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

Good afternoon, and welcome to Empresaria Group plc Interim Results Investor Presentation. [Operator Instructions] I would now like to hand you over to CEO, Rhona Driggs. Good afternoon to you.

Good afternoon, and thank you very much for joining us today. So we're going to start with the financial overview today. Challenging market conditions continued throughout the first half of 2024, which did impact net fee income. On a constant currency like-for-like basis, the group reduced by 9% to GBP 25.3 million; permanent placement was down 21%; temporary and contract was down 1%; and Offshore Services were down 10%. Adjusted operating profit was down 8%, constant currency like-for-like with reported figure down 23% to GBP 1 million, reflecting the impact of a reduction in net fee income, offset by the ongoing benefits of cost actions, which delivered year-on-year cost reductions of GBP 2.3 million. Adjusted diluted loss per share of 1.2p, reflecting the reduction in profits and the allocation of earnings to noncontrolling interests. And our adjusted net debt increased to GBP 13.5 million with headroom of GBP 10.5 million. The industry-wide weakness in demand that we experienced in late 2022 and throughout 2023 has continued through the first half of 2024. Permanent continues to be the hardest hit. Temporary has been more resilient with pockets of growth, particularly in our commercial sector. Offshore Services is feeling the impact of the wider market off the back of a record year last year. The wider IT market continues to be challenging across all our regions. We've continued to maintain tight control of our costs, while protecting our core consultant base to ensure we are positioned for recovery. We've also continued to execute on our strategic objectives. As announced in March, we have completed exits from our Finland health care business. And in China, recently closed our China operation in Half 1, with 2 more expected in the second half of this year. We have streamlined our management structures to strengthen our cross-selling capabilities and further reduce complexity and moved our core operations of IT, professional and health care into a highly scalable model with dedicated sales and delivery teams. And finally, we rolled out additional enhancements to our front office technology platforms specifically targeted at improving productivity. And now I will turn it over to Tim to go through the financial highlights.

