Empresaria Group plc (EMR.L) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Empresaria Group Plc., Interim Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. I'd now like to hand over to Tim Anderson, CFO; and Rhona Driggs, CFO -- CEO. Thanks, Rhona.

Thank you. Thank you very much, Paul. Welcome, and thank you for attending our 2022 interim results presentation today. We will go through our general overview and update on our strategic priorities, financial review, operating review, which is new this -- a little bit different this time versus last time because we are now reporting by region as opposed to by sector. And then finally, closing with the outlook. And of course, there's appendices for reference. So first, turning to the overview. We've had solid NFI growth of 15% on previous year. Our adjusted profit increased 5%, which is reflective of investments in the business. Our adjusted net debt reduced down $3.2 million from the end of 2021. Key themes for H1 show very strong growth in offshore services, ongoing benefits from our diversification both by sector and geography as well as our operational investments that are starting to deliver benefits. We are on track to deliver market expectations and are well positioned to realize our ambition of $20 million in adjusted operating profit in the medium-term. Now we'll turn to some of the operating highlights for the period. You will notice in our results that we have moved to, again, as I mentioned, a regional reporting structure. Offshore Services has performed extremely well. We are optimistic on its continued growth as we look to expand our capacity with investment in infrastructure to accommodate further growth. Our APAC, Professional and IT showed strong NFI growth with Professional up 17% and IT up 28%. Professional in the U.K. increased 17% in NFI, and logistics is showing solid improvement over last year where they were having challenges attracting talent. These results were offset by the expected drop-in health care, particularly in the U.S. market due to COVID-related projects as well as client demand in Germany due to supply chain issues. We are continuing to invest in growing our sales and recruitment teams where we see opportunities for growth and have made investment in dedicated teams in our Asia Pacific region to deliver on our expanded service offering and RPO, where we have seen some positive results. Currently, we have deployed our new front office technology to over 60% of our businesses. We are now working on pre-implementation with the remainder of the businesses that are slightly more complex due to language and/or operating models. On our strategy update, there's a lot of detail in the slides, so I'll highlight just a few areas of progress on our strategic objectives. The first one on building scale in Asia Pac, which has seen positive results in H1, we have asked that our regional sales director to drive and close more regional opportunities with our clients and enhance our cross-selling capabilities across the region. We are already realizing benefit from that, and we'll talk about additional benefits going forward. Offshore Services has been successful in establishing our operation in the Philippines, and we are now up to 89 headcount in that location. Our group head count grew by 5%, excluding our tremendous growth in Offshore Services headcount. And additionally, we continue to supplement our internal hiring through greater utilization of our offshore team. On increasing our diversity of profits, in H1, we have seen some early successes in our expansion into our RPO service offering with our newly appointed Sales Director being instrumental in our success. As mentioned previously, our heightened focus on cross-selling will help us in diversifying our profit by introducing new service lines or locations into our existing client base. On productivity and efficiency, during H1, we went live on our new technology in 3 additional bright businesses, bringing us to over 60% of the group on our new technology with multiple additional projects launched as part of our second phase as an example, things like onboarding, reporting and candidate reach and engagement tools. On target -- our targeted investment in growth, we have continued to invest in revenue-generating headcount, and we'll continue to invest where we see opportunity in addition to continuing to maximize our leverage our offshore team to supplement our recruitment teams. As well as noted previously, we are continuing to invest in our Offshore Services space or infrastructure, and that is underway currently. Now I will turn it to Tim for our financial review.

