Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the PageGroup Q4 and Full Year 2018 Trading Update. My name is Todd, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to today's host, Kelvin Stagg, to begin. Kelvin, please go ahead.

[Kelvin Stagg]

Good morning, everyone, and welcome to the PageGroup Fourth Quarter and Full Year 2018 Trading Update. I'm Kelvin Stagg, Chief Financial Officer, and I have with me Steve Ingham, Chief Executive Officer. I will shortly take you through the headline numbers and the financial review before handing over to Steve for the regional results and a summary. While 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 and which will also be available on our website following the presentation. The group delivered a record quarter with gross profit of GBP 211.1 million. It was also a record year for the group with gross profit of GBP 815 million. For the quarter, this represented constant currency growth of 15.4% and our strongest fourth quarter growth rate for 8 years. This growth was achieved against a tough comparator where growth improved from around 9% in the first 3 quarters of 2017 to 14% in quarter 4. It was our fifth consecutive quarter of double-digit growth with growth in all 4 of our regions. Foreign exchange had a marginal positive impact during the quarter, which led to a higher reported gross profit growth rate of 15.8%. In monetary terms, foreign exchange movements increased gross profit by around GBP 1 million. However, for the full year, foreign exchange had a negative impact on reported gross profit, decreasing our full year growth rate from 15.9% to 14.5% and decreasing gross profit by around GBP 10 million. For the quarter, Michael Page grew 14.2% with slightly stronger growth in Page Personnel, up 17.9%. At the end of December, the group had a record total of 6,116 fee earners and 1,656 operational support staff. In total, we now have a record headcount of 7,772. We have continued to benefit from our strategic operational support program, and as a result, our fee earner to operational support staff ratio improved to a new record level of 79:21. We closed the quarter in a strong financial position with net cash of around GBP 96 million, down from GBP 122 million at the end of Q3. However, this was after payment of both the interim special dividends, which, combined, totaled GBP 53.9 million. Our closing cash figure of GBP 96 million was in line with the end of 2017. I will now provide a more detailed financial review. In the fourth quarter, permanent recruitment grew 17.6% in constant currencies with temporary up 9%. This gave a ratio of permanent to temporary gross profit of 76:24, slightly up on the ratio in Q4 last year. Our higher ratio of permanent recruitment reflects the mix of geographies and salary band in which the group operates. In Latin America and large parts of Asia, for cultural reasons, the white collar temporary recruitment market has only recently emerged. In other markets, the permanent-to-temporary mix reflects the salary band in which we operate. In Michael Page, permanent recruitment represented 84% 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. Our original disciplines of Accounting and Financial Services represented 35% of the group. This is down from 37% in quarter 4 last year, reflecting the continuing success of our diversification strategy. This category grew 11.7%. Within this, Financial Services, which represented 7% of the group, had another strong quarter, growing 21%. Our Professional Services category was the fastest growing, representing 25% of the group and delivering growth of 24.5%. Within this, there were strong performances from our Healthcare, Secretarial and Technology disciplines. Our Technical discipline category, which represented 24% of the group, grew 17.5% with a particularly strong performance from Property & Construction, delivering growth of over 50%. Finally, our Marketing, Sales and Retail disciplines, representing 16% of the group, grew by 8.4% despite particularly challenging conditions in both Retail and Sales. Turning now to headcount. Having added 786 fee earners in 2017 and 561 in the first 3 quarters of 2018, additions in the fourth quarter slowed to 58. The additions were mainly into our Large, High Potential markets as well as those where we saw the strongest growth, such as India. By region, we added 20 in the Americas, 17 in EMEA, 15 in the U.K. and 6 in Asia Pacific. Operational support staff headcount decreased by 4 in the quarter, and as a result, our fee earner to operational support staff ratio increased to a new record of 79:21. At the end of December, the group had a record 6,116 fee earners and 1,656 operational support staff, giving a record total headcount of 7,772. This fee earner headcount and gross profit chart illustrates both our gross profit at reported rates and our record fee earner headcount. The last column on the right shows the quarter in constant currencies to enable comparison with Q4 2017. I will now hand you over to Steve who will take you through the rest of the presentation.

