Hays plc (HAS) Earnings Call Transcript & Summary

Hello, and welcome to the Hays' Q4 Full Year 2022 Trading Update. My name is Courtney, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] And I will now hand you over to your host, David Phillips, to begin today's conference. Thank you.

Thank you, Courtney, and good morning, everyone. Welcome to Hays' quarterly update call for the 3 months ended 30th June 2022, the fourth quarter of our 2022 financial year. I'm here with Paul Venables, Group Finance Director. 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 during 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 highlights and key themes of today's update and discuss regional performances before taking questions. As usual, all net fee growth percentages on a like-for-like basis versus prior year unless stated otherwise. So let's start with the performance overview. We finished our financial year strongly, delivering record quarterly net fees in Q4, up 23%. Overall, group fees and activity levels were sequentially stable through the quarter and clients and candidate confidence remained at high levels. Currency translation had a positive impact, increasing headline net fees by 1% and there were no material working day adjustments in the period. I'd highlight the following key features. One, we delivered quarterly fee records in 15 countries, including an excellent performance in our largest business of Germany. Two, growth in all of our major markets is again led by Perm up 31%, with Temp up at strong 16%, and we saw further margin improvements in both Temp and Perm. The private sector, up 26%, again, significantly outperformed the public sector, up 7%. Three, our largest global specialism of Technology, which is 26% of group fees, delivered another record quarter with fees up 24% and exceeded GBP 300 million of net fees in FY '22. Our Enterprise Solutions business also produced another record quarter with direct outsourcing fees, up 30%. Four, overall, group fees and activity levels were sequentially stable through the quarter, and the group net fee exit rate of June was 19%. Five, consultant productivity remained at high levels, despite increasing consultant head count by 5% in the quarter. Six, as a result of all of the previous points, group operating profit for the year ended 30th of June is expected to be at circa GBP 210 million at the top end of our previous guidance range given at Q3 FY '22. And of course, this includes the one-off cost of exiting our Russia business, which is now complete. And seven, cash performance was strong. We ended the quarter in a robust financial position with net cash of GBP 295 million, which is also after GBP 18 million in share buybacks in Q4. And this strong cash performance supports the Board's commitment to returning significant cash to our shareholders. I'll now comment on the performance by each region in more detail. ANZ. Our ANZ division, 17% of group fees, increased by 12% with fee activity levels sequentially stable through the quarter. Perm, 41% of ANZ fees, was up an excellent 33%, whilst Temp increased by 2% with volume stable across the quarter. In the Private Sector, which is 65% of fees, increased by 13%, whilst Public sector grew by 11%. Australia fees increased by 11%, again led by Queensland up 22%. And our 2 largest industries, Construction Property and Technology grew 11% and 21%, respectively. New Zealand, 8% of ANZ fees, continued its strong run and increased by an excellent 33%. And consultant head count in ANZ increased by 3% in the quarter and 20% year-on-year. Germany. Germany, our largest business, representing 27% of group net fees, delivered another record fee performance, up 29%, with record Contractor volumes and continued strong activity levels. Contracting, 55% of German fees, delivered a record quarter. Fees grew by 32%, driven by 29% growth in contractor volumes, which ended the quarter at record levels. And margin and fee mix increased fees by a further 9%, partially offset by 6% lower average weekly hours per contractor. Temp, 27% of Germany fees, was up 17%, and Perm delivered another excellent performance, up 39%. At the specialism level, Technology, our largest specialism, was up 15%; engineering, 32%; and Accountancy & Finance, up 44%. Consultant head count increased by 6% in the quarter and 24% year-on-year. U.K. and Ireland. The U.K. and Ireland, which is 21% of group fees, increased by 22%, with fees stable through the quarter. Performance was led by Perm, 47% of UK&I fees, up an excellent 43%. Temp was up 8%, with higher margins, offset by slightly lower volumes. Private Sector fees increased by 34% with the Public sector down 2%. Most regions traded broadly in line with the overall business apart from the South West & Wales and the East of England, which grew by 33% and 28%, respectively. And Northern Ireland and the North West, which grew by 5% and 14%, respectively. Our largest region of London increased by 18%, including London City, up 40%. At the specialism level, we again saw excellent growth in Technology, up 35%. And Accounting & Finance, our largest specialism, up 31%, while Construction & Property grew by 7%. Ireland delivered another excellent performance with fees up 59% and consultant head count overall increased by 7% in the quarter and 24% year-on-year. Rest of the World. Rest of the World, which represents 35% of group fees and comprises 27 countries grew by 24%, with 14 countries delivering quarterly records. Perm, which is 67% of fees increased by 25%, with Temp up 22%. In EMEA ex-Germany, fees increased by 21% and activity levels remained strong. Our largest Rest of World country, France, increased by 31%, with Spain up 26%. Italy and Poland both increased, up 37%, and each delivered a fee record. The growth was slower in Belgium, up 6%. The Americas grew by 33%, with fee records in Canada, up an excellent 64% and Latin America as a subregion up 45%, and fees in the U.S. increased by 20%. In Asia, fees increased by 19%, with record fees in Japan, up 65% and another excellent performance in Malaysia, up 27%. China decreased by 5%, with strict pandemic-related restrictions weighing heavily on Mainland China through the quarter. Consultant head count was up 5% in the quarter and 29% year-on-year. Cash flow and balance sheet. Cash generation was again strong, and we ended the year with net cash of GBP 295 million. The Board is committed to returning significant cash to shareholders over a GBP 100 million cash buffer via core and special dividends and buybacks. During the quarter, we purchased and canceled 15.4% -- sorry, 15.4 million shares at an average price of 118p and this left a residual balance on the buyback from GBP 57 million. And as a reminder, the Board will add any residual amount of our share buyback program to the GBP 100 million cash buffer in calculating any FY '22 special. So coming on to current trading and guidance, and I'd make 4 points before an overall conclusion firstly, while we're mindful of increased macroeconomic and geopolitical uncertainties, clients and candidate confidence remains at good overall levels with continued skill shortages, supportive margin dynamics and rising wage inflation globally. Overall -- two, overall, the group fees and activities are sequentially stable at high levels with signs of some market normalization, particularly in the hottest part of the Perm market. But overall, this remains a very good market. Three, after significant investment in Consultant headcount over the last 6 months, we expect growth to moderate to 1% to 2% over the next quarter, mainly in our strategic growth initiatives. In FY '23, as I've said previously, our focus will be on driving productivity whilst continuing selective investments in structural growth markets. And four, we anticipate the group's effective tax rate will benefit from one-off items in FY '22 and will be materially below our previous guidance of 30%. But we expect tax rate to return to circa 30% in FY '23. So in conclusion, we've had a strong end to our financial year and are firmly focused on driving profitable cash-generative growth and increasing consultant productivity. Although the increase in macroeconomic uncertainties are clear, our market-leading position, strong brand, highly experienced management teams and our financial strength mean we are confident we can deliver our long-term objectives. And with that, I'll hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] And our first question comes in from the line of James Rose calling from Barclays.