Thank you, Rhona. So as Rhona mentioned, we've seen solid growth in net fee income in the first half of this year, with net fee income increasing 15%. And alongside that, we've seen growth of 5% in adjusted operating profit. Our revenue is flat year-on-year, and this really reflects the mix. So we've seen permanent NFI increased by 23%, but temp NFI has fallen by 5%, and that's in part due to the expected reduction in health care alongside some challenges in Germany and our U.K. IT business, which we'll talk through in a bit more in a few moments. As a result, revenue is flat year-on-year. The reduction in adjusted diluted EPS reflects again, mix, and this is the impact of the noncontrolling interest in our Offshore Services region, which has had a very strong first half. As Rhona mentioned, we've moved to a regional reporting approach. And as a result, any overheads that are directly related to those regions have been reallocated there, and those are adjusted out of the central costs that we now report. Our adjusted net debt has fallen significantly during the first half, reducing by GBP 3.2 million from where we were at the end of last year. And this reflects both the profits during the period but also that change in mix. So because we've had that small reduction in our temp side of the business, that has reduced the working capital requirement, which is higher from temporary contract than it is from permanent. Headroom remains strong at GBP 14.8 million has improved from December and our net finance costs remained fairly low, but have increased from the prior year, reflecting the increase in interest rates, along with the prior year credit that was included in the 2021 numbers. Moving on to the operating review. So we've highlighted the global diversified sort of diversified nature of the group on this slide, showing both the NFI split by region, service and by sector. Offshore Services has had a very strong first half, it's now 18% of the group. Our temp to perm ratio has reduced to 57% to 43%, reflecting strong growth in perm, and that change in mix from prior year when we were at 64:36. We continue to target increasing our temp to perm ratio to 70:30, and we are focused on growing our temp business. But of course, at the moment in the market, the significant demand has come from the permanent side. In the sector weighting, you can see that, that reflects both strong growth in Offshore, but also in Professional alongside the expected decrease in health care. Looking at the U.K., Europe operations. Net fee income has increased by 3%, while adjusted operating profit has reduced by 20%. This reflects strong performance in U.K., particularly in Professionals. So U.K. net fee income is up by 4%. That is despite a drop in our U.K. IT business, which has fallen slightly year-on-year, although, we are taking steps to resolving issues there. Our logistics operation in Germany returned to growth after challenging 2021, but we have seen some supply chain issues in our German temporary business. And these are partly mainly related around the automotive sector and a part of that is due to supplies which were previously coming from Ukraine and those businesses had to source alternative supplies. So we do expect out to be a short-term impact, but that has impacted our business in the period along with increased sickness rates from COVID impacting margins. Our health care business in the Finland has reduced as expected, with the wide-down of COVID-19 demand. There have also been some significant changes ongoing to the public sector health care in Finland, which are impacting demand at least in the short-term from the public sector. In APAC, we've seen very strong growth in net fee income, which was up 20%. Adjusted operating profit is flat year-on-year. In part, that reflects some challenges we've had in specific operations, such as in Australia, but also a full year contribution of regional overheads in those numbers. We have seen strong NFI growth across most countries and 4 of our locations, Indonesia, Philippines, Thailand and Japan have delivered record NFI in the first half of this year. We've also seen good success in diversifying our service offering and our Recruitment Process Outsourcing has had some good early success. Aviation does remain a challenge. And although, of course, we've seen some strong recovery in aviation from a -- if you like, a consumer perspective in the U.S. and U.K., the majority of our operations and our clients are in APAC, which has been much more subdued, particularly with China remaining fairly close. And at the moment, our clients are still able to record pilots themselves rather than into going externally to recruitment companies to source new pilots. So we're still seeing a subdued market there. However, we are starting to see some sign of recovery, and we would expect that to continue into next year. And you see in the sector split chart there that we've had an increase in IT as a proportion of the region, and that really is reflecting the focus we've had on growing IT in APAC. In the Americas, we've seen and the expected drop in net fee income and adjusted profit during the first half. This is primarily driven by U.S. health care, where we had a very, very strong 2021 with record results driven by the COVID-19-related demand. And with that dropping off this year, we've seen a fall in net fee income and profits. That 2021 demand was for high volumes of similar roles, which we were therefore able to fulfill very efficiently. There is still strong demand in U.S. health care in 2022, but it is now for a much more various type of roles and those, therefore, take more time and effort to fill and that has impacted on our ability to convert net fee income to profit. Our U.S. IT did fall slightly with an extremely competitive marketplace means that counteroffers have become norm and there's a much greater proportion of NFI dropping out of the offer stage. Results were slightly in Lat Am, and 2021, we have a large election project in Chile, which obviously wasn't repeated this year. And Peru has had a slower recovery from COVID-19, which has impacting results there. Our Offshore Services region has had an extremely successful first half to the year and really carrying forward the momentum they had last year into this year. So net fee income up 91% and adjusted operating profit of 94%. And headcount has continued to increase during the period and is now up to more than 2,700. We have 3 locations in this business, 2 in India and one in the Philippines. And the Philippines operation in which we are seeing very strong demand from the U.S., and I think there is now up to 89 headcount. We've seen very good demand from our U.K. clients and a number of our billable seats has increased by 1/3 in the first half of the year. We have seen some slowdown in the U.S. This is primarily driven by that same reduction in the health care demand and that has offset the growth we've seen from other clients. This is expected to be a short-term impact. Our pipeline remains strong, so we continue to expect there's a good growth potential in this business. We are going to be increasing in investing -- sorry, in increasing our headcount capacity in the second half of this year, adding office space and the associated infrastructure. And I would just highlight on the full slides on our website, there is a further slide on Offshore Services in the appendix, which for those who are less familiar with this operation provides a bit more detail on exactly what it does and its track record. And I'd like to hand back to Rhona for the outlook.

