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

Good afternoon, ladies and gentlemen, and welcome to Empresaria investor presentation relating to the half year results to August '23. Thank you very much. Indeed, I'd now like to hand over to CEO, Rhona Driggs.

Hello, welcome, and thank you for attending our 2023 half year results call. Let's start with the quick overview on the first half. We have experienced challenging market conditions from H2 of '22 that continued into 2023, which has impacted our net fee income. Our net fee income reduced 9% year-on-year against a strong comparator. Offshore services was up 15%, permanent placement down 24% and temporary and contract down 8%. Adjusted operating profit was down 71% year-on-year, reflecting a higher starting cost base following 2022 investment and inflationary pressures. This also comes off the back of a strong H1 last year. Measures to improve and manage cost base were taken in Q2 with benefits that will be started to be realized in half 2. Our adjusted diluted loss per share of 0.8p reflecting the strong contribution from offshore services where there is a 28% noncontrolling interest. Our adjusted net debt increased slightly to GBP 8.7 million from GBP 7.9 million end of 2022, with headroom increased to GBP 18.4 million. Key themes, which I will go into on the next slide are really challenging market conditions across the board. Managing our cost base, continued strength in offshore services and continuing to deliver on our strategic initiatives. So the trends we saw and started to see in 2022 and the last half continued into 2023. We haven't seen any significant or sustained signs of improvement. Client and candidate confidence is low, and we've had a lot of false starts. So hopefully, again, there's no significant signs of improvement, we will continue to watch and manage our cost base. Our higher cost base at the start of '23 compared to H1 '22 was due to investment in head count to meet demand in -- earlier in 2022, combined with inflationary impacts. Measures to reduce costs again will be realized in H2. Continued strength in offshore services. Our net fee income was up 15%, profit up 6%. We continue to invest in infrastructure to enable further growth. Strong growth is driven by health care demand in the U.K. And there's been a slowdown in the U.S. and offshore services seen starting in H2 of '22 that continued into H1 of 2023. We're continuing to deliver on our strategic initiatives. We recently announced the launch of the U.S. professional brand in the U.S. -- sorry. That brand has launched and that is organic growth that we are projecting for that business. That is something that we have had planned on our road map. We have launched it and are seeing early signs of success with leveraging the current and existing clients in the U.S. market. Planning for Empresaria's Solutions launch is also progressing. Empresaria Solutions, as a reminder, is an umbrella of services that will cross multiple sectors and regions across the group with more solutions beyond just the transactional permanent and temporary business. The other thing to note on the Empresaria Solutions is that we are planning, and you'll see this in the next slide on our progress slide, that we are planning on a soft launch in 2023 that will include us actually harnessing and leveraging our internal capability with our offshore services team to deliver into MSP clients in the U.K. market. This -- we've already secured a client. We are already working with a very large client that is bringing us into 38 new client accounts in the U.K. So this is really where the start of Empresaria Solutions, and we will continue to scale into other areas such as RPO, which we're already doing quite successfully in the Asia Pac region. As well as other services, including statement of work and more importantly, an equal, I would say, almost more importantly than anything, is enabling us to cross-sell, again, across regions and across sectors with providing transparency to the client and not having them have to deal with multiple buying entities. Our strategy update, I covered a couple of the progress, and I'll focus just on the right-hand side of the slide here on our progress. Again, US Professional has launched, Empresaria Solutions will launch. And then the Philippines hub, we had planned to continue expanding in the Philippines, but did not grow in the period due to lower U.S. client demand. We have the growth of the temporary and contract remains a priority for us across the group, but dependent on market recovery at this point. A further implementation of our front office system was completed in H1 in our Germany personal business. Reporting and onboarding solutions have been identified with implementation to start in half 2 and the delivery center will coincide with launching the Empresaria Solutions into the U.K. market. And again, that will be powered by our offshore services delivery team. We will continue to and have continued to invest in offshore services infrastructure in half 1. Now turning it over to Tim to give you the financial review.

