Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to the PageGroup Quarter 4 and Full Year 2019 Trading Update. My name is Kieran, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to your host, Kelvin Stagg, to begin. Kelvin, please go ahead.

[Kelvin Stagg]

Good morning, everyone, and welcome to the PageGroup Fourth Quarter and Full Year 2019 Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and I have with me Steve Ingham, Chief Executive Officer. I will now present the headline numbers and the financial review before handing over to Steve for the regional review, summary and an outlook.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 and which will also be available on our website following the call.Trading conditions deteriorated in the quarter with all our regions impacted by heightened macroeconomic and political uncertainty to a greater or lesser extent. Consequently, the group delivered gross profit of GBP 205.6 million in the quarter, a decline of 0.4% and down from growth of 2.1% in Q3. Despite the challenging trading conditions, it was a record year for the group with gross profit of GBP 856 million and growth in both constant currency and reported rates of 5%. 19 countries delivered record years.During the quarter, foreign exchange had an adverse impact on gross profit, which led to a larger decline in reported rates of 2.6%. In monetary terms, foreign exchange movements decreased gross profit by around GBP 4.6 million. For the quarter, Michael Page declined 0.1% and Page Personnel declined 1%. We ended the year in a strong financial position with net cash of around GBP 93 million.I will now take you through the financial review. In the fourth quarter, reflecting the heightened uncertainty in many of our markets, permanent recruitment declined 3% in constant currency while temporary grew 7.5%. Our temporary businesses in Asia Pacific, EMEA and Latin America all delivered growth. As a result, our ratio of permanent to temporary gross profit reduced to 74:26 compared to 75:25 the previous year.In Michael Page, permanent recruitment represented 82% of gross profit, down from 83% in Q3. While in Page Personnel, it was less at 54%, also down from 56% in Q3.Looking now at our gross profit by the disciplines in which we operate. Accounting and Financial Services, which represented 35% of the group, declined 0.4%. Our disciplines outside of Accounting and Financial Services represented 65% of the group collectively in the quarter, up from 64% in Q3 and reflecting the continuing success of our diversification strategy.Our Professional Services category, representing 24% of the group, declined 2%.Our Technical discipline category, which also represented 24% of the group, declined by 0.6%.And finally, our Marketing, Sales and Retail disciplines, representing 17% of the group, grew by 2.2%.Having added 619 fee earners in 2018, our fee earner head count reduced by 35 in the first 3 quarters of 2019. During the fourth quarter, our fee earner head count fell a further 54. Fee earner head count reduced in response to the heightened geopolitical and macroeconomic uncertainty seen in many of our markets, most notably in Greater China and the U.K. However, we continued to invest in markets where we saw the greatest growth, such as the U.S. Our flexible business model enables us to react quickly to changes in market conditions. We can grow our head count rapidly in a strong market or in more challenging conditions use our staff attrition to adjust our head count lower, focusing on productivity and conversion. Operational support staff head count decreased by 37 in the quarter as several of our global transformation programs, particularly the implementation of our new Global Finance System were completed. This resulted in our fee earner to operational support staff ratio remaining at 78:22. At the end of December, the group had 6,027 fee earners and 1,671 operational support staff, a total head count of 7,698.This fee earner head count and gross profit chart shows the flattening of both our gross profit growth rate and fee earner head count. The last column on the right shows the quarter in constant currency to enable comparison with Q4 2018.I will now hand you over to Steve for a regional review, summary and outlook.

