Hays plc (HAS) Earnings Call Transcript & Summary

Hello, and welcome to the Hays' Quarter 3 Conference Call. My name is Judy, and I'll be the coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, David Phillips, Head of Investor Relations, to begin today's conference. Thank you.

Thank you, Judy, and good morning, everyone. Welcome to Hays' quarterly update call for the 3 months ended 31st March 2022, our third quarter of the '22 financial year. I'm here with Paul Venables, Group Finance Director. But before we begin, please be aware that this call is being recorded with the recording accessible using the number and code provided in the release. Please be aware that our discussions may contain forward-looking statements that are based on current expectations or beliefs as well as assumptions on future events. There are risk factors which could cause actual results to differ materially from those expressed in or implied by such statements. Hays disclaims any intention or obligation to revise or update any forward-looking statements that have been made on this call, regardless of whether these statements are affected as a result of new information, future events, or otherwise. I'll now hand you over to Paul.

Thank you, David. Good morning, everybody, and thanks for joining us. I'll present the highlights and key themes of today's update and discuss regional performances before we take your questions. As usual, all net figures and percentages are on a like-for-like basis versus prior year, unless stated otherwise. Performance overview. In Q3, we delivered record quarterly fees, up 32% with excellent growth in all regions and an all-time fee record in March. Currency translation had a negative impact, decreasing headline net fees by 3%, and there were no material working days adjustments in the period. I highlight the following key features: one, we delivered quarterly fee records in 19 countries, including a standout performance in our largest business in Germany and in the strategically important markets of the U.S.A. and France. Two, growth was led by Perm at 48% and Temp by 21%, both excellent results. The private sector up 35%, again significantly outperformed the public sector, which is up 15%. Comparing to pre-pandemic fee levels, fees in the quarter were 11% above Q3 FY '19. Four, specialism level & Technology, our largest global specialism, and now 26% of group fees, delivered another record performance with fees up 35%. Five, consultant productivity remained at near record levels despite increasing consultant head count on a headline basis by 4% or 325 in the quarter. Six, our net fee exit rate in March was 26% despite a 16% tougher year-on-year growth comparative. Seven, during the quarter and as previously announced, due to the ongoing conflict in Ukraine, Hays ceased trading and exited Russia. In half 1 FY '22, Russia represented about 1% or GBP 5.9 million of group net fees and GBP 0.8 million of operating profit. We provided GBP 5 million of one-off closure costs, which we'll incur as an expense above the line in half 2 FY '22. Eight, we reiterate the guidance given at our half year results for FY '22 operating profit of between GBP 210 million to GBP 215 million, excluding this one-off Russia impact. Nine, finally, cash performance was strong and we ended the quarter in a strong financial position with net cash of GBP 240 million, in line with our expectations. I'll now comment on the performance by each division in more detail. Our ANZ division, which is 16% of group fees, increased by 24%, with activity stronger in March, as pandemic impact eased, particularly in Perm. Perm, which represents 40% of ANZ fees, was up an excellent 57%; whilst Temp increased by 9%, against a relatively resilient performance last year. Private sector, 66% of fees, increased by 28%, whilst public sector grew by 18%. Australia increased by 21%, led by Queensland up 28%. And our 2 largest specialisms: Construction & Property and Technology grew by 14% and 42%, respectively. New Zealand, 9% of ANZ fees delivered a fee record and increased by an excellent 62%. Consultant headcount in ANZ increased by 4% in the quarter and 26% year-on-year. Germany, our largest business representing 27% of group fees, delivered another record