions on the call, so I will hand back to the PageGroup team to wrap up.

[Stephen J. Ingham]

Thank you. And thank you for the questions. As there are no further questions, thank you all for joining us at the short notice this morning. Our next update to the market will be our fourth quarter trading update on the 12th of January 2022. Thank you.

[Operator]

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.