[Stephen J. Ingham]

Thank you, Kelvin. I'll now give a brief overview of our regional performances before presenting each region in more detail.With the group impacted by heightened macroeconomic and political uncertainty, gross profit declined in the fourth quarter by 0.4% in constant currencies against a tough comparator of 15.4% the year before. Our Large, High Potential markets, representing 34% of the group, grew 4%, collectively, with challenging trading conditions in Greater China and Southeast Asia impacting the growth rate.In our largest region, Europe, Middle East and Africa, which represented 50% of the group, we grew 2.3%. This was below our quarter 3 growth rate of 5.6% with increased macroeconomic and political uncertainty continuing to impact confidence.Asia Pacific, representing 18% of the group, declined by 7.9%, in line with Q3. Trade tariff uncertainty continued to impact confidence in Mainland China, while our business in Hong Kong was disrupted by the protests.The Americas, representing 16% of the group, was again our fastest-growing region, up 5%, with growth in both North and Latin America.Finally, in the U.K., disruption from Brexit impacted market sentiment with gross profit declining 4.8%, broadly in line with Q3.Moving now to each of our 4 regions and starting with the largest, Europe, Middle East and Africa, which represented half of group gross profit. With a head count of over 3,000, we delivered growth of 2.3% in constant currencies. Growth in Michael Page, 55% of EMEA, was slightly stronger, up 4%, while Page Personnel was flat.In France, our largest country in EMEA, representing around 1/3 of the region and 17% of the group, we grew 1% with confidence impacted by increased macroeconomic uncertainty as well as the recent large-scale strikes.Germany, 9% of the group, grew 16%, with our technology-focused contracting business, Michael Page Interim, now 26% of Germany, delivering another record quarter and growth of 50%.Benelux grew 6% with The Netherlands flat and a standout performance from Belgium, delivering growth of 17%, which was a record quarter.Southern Europe, also impacted by political and macroeconomic uncertainty, grew 2% with Italy and Spain delivering growth of 3% and 2%, respectively. The Middle East and Africa, which represented 2% of the group, declined 3%, with the U.A.E. flat and tough trading conditions in Africa. Fee earner head count in the region declined by 9 in the quarter.Our Asia Pacific region, which represented 18% of group gross profit, declined by 7.9%. In Asia, 76% of the region and 14% of the group, we declined 8%. In Greater China, we were down 14%. Mainland China declined 7%, an improvement on the decline of 27% in Q3 as the comparators become easier and our business adapted to the more challenging trading conditions. However, our Hong Kong business continued to be impacted by the social unrest and declined 27%, in line with Q3. Southeast Asia was down 4% with strong growth in some of our newest countries, namely, Indonesia, Thailand and Vietnam, offset by a decline in Singapore of 19%, albeit against a tough comparator of 37% the year before.Elsewhere in Japan where we continued to focus on both the Gaishikei and Nikkei markets, gross profit declined 1%, down from growth of 5% in Q3 where trading more challenging amongst multinational clients.In India, where we've invested heavily in fee earners, up 28% year-on-year to around 160, we delivered a strong performance, up 13% despite a particularly tough comparator of 79%.Australasia, which represented 24% of Asia Pacific and 4% of the group, declined 10%. Australia was down 7% against a strong prior year comparator of 25% with the challenging conditions in New South Wales continuing to offset good growth elsewhere.Overall fee earner head count in the region declined by 31, mainly in Greater China.The Americas, which represented 16% of group gross profit with a head count approaching 1,400, was our fastest-growing region, up 5%. This was despite a particularly tough prior year comparator of 29.2%. In North America, representing 10% of the group and 60% of the region, we grew 5%. In the U.S., 95% of North America, we grew 10%. Growth was strongest in our offices outside of New York, which was impacted by a weaker financial services sector.Latin America, 6% of the group and 40% of the region with a head count of around 800, grew 5%. Mexico, our largest country in Latin America, grew 9%. Brazil continued to perform well and grew 4%, driven by Page Personnel. Our other 4 countries in Latin America with a combined head count of over 300 grew 4%, collectively. Record performances from Argentina, Colombia and Peru were partially offset by the challenging trading conditions in Chile, which was affected by political and social unrest.Our fee earner head count in the Americas increased by 13 mainly into the U.S. and Mexico.Finally, the U.K., 16% of the group, declined by 4.8% with disruption from Brexit increasing uncertainty and impacting confidence. Page Personnel, which represented around 1/4 of the U.K., suffered from client uncertainty impacting job flows. As a result, we declined by 4%. Michael Page, which is focused on more senior opportunities, continued to be impacted by lower levels of candidate confidence and declined by 5%. Most disciplines across both brands experienced difficult trading conditions, though there were some areas of growth, such as marketing, secretarial and technology.Fee earner head count decreased by 27 in the quarter, predominantly in our Michael Page business.I will now finish with a brief summary of our fourth quarter results and an outlook. The majority of our regions were impacted by increased macroeconomic and political uncertainty with gross profit declining 0.4% in constant currency. During the quarter, we decreased our fee earner head count by 54 mainly in Greater China and the U.K. Our operational support head count decreased by 37 as several of our global transformation programs, particularly the implementation of our new Global Finance System, were completed. Our financial position remained strong with net cash of around GBP 93 million. Despite the tougher trading conditions in Q4, we expect full year 2019 operating profit to be in line with our previous guidance of GBP 140 million to GBP 150 million.Looking ahead, the challenging trading conditions experienced during Q4 across the majority of our regions are expected to continue. There are challenges in EMEA, including social unrest in France and heightened political tensions notably in the Middle East. Asia Pacific continues to be impacted by trade tariff uncertainty in Mainland China, the protests in Hong Kong as well as the fires in Australia. In the Americas, the weak financial services market in New York as well as the social unrest in Chile are expected to continue to impact the region's results. In the U.K., Brexit-related uncertainty is anticipated to be ongoing during 2020.The group was impacted by adverse foreign exchange movements during Q4, decreasing our Q4 reported gross profit by 2.2 percentage points or GBP 4.6 million. Looking forward, we expect that these foreign exchange headwinds will persist or possibly increase. Our flexible business model enables us to react quickly to changes in market conditions. We can grow our head count rapidly in a strong market or, in more challenging conditions, use staff attrition to adjust our head count lower and focus on productivity and conversion.We're clear market leaders in many of our markets with a highly experienced senior management team, which we believe positions us well to take advantage of all opportunities during 2020.Despite the tougher trading conditions, we will continue to focus on driving profitable growth while progressing our strategic investments towards our vision of 10,000 head count, 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.