quarter, up 32%, and included a record in March. Overall business confidence was stable with clients continuing to invest in new and extended existing projects. Contracting 55% of German fees delivered a record quarter. Fees grew by 31%, driven by 29% growth in contractor volumes, which ended the quarter at record levels. Margin and fee mix increased fees by a further 8%, partially offset by 6% lower average weekly hours per contractor. Temp, which is mainly in the engineering and manufacturing sectors, continued to recover, up 28%. Although given slower recovery in Automotive, parts of the manufacturing sectors remained 10% below pre-pandemic levels. Perm delivered an excellent performance of 43% and consultant headcount increased by 9% in the quarter and 19% year-on-year. The U.K. and Ireland, 22% of group fees, increased by 29%. Thereby excellent Perm performance of 59%, and Temp up 13%. Private sector fees increased by 40%, with the public sector, which was resilient in the prior year, up 9%. Most regions traded broadly in line with the overall business apart from the Northwest and Southeast, which grew by 49% and 41%, respectively. Our largest U.K. region of London grew by 28%, including London City, which is predominantly private sector focused, up an excellent 57%. Ireland delivered another excellent performance with fees 61%. At the specialism level, we again saw excellent growth in technology of 52%, as we did in HR and education at 52% and 50%, respectively. Accountancy & Finance, our largest U.K. business, grew by 35%, and C&P 16%. Consultant headcount increased by 4% in the quarter and 24% year-on-year. Rest of the World, representing 35% of group fees and comprising 27 countries, grew by 36% with 17 countries delivering quarterly fee records. Perm, which is 68% of Rest of the world fees, increased by 43%, with Temp up 24%. In EMEA ex-Germany, fees increased by 33% and activity levels remained high. Ten countries delivered record quarterly fees, including our largest Rest of the World country, France, up 38%; Spain, 46%; Poland, 39%; and Switzerland, up 28%. The Americas grew by 54% with records in all countries in the region, including the USA, our second largest country, at 47%; Canada, 64%; and Brazil, 78%. Asia fees increased by 27%, with standout performances in Malaysia at 53%; and Japan, which showed improves momentum, with fees up 42%. China grew by 10% and growth slowed through the quarter as strict pandemic restrictions were reintroduced. Consultant headcount was up 1% in the quarter and 34% year-on-year. Cash flow and balance sheet. Cash collection was good and we ended the quarter in a strong financial position with net cash of GBP 240 million, in line with our expectations. Current trading and guidance. I'd make the following points: one, whilst we're mindful of increased macroeconomic and geopolitical uncertainties, client and candidate confidence remains strong with continued skill shortages and rising wage inflation globally, especially at the higher salary levels. The group's activity levels remain strong. Two, after significant investments in consultant headcount over the last 12 months, we expect investment to moderate to 1% to 3% over the next quarter with headcount growth in Germany and in our strategic growth initiatives, which continue to perform strongly. Consultant productivity remains at near record levels, and we expect to increase this further in FY '23 and beyond. And three, on 28th of April 2022, we'll be hosting an Investor Day in London, focusing on the significant structural growth opportunities we see across many markets. We look forward to seeing many of you in person on the day, but we'll also be live webcasting the event, the details of which are in our Q3 statement. In conclusion, we are focused on driving further profitable growth as we pursue our route to exceeding previous peak profit levels supported by our strong brand, highly experienced management team globally, and our financial strength. We're firmly focused on positioning Hays as a clear market leader in the most attractive long-term sectors and geographies, including Technology and Germany. I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] Our first question is coming from the line of Rory McKenzie from UBS.