Thank you, Tim. So we're continuing to invest in the business, growing sales and recruitment teams in areas where we see high demand and opportunities along with our expansion in our Offshore Services business to increase our capacity to meet the demand that we're seeing and continuing to see going into the future. And then also the technology rollout and implementation of the next phase of our IT road map and will continue into this year and early next year into the rest of this year and early next year. In regards to -- while there's macroeconomic uncertainties, we have not yet seen any adverse impact barring some local impact in our German temporary business. Our client demand remains strong and talent shortages are expected to continue despite forecast for an economic downturn. The staffing market is a $600 billion market, and there is always market share to take. So I think, again, even if demand starts to slow, there is market share out there, and we are going to go get it. So I think the -- when you look at our -- I think you've all read the news that our Chairman has retired, we have a process underway right now to strengthen the Board with the appointment of 2 new nonexecutive directors following his retirement. We've had a solid start to 2022 and are optimistic for the year ahead and certainly very confident that we will deliver full year results in line with the market expectations. And I would say, lastly, but most importantly, we feel well positioned to realize our ambition of delivering $20 million in adjusted operating profit in the medium-term.

That's fantastic Rhona and Tim. Thank you very much indeed for the presentation. [Operator Instructions] Rhona and Tim, as you can see, we've had a number of questions submitted throughout today's presentation. If I may just ask you just to click on that Q&A tab and where appropriate to do so, just read out the question and give your response, please.

Yes.

Yes. Sorry.

Go ahead. You go.

Okay. Yes. So, we've had one question highlighting that there's some industry commentary highlighting a slight slowdown in times high, which I think is referring to the page Group obtained a couple of days ago. Can you update us what you are seeing over the summer period?

So I'll take that one, Tim. And I would say that we're not as yet seen any slowdown in time to hire. Now of course, the U.K. is a big holiday time in the summer. So there may be -- we haven't yet seen any significant or any real slowdown in demand at all or time to hire. What we are seeing, again, is continued competition for counteroffers and certainly, the talent shortage is continuing. So I'm not seeing what they're seeing. But again, our businesses are very different. We're not experiencing any notable slowdown in time to hire at this point.

And another question. So given the macro backdrop, we might expect that to be a slowdown in the pace of perm hiring. Rhona also she demonstrate, we're continuing to see growth in perm. Are you noticing any change in confidence levels and where are the strongest areas of that growth?

So in the perm hiring, I think the perm demand for us, what we've been seeing, in particular, at the start of this year and kind of going into the June time frame, so to speak, the permanent hiring has been strong because clients are really wanting to secure this talent on a permanent basis as opposed to a contract basis given the extreme talent shortage that is out there. And you also have a very -- as you all know, a candidate-driven market right now where candidates are able to get the benefits of being kind of a contract where they can work flexible hours or work-from-home or work to have that flexibility that a contract role provides in a permanent role today. So I think that is also part of that notable change in permanent hiring. Changes in confidence levels, a little bit maybe in the U.S. in terms of IT, but again, demand remains strong. So -- and I would say the strongest areas of growth for us is certainly our Offshore Services business, our IT and our health care and our Professional, I think all have strong areas of opportunity. And again, given the size of the market, we have opportunity to take share even if there starts to -- if we start to see a slowdown in demand.

