Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone, and welcome to the PageGroup Q4 Trading Update Call. My name is Seth, and I will be the operator for your call today. [Operator Instructions]I will now hand the floor over to Kelvin Stagg, CFO, to begin. Please go ahead.

[Kelvin Stagg]

Good morning, everyone, and welcome to the PageGroup Fourth Quarter and Full Year Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and on the call with me is Steve Ingham, Chief Executive Officer.Although I will not read it through, I'd just like to make reference to the legal formalities that are covered in the cautionary statement in the appendix 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 Q3 continued into the fourth quarter. Consequently, the group delivered gross profit of GBP 246.8 million in the quarter and GBP 879.1 million for the full year, a record quarter and year for the group. Against Q4 2020, we grew 55.1%. Given the magnitude of the impact of COVID-19 in 2020, we are comparing our results in constant currencies throughout this presentation to our previous record gross profit year of 2019. Compared to Q4 2019, we grew 24.2% in constant currencies, an improvement on the 12.9% in Q3.Reflecting the continued improvement in trading conditions, in Q4, we increased our fee earner headcount by 310. This made a net 937 for the year. As such, our fee earner headcount has now returned to our pre-pandemic level at the end of 2019. Our operational support headcount rose by 50, which improved our ratio of fee earners to operational support staff to 78:22. Overall, the group had 6,082 fee earners on a total headcount of 7,838.We have a strong balance sheet with net cash at the end of December of around GBP 152 million, having paid out GBP 100.2 million in dividends to shareholders on the 13th of October.I will now provide a brief financial review. In line with previous quarters, trading was stronger in permanent recruitment compared to temporary. Overall, permanent recruitment grew 30.5% against 2019, with temporary up 6.9%. Reflecting this, our ratio of permanent to temporary gross profit was 77:23.In Michael Page, permanent recruitment represented 84% of gross profit, while in Page Personnel, it was less at 58%. Michael Page continued to be more resilient across both permanent and temporary recruitment, reflecting the more favorable conditions and stronger trading in higher income roles.Reflecting the continued improvement in trading conditions, in Q4, we added 310 fee earners, giving a total of 937 in 2021. Within these 2021 additions were around 700 experienced hires to complement the 400 experienced hires we added in the second half of 2020, giving a total of over 1,100. Our fee earner headcount has now reached the pre-pandemic level at the end of 2019. Our operational support headcount rose by 50 in Q4, improving the ratio of fee earners to operational support staff to 78:22. Overall, the group had 6,082 fee earners and a total headcount of 7,838.This fee-earner headcount and gross profit chart shows the unprecedented scale of the decline in group gross profit in 2020 and the comparison to the global financial in 2008. It shows how we chose strategically to maintain and invest in our platform, which has driven the sharp recovery seen through 2021.Productivity is now at record levels, up 25% on Q4 2019. This was driven by improved trading conditions, a shorter time to hire facilitated by video interviewing, investments in new systems, wage inflation and improvements in fee rates as a result of the high demand and short supply of candidates.I will now hand you over to Steve for a regional review and a summary.

[Stephen J. Ingham]