Firstly, on the group exit rate of plus 26%. Obviously, year-over-year growth is slowing due to the comparators. But I think looking at a 3-year stack, your net fees were up 10% for the quarter and 10% for March, including the Russian closure. So is it fair to say you probably exited the quarter still seeing a small underlying acceleration? And then secondly, German contractor fees look exceptionally strong. Can you just talk about the kind of volume, contracted margin, sickness dynamics, and how we're going to build up that fee growth rate? Yes, I'm going to go with those 2 first, please.

Okay. So on the group exit rate of 26% and the other comments you made. First of all, we were 11% above Q3 FY '19. And March was a very strong record performance. So it beat previous records by a significant amount in pounds millions and was really uniform across the patch within that. Continental Europe was, by far, the strongest performance. I mean, we had a record in Mainland Europe, ex-Germany, that was a good 15% to 20% better than we've done before, so a very strong performance, and really across the board. So I mentioned a number of countries earlier on had, had strong quarters. But certainly, France, which has been 1 of the businesses that has returned to material growth slightly later than places such as Southern Europe, Spain, et cetera. France had a monster March, I think all of that is encouraging for the next few months. So certainly, from a March standpoint, how did we feel? Continent Europe was the strongest, Germany was the second strongest and then, I guess, a gap to Australia and the U.K. We're very happy with it. And then on the German contractor market, I think the first thing is, it's a very strong market at the moment. There is no doubt that in all markets in the world, including Germany, those parts of the market that are higher salary levels, strong decision-making or strong technical skills areas. They've got both the highest demand, they've got the fastest decision-making, and have also got the most significant wage inflation going through. And I think what we tried to do in these results is give a little bit more color in that, specifically on contracting. We've added some previous trends where actually, volume was slightly greater than fee growth, but that was, to an extent, partially offset by a reduction in hours. We're continuing to see more 4- and 3-day assignments. And I think that's naturally in the world we're in today, and also in a very skill-short market. If we've got an excellent IT professional that wants to work 3 or 4 days a week, our clients are taking them very quickly. Whereas I think it's fair to say, in Germany 3 or 4 years ago, they would have wanted somebody to have worked 5 days a week. And secondly, as you can see, margin and fee mix increased fees by 8%. So as we said before, we are determined to show that we're a winner on the back of wage inflation. These are very skill-short candidates, and there is an appropriate rate to charge for them and an appropriate level of margin, and we are trying to edge that up, which I think is an important part. So generally, the dynamics in contracting, which is more technology-focused, very strong. Things like sickness, yes, a little bit more. Actually, in the contracting space, that doesn't matter as much because a large proportion of our contractors can do and can work from home. The sickness part of it was a little bit greater within Temp. But on the basis that our Temp fees were up 28%, it didn't make sense to pull that out. But of course, we've got a number of countries around the world at the moment, not just Germany, where the Omicron variant has kind of ripped through, and clearly, where you have contractors or temps that physically are working at client premises, a number of those have to test on a regular basis and there's been a kind of a slight impact. But I think if anything, Rory, we can take some confidence from that, that these results take a little bit of a hit on the sickness side of it, but that is being more than offset by what we're doing in average Perm fee and on Temp margin.

Okay. Great. And then just lastly, to be clear on the profit guidance. You're taking the GBP 5 million charge for closing Russian operations above the line rather than taking an exceptional charge, maybe at least I should say an eggceptional charge. But then that's the only change to the headline guidance range for this year.

Correct. I think there was an Easter pun there somewhere, but I guess you're getting a prize for that, I'm not sure what prize yet. But I mean, the point is that we're a business making more than GBP 200 million a year, and therefore, under the definition of the accounting standards whilst this is an exceptional event, it is not material enough to be treated as exceptional. But clearly, it's a one-off and therefore is irrelevant from the long-standing profit generation capacity of the business, but we just wanted to be very clear today so that there was no misunderstanding.

Great. And excuse the jokes.

The next question in the queue is coming from the line of James Rose from Barclays.

It's James Rose from Barclays here. I've got 2, please. The first is on China. Could you talk through what trends you're seeing in March and potentially what we could think about modeling for April. Has activity completely stopped there? Is it going down double digits? It would just be helpful to frame that. And then secondly, on wage inflation. Do you get the sense that it's becoming more broad here across a greater variety of roles and income levels, or is it still fairly concentrated in the high skill roles?