[Stephen J. Ingham]

Thank you, Kelvin. I will start with a brief overview of our regional performance before presenting each region in more detail. As Kelvin has said, gross profit in the fourth quarter grew 15.4% in constant currencies, our highest fourth quarter growth rate for 8 years. Our Large, High Potential markets, now representing 33% of the group, grew 25% collectively in the quarter and all individually delivered a record year. Our largest region, Europe, Middle East and Africa, which represented 49% of the group, grew 13.9% and delivered a record quarter. While many countries in this region performed strongly, the standout performance was from Germany, up 28%, a fourth consecutive quarter of over 25% growth. This was driven by our Interim business, which grew 44%. Asia Pacific, 20% of the group, delivered growth of 22%, with strong performances in both Asia and Australasia. The U.K., 16% of the group, where market conditions remain challenging, delivered a second consecutive quarter of growth, up 2.1%. The Americas, 15% of the group, was again our fastest-growing region, up 29.2%, with all countries achieving growth of over 20%. Across the group, 20 countries achieved growth of over 20% and 23 delivered record years. Foreign exchange movements improved our reported performance by 0.4 percentage point in the quarter. Moving to each of our 4 regions and starting with the largest, Europe, Middle East and Africa, which delivered a record quarter. With a headcount of over 3,000, EMEA delivered its 18th consecutive quarter of double-digit gross profit growth, up 13.9% against a tough comparator of 19.3% in Q4 of 2017 with 5 countries delivering growth of over 20%. Michael Page, 55% of EMEA, grew 13%, while Page Personnel grew 15%. France, now our largest country, representing 17% of the group and 1/3 of the region with over 700 fee earners, grew 10% and delivered a record quarter. This was despite the impact of a tough Q4 2017 comparator of 28% and the disruption from the gilet jaunes protest. Both Page Personnel and Michael Page grew at similar rates. Germany, 8% of the group, grew 28%. In our contracting business, Michael Page Interim, now 20% of Germany, our sustained investment in fee earner headcount, up 42% year-on-year, delivered growth of 44%. Benelux grew 13% with the Netherlands up 15% and Belgium delivering a record quarter. Southern Europe grew 16%, and Spain, 5% of the group, grew 10%, with a marginal decline in Catalonia, offset by strong growth elsewhere. Italy and Portugal also delivered strong performances, up 23% and 32%, respectively. The Middle East and Africa, which represented 2% of the group, grew 19%, driven by a record performance in the U.A.E., up 46%. Fee earner headcount grew by 17% in the quarter, mainly in Germany. Our Asia Pacific region grew by 22%. In Asia, 75% of the region and 15% of the group, we grew 21%, a seventh consecutive quarter of double-digit growth. In Greater China, one of our Large, High Potential markets and the group's fourth largest market in Q4, growth slowed to 12%, down from its exceptionally high Quarter 3 growth rate of 31%. While Hong Kong remained strong, Mainland China experienced slowing activity in the quarter as a result of the ongoing uncertainty around trade tariffs. Southeast Asia, another of our Large, High Potential markets, grew 30%, driven by a strong performance in Singapore, up 37%. Vietnam, our fifth and newest country in Southeast Asia, continued to perform to plan. In Japan, where we've increased fee earner headcount by 22% year-on-year, our focus on both the Gaishikei and Nikkei markets continued to bring success with growth of 28%, a third consecutive record quarter. India, where we now have over 120 fee earners, delivered a standout performance, up 79%, following 68% in Q3. Australasia, which represented 25% of Asia Pacific and 5% of the group, grew by 25% in the quarter. Australia's growth continued to accelerate to 25%, up from 17% in Q3. Following our strategic investment in fee earners in 2017 and the opening of a new office in Canberra last year, we saw growth across all our Australian offices. Overall, the region added 6 fee earners in the quarter. The U.K. delivered its second consecutive quarter of marginal growth despite Brexit and political uncertainty continuing to impact confidence. Although market sentiment remained weak, there were areas of good growth. In Page Personnel, which represented 25% of the U.K. and operates primarily in finance and business support, we delivered growth of 12% and a record year. However, Michael Page, which is focused on more senior opportunities, declined by 1%. All regions performed in line with the U.K. average. Fee earner headcounts increased by 15 in the quarter, wholly into Page Personnel. Finally, to the Americas, with a headcount of over 1,300, this was our fastest-growing region, up 29.2% in the quarter. In North America, 9% of the group and 59% of the region, we grew 30%. The U.S., 91% of North America, grew 32%. In the U.S., our Technical disciplines were the strongest performing. Our strategy of diversification both in terms of location and discipline continued with notable performances from our regional offices in Boston, Houston and Los Angeles. Canada delivered its fourth consecutive quarter of double-digit growth, up 20%. Latin America, 6% of the group and 41% of the region, with a headcount of over 800, grew 28%. Brazil recorded a fifth consecutive quarter of double-digit growth and grew 25%. Mexico, the largest country in the region, grew 30%, following our significant investment in fee earners, up 40% year-on-year. The other 4 countries, Argentina, Chile, Colombia and Peru, with collective headcount of over 300, all grew over 20%, and Colombia achieved a record quarter. Fee earner headcount in the Americas increased by 20 in the quarter, mainly into Brazil and the U.S. I will now finish with a brief summary of our fourth quarter results. The group delivered another record quarter with gross profit growth of 15.4% in constant currencies. We saw growth in all 4 regions, and 20 countries achieved year-on-year growth of over 20%. Our Large, High Potential markets grew 25% collectively, following our year-on-year fee earner investment of 20%, and they now represent 33% of the group. We added 58 fee earners in the quarter and now have a record total headcount of 7,772. Our operational support staff headcount decreased by 4 in the quarter. As a result, our fee earner to operational support staff increased to a new record of 79:21. Our financial position remains strong with net cash of around GBP 96 million, in line with our cash position a year ago. We are pleased with the group's 2018 performance and expect full year operating profit to be in line with consensus. As we enter 2019, we are also mindful of the heightened uncertainty regarding the outlook. Headlines of global disruption or political instability such as Brexit in the U.K., the impact of trade tariffs, particularly in Mainland China, social unrest in France and broader macroeconomic uncertainties globally do not encourage candidates to make job moves or for clients to make hiring investments. However, we will continue our strategic investments into our Large, High Potential markets and into markets where we see opportunities for growth. Our focus remains on driving profitable growth as we work towards our Vision of 10,000 headcount, GBP 1 billion of gross profit and GBP 200 million to GBP 250 million of operating profit. Our flexible and diversified business model ensures that we're able to respond quickly to any changes in market conditions. Kelvin and I will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] Our first question today comes from Anvesh Agrawal calling from Morgan Stanley.