[Operator]

[Operator Instructions] Our first question comes from Andy Grobler from Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Three quick ones, if I may. Firstly, in the U.K., clearly, Q4 was difficult and while saying we've got certainty would be going a bit too far, we do have a bit more clarity now. What are you hearing back from some of your clients in terms of their hiring expectations? One of your peers suggested that there was a little bit of confidence edging back into the market and the REC data suggested the same. Secondly, on cost savings through 2020. Can you just -- I know this is a trading update, can you just remind us what costs kind of naturally fall out through 2020?And then, thirdly, on Germany, where despite the tough macro backdrop, you had a really good quarter. What is the momentum? And what is your year-on-year head count growth going into 2020 to drive any further growth?

[Stephen J. Ingham]

Okay, Andy, it's Steve. I'll take question 1 and 3, and Kelvin can handle the cost savings. Look, it's very early days. I mean we've had just over a week of trading since we've been back from Christmas in the U.K. I think the logic would be that having gone through a difficult quarter with, as you say, some uncertainty leading up to the election, you'd like to think that, that would create a pent-up need and 1 or 2 clients, therefore, will release vacancies they may not have released during the quarter. It's really too early to say that. But yes, I'd be a little optimistic that, that may happen. I don't think we're out of the woods yet in terms of having certainty, as you say. I think the Brexit uncertainty will continue for some time. So I would hope things will be an improvement on Q4 going into the first quarter but not significantly.On question 3, yes, we were very pleased with the performance of Germany throughout last year. I think, as I've said before, we were predominantly a perm business pre-2009 when we decided to focus on Page Personnel and temp and also contracting in Michael Page Interim. And as a result, I mean, we were coming at it from a very small base and so we focused on SMEs and we focused on the technology market where we had good expertise in the perm market, and I think that's helped us. Where the economy hasn't been particularly strong, we've been focused on smaller clients, and many of them. And I think that builds up a skilled base of selling, which allows us to constantly open new doors and develop client relationships and that's helped us build what we feel is market share, particularly in that contracting market. We aren't a player in the very large contracts, particularly in the automotive sector, and that's probably the hardest hit sector in Germany. So we've probably avoided some of the pain that maybe others have felt. So delighted with our performance. Again, I'm speaking to our head of Germany actually later today. It is only really 8 or 9 working days into the year. So far, nothing tells us that we won't continue, but it is, I would repeat, only a few working days into the year. So hopefully, we start the year with good momentum. What will happen will unfold, I guess, as the months tick by.Sorry, on fee earners, I mean, we have grown our head count in Germany and we'll continue to invest. It's one of our high potential markets and we see a lot of potential. And clearly, with growth of 50% in the contract market and growth in perm as well, we will have to add fee earners throughout this year if that continues. But we're doing it cautiously. I mean as they get to the end of every month and we see mid- to high teen growth, knowing the performance of some of our peers, they are certainly not complacent. So we hire where we need to, to sustain the growth rate that we have, but we're not hiring ahead of that rate, if that makes sense?