Yes. On China, clearly, I guess, a couple of bits of color, if it is useful first of all. Clearly, within China, there are 2 component parts. There is Mainland China, and that was down 4% in the quarter; and there is Hong Kong, which is up 46%. And I think there are different conditions in both. Hong Kong is clearly more white collar, banking, catching finance, technology focused, still strong conditions, because they're continuing with lockdowns. I think in China what really was the issue was the fact that when the lockdowns were imposed, there was a high expectation it would continue. And I mean, clearly, it's being imposed, which is meaning that lots of businesses know that they won't be able to operate, or at least if they are operate, people are sleeping in a lot of the banks, people are actually sleeping in their offices. So we were certainly negative in March. The good news is that most of those fees -- it's not like we've at this stage lost fees. A lot of the fees were deferred. Clearly, we recognize permanent revenue when somebody starts work. And therefore, the fact there were significant lockdowns across March means that we lost some fees that have gone forward into April and May. And therefore, I think the real issue for Q4 is how long will these lockdowns continue and in what sort of basis afterwards. But we continue to -- we've got a great business in China. I think considering the circumstances, the team have done an exceptional job, clearly looking after our own employees as well as helping our candidates. And I've got no doubt that we'll return to growth very quickly. And on wage inflation, you're kind of correct. If 6 months ago, this was more sector focused. I think we all understand the areas such as IT, where I can pick a number of roles, where if I actually look at what the going rate is for those roles today versus what it was a year ago, actually, the starting salaries has gone up between 10% to 20%. So that's really quite significant in the technology space. I think now much broader across the market, there are 2 things driving it in some respects. One, massive skill shortage in any of the decision-making roles. So for example, if we said decision-making roles are 50,000, 60,000, 70,000 and above, very skill-short. And our clients continue to make fast decisions and they understand that candidates have got choices, they're going to have several options, and there's also going to be a lot more counter offers from employers desperate to hold on to them. So we really are seeing an uptick inflation across the board. And I think that is now almost baked in for the next 12 months because, of course, inflation is now at exceptionally high levels. And I think it's very difficult for a lot of organizations across the board if inflation rates are up 6% or 7% or 8% or 9%. And I think you can see, generally, most companies that we're seeing are doing increases in the 4% to 5% across the board, that they're paying up for talent at a higher level than that. And I think the benefit for us is, as we described at the interims, whilst our average firm fee, for example, was -- there was no minimal increase up to September, we saw that really accelerate and we had an exit rate up of about 3%, and that's continued to accelerate into this quarter. And I think I'm as much pleased by the temp margin because, of course, that means that as we place each new temp into an assignment, they are getting more money. So we get more pounds margin per hour, but we're also able to get a pickup in the margin that we're being able to charge. So yes, it's more in growing. Yes, it's at a higher level. It feels like calendar year '22 will be the year of kind of around 5% across the board. And then people are changing jobs, that's normally for a promotion. And in the past, you would have expected to have got 10% to 15% at the moment. It is much more in the 15% to 20% or around 20%. So it's -- I've only done this job for very, very close on 2 weeks of 16 years now. And when I joined, wage inflation was about 5%. Today, it's about 5%. Of course, the difference today is that cost inflation, for a lot of individuals, it's a higher level. And I think 1 of the quandaries to companies is the need to make sure that they do something proactive with their employees because otherwise, in a very skill-short, hot market, the best opportunity for people to get a material increase is to change jobs. And of course, at Hays, we're very happy to help all of our candidates find the next perfect role for them.

[Operator Instructions] The next question in the queue is coming from the line of Thomas Truckle from Jefferies.

Congratulations on a strong set of Q3. I have 2 questions, if I may. The first of which is regarding the net cash of GBP 240 million, whether there's anything to comment there, either on cash flow working capital and if cash collection has remained strong? And then my second question is just regarding headcount investment, thinking further out into FY '23 as to whether there's any view there or whether there is sufficient capacity in the system to fuel strong growth going into that year, given FY '22 investments was quite strong?

That's 2 good questions, Thomas. So first of all, on cash, happy with where we are at the end of March and confident that we will increase it further as we go across the back end of the year. As most of you know, we always tend to have a stronger cash performance in the second half versus the first half. And there are no encumbrances when we get to the end of June. So I think we'll have a strong cash performance. That will clearly put us in a position to materially reward our shareholders at the end of the year, and we'll give more on that when we come to the Investor Day in 2 weeks' time. David has told me if I don't get 5 plugs for the Investor Day that I won't be able to stay in the office any longer. So there's plug #2. I'll come back later on, on that. So I think cash performance is good and we expect to do even better. Clearly, we've got interim dividend to go out in April. But a lot of the tax that we pay is front-end loaded. So I think we're in a strong position there. And on head count investment, I've only done the job for 16 years, which means I've got 3 to 5 weeks. And I know we've got 3 to 5 weeks' visibility. And we will continue to look at everything like a hawk, as we do. Every Tuesday morning, we get all of the trading data globally graphed against where we expect it to be, where it's come out, all those things. And that's important in determining headcount. The important point, which is what you alluded to, is the headcount we've got today, we can increase our fees by 5% to 10% without further headcount investment. And absolutely, FY '23 is going to have a greater degree of monetization. So we'll continue to invest in areas such as the structural growth initiatives, technology. We're #1, #2 player at the moment. We're determined to double the size of that business, and we will continue to invest behind that. And I think Germany will continue to get significant investment because of the sheer profit upside in that business. But beyond that, I think we'll focus much more on driving consultant productivity, monetizing the investment we put in place, take advantage of price inflation, which we'll need to do because, of course, we'll have cost inflation, all of our own pay increases go through in July. And so that's going to be important for next year. And I guess, just finally, as a point, certainly for this financial year, we expect the drop-through to be between 40% and 50%. And if you look at the mix of growth in this quarter, there was a little bit more in rest of the world, a little bit less in Australia than we'd expected. And therefore, that has a little bit of a mix, so 40% to 50% drop through for this year. But then we go into next year looking to monetize significant levels of the investment. So I think we're well placed. But as to the actual headcount we do next year, we look at that. We always have plans for the next 3 months but, of course, we update those plans every single month based on activity levels and discussions with clients, et cetera.