Two questions from me. The first one is just to come back on your design for normalization in the hottest areas of Perm and just give opportunity and sort of what you're seeing? And then secondly, could you talk a bit more about how the U.S. business is doing and in particularly your exposure to tech rolls? Is there any sign of slowdown there? Or what your leading indicators tell you in the U.S.?

So I think the -- you remember, James, on the last couple of quarters, I've said my more than 16 years now at Hays, this has been the strongest Perm market I've ever seen by some way. And of course, that can never continue to expand at that level of growth. So all we've seen, I think, is just some froth come up at the top of the market. This remains a very strong Perm market today. There's good candidate and client confidence. I think one of the benefits of operating in the specialist recruitment market is that we know the significant shortages. And today, there's high levels of job churn and wage inflation. So this remains overall a very good market. And then specifically on your points on the U.S. Look, I think overall, the U.S. remains a good market. The nature of our business in the U.S. is our tech business is well diversified, is not as strong as it was 3 or 6 months ago, but we're still delivering good growth today. And I think if I took all of the data we've got around the world, I think the strength in these results is we had a monster March, which was an all-time record by about GBP 8 million. And sequentially, we've been stable across this quarter. June, for example, isn't a record. But actually, if we adjust for less working days in June versus March, then our fee level in June was very similar to the March level. So good overall market. Perm not as strong as it was 3 or 6 months ago, but this is a really good market for us to drive profitable growth.

The next question comes in from the line of Thomas Truckle calling from Jefferies.