Thank you, Kelvin.The group saw a significant improvement in Q4, which was up 55.1% on 2020 and 24.2% on 2019, our previous record year. We exited December with our strongest growth rate of the year when compared to 2019, with improvements in all regions and most countries.Our 5 Large, High Potential markets of Germany, Greater China, Latin America, Southeast Asia and the U.S. delivered standout results in the quarter, growing 41% collectively. This was a record performance for the category, with 3 of these markets delivering record quarters. We now have over 2,400 fee earners across these 5 markets, which compares to around 800 back in 2010, coming out of the global financial crisis.In our largest region, Europe, Middle East and Africa, which represented 50% of the group, we grew 21.2% on Q4 2019, up from 9.9% in Q3. Against 2020, this represented growth of 48%.Overall, conditions continued to be more favorable in Michael Page, which is focused on higher income permanent recruitment and was up 35% for the quarter against 2019. Conditions were more challenging in Page Personnel, which is focused on lower level recruitment, with a higher proportion of temporary up 6% overall.France grew 3% against 2019, a record quarter and a significant improvement on the decline of 8% in Q3. Page Personnel, representing around 60% of France, was impacted more significantly by the lockdowns.Germany, the group's third largest market, delivered a record quarter, up 53% against 2019, with strong growth and record performances in all 3 brands.Our primarily technology-focused Michael Page Interim business, continues to be the best performing, but we also saw strong growth in Michael Page and Page Personnel. We now have approaching 600 fee earners in Germany, an increase of 16% on Q4 2019, which positions us well for continued growth in this Large, High Potential market.Belgium, the Netherlands, Italy and Spain all grew strongly, with Poland up 93% for the quarter versus 2019. 9 countries in the region delivered record quarters despite the seasonal impact of Christmas.In Asia Pacific, representing 20% of the group, Q4 gross profit grew 33.8% on 2019, up from 20.4% in Q3. Against 2020, this represented growth of 48.7%. In Asia, 16% of the group, we grew 45%.In Greater China, 8% of the group, we grew 32%. Mainland China was up 46%, with good growth amongst both domestic and international clients. Hong Kong, which has been slower to recover than other markets in the region, was up 11%, a significant improvement on the growth of 1% in Q3.Southeast Asia delivered a third consecutive record quarter and was up 58%, with Singapore up 36% and the remaining countries in the region up 75% collectively, including record performances for Indonesia, Thailand and the Philippines.Japan was up 44%, delivering another record quarter and a further improvement on the already strong growth of 36% in Q3. India also delivered another record quarter, growing 95% versus 2019. We have over 180 fee earners in this market, which now represents 8% of the region. Australia grew 7%, a notable improvement on Q3, which was down 3%, with the strongest growth in Victoria and Queensland. In the region, overall, 5 countries delivered record quarters in Q4.The Americas, representing 15% of the group, was up 33.3% on 2019, a further improvement on the growth of 24.6% in Q3. This represented growth of 75.7% on 2020. The U.S. grew 28%, with strong growth in all offices, though most significantly in Boston and Chicago. Growth was strong across all disciplines, with the best performances from Property & Construction, our largest discipline in the U.S., as well as Technology.In Latin America, gross profit grew 44%, a record quarter, up from the growth of 22% in Q3. Mexico, our largest country in the region, was up 27%, improving from the growth of 18% in Q3. Brazil grew 41%, up from 27% in Q3. Elsewhere in Latin America, the remaining countries were up 63% compared to 2019 collectively for the quarter, with record quarters for Argentina, Colombia and Panama.In the U.K., representing 15% of the group, gross profit grew 14.1%, a significant improvement from the growth of 1.3% in Q3. Against 2020, this represented growth of 73.2%. Like our other regions, conditions in trading improved as the quarter progressed, finishing in December with our strongest growth rate of the year versus 2019. Our higher salary level-focused Michael Page business was more resilient, up 18%, and Page Personnel returned to growth, up 4% in the quarter.I will now provide a brief summary of our results. I'm pleased to report that 2021 was a new record year for the group. The quarterly improvement we saw in 2021 continued in Q4, with growth in constant currencies of 24.2% versus 2019. Productivity is at record levels, up 25% on Q4 2019. This is due to improved trading conditions, a shorter time to hire facilitated by video interviewing, investments in new systems, wage inflation and improvements in fee rates as a result of the high demand and short supply of candidates. This noticeable improvement and record performance in Q4 was seen throughout the group and was achieved despite the backdrop of continued restrictions or lockdowns in many of our markets.Given the strength of our performance in December, we now expect 2021 full year operating profit to be marginally in excess of our previous guidance of -- in the region of GBP 165 million.We believe that our strategy of maintaining and investing in our platform throughout the pandemic has been key to us achieving the results we're announcing today. This was demonstrated by our investment in experienced hires as well as continuing with our rollout of technology and innovation.Reflecting the continued improvement in trading conditions in Q4, we added 310 fee earners in the quarter, giving a total of 937 in 2021, of which there were around 700 experienced hires. Along with the 400 experienced hires we added in the second half of 2020, we've invested in 1,100 experienced hires since Q2 2020. Our fee earner headcount has now reached 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. We believe this helped us make the right investment decisions in 2020 and 2021 and positions us well to take advantage of opportunities to grow and improve our business.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. However, we're maintaining our focus on driving progress towards our long-term strategic goals.Kelvin and I will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] Our first question comes from the line of Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

Just 3 questions from me, really. First, are you able to give a bit of a flavor on price, volume mix within the growth or just for some color on what sort of wage inflation you're seeing across the business?And the second is, given where the productivity is, how should we think about the conversion margins and headcount investment in FY '22, assuming sort of the momentum in the business remains strong?And then finally, I know it's very early in the year, but any comment on activity or KPIs so far in the new year?