The next question in the queue is coming from the line of Anvesh Agrawal from Morgan Stanley.

Most of my questions have been asked. Just one from me. You obviously called out Auto bit sluggishness in Germany. But outside of that, would you like to point any other industries where possibly we could see some impact from the current geopolitical uncertainty. Just thinking about the lead indicators on the KPIs as you sort of head into the final quarter of the year-end FY '23.

Yes. I think your point is well made. And first of all, credit to you for dialing in from your vacation. That's very impressive. I think we mentioned Auto. Auto is an interesting industry for us at the moment, because I actually see that has a significant upside potential in Germany, simply because, as you guys know, it used to be about 20% of our fees. Today, it's about 6% or 7% of our fees. And we really are the lead recruitment company in providing engineers in the electrification of vehicles, and there's a lot of demand going on in that space. Now coming to your broader point, I think we're all mindful of where PMI indices are across the world, and specifically, of course, within Germany. And of course, manufacturing PMIs have dropped dramatically over the last 6 weeks, et cetera. So far, we've seen no impact in our forward indicators, and we continue to have very high levels of incremental contractors and temp. Specifically within this quarter, the absolute growth in percentage terms of new temps really started to pick up, Anvesh, and I think, again, that's quite encouraging as we went across the quarter. But of course, most German companies will be watching their own indicators very tightly, as do we. But so far, all of the indications we've got are all positive. But as you guys know, one of the benefits of this very experienced management team, both globally and in all other countries, including in Germany, is that we've all been through various cycles across that period of time, various sensitivities. We watch our business like a hawk, and we'll move quickly if we have to. But at the moment, indications are positive in Germany, and we will continue to invest in headcount in Germany in this quarter. And again, one of the advantages for everybody on the call, if you attend the Investor Day, you'll actually have the top 3 members of our German management team there. So you can ask them specifically those questions, both at the session and in the drinks afterwards.

Yes, that's very clear. Just as a follow-up on that, really. Has anything sort of changed structurally for you that you can be a bit more resilient even if we have a bit of industrial softness, let's say, in Germany. I mean, the traditional wisdom is, we probably see the slowdown first in sort of [indiscernible] of the world and then sort of followed by [indiscernible]. But have things changed post pandemic structurally that you could be a bit more resilient?