Thomas Truckle here standing on behalf of Kean Marden. I have 3, if I may. The first of which is cash generation clearly appears to be strong. Is there any further commentary around cash collection or debtor days versus perhaps previous quarters? My second question comes to the Contractor volumes, clearly, record Contractor volumes in Germany. Is there any stickiness there? In other words, are we able to anticipate those volumes will remain in subsequent quarters? Or can it vary very much so quarter-on-quarter? And then my third question is just around the narrative of potential gas restrictions in Germany. Clearly, exposure to tech and perhaps accounting may be limited, but for those more industrial sectors such as engineering or construction, is there any risk to those areas?

No, I think they are good questions, Thomas. And if I miss part of it, please do come back. First of all, on cash generation, I guess, as the group FD, and this is my 17th year end, I'm delighted to be finishing on a strong cash position. It's too early to say where our debtor days are. But I think considering we've had strong growth in our Temp markets over the year. The fact that our working capital has only increased by GBP 50 million in the year is something that we're incredibly proud of. And, I think, James Hilton has to take a hell of a lot of credit for that. He's done a great job in managing it around the world. And this will be great for the future as well as James takes over. So I think the generation itself was strong. We could well have gone with excellent. It was more than we expected, Thomas. We've certainly done GBP 20 million-or-so more than we expected. And therefore, as the Board thinks over the next couple of months and certainly we come to decisions we have to take it in August. I think, first of all, we'll look at the buyback program and whether we want to top that back up to GBP 75 million, clearly, no decision taken yet, but we'll reflect on that. But even if we did that, if we top that buyback program up from GBP 57 million to back to GBP 75 million, you'd still be looking at a special dividend of about GBP 120 million. We feel no need to continue with this working capital buffer. We said that we were looking to stop that this year. And then finally, of course, the core dividend itself will be strong. So I think you can see scenarios of total dividends for the full year in the region of about 10p with about 9p coming as part of the special and the final course. So I think all that's important. We've always been, by far, the best cash-generating machine of the specialist recruiters globally. And I think a final dividend, including special in the region of 9p and 10p for the full year, including the interim is I think a strong performance. So I'm sure our shareholders will be happy with that. Coming on to Germany, I think your question is -- both your questions are spot on. So let me take the Contractor volumes first. I think without a doubt, our standout performance is in the German market because we are, by far, the market leader in Germany, and we will have grown our Contractor base this year by an amount that's bigger than all of our competitors put together. So we're -- we have a very strong business in that marketplace. And I think our team has done a great job in driving growth. Contracting originally was very much a tech business. Now it's much more diversified. We've got by far the largest contracting heavy high-end senior interim market in Accounting & Finance. We've got a superb HR practice now that we've built out over the last few years. And I think the nice thing about Contracting volumes is, on average, contractors last -- contracts last on average about 9 months. And if you remember, whether it was the financial crash in 2008 or the pandemic in 2020, no Contractor assignments were canceled earlier. So I think the Contracting base in Germany and the German business in total was the best performer and is the one that we would be the most confident of going into the next year, hence why we did investments. So I think we're in a strong position, and I'm very confident that, that business will continue to grow into the next year. And then you come back to an interesting part, don't you? Because understandably, there's a lot of focus in the press and the markets at the moment about inflation and concerns about where economic growth goes to. And they're very understandable, and we all read it and that is clear. I think without a doubt, the energy situation in Europe is the most precarious one. Will supplies continue to flow through to Europe in gas and oil? Well, I think we all hope so. But that's not something that's within our control at Hays. But if you look at the German press at the moment, there's a lot of discussions going on between German government and large manufacturers. So where we are is, we've got a fabulous business in Germany. It grew up 29%. I think it will be by far the largest growth market for us next year. So we're in an incredibly strong position. We can't control what happens in energy, neither should we try to. Our job is to stay very close to all the activity in our business that we do and make sure that we convert every growth opportunity we've got. But great questions and hopefully, I answered them, Thomas.

[Operator Instructions] The next question comes in from the line of Rory McKenzie calling from UBS.

It's Rory here. Just 2 for me, please. Firstly, that 19% growth rate in June suggests that fee growth slowed through the quarter. But you also say that activity levels remained sequentially stable. So can you help us interpret that exit rate? Anything to be aware of there? And then secondly, what's your estimate of where wage inflation is tracking now? And is it perhaps stabilizing after about 18 months now of acceleration? And maybe beyond that, it would be great to get your thoughts on what happens to client confidence in the current market? Maybe we finished that kind of catch-up hiring from 2020 now? And obviously, everyone is seeing costs of labor go up and up. So at what point do you think almost this kind of impacted its own cycle, if that makes sense?

