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

Good afternoon, and welcome to the Empresaria Group plc Full Year Results Investor Presentation. [Operator Instructions]. Before we begin, I would like to submit the following poll. And I would now like to hand over to CEO, Rhona Driggs. Good morning to you.

Hello. Thank you so much for joining us today. Good morning, good afternoon, everyone. We wanted to cover today the full year results for 2023. We -- on the agenda, first is the -- we'll give you a brief overview and strategy update. We'll go into some financials, operating review and finally close out with the outlook. So please feel free to put questions in the question box, and we will attempt to answer as many as possible. So first, to give you a quick overview. Obviously, the staffing sector experienced a pretty challenging 2023, and we were no exception market conditions were not great throughout pretty much the whole of our markets and our sectors across the group. Permanent placement was hit the hardest, down 25%. Overall, we saw a reduction in our temporary contract of 10%. The overall reduction year-on-year was 12% on NFI. And our offshore services performed quite well, and we'll talk about that a little bit more in the coming slides. But that actually saw a growth of 8%, proving its strength and resilience. Our adjusted operating profit was down 50% to $5.1 million. We had a higher cost base at the start of '23, reflecting an investment in head count in 2022 to meet client demand, combined with inflationary impacts. We took measures to reduce costs in response to the reduced demand. So we experienced a 17% reduction in head count during 2023, excluding our offshore services business. Full year costs were down 5%. H2, however, were down 11% year-on-year. Adjusted diluted earnings per share reduced to 0.6p, reflecting relative strength of offshore services, which has a 28% noncontrolling interest. Our adjusted net debt increased to GBP 11.1 million from December of 2022 with headroom of GBP 17.8 million. Our proposed dividend of 1p per share is a reduction from 1.40p last year, reflecting the Board's confidence in the group's medium-term prospects while acknowledging the lower level of profit in 2023. Going on to our operating and strategic updates. We are focused on reducing operational complexity while delivering on our 3 key pillars for growth. We're reducing operational complexity, investing in people, process and technology. With that, we've streamlined our leadership structure. Our core sectors are now under a single leader in each country, allowing us to reduce the size of our senior management team. We've accelerated the implementation of our 180 operating model in those core businesses across the group. And we've continued to invest in our front office platform and related products to help, again, drive greater efficiency and productivity throughout the group. Our Pillar one, as a reminder, is a focus on our core sectors of professional, IT and healthcare. We took the decision to close our loss-making operation in Vietnam, this past year. And that, again, is a market that we didn't see that we were able to really scale our other businesses into that market and it had continued to throw off loss-making -- losses, throughout the majority of its time being opened in the group. We merged our U.K. marketing brand into our lead professional brand and further divestments of 4 small operations are planned, in operations in markets and sectors that have limited opportunity to scale. Really those are not going to be -- they're very small and not material contributors to the group, and that will further again allow us to -- further reduce complexity and allow us to scale in our IT and healthcare and professional businesses. Our U.S. Professional business did launch last year under our lead professional brand. That business is just starting out really because they, of course, launched in a very tough market. But we're already seeing some synergies with our IT business there in the U.S. and have had some success in gaining some traction with cross-selling both in the IT and the health care client space. Pillar two is diversification of our service offering. We're continuing to work on developing additional services to further diversify outside of the traditional contract and permanent hiring. We saw success last year in developing some strategic partnerships to deliver against MSP programs in the U.K., which we're super excited about. And then finally, success in delivering RPO projects continued. And in particular, our Philippines operations showed really solid growth last year, and part of that driver was their RPO services that they were offering in APAC. And then finally, our Pillar three is continued growth in our Offshore Services business, which, of course, has performed really well over the past several years. And we're continuing to increase not only our scale in that business, but also a diversity of services we're offering to our clients in that area. And now I'll turn it over to Tim for the financial updates.