Thanks, Rhona. So just turning to the financials, Rhona has talked through most of these already, but just touching a few other pieces. So revenue was down 3% in the period. So that compares to the 9% fall in net fee income, that reflects the mix. So the greatest drop seen on perm, whereas temp didn't fall by sound amount. So that's a mix point. That's why revenue is not down by as much. Overall operating profit down 71% and then adjusted earnings and loss per share, moving to a small loss of 0.8p and that reflects the noncontrolling interest in offshore services, which has performed well in the period. Now turning to the balance sheet. Adjusted net debt has increased slightly to GBP 8.7 million, that reflects some of the half cash outflows we took in the first half year. So dividends, tax is normally first half weighted and then we also have CapEx. Also had reasonably significant movement due to FX in the period. That's been GBP 0.8 million due to the strengthening of sterling. Headroom remains strong. We've done a lot of work in the period to improve our efficiency with cash in order to help manage the net finance costs, which of course, have been increasing due to rises in interest rates, and that has helped to improve the headroom position. Our balance sheet continues to show how resilient it can be in the face of really any market conditions. So moving on to the operating review. Shape of the group has changed slightly during the year, reflecting those trading conditions. Offshore services now increased to 23% of net fee income. Our temp-to-perm ratio has increased to 62% to 38%, and that reflects through the weaker perm much rather than growth in temp. And then by sector, we've seen falls in professional and IT as a proportion of the group with offshore and commercial both growing. In U.K. and Europe, net fee income was down 13%, with adjusted operating profit down 55%. U.K. saw the weakest results in the period. Net fee income there was down 25% again driven by permanent -- drops in permanent placements and the largest impacts were seen in our IT and professional businesses. Our results in Germany were much more solid. We did see growth in our logistics operations, which helped to offset some smaller reductions elsewhere. Turning to APAC. Obviously, a theme for first half of the year is the drop in IT. But actually, when you look at technology companies, the impact is wider because obviously, they've recruited more in just IT roles. In APAC, we do work on technology companies. So we're seeing drops across both IT and professional. So overall, net fee income was down 8%, we have seen some individual challenges. Thailand's situation politically is impacting demand there and the company is very productive to hire until that is resolved. Singapore and Australia have both had poor performances in the first half and contributed losses to the results. We've taken a lot of actions in both of those to resolve those situations. We have seen some strong performances, both China and the Philippines showed some very good growth in the first half of the year. And we have started to see some improvement in aviation. This is a relatively low gross margin business. So that's why revenue for the region is high -- up sorry, by 13% because it's high revenue but low margin. So the impact on net fee income is more modest, and that business does still remain loss-making. Turning to the Americas. The results here really are driven by the situation in the U.S. So net fee income down 26%, and the adjusted operating loss moving to a loss of GBP 0.3 million. IT, we obviously saw a significant falls in demand in the second half of last year, and that's continued into this year and been exasperated by the Silicon Valley Bank collapse. We have quite a lot of clients who are start-ups who were using SVB for financing, so that significantly impacted demand from those. Healthcare has come down obviously from its COVID-highs, demand and pay rates have fallen significantly over that time. In LATAM, we are seeing some solid increases in net fee income and profit and our retail outsourcing offering remains in demand. That is performing well. And moving to offshore. We've seen net fee income rise by 15% and adjusted operating up by 6% to reflecting investment that we've been continuing to make in that business. Our U.K. health care clients are continuing to grow. So we've added 17% more billable seats for those clients, 30th of June compared to 31 December last year. U.S. continues to be challenging, so that wider [indiscernible] and weakness in IT demands impacting our clients, which in turn is impacting what they require from us. So we've seen that 11% fall in billable seats in the period. Now over to Rhona for the outlook.

Thank you, Tim. So on the outlook, current market conditions expected to continue to impact the rest of this year. We're continuing to keep costs under review, maintaining the resources required to maximize opportunities as and when confidence returns in the market. The drivers that will benefit when market confidence improves, still remain. There's relatively low unemployment and skill shortages. I will say that right now both candidate and client confidence that not only are we not seeing the demand on the client side, but candidates are more reluctant to make a move with the uncertainty in the market. That remains a challenge. However, when that changes, again, I think the upturn will be robust. We are making progress on our key strategic actions to deliver growth. Given current market conditions, we continue to review operational and investment priorities to ensure the group is best placed to realize our medium-term ambition. I'd now like to turn it over for questions.