[Anvesh Agrawal, Research Associate]

I just got a couple of questions. First, on the U.K., I mean, we are clearly in the very tight labor market and the wage inflation is increasing. So are we reaching a state in the U.K. where even if the uncertainty continues, adoption at some point will -- has to happen. All the senior candidates are kind of happy to sit where they are even if the uncertainty continues for next, let's say, 6 to 12 months? And then second on the headcount addition, can you just comment on the capacity of the business from a headcount perspective? I mean, clearly, there are headwinds to the growth and if we, let's say, go to high single-digit or low double-digit fee growth from here, can you manage that with the existing headcount? And what is the measure you use and terms to see the headcount level? Is it fee per employer or profits per employer? What's the best measure there?

[Stephen J. Ingham]

Okay, on those two. First of all, in the U.K., look, whether there's -- whether the uncertainty becomes clear in the next few months or not, it's fair to say that senior candidates can definitely wait. I think the more financial responsibilities or personal responsibilities a candidate has, the more reluctant they are to make a job move with uncertainty out there, and it is totally understandable. If you've got a mortgage or the cost of children going to school or whatever it is, the reality is, is if you're worried about making a job move, you probably will sit on your hands and wait until you have a bit more confidence and clarity. We have to remember, though, the 25% of our business in the U.K. is Page Personnel who've just come off a record year. Typically, their candidate profile is younger. Often, therefore, with younger candidates, you have less responsibility, and as a result, if they are unhappy with either the job content, the industry they work in, or more importantly, to many, the values of the company they represent, maybe their CSR policy or their policy towards diversity, then they will be influenced to make a job move and they'll make that move anyway irrespective of confidence status in the marketplace. So I think there's some stabilizing factor there between the brands that we operate under, but it's fair to say if we have some sort of clarity in the outlook in the U.K., then we would expect business to improve as a result. In terms of headcount growth, we, I think, have demonstrated in previous cycles we have the capability or the capacity to react very, very quickly. If our growth rate was to reduce to single digit, and to be clear, we don't expect that right now, but if it was, then, of course, we would hope to manage that with the existing headcount. We measure their key KPI through the gross profit they do per fee earner. And whilst clearly, if the market slows, it's difficult to do it with the existing headcount because clients -- if things slow down, it means that clients are probably freezing jobs, they're potentially canceling jobs. And if not, they're certainly taking longer about making decisions, which means that maybe a 2-interview process becomes a 3-interview process, a process that took 2 weeks could take a month. And therefore, clearly, it can slow down the productivity of individuals, but we would expect to do that with the existing headcounts. If things got negative then, then what tends to happen is some of the less experienced consultants struggle, they don't enjoy recruitment and they step away from the industry. If we continue to maintain this level of growth for this year, which is the current expectation if you look at consensus, then clearly we'll add headcount and continue to train them up and try to improve productivity, which is also a strategic objective of all the managing directors and our COO operation here to try and improve the productivity as we continue to grow. So whatever happens, we believe we can react in headcount terms.