[Andrew Charles Grobler, Analyst]

Yes. Okay. Thank you.

[Kelvin Stagg]

Coming back to you on cost savings. The main aspect of cost savings this year will come from the ending of some of our transformation programs. So we saw some of the people fall away that have been helping us to implement the Global Finance System. The 37 decrease in nonops that we saw during Q4 was primarily related to that. There was also a reduction in our help desk as actually some of these programs have embedded themselves and the number of calls have gone down.The one that we expect to deliver some savings, which I anticipate to be of the order of about GBP 6 million this year, relates to the conclusion of some of the larger infrastructure programs within our IT function, so things like the rollout of Windows 10 in terms of closing some of our data centers, which will deliver some savings over a period of time.

[Andrew Charles Grobler, Analyst]

And is that GBP 6 million, is that a gross number or a net number as of now?

[Kelvin Stagg]

Net.

[Operator]

Our next question comes from Bilal Aziz from UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

Just wanted to clarify the profit bridge for the year ahead. I think you previously suggested you had GBP 6 million of gross savings in 2019 as well. What was the net number that you were able to achieve from those cost savings, just to understand the delta year-over-year?And secondly, can you perhaps break out Page Personnel and Michael Page growth in France, please?

[Kelvin Stagg]

I'll take the cost saving one. I mean, the cost savings within the year were as delivered. I think it's quite difficult within our overall profit numbers to try and gauge the difference between the impact on productivity of the various different macroeconomic and political issues that went on during the year vis-à-vis the cost savings. But the cost savings were broadly as originally expected and delivered.

[Stephen J. Ingham]

In terms of France, for the quarter, Page Personnel and Michael Page grew almost exactly the same, plus 1%. I have to say, though, in the third month of the quarter, we don't typically break out months within a quarter, Michael Page actually grew by more than Page Personnel. And that was, I think, the direct reflection of the strikes, making it -- I mean, the transport strike amongst others, and that made it very difficult for temps, particularly, to get to work so we lost temp hours in what is a very big temp business for us where people literally couldn't get to work, and invariably, more senior candidates still made a lot more effort to get to interviews and so on, so our Michael Page business outgrew Page Personnel. But for the quarter, they were both plus 1%.

[Operator]

Our next question comes from Hans Pluijgers from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

And then looking where you pointed a little bit out for Germany on your KPIs, maybe what the outlook is, could you maybe go through some other regions like -- especially the bigger regions like the U.K. and Continental Europe more in general. So what, let's say, is the development in the vacancy growth over the last, let's say, 2, 3 months and going into Q1? And also what you see over the last quarter in, let's say, the conversion ratio and, let's say, the speed especially from going from a vacancy to replacement?And secondly, could you maybe give us some feeling how you look at the budget for this year? I know you don't give guidance, but I can imagine you're a little bit cautious for this year on budgeting. Could you give some feeling on that?And then, lastly, on -- going back on Germany, you already said you're more focusing on the SME segment, but are there, let's say, any specific jobs you are doing quite well? You already looked focused on -- indicated on technical positions, technical. Are there any specific job categories you've been focusing on and where you could, let's say -- can still see handsome growth going forward?