Rhona, Tim. Thank you very much indeed for updating investors this afternoon. [Operator Instructions] I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor meet company dashboard. Rhona, Tim, you've had a number of questions from investors this afternoon. I wondered if I may, just hand back to you and ask you to read out the questions and where appropriate to give response.

Yes. So we've got a few questions in. So firstly, how optimistic are you about the prospects for LMA recruitment how big an opportunity is this for the company? So I think it's probably a reference to the rebrand and the launch in the U.S.

Yes. Yes. So I'm very optimistic about LMA recruitment, not only we're taking the opportunity to really create a global brand with LMA and -- so that's exciting. There's already some cross-selling that's happening not only just in the U.S. but amongst the various LMA brands in the U.K. and in Singapore. So I mean it is organic growth, which is much slower than acquisition. But I am very optimistic that we have now coverage points, particularly in the U.S., where we had IT and health care, but nothing in between to really be able to expand out our service offerings and get much more sticky with our client base in that market.

So second question, how much room do you have to reduce costs further if conditions continue without comprising the customer offering?

So we are trying to protect where we can, and it makes sense to -- for example, in the U.S., we have already cut to the point that we can't cut anymore. We need to ride it out. But in other markets, we do have other levers to pull. If need be, we just didn't want to go -- we went pretty hard on the cost but we're still in this period of evaluation, but we do have the ability to pull levers and to pull them quickly if need be.

And then actually, we've got possibly two more questions. So what -- where are your priorities operationally over the next 6 months?

Our priorities operationally are really, again, going back to our road map and really the pillars in our road map of really scaling when the market returns, of course, the tech and IT market, which we still feel is a really good market to be in as well as the professional that we've already mentioned. In addition to that, the Empresaria Solutions is really going to help us hopefully gain some traction and also be able to deliver into a whole other pocket of clients that we haven't had access to in the past. What's the latter part of the question?

I don't know if this question has been deleted by the -- So the operating priorities for this next 6 months.

Yes. And I would say, again, the operating priorities are to get these -- the businesses that are underperforming right now to get them to the point where they are poised for growth and ensure that they have the right operating model. We are aggressively moving more into a 180 delivery and sales model. We are laser-focused on building our sales capabilities across the group right now, and that is probably the key priority over the next several months.

So there's another question here about just highlighting that we don't own 100% of all the businesses and perhaps there's a perception from some commentators that that's a disadvantage of where we have plans to become a 100% owned structure where management incentivized through options. And so I think it's probably for those who may be less familiar recent company, I mean, we don't operate a management equity scheme anymore. The group used to pursue equity in subsidiaries to management as a means of incentivizing to grow those businesses. That's not something we've done for a little while now. That said, there are still some legacy either management or other minority shareholdings in place. I think where the opportunity arises, we do look to buy those in and we have done so over the last couple of years. I think, obviously, that's not always possible. So yes, yes, our preference is to own 100% of subsidiaries. But clearly, that needs to work for both parties in any transaction to buy that [indiscernible]. And then one last question by looks of it. And so do you see any sectors and/or geographies recovering quicker than others?

I said that earlier, I was having a conversation with someone and I suggested that COVID was much more predictable than this market is right now. So at the moment, it's really hard to say. I don't know. I think there's possibility in Asia, but even our business, our IT business in Japan has struggled this year. So I think it's really hard to say at this point in time. So I don't think I'd comment any further other than we just -- we really don't know.

That's great. Rhona, Tim, thank you very much indeed for answering all these questions. And thank you, everybody, for your engagement this afternoon. Rhona, Tim, I know that investor feedback will be important to you, and I will shortly redirect those on the call to give you their thoughts and expectations. But I wonder if I may before doing so, if I could just ask you for a few closing comments, and then I'll ask investors to give you their feedback.

Yes, sure. Thank you. While we are disappointed with the start to 2023, we are making progress on our key strategic actions to deliver growth. And we are optimistic that we can and we will capitalize on our opportunities when the market conditions return. And I want to thank you all for taking the time to join us today and look forward to speaking with maybe some better news next time.

That's great. Rhona, Tim, thank you once again for updating investors this afternoon. Can I please ask those on the call not to close this session. As we're now automatically redirect you for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Empresaria Group PLC, I'd like to thank you for attending today's presentation, and good afternoon to all.