Hays plc (HAS) Earnings Call Transcript & Summary

Hello, and welcome to the Hays' Trading Update Call for Q2 FY '23. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, David Phillips, to begin today's conference. Thank you.

Thank you, Laura, and good morning, everyone. Welcome to Hays' quarterly update call for the 3 months ended 31 December 2022, the second quarter of our 2023 financial year. I'm here with James Hilton, Group Finance Director. Before we begin, please be aware that today's call is being recorded with the recording accessible using the number and the 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 in 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 James.

Thank you, David. Good morning, everyone, and thanks for joining us. I'll present the highlights and key themes of today's update and discuss regional performances before taking questions. As usual, all net fee growth percentages are on a like-for-like basis versus prior year unless stated otherwise. Performance overview. We performed well in the quarter with strong performances across our key strategic areas, including Temp and Contracting, Technology and in Germany. Group fees grew by 8% and were stable at high levels with November matching our previous fee record from September 2022. Performance was consistent across the quarter, and our December fee growth exit rate was 5% or 6% when adjusted for working days. Growth was led by our Temp and Contracting business, up 9%, with Perm up 7%. This represented the first outperformance of Temp in 7 quarters. Currency translation had a positive impact, increasing headline net fees by 3%. Adjusting for 3 fewer working days in Germany versus the same period last year, group fees increased by 10%. I would highlight the following: One, growth in Temp and Perm was driven by our actions to increase fee margins and our focus on higher-value markets, together with the positive effects of wage inflation. Two, activity remained at good overall levels. Temp volumes increased through the quarter, in line with our normal seasonal trends, but we saw overall Perm volumes decrease modestly through the quarter. Three, we delivered quarterly fee records in 9 countries, including a standout performance in our largest business of Germany and also in EMEA. Our largest global specialism of Technology, 26% of group fees, also delivered another record quarter with fees up 10%. We grew direct outsourcing fees in Enterprise clients by 7%, increasing our market share with a strong pipeline of opportunities ahead, and had an excellent performance in our Engineering business, up 23% and now representing 10% of group fees. Fourth, group consultant headcount decreased by 2% in the quarter, as previously guided, as we balance modest investments in supportive markets with selective reductions where underlying demand was lower. Consultant headcount increased by 10% year-on-year, in line with our underlying fee growth, and average consultant productivity was stable at good levels. Five. Our cash performance was good, and our 31 December net cash position was circa GBP 100 million, in line with our expectations, after paying circa GBP 150 million in core and special dividends and circa GBP 19 million in share buybacks in the quarter. I will now comment on the performance by each division in more detail. Our largest market of Germany, which represented 28% of group fees, delivered another record fee performance, up 22% or up 28% when adjusted for working days. Fees increased sequentially through the quarter, driven by good levels of client demand and ongoing skill shortages in our high salary markets. Contracting, 59% of Germany fees, delivered another record quarter, up an excellent 26%. This was driven by 19% growth in contractor volumes, again to record levels. Improved Margin and Contractor rate mix increased fees by a further 11%, partially offset by a 5% headwind from fewer working days. Hopefully, average weekly hours per contractor was flat versus prior year, in contrast to a declining trend in recent quarters. Temp, 23% of Germany fees, increased by 5% or by 20% on a working day adjusted basis, driven by 17% volume growth. Perm delivered another record performance, up 32%. At the specialism level, Technology, our largest specialism, was up 12%; Engineering up 20%; Accountancy & Finance up 29%; and HR up an outstanding 160%. Consultant headcount was up 3% in the quarter and up 19% year-on-year. The U.K. and Ireland, 21% of group fees, increased by 4%, with fees sequentially stable through the quarter. Performance was led by Temp, 55% of UK&I fees, up 5%, entirely driven by increased margin and mix. Perm was up 2%. Private sector fees, 68% of UK&I fees, increased by 3%, with the Public sector up 6%. Most regions traded broadly in line with the overall business, apart from Northern Ireland and the Southwestern Wales, which increased by 9% and 8%, respectively; and