[Stephen J. Ingham]

Well, let me cover off the third one there for you. Look, KPIs and activity have continued where they left off in December. Nothing's changed. The Omicron variant that clearly hit us early December, late November, there was clearly an anxiety around that in the markets and so on. It really did not affect anything in terms of activity or our KPIs. And so yes, we've woken up in January, and people have got back to work either at home or in the office, depending on where you are. And activity levels look strong. So we don't have any major anxiety that suddenly things have changed.

[Kelvin Stagg]

Yes. Start with the first one then in terms of price, volume mix, it is different by market. So probably in the most extreme, it will be somewhere like the U.S., where wage inflation is probably the highest, and that will be exacerbated in certain disciplines such as Technology. I mean, anecdotally, we're seeing people move jobs for very large numbers. But I would have said that wage inflation there is probably going to be something like 20% for people moving jobs in that very high level in technology on the West Coast. I think it's probably not as high as that in places like Europe and the U.K., and it's probably around the 10% or somewhere like that. But it is quite different depending on the roles that you're placing people into than the rest. But there is definitely wage inflation, and there's largely wage inflation throughout all of our businesses.

[Stephen J. Ingham]

The point -- I think the point that Kelvin makes as well is very valid. Wage inflation, which I think you're talking about or asking about, is the broader, wider employees that a company has. We're obviously placing people from one company to the other, and that's what we view as wage inflation. And that gap has just got bigger. So you've got an underlying wage inflation in the overall employment category, which is a much lower figure. But to persuade people to move from one company to another, we are seeing anywhere between 10%, as Kelvin says, in Europe and the U.K. and Australia through to 20%, 25% in some markets where there's particular high demand, short supply like Technology. And that gap has widened significantly, and that clearly gives us an advantage in terms of the fees we charge.

[Kelvin Stagg]

So I'd add to that, in terms of volumes, time to hire has certainly come down, and that is partly as a result of things like video interviewing and the ease of getting people through the process. It's also that, as you see previously in these sort of times, you've got to make decisions fast if you're a client and you're trying to hire somebody because that person is likely to get a number of different offers. And accordingly, we're seeing fee rates harden again, as you would expect, where you get a scarcity of candidates. It's a bit difficult to give you, again, a sort of empirical numbers on that. We tend to see fee rates come off by around 10% -- sorry, 10% over the percentage points that we charge. And you tend to see that recover. I would expect that's probably in the order of what we've seen at the moment.Moving on to your second question in terms of commercial and headcount investment, I think you're likely to see -- and we obviously haven't closed out 2021 fully yet. But you're likely to see that our conversion rate in the second half of 2021 was in the low 20s percentage. Should that continue going forward? Possibly. I think we're likely to see a higher amount of staff attrition in our own people as markets continue going forward, and we're less likely to be able to access the experienced hires that we've probably been hiring recently. Having said that, there's no real reason with wage inflation around to think that productivity is going to drop particularly far.So conversion rate should be pretty healthy going forward. We hired just under 1,000 people net in 2021. I could see why that might continue, but it's so early in the year, and we've not really seen anything apart from a couple of weeks of activity levels. So I think that's probably something that you're -- can come back and ask us at the end of Q1, and we'll be able to give you a better indication of how we've started and, therefore, what we're likely to do in terms of headcount investment.

[Operator]

Our next question is from Andy Grobler from Credit Suisse.

[Andrew Charles Grobler, Analyst]

Three from me as well, if I may. Michael Page continues to outperform Page Personnel. To what extent do you think that is going to be an ongoing sort of permanent difference, just given where markets are? Or would you expect Page Personnel to catch up through '22, '23 as temp books rebuild and, I guess, markets evolve?Secondly, and I guess just adding to the previous question, you split out the 25% productivity growth between those 5 segments. Roughly speaking, how much of that 25% is attributable to time to hire, systems, wages, fee rates and market? And then -- which was probably quite a tricky question.And then lastly, just in terms of candidate behavior, we've had strong demand through '21. Are you beginning to see candidates kind of actively change and look more aggressively to move jobs, given that wage inflation in the 10% to 25% premium they can get on moving jobs?