So 3 great questions. And the third one, well, we should all get our collective kind of futuristic views on the table. But I think if we start with the first one, no, we're really happy with June. It's just the comparatives get harder a year ago. So if you remember, a year ago, we had a phenomenally strong end to the year. And as I said, whilst if you look to absolute level of fees, June is below where March is if I adjust for working days in Germany, I think we had 2 less working days in Germany in June than we did in March just for that and [ Jubilee ] and all that sort of rubbish you end up at the same fee level. So very happy with the fee level or we're trying to get across this is that we've been sequentially stable across the quarter. So if you go from March into April into May into June and you adjust the months for working days. They're all at the similar level, and March was a monster record. So I think we're very happy with that. On wage inflation, has it stabilized after 18 months? I don't think so. I think what is clear is over the last 6 months, most companies have realized that after a decade or so of it being north of 2% because as we've discussed before, 1% we're seeing as being insulting and you should build it up and do 2%. I think pretty much across the board now. What we're seeing is around 5%. Clearly, there are certain companies that are doing kind of one-off payments. But I think 5% across the board, certainly in the professional space is what we're seeing. And then on top of that, of course, as we know, there's a massive war for talent. And if you look in the technology space, if you're in tech, this is a great opportunity to be changing jobs or going for new assignments because there's a massive skill shortage around the world. The war for talent is really real. That's on one hand, has been exacerbated by the fact that there's been [indiscernible] immigration, skilled immigration into major markets around the world, whether that is the U.S., whether that's the U.K., whether that's Australia, whether that's Germany, et cetera. But at the same time, as we know, there is greater opportunities to work from home and work remotely, et cetera. So I actually think wage inflation will stay at this kind of elevated level for some time. Do I think companies across the board are suddenly say, well, 5% is not enough, it's going to go to 10%? No, I don't. What I think they'll do is they'll go with 5%. They'll try and secure the real talent in that business. And they understand that for certain roles they're bringing in, they're going to have to pay more. And then finally, on client confidence, I don't have a crystal ball, Rory, I got, I wish I did. What I know in our business is it's superbly managed. All of our operators are on top of all of the trends, all of the time. And at the center, we have a really good dashboard of all of our data with new jobs registered, interview numbers, conversions, time to hire, all this data by sector, by country, and James has done a great job in pulling all that data together. So we have a global dashboard that we can discuss with all of our country managers when we do the reviews. I think this is an intriguing conundrum. Absolutely, the economic data is worth, absolutely from a macro level company, there are enough concerns out there that could cause real issues. But at the same time, we've got full employment. I read a report that came out on Australia this morning where record low unemployment at 3.5%, which means that there is no unemployment at all in the skilled space. So the talent for the -- so the war for talent continues to be dramatic. Therefore, I personally don't think this is as much about client confidence. That will be what it will be, and it will be logical. It's much more about candidate confidence and does that remain strong? And all we can say today is it's at very high levels. But I think that will be the determination of where the specialist recruitment markets go to over the next 3 months, 6 months and 1 year. But certainly, today, it remains a very good market.

The next question comes in from the line of Paul [ Kirjanovs ] calling from Crédit Suisse.

I just had a question on head count additions. Are you seeing trouble with accessing experience hires? Is that mix between experienced and nonexperience changing for you? And does that affect productivity plans? And maybe as a follow-up, are you seeing trends changing in your own attrition internally?