So I think it will -- and we're always into theory here at least. But you're always into how difficult is the event, how long does it go? That determines whether companies just go a little bit slower on hiring or whether they stop hiring. Sitting here today, I will be very confident with our contractor base. And of course, 1 of the benefits, I think, now versus, let's say, the pandemic scenarios, I don't really see a situation, in absence of further escalation or a large energy issue within Germany, that clients are going to stop doing things. Clearly, there's lots of supply chain issues that we're seeing in the manufacturing sectors around the world. But I think 1 of the benefits in the contracting space is the high salary levels, the massive skill shortage in that market today, and the long tenure of each contract. So our average contracting assignment is about 9 months. At the moment, our average Temp assignment is about 12 months. And therefore, I think one of the things that Germany gives us, and it's 1 of the reasons that we're happy to continue to invest, is that we've got a greater forward secured revenue stream in Germany. And therefore, for a recruitment company, one of the benefits, one of the structural benefits we see in having a high-end contracting and temp business is that there's a longer-term visibility that gives you in revenue stream. And therefore, you go into an FY '22 -- FY '23 with a greater proportion. And then finally, of course, 2 final messages. First of all, a lot of the work we do goes into the R&D space. And secondly, one of the common themes in Germany and across the rest of the world is how many of our clients have come out of the pandemic and are really focused on driving efficiencies and digitization in their own business. And I think that's one of the reasons that we're seeing significant growth in the tech space. And it's one of the reasons as well. I think we're perfectly placed in whatever the scenarios are over the next few years. I think if clearly, there is some sort of economic weakness, again, we'll set up this case at the Investor Day, is that, that may just delay our opportunities for 1 to 2 years, but I'm incredibly bullish on the tech and the German opportunities for this group. And I've said on open mike before, I will exit the business with about -- my total shareholding will be about GBP 2 million, and I intend to keep those 2 million shares, because I actually think the opportunities for Hays over the next 5, 10 years is really quite dramatic. So that doesn't mean that we can buck a [indiscernible] dish, but I think it does mean that our German business has the greatest forward secured revenue stream at any high-end recruitment business in the world, which is a good position to be in.

And the next question is coming from the line of Steve Woolf from Numis.

Just a quick question regarding your own headcount experience and the additions that you've been making. Where has it come from? Whether it's being competitors or new people to the industry? How easy has it been given the way that you're recruiting now with use of technology? And whether to get people in the door, you've had to change any of your wage structures or cost structures accordingly, whether it's higher or lower incentive proportions around that? So just any sort of color around headcount, please.

Yes. So the mix has continued to be similar to previous quarters and about 20% is experienced hires from the competition and about 80% are newcomers, whether that is people with experience in industries. We bring a lot of people into our business who have got experience of Construction or Accountancy & Finance or HR or Legal, they know the sort of work before they join us. They may not have recruitment experience, but they know that. And that's always been one of our target markets. So I think, first of all, we've got a great brand. Secondly, we've got a great proposition, come and join us, be successful, and you can run the group. And we've got lots of fabulous role models in running specialisms, running offices, running countries that started with Hays 5, 10, 15, 20 years ago and are now running large businesses. So that's successful. Of course, we also have a -- I mean, one of the beauties for experienced consultants today and also for those consultants coming through is in a very strong Perm market where clients are making faster decisions and you have some wage inflation. Commission is much greater. I mean, I think we said at the interims, our commission percentage payout this year is about 2% of fees higher than normal. Because we've got a lot of recruitment consultants who are billing GBP 0.5 million a year, GBP 1 million a year, above GBP 1 million a year, because it is a very strong market. So the nice part there is the more successful they are, the more they build, the more they earn, and the more we retain them. So I think it's a virtuous model. And I think, Sandra Henke, who is our HR Director, I think has been with our business for more than 20 years. She has done a superb job with the teams around the world in making sure that we've always got real talent pipeline. We focus very heavily on our employee value proposition in the way we go to market and the way we bring in. And our training programs are second to none. And I think all of those are very important in trying to make sure when you bring somebody in, you give them structured training, mix of kind of classroom and via technology and on-the-job training. And I think that continues to be the case. So we've been able to increase our head count, very happy with the quality, very happy as people are moving up the productivity curve, which I think, again, sets us well for next year. And I think the teams have done a good job in getting a high-quality intake in this year in clearly, what's again, as you say, a tighter market.

There are no further questions in the queue. [Operator Instructions]

So if that's all of the questions for today, and we only had 2 Easter references. I think certainly, Rory felt like he was on the beach already or heading to the beach. We'd like to thank you all again for joining the call. I look forward to speaking to you at our Q4 FY '22 results on the 14th of July, and of course, seeing you at our Investor Day, which I think gets me to 5, which means I can now have a cup of coffee. Should anybody have any follow-up questions, Dave, Charles and myself will be able to take calls for the rest of the day. Thank you very much for joining us and also thank you very much for your questions. Thank you. Bye.

Thank you, everyone, for joining us on today's call. You may now disconnect your handsets. Host, please stay connected.