[Operator]

Our next question today comes from Steve Woolf calling from Numis Securities.

[Steven John Woolf, Analyst]

Just a couple from me. Firstly, can you outline some of the key areas of exposure in Germany for the end market? And then, secondly, regarding wage inflation, perhaps you've sort of covered off maybe a bit in the U.K., but again, just some key areas maybe with regard to Germany, sort of Australia and maybe the U.S. as to where maybe they're contributing to some of the growth there.

[Stephen J. Ingham]

Yes, I mean, in Germany, to be clear, we've got a fairly wide exposure to all industries, but no dependence on one industry and I think that's important. Clearly, for example, the automotive industry is faced with some challenges at the moment. We're not that dependent on the automotive industry, particularly in Germany, because it's fair to say their requirements, particularly in the contract field, are for very large volumes. And as you're aware, whilst our contracting business is having record performances at the moment and growing in Q4 at 44%, we're not at the stage in terms of size and capacity to be managing the sort of volumes that industry requires. And so we are not dependent on large automotive clients. So typically, it's a wide range of industries. It's a wide range of job types as well in that we do everything from accountancy through to sales and marketing with engineering and technology -- technical disciplines in between and also wide range of geographies. So we think we've got a diverse business, and it's right across all of that, that actually we've seen good growth last year in Germany. And at the moment, all KPIs, et cetera, have not changed to indicate otherwise. In terms of wage inflation, it's difficult, Steve, as you would appreciate. The underlying wage inflation we typically see as salaries change at the beginning of the year. Most people get a salary review around now and it takes us a while to see exactly what people are getting. You take Page, we give everybody a salary review in their appraisal in January and that comes through later when they start to -- when candidates typically are updating us in February and March. But if you look on our own staff, roughly speaking, it's 2%. And that's, roughly speaking, what we're seeing in the markets you asked about. However, clearly, if we're helping people to move jobs, people don't typically move jobs for 2%. They move for a lot more hopefully. And there, depending on the profile of the individual and the sector and so on, it can be anywhere between 5% and 15%. Clearly, it's a supply and demand there. And if a particular skill, you mentioned in the U.S., for example, we do a lot of work in the Property & Construction area, if a particular firm wants a project manager that's relevant to the project they've got and if they're difficult to find, then, frankly, wage inflation can be as high as 15% to land the person to manage that project. They're time constrained and so on. So we get high spots. It's fair to say that in some of those markets, in some sectors, the average could actually, between the underlying and the people making job moves, could be as high as 5%. But I think in February, March, we'll start to see the overall sort of global being low single digit. Hope that helps.

[Operator]

[Operator Instructions] Our next question is from Rahim Karim calling from Liberum.

[Rahim Nizar Karim, Research Analyst]

Two questions, if I may, the first is just on headcount. Good growth in the fourth quarter, obviously kind of slower than we saw in the third quarter and just wondering if there was anything that we can take in terms of leading indicator for the full year '19 and if you could give us any guidance perhaps, that would be helpful at this stage. And then the second was just on cash. A good performance, but slightly weaker than perhaps I'd been anticipating. Is there -- was there anything, in particular, that we should be aware of that perhaps resulted in that performance?