Thanks, Rhona. Rhona has covered both the slides, just put out a few extra little bits. You can see here that the revenue on a constant currency like-for-like basis did increase by 4%, and that reflects that resilience in our temporary and contract business and in particular, some more positive results in our lower-margin, higher-volume temporary and contract businesses. Our overdraft, as Rhona said, is down GBP 2.3 million constant currency like-for-like, reflecting that benefit of those cost actions in 2023, and that is what has driven the operating profit to drop by just 8%, GBP 0.3 million despite that fall in net fee income. Loss per share does reflect allocation of earnings to noncontrolling interests. Our central costs are down 13% year-on-year as well. So moving on to adjusted net debt. Adjusted net debt has increased for the half year versus December, and that's really driven by the impact of an exceptional bad debt expense that we had in Germany, which at the half year is essentially a full GBP 3 million impact for the outstanding trade debtors position at that point. Our average net debt for the first half was GBP 10.9 million. That compares to GBP 7.9 million last year. And despite that increase in net debt, we managed to hold net finance costs at the same level as previous year. This reflects some improvements we've made in terms of cash efficiency. And by that, I mean that we're getting better at offsetting our cash positions against our debt positions in various jurisdictions. Because we're in so many countries, we do have a cash position in a lot of those that don't have local facilities and this can create some inefficiencies, but we've improved our processes to offset that as much as possible. Headroom remains strong, GBP 10.5 million. That is lower than what we had in December, but that's because those cash efficiency actions have enabled us to reduce some of our certainty levels and therefore, we've still got strong headroom and certainly sufficient to cope with any requirements we have at the moment. Just moving on to an overview of the group, and you can see that the proportions in certain buckets have changed a bit year-on-year. So looking at it by region, U.K. and Europe has increased as a proportion of the group, reflecting that relative strength in commercial. APAC and Americas have reduced as far as Offshore side [indiscernible] level. Looking at it by service, our temp to perm ratio has increased to 68:32, so that's excluding offshore. That reflects really the reduction in perm and also the resilience of temporary and contract. And we do target having a 70:30 ratio, but the driver here really has been that drop in perm rather than growth in temporary and contracts. And then looking at it by sector, you can see that commercial has increased as a proportion of the group, reflecting the stronger performance there. IT has reduced and other things have remained broadly stable. Moving on to the regions. In U.K. and Europe, overall, net fee income was down 5% on a constant currency like-for-like basis. Within that, the U.K. fell by 9%. So that was in line with the wider group. Again, the pattern of perm being most significantly hit has been reflected here is really driven by perm, particularly in our IT and professional businesses. Our temporary and contract has been more resilient, and we've seen some positive indications in certain places, but it remains a challenging market in the U.K. Germany and Austria results were solid. Our logistics businesses performed very strongly, and that offset some drops in other operations in those countries. So overall, net fee income was in line with prior year. And as Rhona mentioned, we exited our health care operations in Finland. So those results are excluded from the like-for-like measures. Moving on to APAC. We did see a significant drop in net fee income of 25% here. However, if you strip out the effects of currency and we remove our China operations that we closed during the period, net fee income was down 12%. And actually, revenue saw a small increase that's reflected in the mix and relative resilience in temporary and contracts. IT demand has been the main driver of this fall. The most significant impact has been in Japan. We've also seen reductions in Singapore and Philippines, where we also do quite a bit of IT business. Last year, really we saw IT hit the U.K. and U.S. as the biggest amount. This year, APAC caught up in that respect, and so we've seen a more significant year-on-year drop in this region. We have seen some good progress in aviation with net fee income increasing by more than 20%, and that really reflects our success in diversifying our revenue into engineering and permanent roles. Historically, we've been 100% doing pilots on a temporary and contract basis. So we're seeing some good success there through that diversification. Moving on to the Americas. The U.S. has really been the main driver of results. Although overall net fee income was down 16% on a constant currency like-for-like basis, the U.S. was down 50%, and IT, in particular, continues to be extremely challenging. We did start to see some positive momentum in health care as H1 progressed, but that was starting from quite a low point at the beginning of the year. So that's still down year-on-year against the stronger comparative, but we are seeing some positive signs as we exit the first half and into the second half. So we're hopeful that's now moving in a good direction. South America has continued to perform strongly, and we did see growth of 10% in net fee income in constant currency. Currencies have moved again us there. So that's really flat when you look at it in GBP, but we have seen that underlying growth and profits did also grow in South America as well. Turning to Offshore. Offshore Services had a record year last year, and that was really driven by our U.K. health care business, which despite U.S. demand softening last year around health care, demand remained strong right towards the end of the year. Unfortunately, that did drop off at the very end of 2023 and at the start of 2024, and that's what has driven 9% drop year-on-year in constant currency. That has now stabilized. We're not seeing any further drops. And it's the same with the U.S., we're in a very stable position. However, we're not yet seeing a significant return to growth either. We haven't lost any significant clients, and so we are well positioned, and as their demand returns, we are well positioned to fill those seats back up and to build those [indiscernible] back up. We are also continuing to push other services that aren't purely driven by the recruitment side. So like back office and accounting and finance, for example, we are still seeing growth there in this period, and that's something that we're continuing to drive going forward. Handing back to you, Rhona.

So we expect weak hiring trends to remain for the remainder of the year. Therefore, we continue to maintain tight control on costs, while protecting our consultant base and making limited investments in sales teams. I'm extremely confident that with the progress we've made in reducing the complexity across the group, the operational changes we have made, and the continued focus on executing our strategic objectives, positions us well for recovery when the market returns. And now I'll hand it over for Q&A.

That's great, Rhona and Tim. Thank you very much indeed for your presentation. [Operator Instructions] Rhona and Tim, as you can see, we have received a number of questions throughout today's presentation. And Rhona and Tim, if I may now hand back to you and kindly ask you to read the questions where appropriate to do so, and I'll pick up from you both at the end.

Well, I'm only seeing one question actually rather than a number at the moment. So the question we got is saying, given the first half results and the current market conditions, how confident are we meeting the full year market expectations? So I guess a couple of things on that. Firstly is we are historically quite second-half weighted, particularly in some of our businesses that have performed quite well this year. So those in the commercial sector, they are quite second-half weighted, because we're working with supermarkets as our end clients in a lot of cases. And what we see is that Q4 period in the run up to Christmas is a very big profit period. And then not wishing to get a little bit too technical, but we also have more bank holidays in the first half of the year in those businesses. And when there's a bank holiday, we have to pay workers, but we don't get revenue. So again, that pushes our results to be second-half weighted. So there are those factors combined with the actions we've taken on exits and how the actions have been taken around costs, et cetera, mean we're comfortable with the market forecast that are out there.