[Stephen J. Ingham]

Well, as I keep saying, we are only a few days into the new year. I mean in terms of how do we track at the end of last year in terms of job flow, fairly consistent. So the job count has not gone up, but it's not gone down either. What we have found that, in particular, markets like France probably the most impacted by some social unrest and the strikes, what we found was that the time to hire was extended. So where it might have taken a few weeks, 4 or 5 weeks to place somebody in a permanent role, it just took longer and clients were less decisive and insisting on another interview or whatever before making a decision. We didn't see jobs canceled or frozen.So job flow at the moment, so far this year, it's too early to call. Like I said, most people got back last Monday, and we're only Tuesday of the following week. So with 7 working days behind us, it's difficult to tell. At the moment, we're comfortable with how we're traveling in January. But we haven't even done a mid-month estimation of where we'll end at the end of the month, so it is very, very early days. But there's no red flags in terms of concern and so on.As I said before, in Germany, yes, it is the SME market. It's technology rather than technical positions that we're predominantly focused on in our Interim business, which has done particularly well, plus 50% in Q4. And so it is IT roles in a contracting fashion that's growing the strongest in a wide selection of different industries.

[Kelvin Stagg]

Maybe I can talk to the budget question. I mean we did our budget as we always do and started in September, October time last year to land a number in December. I'm going to say by the time that we'd really cooked that number in the beginning of December, it very much looked like it was probably out of touch. There were a lot of things that changed during Q4. So we've actually reforecasted the whole business last week to come to another set of numbers that are probably a little bit more in tune with the current macroeconomic and political tensions we see around the world. I mean, in short, we ended last year broadly flat, down 0.4%. I think as of today, it's difficult to look into a crystal ball and see anything that's particularly adrift from that. So we probably view today the consensus, which implies a very small amount of top line growth and broadly flat in terms of conversion rate on the current year, is where we would be until we see otherwise. And we, as we say within the statement and we always say, have a very flexible business model that allows us to adjust our head count and adjust our costs to the revenue that we see at the time, and we'll continue to do that hopefully as we go through the first quarter. And probably through into April, May time, we'll have a better view on some of our bigger markets, particularly the U.K. post the elections; particularly China, post the Chinese New Year and we'll have a better picture. But we're broadly comfortable with where consensus sits today, and as I say, there's a lack of visibility and very early in the year.

[Operator]

Our next question comes from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I've got 3 questions. Firstly, on Brazil where the growth rate has kind of remained positive but the run rate has slowed down in Q4, so maybe if you can just comment what has caused there? Is it -- and what you're seeing in -- are there kind of early signs that Q1 will be better again?And then can you just give an idea in terms of number of contractors or temps that you are placing in Germany, just the absolute number?And then, finally, just to clarify your point on conversion margin, Kelvin, when you said you expected to be flat for FY '20, I assume that's underlying and does not include the expected cost savings?

[Stephen J. Ingham]

Well, to tell you whether Brazil will be better in Q1 would be quite a prediction. Q1, obviously, is a more challenging quarter generally for the region because of Carnival. But there's nothing to say that Brazil wouldn't see another strong month -- a strong quarter for us. So I don't think you can read anything into it particularly slowing in Q4. I mean, politically, it's improved throughout 2019, but not to the point where there isn't some social unrest and some concerns going forward. But I think momentum at the end of the year was good. But like I say, it's our weaker quarter of the year.In terms of contractors, we don't disclose the exact contracting number, but it's growing, both in temp and contracting in Germany, and we are comfortably north of our objective of being over 1,000.

[Kelvin Stagg]

Yes. Coming back to the conversion number, no, I mean, the GBP 6 million, obviously, is an improvement. I think this early in the year, strange as it sounds, that's possibly slightly in the rounding. I think that the macro effect of some of these other political and socioeconomic issues that are going on would mean that that's probably just going to -- only to become a benefit as we go forward or get eaten up by those issues. But we will deliver the cost savings here regardless of what goes through on the underlying profit.