[Stephen J. Ingham]

Okay, Rahim, I'll tackle the first one and Kelvin can tackle the second. Look, typically, our headcount does grow slightly slower in Q4 anyway as we near the end of the year. So that does account for some of it. I think it's fair to say the headlines and our own caution, as we closed the year off, which has been a very successful year, probably reflects the rest. So clearly, we're -- our own management who make the final decisions over hiring somebody into the business, they are aware of the headlines that we all read. And clearly, the more concerned that they read into those headlines, then probably the more anxious they are about hiring. And that's exactly the behavior we talk about with our clients and it's reflected on our own headcount growth. That said, in terms of our expectations for this year, which clearly could change throughout the year depending on what actually happens and how some of these headlines play out, our own expectations going forward that, roughly speaking, our headcount would probably grow around 500 people in 2019. Now that's as we sit here today with the KPIs that we're seeing today. And it's fair to say that we didn't see anything in December that we didn't see throughout the course -- or throughout last year apart from the markets we mentioned, Mainland China and perhaps some concerns right at the end of December in France. So nothing alluding to any reason at the moment why that won't be the case in 2019.

[Rahim Nizar Karim, Research Analyst]

Sorry. Can I just check, is that fee earners or total headcount?

[Stephen J. Ingham]

Fee earners.

[Rahim Nizar Karim, Research Analyst]

The 500, fee earners.

[Kelvin Stagg]

On the cash -- I think actually on the cash, you are slightly right. We were expecting to be a little bit higher on cash at the end of the year. I wouldn't read anything particularly into it. We had some timing on temp payrolls, that just in terms of when they went through. With Christmas and the timing that Christmas had meant that we had quite a large outflow. We had a sizable temp and contracting business nowadays around the world and it just actually fell slightly unusually that we ended up with a fair outflow in the last couple of weeks before Christmas. I think you'll probably find some of that flows back in, in the beginning of this year. And so actually, yes, somewhere, I don't know, maybe GBP 5 million or GBP 6 million higher is probably a more natural endpoint.

[Operator]

Rahim's line has been disconnected. Our next question is Matthew Lloyd from HSBC.

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

A couple of questions. Obviously, the big concerns in the market have sort of colored some of the questions towards sort of German automotive and yellow vests. A couple of questions. So are any of the other markets showing any sort of signs of slowdown for you in terms of early temp order intake or exit rate or anything that should sort of heighten any concerns? Or are they a bit more stable? And then a sort of slight follow-up question, same basic theme, are there any bits that are surprisingly good?

[Stephen J. Ingham]

So question one, the short answer, Matthew, is no. I mean you can imagine our heightened anxiety when there are so many headlines that are seemingly negative. We are all over it, in our language, and clearly, have close contacts with all of the regional managing directors. And to remind everybody on the call, there isn't a regional managing director that I've got that hasn't got 20-years-plus experience in this market. And therefore, they typically are watching for the signs up and down. And it's fair to say that we haven't seen anything. I would counter that by saying it's been Christmas, no surprise to all of us, and therefore, it is a slightly more difficult time for us to see the signs than it is in a typical -- in the middle of a typical quarter or the end of any of the other quarters throughout the year. Any bits that have been particularly good? Well, I'll highlight a few that we were particularly pleased with, I don't think it's been a surprise. Australia has been a steady improvement throughout the year. I think we were quite bold at the beginning of last year to say we know what we're doing is the right thing. We're very confident in where we'll get to. It's been a delight to obviously see them finish the year with 25%. Southeast Asia, it's fair to say that we're getting mixed results from other players in our market around Singapore. And therefore, it's great to see them have an amazing year and finish so high with 37% growth. So I think that's probably been a surprise when we know that some other markets have struggled, some other players have struggled. And the other one, which I think is, again, good for us, good reassurance around our strategy is India. And it's not one that gets talked about a lot, we haven't mentioned a lot. But clearly, their growth rate was astronomic, to say the least, in Asia. Now we are relatively small with 120 full fee earners at the moment, but the sort of growth rates we're now seeing, the level of profitability that we have in India, we operate in 2 cities, in Mumbai and Gurgaon, which is Delhi, with a view that potentially we'll start to look at second tier cities later this year or the following year. But this one, we believe, could offer the group the really exciting potential going forward. And I suppose if I had to pick one country with surprising growth, as you asked, that's probably the one I would highlight.

[Operator]

[Operator Instructions] We have no further questions registered so I'll hand back to you, Kelvin.

[Stephen J. Ingham]

Okay. Well, look, hopefully, any questions reflect the clarity of the statement. As there are no further questions, thank you for all joining us this morning. Our next update to the market will be our 2018 full year results on the 6th of March 2019 and our first quarter 2019 trading update will follow on the 10th of April. Thank you, everyone.

[Kelvin Stagg]

Thank you.

[Operator]

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