[Stephen J. Ingham]

No worries. And I think your statement about question 2 is probably true, so that's Kelvin's.Question 1, in terms of Michael Page outperforming Page Personnel. We see that changing and Page Personnel catching up as temp books grow. And I think, particularly with low-end temps -- low-income temps, that probably requires offices to be open. So we'd like to think that as COVID tones down at some point and we can go back to the offices and there isn't a new variant hopefully, then that business would catch up. And certainly, we're already seeing that. You've seen a number of the markets turn positive in Page Personnel, and they are already catching up. So there's no reason throughout this year, and our expectation would certainly be for that to happen.And as you know, the overall conversion rate of Michael Page, Page Personnel is typically about the same in a strong market because our top fee earners tend to be those that actually are in temporary recruitment in a typically good year. So yes, we expect that to catch up. We've already seen evidence of that in '21. We would hope that it happens in 2022.In terms of the third questions -- I'm leaving the second for Kelvin. In terms of candidate behavior, we've not seen any slowdown. And it's true to say what you said, the temptation is there. Candidates are getting phoned. They're being contacted. They're very socially media aware. So they see salary surveys. They read the -- or hear the anecdotal stories of colleagues moving, friends moving and so on, who talk about the salaries they've moved on or the sectors they've moved to and the excitement there. That fuels behavior, of course.It's also true, and I think Kelvin mentioned it earlier about the speed to hire being impacted by video. It also means that the barrier to looking for a job is that much lower. In other words, your commitment to looking for a job used to be that you're going to have to take days off and go for an interview because you have to be face-to-face with somebody the other side of town or even a drive away if you're outside of London. And if you had an analyst interview and it was a 4:00 in the afternoon, you might have to take a half day as holiday. Nowadays with video, the commitment to looking for a job is much, much lower. Sure, yes, I'll go for an interview. Yes, I'll take a look and hear what they've got to say. It's not a huge commitment. So I think candidates' thoughts about moving jobs has just got a little bit easier as well now that video is a part of the game.

[Kelvin Stagg]

Yes. I'll come back and attempt the second question. I think I'll start with, it's almost impossible to fully disaggregate where that 25% of productivity is coming from. I think that we are definitely seeing a hardening of fee rates, and I talked a bit to that one. I mean, our fee rates typically have peaked somewhere around sort of 22%, and they tend to come off somewhere just below the 20% through a cycle. So they don't move massively. They are trending back up a bit. That will -- contributed a bit towards that, and it's different in different markets, obviously, depending on the geography. The highest fee rates will be somewhere like Japan. The lowest fee rates would possibly somewhere like Australia or in Portugal. But within those bands, they tend to move up and down, as I say, by about 10%.I think it's fair to say that our Large, High Potential markets that performed particularly well in the quarter and during the year tend to have typically higher fee rates, apart from maybe Latin America. But in China, in Germany, in the U.S. and in Southeast Asia, the fee rates tend to be higher, and therefore, that would give you a bit of a mix difference.Wage inflation is certainly contributing, and you'd see that more in certain disciplines. I think the fact that Technology is now, I think, about 12% of the group, that tends to have particularly high fee rates and particularly high contribution just because of how scarce the roles are in a number of Technology roles at the moment.And the last one, but I think the one that probably is the biggest contributor is the one that Steve mentioned, time to hire. I mean, actually, in terms of the number of jobs that you can place, typically, a Michael Page consultant would only place about one placement per month. In terms of that moving up into 1.2, 1.5, that's what materially moves the productivity. And so if I -- I would be guessing, but if I was trying to put them in order, I think the time to hire probably has the biggest impact on it. I would expect that wage inflation and fee rates are going to be broadly similar and a lower amount.

[Operator]

Our next question is from Kean Marden from Jefferies.

[Kean Marden, Head of Business Services Equity Research]

So just continuing this theme, but I guess we're getting client questions on it this morning, so that's why you're being -- getting asked on this. So on that 20% to 22% range, Kelvin, you just mentioned, so that's a familiar number for us. But do you have a feeling for the moment about where you sit in that range? So are we sort of 21%, 21.5% or maybe at the top? And I guess, is there a possibility actually that given the shape of current labor markets, that actually you can move beyond the previous 22% peak over the next year or 2? Or is there a natural cap, do you think?