[Operator]

Our next question comes from Paul Checketts from Barclays Capital.

[Paul Daniel Alasdair Checketts, Director]

I've got 2 as well, please. There's just 1 country I wanted to -- that we haven't covered that I was hoping to ask about that, that was Mexico, which slowed quite materially. Can you just give us a feel for what you're seeing there? And then a more general one on Asia. If you look at the slowdown over '19, I suppose, is it more of a multinational company issue, Steve, and the local businesses are holding up better? Or is it a bit more widespread?

[Stephen J. Ingham]

Yes. I mean, just on Mexico, I think it's nothing more than a comparator, a very tough comparator. If you look back to 2018, we were growing in the mid-30s in Q3 and high-20s, 27.7%, in Latin America in Q4. So again, I wouldn't read much into it. Our Mexican business is doing well. We're still hiring into it. And we also benefit there from a reasonable amount of RPO business as well and sometimes projects finish and staff and volumes aren't consistent throughout every quarter, so I wouldn't read anything into it. We're still very confident in Mexico and Latin America as a whole with the exception of Chile, where, clearly, there's been some issues in Santiago.In Asia, yes, I mean, it's not completely confined to only multinationals, but that is where the top of the sentiment exists with some multinationals just cautious on their investment in head count. And we -- it's a difficult one to predict exactly what will happen this year. So far, for example, it does feel like it's quieter in Hong Kong talking to them, but equally, they are anxious as to whether the unrest we saw in the second half in Hong Kong continues through Chinese New Year. Let's hope it does. But clearly, if things do settle down, then Hong Kong typically has a track record of recovering quite quickly. For us, it's a very, very big business. So when a few multinationals hold back because they're cautious about investment, that can hurt us quite quickly. And looking at the growth rate we were achieving in the first half of last year in a market like Hong Kong and then what we experienced, which is unpredicted in the second half, that would have taken GBP 6 million of GP away and probably GBP 2 million of OP of our business and it wasn't predicted. So -- but equally, if it comes down, then clearly, we'll be in a better position at the midpoint of this year.And that concern that some multinationals have isn't just confined to China. I mean it's the same, to a degree, in Japan and in Singapore. It's -- and we are dependent on both local companies as well as multinationals. So if a few of them take the foot off the gas in terms of investment, we feel that can equally change very quickly should other factors change this year.

[Operator]

[Operator Instructions] Our next question comes from Steve Woolf from Numis Securities.

[Steven John Woolf, Analyst]

Guys, just one for me. Regarding your balance sheet position and sort of references you made before to the GBP 50 million sort of cash buffer position, I guess a lot of the capital returns before you've made clear was sort of predicated on the market outlook at that point. Do you still stick to that GBP 50 million? Or this position is subject to review by the Board, et cetera?

[Kelvin Stagg]

Steve, yes, I think there's nothing really that would cause us to move away from that. In terms of cash flow, we've got a healthy cash flow. We ended up with a healthy balance at the end of the year. As you know, if we go into a sort of a slowdown, we will see some of our temp books unwind and we'll actually end up with a greater inflow of cash. So -- but we don't, at this time, feel that we need to hold more cash. We've got group level facilities that would carry us through any short-term challenges, and we don't currently have any downstream fundings that would take that any lower. So today, GBP 50 million is fine and we'll continue to assess in August, as we always do, what we think would be the right way to return excess capital to shareholders, which more recently has been by way of a special dividend. And depending on where the share price is and what our shareholders want, we will make that decision in August again.

[Operator]

[Operator Instructions] We have no further questions on the phone lines. I'd like to hand back over to you.

[Stephen J. Ingham]

Thank you. As there's no further questions, thank you to all of you for joining us this morning. Our next update will be our 2019 full year results on the 5th of March 2020, and our first quarter 2020 trading update will follow on the 15th of April. Thank you, everyone.

[Operator]

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