Thank you. And again, Paul, if I miss any part of that, please do come back to me. Look, I think on head count, generally, as I said before, over the last 18 months or so, I think we've had a really good mix between about 80% of the people coming into our business being new grads. They may well have had 1 or 2 years' experience in the relevant area. As I've said to you several times over the years, kind of failed accountants are fabulous for our accounting and finance business because at least now the market inside out. But equally, we have a superb academy that gives people very relevant skills and training. But we also mix that with about 20% of experienced hires, and that's what we use to help accelerate the growth and open up new subspecialisms, whether that be in technology, life sciences, HR, around the world. And we set out a stall at the Investor Day, we continue to rapidly rollout some specialisms in the technology space. And I think that was demonstrated in another great set of results today, GBP 300 million, well on the way to GBP 500 million and beyond. Do we see any difference in that mix between inexperienced and experienced hires? No. Do we struggle to bring people in? No. We are the preeminent specialist recruitment company in the world. And that puts us in an incredibly strong position to attract the talent. We've got some great leaders and managers around the world. And in the end, you join the business to work for inspiring individuals. We perform -- for example, we had the [ PLC ] Board having a complete review of our U.K. business over the last 2 days [Audio Gap] I'm excited about where the opportunities for the U.K. business is over the next 4 or 5 years. And then looking at internal trends, no real change in kind of attrition. By the very nature of recruitment, you have a reasonable level of attrition in the first year because this is a hard sales-driven operation. Then when people get beyond that 1 to 2 years, they tend to stay with us up to 5 years. And then the very nature of that is some people will leave similar to your industry between years 5 and 7 to set up own practices or do other things or whatever. But no, no, for us, very easy to get real talent into our business and really quite excited about the opportunities we've got to drive that talent forward. And certainly, all of the people we brought into our business over the last year, if we look where they are on the productivity curve, which has gained a lot of the data that we look at, making good progress. And that puts us in a really strong position, which is why our head count investment we expect to be much lower in the next year because we've got sufficient head count in our business today to drive volume growth of 5% to 10% and our primary focus in FY '23 is on driving consultant productivity.

The next question comes in from the line of Anvesh Agrawal calling from Morgan Stanley.

Just -- most of my questions have been asked. Just a bit of a follow-up on the head count question, really. Like 5% addition in the quarter when the run rate on the fees was sort of stable, seems quite punchy. I'm just wondering what drove that? And I know you sort of expect it to be sort of a bit moderate going forward and productivity focus. But like what led to this strong addition in the head count when there was no real acceleration in the underlying fee rate?

Yes. I mean I think, Anvesh, managing head count is a combination of lots of factors, isn't it. It's what is the availability of really talented individuals in the market. As you know, we set out our stall at the Investor Day around investment, specifically into SGI and tech. And we were also looking to continue with investment in Germany because I think that's warranted with where we are. Absolutely, we ended up with 1% or 2% more than we expected going into the quarter. But equally, you've seen that that's why we've given the guidance we've given going into the next quarter. I actually think over the next 6 to 12 months outside of SGI, we've now got -- I think we're in a really good position now to just put our foot on the ball, drive the SGI investment continuing going forward. We don't need to make further investments in BAU investment. We're happy with the head count we've got. We'll focus on driving productivity that will help drive our profitability and sets us up really well, assuming the economy holds for a good year next year, but it's never -- it's more of a -- it's more of an art than a science yet, perhaps 1% to 2% higher than we would have expected, but that will be adjusted in the next quarter.

Yes. And just one the SGI. I mean, like, obviously, there is a big structural growth out there and that's sort of driving that investment but sort of what we look to in KPIs is something to have a rethink or put a break on it in case the macro environment sort of start to deteriorate or that's an investment that you sort of continue to make even if there is a modest slowdown?

Yes. I think, Anvesh, I'm always using the word you've used assuming a modest slowdown, we continue with all of the SGI investment, I think we set our stall out very well at the Investor Day. We've got a very supportive shareholder base, their experienced management team, and we will continue to drive forward. I think SGI gives us such fabulous opportunity not just in tech, but also in enterprise. Without a doubt, companies continue to bundle together in the specialist space. They're purchasing of recruitment is a growing market incredibly well positioned as that market grows. It's been fascinating to see a number of our competitors decide after years of saying that we're never going to get involved. It's about time to get involved in this space. We have a really strong market position. We're determined to drive it forward. But clearly, in the business as usual head count, as I said, we've got it in place, that absolutely will look at all of the underlying trends. If they continue to be strong, then we'll look to return to some modest investments in that space in the second half. Clearly, if the trends got weaker, then we would adjust the head count. We are a very experienced management team. We know exactly what to do if market trends change. But at the moment, as I kind of started the call with this remains a very good market with really good growth opportunities.

We currently have no further questions in the queue. [Operator Instructions] Okay, and we have no further questions coming through. So I shall hand the call across to yourself, David and Paul for any concluding remarks.

Thank you very much, Courtney. So that's all the questions for today. We'd like to thank you again for joining the call. I look forward to speaking to you next at our full year results on the 25th August and then clearly, James Hilton will take over for the Q1 in October. Should anybody have any follow-up questions, David, [ Charles ] and I will be available to take your calls for the rest of the day. Have a great day and a really good summer. Thank you very much, guys. Much appreciated.

Thank you for joining today's call. You may now disconnect your handsets.?