Thanks, Rhona. So Rhona has already talked through most of this, but just to reiterate. So revenue down 4% and the reduction there is lower than what we've seen our net fee income reduced because of the mix. So obviously, we've seen a drop by more than 10%. As net fee income down 12%, cost saving action in the year help mitigate the impact of that profit. But because that -- those savings were second half weighted. We've seen our adjusted operating profit fell by 50%. And then with that impacts our noncontrolling interest in Offshore Services, our adjusted earnings per share are down to 0.6p. Looking to the balance sheet. Adjusted net debt has increased during the year. However, our average monthly net debt actually has been quite a lot lower for the majority of the year. So what we saw was an increase in working capital outflows towards the end of the year due to some specific projects and specific sort of trading situation. So overall, actually, our net debt average has been lower, but we have seen that increase at the end of the year. Our asset [indiscernible] ratio as a result is above our target, and that's increased to 36%. We continue to target a sustained reduction to 25%. Headroom continues to be very strong. So we have plenty of scope in our facilities to handle any trading requirements as and when the market recovers. And net finance costs are higher from the prior year, reflecting those increases in interest rates. And hopefully, that has now peaked, and we wouldn't expect to see that continue to increase, although there may be a run rate increase in the first part year just to reflect where we're expert at the beginning of 2023. Moving on to the operating review. So that strength in offshore services during the year, means they now account for 24% of our total time. Our temp-to-perm ratio, we continue to target a 70% to 30% split. We have moved closer to that in the year, but of course, that's more a reflection of the troubles we've had in perm rather than strength in temp. So that reflects that drop in perm. On the sector weighting, professional IT and healthcare have been challenged in the year. So commercial and offshore services now to make up a more significant part of the group than they did in the previous year. And moving on to our regions. In the U.K. and Europe, net fee income was down 12%, with adjusted operating profit down 36%. The weakest results we saw here were very much in the U.K., where net fee income was down 21%. Again, the themes are fairly similar. So the greatest [indiscernible] in the perm placements, and the largest impacts were seen in IT and professional. Elsewhere in the region, our results in Germany were quite solid. Net fee income dropped by only 2%. In Germany, we're now our commercial sector and the nature of our clients means that it tends to be a little bit more stable when we see these market movements. In APAC, net fee income was down 14%, and adjusted operating profit moved the [indiscernible] to a loss position for 2023. Again, the themes are fairly similar. So that demand in -- from technology companies, in particular, in APAC, both IT and professional skill sets was really the main driver of results across the region. We did see some good performances [indiscernible] the Philippines delivered a record net fee income year, which was very pleasing. This was driven by some strong success in RPO that Rhona talked about a few moments ago, and that's something we are looking to replicate across the region. Singapore and Australia both performed poorly during the year and contributed losses. And we have to take action in those businesses to improve performance, and we'd expect that to be better during 2024. Our Aviation business, which has obviously struggled the last couple of years, aviation, although it's recovered quite a lot in U.K. and the U.S. in APAC, we're still, I believe, at around 70% of the levels of flights from pre-Covid. We are starting to see some improvement, and that's really come from diversifying our offering outside of pilots, but also doing more perm in that business. We are seeing some improvements in NFI, although which our business has remained loss make in 2023. We are seeing some positive signs. Moving on to the Americas, really sort of the table 2 halves in North America and U.S. That's the main driver of these results. The U.S. was extremely challenged in the staffing market last year. We saw significant impacts from both IT and healthcare and IT really impacted by the wider drop in demand, but also, we had quite a lot of exposure to clients who are customers of Silicon Valley Bank and that collapsed at the start of last year due to have an adverse impact on our clients, they stopped hiring. And then in healthcare, we've seen that really drop in the U.S. from those [indiscernible] highs in both the demand and pay rates falling substantially. South America, Chile had a very strong year. They delivered some really good results, good growth in both net income and profit. And unfortunately, overall, net fee income in this region was down 30%, and we did move into a loss-making position for the year. Offshore Services continued to perform extremely well. Net fee income and adjusted operating profit, both increasing despite the market conditions. This was driven really from U.K. healthcare, which grew strongly in the first half of the year. And we did see some fall back towards the end of the year as the NHS looks to manage its agency spend, but this didn't have a significant impact on results. U.S. demand has been challenging, but we did see this stabilize in the second half of the year. So we feel we will be more confident about where that direction [indiscernible] moved into 2024. We just highlighted on this slide, the strong track record of this business. So we've seen a 32% compound annual growth rate in net fee income since 2017. And even during COVID, you can see that this business, although it was impacted, it came back really strongly. So our businesses look to manage their spend in troublesome times. This is something that they can turn to, to really help them perform and to manage their costs. So we continue to believe this is an extremely valuable part of the group is something that we expect to perform well going forward. And now back to Rhona for the outlook.

All right. Thank you, Tim. So we expect current market conditions to continue throughout the first half of this year, and that is the sentiment widely across the sector right now. Relatively low unemployment rates and ongoing skill shortages should accelerate recovery. And I think, again, typically, what we see is the temporary business will come back a bit more quickly than the permanent business. But we are, again, cautiously optimistic that half 2 will bring some positive momentum. We're closely managing costs right now, continuing to manage costs, although we are making targeted investments in sales to ensure we maximize opportunities when the confidence returns. We are continuing to take action to reduce complexity and simplify our operations to enable us to drive scale, deliver on our strategic objectives and create shareholder value. We're confident in our ability to navigate through this environment, and we are well positioned to respond as the market recovers. And with that, we'll look to address any questions.