the Northwest, which was down 3%. Our largest region of London was flat, including London City, up 4%. At the specialism level, Technology produced another record quarter, up 13%; and Accountancy & Finance grew 4%; while Construction & Property declined by 2%. Ireland delivered another excellent performance with fees up 22%. Consultant headcount decreased by 6% in the quarter and increased by 6% year-on-year. Our ANZ division, 14% of group, decreased by 4%, with fees broadly stable through the quarter. Perm, 38% of ANZ fees, was down 1%. Temp decreased by 6%, with volumes down 12%, partially offset by improved margin and mix of 6%. Private sector, 61% of fees, decreased by 6%, with the Public sector down 2%. Australia fees decreased by 6%, with New South Wales down 3% and Victoria down 12%. Our largest ANZ specialism Construction & Property grew by 4%, while our second largest specialism Technology was flat. Accountancy & Finance was up a strong 15%, with HR down 11%, and our Other smaller specialisms, also down 11%. New Zealand, 9% of ANZ fees, continued its good run and increased by 10%. Consultant headcount decreased by 5% in the quarter and increased by 5% year-on-year. Rest of World, representing 37% of group fees and comprising 28 countries, fees grew by 6%, including 8 countries delivering quarterly records. Excluding the fee impact of the closure of our Russia business in March 2022, Rest of World growth was 9%. Perm, 66% of Rest of World fees, increased by 6% with Temp up 7%. EMEA ex-Germany produced record fees, up 13% or 19% excluding Russia, with broad-based growth across the region. France, our largest Rest of World country, and Switzerland, both delivered record performances, each up 23%. Italy and Poland increased by 24% and 10%, respectively. And the UAE delivered a standout performance, up 69%. The Americas decreased by 1%, with strong growth of 21% in LatAm and good growth in Canada of 10%. The U.S.A. was down 9%, with fees and activities slowing through the quarter, particularly in Perm. Asia declined by 5% with excellent fee growth in Japan, up 38% and with Malaysia up 9%. China decreased by 28%, although Hong Kong significantly outperformed Mainland China, where the pandemic continues to significantly impact performance. Excluding China, our Asia business grew by 20% overall. Overall, Rest of World consultant headcount was down 1% in the quarter and up 9% year-on-year. Cash flow and balance sheet. We had a good cash performance and ended the quarter with net cash of circa GBP 100 million after paying circa GBP 150 million in core and special dividends in November. We saw a working capital outflow over the half year driven by the excellent growth in Contracting and Temp in Germany and EMEA, which are our highest salary and therefore, most working capital-intensive markets. We also purchased and canceled 18.6 million of shares under our buyback program in the quarter. Our buyback program has a residual balance of circa GBP 18 million outstanding at 31 December. Current trading and guidance. I would make the following points: As always, at our Q2 update, it is too early to quantify our new year Temp and Contractor return to work. However, our client and candidate activity remained at good levels in our Temp and Contracting business. Perm activity weakened in several markets across Q2, notably in Australia, the U.K. and the U.S., where we saw a lengthening of some client decision-making and increased candidate uncertainty. Two. Demand in our core markets continues to be underpinned by skill shortages globally. Three. Our actions are driving supportive margin dynamics, as is wage inflation, and we expect to remain a net beneficiary of wage inflation through FY '23. Four. Having adjusted consultant headcount in several markets in Q2, we currently expect consultant headcount will be broadly flat in Q3 overall, as we focus on driving productivity, while selectively investing in attractive structural areas such as technology. Five. The group's cost base prepared decreased through the quarter by just over GBP 1 million per period, and we remain focused on cost control. And six. As flagged in the statement, group operating profit in H1 FY '23 is expected to be between GBP 95 million and GBP 97 million. In conclusion, we have performed well and exited the quarter with working day adjusted fee growth of 6%, led by our largest market of Germany. Clearly, we are mindful of macroeconomic uncertainties and our highly experienced management teams will react swiftly to any changes and are watching these indicators closely. Our focus is on further increasing margins and closely managing our overheads, while capitalizing on the significant opportunities we see in the longer term. I will now hand you back to the administrator, and we are happy to take your questions.

[Operator Instructions] We'll now take our first question from Rory McKenzie at UBS.