We've had a couple of questions around offshore. So trying to roll them into one. So one, sort of how do we expect this to expand going forward? And can we get a bit more detail on the operation? And do we expect to see more competition and margin pressure in this business over time?

So with Offshore Services, it's -- we absolutely have confidence that it's going to expand and grow. The demand is high as you will -- you've certainly read that inflation and wage inflation, in particular, has been a huge burden on staffing companies. And this sector primarily or this service primarily supports the staffing sector. So there -- the clients are staffing competitors currently. And when you look at the demand has really been in -- 2 reasons for the demand. One is off the back of COVID, clients are realizing that they can have recruiters anywhere, and they don't need to be physically in an operation. So I think that has increased demand. The difficulty in hiring experienced talent and experienced recruiters also is lending itself to leverage Offshore Services much more widely in the recruitment space. And then I would say, lastly, when we're talking about margins and pressures regarding margins, I think there could be. But I think because it is also -- there's pressure for wage inflation for us on the -- in India as well and it's a highly competitive market. But we don't see that having any significant impact, and we don't expect that to have any significant impact on our margins going forward. We run a very efficient business, and it's getting more and more efficient as we grow it in numbers in size. So -- and the bench is strong with talent in both India and the Philippines.

And then we've got a question around our net debt. So having reduced the net debt substantially, are you looking to get net cash? Or would you look at M&A or further investment organically? So I'll ask Rhona to skip. So we're aware that a lot of our peers and this to peers tend to typically in the net cash position in this industry. So we know there's -- there is a negative investment sentiment around debt generally. I wouldn't necessarily say we're looking to get to net cash or these model in the short-term. What we are trying to do is make sure we balance the opportunities to invest in the business, particularly organic growth against the desire to reduce those debt levels. And what we don't want to be doing is focusing on reducing debt at the cost of the long-term growth of the business. So that's why we've been investing in the business, investing in technology, et cetera, because we believe that's the best way to grow the business longer-term. And of course, in time, that will also reduce our net debt position. We do continue to look at M&A and we're always keeping an eye on M&A options. Clearly, if something suitable was identified, then we would need to fund the options whether that could be shares or debt role depends on the situation at the time. But certainly, it's something we continue to look at, but we're not sort of focused -- we're mainly focused on growing business organically rather than through M&A. And then another question, one question around the operating target. How do you define medium-term? I mean, medium-term -- well, first I have to say, we will provide more detail on how we plan to deliver that GBP 20 million operating profit in future presentations. Medium-term, typically, I think we'd say it's 5 years, I think that's fairly typical in terms of definition of the medium-term, that's what we're really looking at in this case. And I think that is all the questions.

Thank you very much. I think you have actually covered, those a few around that target. So thank you. That's great. And if there's any further questions that do come through, of course, the company will be able to review those, and we'll publish the responses where appropriate to do so on the Investor Meet Company platform. And perhaps before redirecting investors to provide you with their feedback, which I know is particularly important. And may I just ask you for a few closing comments, please.

Sure. First of all, I want to, again, thank everyone for taking the time to join us, and we've got some really good questions as well. So thank you for that. I am absolutely confident in where the group is headed. We have made significant changes to our operating structure to become more efficient over the last couple of years, the level of collaboration, the culture we're building here will be a differentiator for us. Turning to our business lines when I look at what the opportunity is, particularly for Offshore Services, IT and Professional, which we're already doing really well in, and we have a good footprint on, but I feel very confident that we will not only meet our market expectations but meet that medium-term goal of $20 million in operating profit. So with that, I'm going to again close off by saying thank you and turn it back to Paul.

Rhona, thank you. Tim, thank you indeed for updating investors today. Could I please ask investors not to close the session should be automatically redirected to provide your feedback or the team can better understand your views and expectations. This will only take a moment to complete and those is greatly valued by the company. On behalf of the management team at Empresaria Group Plc., we'd like to thank you for attending today's presentation. That concludes today's session. Good afternoon.