[Operator Instructions] I would like to remind you that we are recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard. Rhona, Tim, as you can see, we have received several questions throughout today's presentation. And if I may now hand back to you and kindly ask you to read out the questions, give responses were appropriate to do so, and I'll pick up for you both at the end.

Yes. So we've got a couple of questions. So firstly, can you expand on the enhancements and automation initiatives you have implemented? And can you see AI playing a role here?

Yes. And Tim, I think that's a great question since you have spearheaded, but we -- I'll let you take over, but I'll just say that, that is an area we continue to focus on, and we additionally added a new technology but bolt-on, if you will, to our [ Bullhorn ] system that we have rolled out, largely across the group. We have one business -- one of our core business left to -- and currently in implementation right now that should be completed this year. And the majority of what we look to do will be completed once that rollout is done. Tim, do you want to take the rest of that?

Yes. And I think the fact that we've got pretty much all of those core businesses on a single platform is what enables us to start to really get the full benefits from our technology and to really start to enhance them with those [indiscernible]. I mean just looking at the automation piece a little bit. I mean we've been using automation for a few years now, but we're getting better and smarter at how we use it. And it seems such a huge amount of time for people in our business and getting the data complete and accurate and up to date is one of the key things we use it for as well as sort of making sure we're on top of processes and [indiscernible], to make sure we're not leading relationships to sort of lapse. We use it for lots and lots of things. But I do think we're still really scratching the service of what we can get from it. And I -- same point. I mean we are starting to use elements of that in what we do, but what we're making sure is that we're in very close to our IT partners, so that as and when those sort of integrated AI solutions come in, we're able to be at the forefront of using those and getting the benefit straight away. And I think although there are things you can go out and do on your own and news around your core products, what we really want to see is those tools to build it in and embed because that's where I think we'll get the best value.

Tim, I think just to add one quick note to that is that we have recently launched our global Canada database, and we were able to do that because we're on a single platform, which is absolutely going to be a big benefit to our businesses as they look to higher tail and across the globe. And then secondly, the ability to really see into what businesses are doing what clients were doing business with in certain areas for cross-selling and maximizing cross-selling opportunities. So it really -- I think this year we'll really start to see the full benefits through with those additional enhancements Tim mentioned as well as the global candidate database and the ability to really maximize cross-selling opportunities with the CRM functionality.

So moving on to next question. So given the market conditions, what indicators should we look for to monitor the strategy effectiveness and potential to achieve your medium-term profit targets?

So I think -- when we think about the -- looking at what indicators, I think the temporary, as I said, will likely come back. I mean, that's historically what has happened in any sort of downturn. We see that temporary business come back up. So we should start to see the uptick in NFI in the contract business for [indiscernible] as one of the key indicators going forward. I think the other is just our ability to, I guess, navigate through this market with keeping our cost base in line with -- and reflective of market demand going forward. And Tim, is there anything else you want to add to that?

No. I think anything I'd say is that given the current market conditions, what we are focused on is really is delivering the elements of that plan. I think there's only so much we can do to control the market. But if we can make sure we are in the right condition to benefit from as and when the market turns, that's what we're really focused on to make sure that when the market is on our side, we can really drive that growth. And then just one final question, which I think I'll probably take this one on. So do you see acquisitions in the current market as a near-term opportunity to scale up the business, if I was a finding at heart. So our strategy is primarily an organic one, and we focused on that as much as anything because we do have a net debt position, and we know that to the extent that, that's just advantageous from an investor perspective and being a recruitment business to sort of [indiscernible] on slightly. That we very much will be keeping an on out for opportunities as and when they arise. And if we think there is something that we'll help us to really drive forward our strategy and will benefit multiple parts of that strategy, then absolutely, that's something we would look at. But clearly, we need to be a little bit cautious in how we invest that money in this market.

That's great. Rhona, Tim thank you for addressing all of these questions that came in from investors today. And of course, the company can review all questions submitted today. I will publish those responses on the investor company platform. But before we directing investors to provide you with a feedback, which I know is particularly important to the company, Rhona, can I please ask you for a few closing comments.

Yes. Thank you. I'd like to, I guess, close with saying that it's not the year we wanted to report for sure. It is a disappointing here and certainly we're expecting that we will continue -- while it's been difficult. I think we've made a lot of progress on our strategic initiatives. We're continuing to look at, again, reducing our complexity and really focusing on those areas that we see opportunities for growth when the market recovers. And we're absolutely confident that we can continue to navigate this current environment and are absolutely unequivocally positioned well to grow when the market returns. So in closing, we want to thank you for your support. We want to thank you for taking the time today to join us. And as always, we appreciate your feedback.

Rhona, Tim, thank you once again for updating investors today. Can I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete I'm sure we'll be greatly valued by the company. On behalf of the management team of Empresaria Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.