It's Rory here. Three, please. Firstly, can you talk about the volumes in both Temp and Perm? How they evolved through the quarter? I appreciate December was a tough month to look at comparisons, but yes, just how those numbers evolved? And then secondly, obviously, the pricing component of fee growth, so the combined wage inflation and fee rate expansion, and is that still rising sequentially? And are you seeing any areas where you expect that to come down? I appreciate you've shifted the mix quite a bit. And then lastly, you talk about how headcount is likely to be flat sequentially. Can you just say what that could then mean for the kind of periodic cost base we should expect in the second half?

Thanks, Rory. I'll start with the question on volume on Temp and Perm through the quarter. I think what we saw in intent was good levels of activity overall. And we grew our headcount, our external headcount or our Temp volumes sequentially by about 4% through the quarter, which is kind of consistent with what we would normally expect through this part of the year. So that's why we put in line with our normal seasonal trends. So we continue to see good numbers at Temp starters with our clients. And I think importantly, we saw our clients in most of our major Temp markets looking to extend contractor placements. So we saw lower levels of finishes than we would normally expect. And I think that's indicative of a skill-short market where companies still need work to be done and they're keeping hold of good talent. So that, again, was a tailwind to the sequential trend on Temp volumes. Perm, on the other hand, as we put in the statement, decreased modestly on a sequential basis through the quarter. And as you say, it's always slightly difficult to get a read through on December because of seasonality. But again, I'd say that Perm volume placement reduced by about 5% to 10% sequentially in comparison to Q1, so if I look at that on a month-on-month trend. Your second part of the question was around the pricing dynamic within that sequential trend and whether we saw the continuation of positive pricing? And I think, again, it's always difficult to look at it month-on-month because you get natural sort of ups and downs depending on the month in question. But I think we did continue to see a positive support in Perm and in Temp pricing on a sequential basis, as we move through the half. So I would say that it perhaps wasn't quite as strong as what we saw in the 6 months to June, where I think that dynamic was clearly a very positive one, but we did see it move forward through this half and into this quarter as well. I think the final question was on headcount and cost base. And I think we -- obviously, we put in the statement, we reduced headcount by 2% overall through the quarter with -- and that was a sort of selectively investing in countries such as Germany and Europe, where markets were positive, and we reduced slightly in other markets, notably in the U.K. and Australia, where things are a bit tougher. And that's a balance that we're quite happy with, and we managed to keep overall average productivity at good levels and headcount in line with underlying fee growth. So I think that was a good outcome for the quarter. Going forward, as we stand today, we expect it to stay pretty flat through the third quarter. Clearly, if things change, then we'll review that and respond appropriately. What does that mean for the cost base? Well, I think other things being equal, I would expect it to remain fairly consistent if we're keeping headcount fairly level through the next quarter, Rory. So as you know, we keep a close watch on all our overhead costs, and we did that through Q2, and we'll continue to do that through Q3. But I expect it will be running broadly flat if our headcount is staying broadly flat through the next quarter.

We'll now move on to our next question from Kean Marden at Jefferies.

Another question, I'm afraid, on net fee margins. So just looking at Alistair's comments about further increasing them. Do you mind, James, just running through that in a little more detail? So are we looking for positive mix factors to drive that or are you still looking at sort of real underlying expansion in fee margins in some pockets? And I guess, those have obviously been sort of tight labor markets, which is pretty obvious. But if you can call out any particular areas that maybe Alistair had in mind in that paragraph? And then secondly, we're still not seeing sort of normalization in debtor days, which is great news for you guys and your finance team at the moment, but are you starting to see any change in sort of payment behavior in any pockets anywhere that you might want to highlight?

Thanks, Kean. Yes, the fee margin question is a good one. And I think it's -- I mean, what we're seeing is the positive pricing has really come from 3 areas. Clearly, our own actions and efforts we have taken to increase our margin in a skill-short market. I think secondly, our focus on targeting parts of the market which are higher value and not just of long-term strategic growth, but also their higher value and higher-margin parts of the market such as Technology, such as Engineering and other sort of skilled areas as well. And that's had clearly a mix impact, which has been beneficial through this half and we expect to continue going forward. And then finally, clearly, there's been underlying wage inflation in the market overall, which has clearly had a positive impact on pricing overall. But I think the second of those factors is a really important one and is part of our long-term strategic positioning of the business on markets such as Technology, where average day rates on Contractors and Temps are significant and are high; likewise, Engineering, which this quarter grew by 23%, is now our fourth largest specialism at 10% of the overall group fees. And that mix and repositioning of the business to focus on those markets has been a significant positive and I would expect that to continue. I think, Kean, the second question was on DSOs. And yes, we've had a good half. I mean going back to prepandemic days, DSOs were at 39 days, and we reduced that through the pandemic to 33, 34 days. And we've held on to that through the half. We saw -- usually cash collections were a little bit slower through the summer, as people go on holiday, and then from September through to Christmas, we've had a good run on cash. We've collected well. The teams have done a great job. And we've closed the year at GBP 100 million -- sorry, the half year at GBP 100 million of cash, which is where we expect it to be, which reflects our performance and that's after clearly the dividend and the buyback payments through the quarter.