Next question I'll take is, since APAC and Americas have shown significant declines in net fee income, what specific challenges are you facing in these regions? And how are you addressing them differently compared to U.K. and Europe? So first of all, I think the IT market in particular has impacted both the results in the U.S. and Asia Pac. In Japan, in particular, they've had a very challenged year, and they are 100% IT. And the U.S. has really struggled since the Silicon Valley Bank situation about 1.5 years ago, I want to say, now going on 1.5 years. So we're addressing that by, again, continuing to keep ourselves in the market and continuing to drive our sales efforts and looking at diversifying. In particular, in the U.S., we were heavily weighted in start-ups and they fast forward -- going back, sorry, 1.5 years ago. And now we have diversified our revenue base much more. We're also on the heels of winning some new business through some MSP providers in the U.S. So that will help us again to that diversification point. And in Japan, we are starting to see a little bit of a more positive momentum going into the second half of the year, but they were hit, again, quite hard, as well as across Asia in the IT market. So it's primarily IT, which, again, the wider industry is feeling as well.

So next question is just asking that despite cost reductions, adjusted operating profit fell. How do we balance cost control with necessary investments for future growth? So I'll say, firstly, it is a balance. When we're making those cost reductions, we're very careful to look to ensure we're protecting business in terms of its ability to grow and its ability to come back when that market recovers. There are still investments going on within there, because we need to make sure we're investing in IT, in particular, but also training and those sorts of areas which are going to help us maximize that NFI growth as and when the market recovers. So absolutely, it is a balancing act to make sure we get that right. But we feel we're making the right decisions on that and ensuring that we're not carrying more costs than we should, but we are protecting the core consultant base that will help us come back. So there's one more question here. So given this challenging market conditions, what growth opportunities or sector do we think has the most potential for recovery and expansion in the short to medium term?

So I would say, I think Offshore is going to come back extremely strong. Historically, it came back -- if you think back to COVID, it took quite a dip during COVID, but then within a few months, it started to rebound, and off the back of that, had a couple of record years. So I think Offshore will come back extremely strong. I think IT, eventually, is going to stabilize and come back and that's continued what we consider a high-growth opportunity for us in the future. As well, what we are continuing to focus on is really making sure that we have a balanced portfolio between our temporary contract business to our permanent business. So I think continuing to focus there on making sure that we're growing that proportionately on the temporary and contract side to, again, protect against what has happened in the market with the permanent placement erosion over the last 1.5 years.

That's great, Rhona and Tim. Thank you for addressing all those questions for investors today. And of course, the company can review all questions submitted today. I will publish those responses on the Investor Meet Company platform. I can see one question has popped up. Would you like to address that question, or we can leave it for another time?

We shall see what it is. So yes, just someone is commenting that in the previous RNS, we highlighted that -- the question here is saying about commenting on the value of the sum of the parts versus the market as a group. But I think what we did comment on in the past RNS was really pulling out the potential value of our Offshore business, which has been extremely successful, and we've seen other transactions in the marketplace to show that those sorts of businesses can go for high multiples. I mean that remains the case. And yes, Offshore has had a more challenging 2024, but we still see immense value in that business both now and going forward in the future.

Perfect. Thank you very much, Tim. But before we redirect investors to provide you with a feedback, which is particularly important to the company, Rhona, can I please ask you for a few closing comments?

Yes. Thank you very much. I think I'd like to close by saying that we are extremely confident in our ability to continue to successfully navigate the current environment and even more confident in our ability to capitalize quickly when the market recovers. I want to thank everybody for their time today, for joining us for the interim results presentation, and I look forward to a much more positive update in the next time we speak. Thank you very much.

Perfect. Rhona, Tim, thank you once again for updating investors today. Could I please ask investors not to close this session, as you'll 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 and I'm sure will be greatly valued by the company. On behalf of the management team of Empresaria Group plc, we would like to thank you for attending today's presentation, and good afternoon to you all.