[Stephen J. Ingham]

Well, there isn't a natural cap because, of course, there's a geographic mix in there, Kean. You're right, it tends to average out at about 22% at a peak. But of course, as Germany becomes -- and Asia becomes a higher proportion of the group, the U.S. becomes a higher proportion of the group, the fee rates there are actually higher than they are in the U.K. and France. So as the U.K. and -- comes down, Australia comes down as -- and you've got to remember, Australia was one of our top 6 markets and isn't now, you've got much lower fee rates in Australia and the U.K. than you have in the U.S., Germany and Asia. So the mix effect is that it potentially could get higher. We've also got a mix effect happening at the moment, and that is that Michael Page is doing better than Page Personnel. And clearly, we charge higher fee rates for higher salaried jobs.So again, that is actually helping our average fee rate at the moment. So it sort of depends on brands. Page Personnel doesn't exist in every market and exists far less as a proportion of Asia and North America, for example, than it does in Europe and the U.K. So both of those do have a mix impact on where the average fee rate is. So it should move towards 22%, depending on the, I would say, economic situation we've got. In theory, it could go through 22%. As we've often said, I mean, our average fee rate in Germany is already 25%. In Japan, it's 30%. In the U.S., it wouldn't be much below 25%. So that just gives you an idea. And they are clearly a much bigger proportion of the group.

[Kean Marden, Head of Business Services Equity Research]

Cool. And Kelvin, do you have a feel of where you sit at the moment? So is it sort of that 21%, 21.5%? Or too difficult to...

[Kelvin Stagg]

I would guess it's in the low 20s. Yes, I would guess it's in the low 20s, probably nearer the 21% than the 22%. Yes. I'm doing that whilst trying to think about the mix differences and trying to think about Page Personnel being a little bit weaker in 2 markets than anywhere else. It is a guess, but I suspect it's somewhere around 21%.

[Operator]

[Operator Instructions] We have a question from Karl Green at RBC.

[Karl Green, Analyst]

Yes. Just one outstanding for me. Just in terms of the net cash position that you guided to approximately for the year-end, looks pretty strong in light of the significant dividend payment you made in October. Anything notable you'd sort of pull out at this stage in terms of performance in the last few months of the year on the balance sheet and cash flow, please?

[Kelvin Stagg]

Yes. We ended up a bit higher than we'd anticipated is the right answer. And I think back when we were doing our calculations for what size the special dividend should be, my thought process was I wanted to get to roughly net cash of GBP 50 million at the end of January. And the end of January because our bonus payments for senior staff and then the Q4 profit share go out in January, and I am anticipating that to be about GBP 30 million, so that makes GBP 80 million. We said at the same time that we've seen about GBP 75 million, GBP 80 million of working capital outflow during 2020. We've seen -- and it was roughly 50-50 in terms of perm and temp. The perm had come back in, the temp hadn't, and that relates to the slightly weaker Page Personnel businesses in the U.K. and France. So I also held back a GBP 40 million amount of working capital when we were doing that calculation.And so back in July, we were sort of going, how much do we return by way of interim and special dividends such that we get to GBP 120 million at the year-end? And we've ended up GBP 32 million ahead of that. That's as simple as the profit we were expecting back at the end of July was about GBP 40 million less than we ended up delivering. And therefore, the cash coming through off the back of that has made up the difference. I'll be making the same mental calculation when we get to July this year and trying to work out what the interim and likely special dividend is going to be that we would pay in October. And so you can sort of carry that GBP 30 million forward and assume that we'll add that into that number.

[Karl Green, Analyst]

Great. That's very helpful. And just on that, just in terms of the variable comp that's going through, just in case I missed it, just any kind of update on the monthly cost base run rate at the moment, please?

[Kelvin Stagg]

Given that we added another 300 fee earners in the last quarter and we're broadly in line with where we are at the end of '19, I expect our cost base is going to be broadly in line with where it was in 2019. I mean, we'll be a little bit lower for things like travel and staff entertainment that hasn't fully come back, but we would have put some wage inflation in terms of paying our own staff. And those things might just about offset. So I think our cost base is broadly in line with where it was at the end of 2019.

[Operator]

We currently have no further questions on the call. So I'll hand you back to the PageGroup team to conclude.

[Stephen J. Ingham]

Thank you. Well, as there are no further questions, thank you all for joining us this morning. Our next update to the market will be our full year results on the 3rd of March. Thank you.