And to be clear, no pockets of sort of slightly concerning behavior or just sort of lengthening in terms or more difficulty in collection from any parts of the business? I appreciate the overall number is still pretty healthy.

No, no. We're seeing pretty good trends on collections. No real change in insolvency risk and underlying risk with clients. Our ledger aging is consistent. We've not seen that deteriorate, which is a positive. So all the relative buckets are kind of in line with where we'd expect to be. So I think great performance from the guys. Clearly, we keep a very, very close watch. Personally, I spend an awful lot of time watching it, and we'll continue to do that. But I think the teams around the world have done a great job.

[Operator Instructions] We'll now move on to our next question from James Rose at Barclays.

Two from me, please. Firstly, on headcount. The second quarter was down a little. And then I guess, why the guide for flat headcount in Q3 when that's still up year-on-year or why not take that down a little bit? I mean it seems like quite a positive signal coming from you still. And then secondly, on Germany, I mean, it still looks really strong. How broad-based is that across your customer base, I mean, across the regions? Are there any areas which are slowing down? And any sort of helpful comments on changing customer behavior you're seeing in that region would be appreciated?

Sure. Okay. I'll start with the headcount. And as you mentioned, James, it was down 2% in the quarter. And why have we guided flat for the next quarter? I think simply, we've made some corrections where it was appropriate to through this quarter. And we've got the balance in line overall with the underlying level of fee growth. We exited a 10% headcount increase and that's consistent with the underlying fee growth through the quarter. So I think that's been quite a good correction and the right one to make. And I think as the market is today, we're happy with that level of capacity that we've got in the business. And bearing in mind the market is a little bit tougher than where we were 12 months ago, we need the headcount we have to drive the fees to the level that they are. And I think that we've got the right level of mix of headcount in the business. Clearly, we'll continue to review it and we'll tweak where necessary, but we'll keep a close watch on the market and we'll make any adjustments if we have to. I mean I would add that through this half, we've added close to 300 heads in our SGI program and that's continuing the strategic investment and positioning of the business into long-term growth markets. And I think clearly, that's a cost implication of about GBP 8 million through the half. But I think we're starting to see the benefits of that coming through in the performance of the business where clearly, we've performed strongly in those areas. So overall, we're pretty pleased with where headcount is. We're happy with it now, and we'll keep a close watch on the trends in the new year. I think your question on Germany was -- I mean we're absolutely delighted with the performance in Germany. I think it really is a superb performance given the scale of that business. And bearing in mind that business did over GBP 90 million of fees in the quarter and is in the business with 2,100 consultants. So it's a big business. And to grow that at an underlying rate of 28%, I think, it really is a standout performance. All of our contract areas performed well, whether that's Contracting, Temp, and Perm, all performed well during the quarter. I mentioned on one of the previous questions around some of the trends we've seen on client behavior, and we've definitely seen that in Germany perhaps more so than anywhere else where clients have been hanging on to Contractors and Temps. And we've seen lower finishing numbers than we would normally do. And clearly, that's a tailwind to overall volumes. And we're continuing to see positive pricing dynamics across Germany, and we expect that to continue given such skill shortages in the market. And I think this performance has underlined our strong market position as market leader in Germany. Perm, actually, we had a record Perm performance in December, which was, again, very, very pleasing and being up 32% in the quarter in Perm was a really, really strong performance. And client-wise, we're continuing to see good dynamics and conversations with clients in automotive, in manufacturing, broad-based in defense technology areas. So there's no real obvious pockets of weakness in the market. It's a pretty consistent picture. And I think it is indicative of the underlying level of activity in the German economy.