Hays plc (HAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the trading update for the quarter ending 31st of March 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Phillips. Please go ahead.

Thank you, Sharon, and good morning, everybody. Welcome to Hays quarterly update call for the 3 months ended 31st March 2023, the third quarter of our FY '23 year. I'm David Phillips, Head of Investor Relations, and I'm here with James Hilton, 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 will 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 the regional performances, before taking questions. As usual, all net fee growth percentages are on a like-for-like basis versus prior year unless otherwise stated. Overall, we delivered another record quarter with good growth across our key strategic areas, including Temp and Contracting and Technology, and an excellent performance in Germany. Group fees grew by 5%, including a monthly fee record in March, and our growth exit rate was 4%. Growth was led by our largest business, Temp and Contracting, which represented 59% of group fees and was up 11%. Perm fees decreased by 2%, as activity levels reduced through the quarter, driven by reduced clients and candidate confidence, which led to a lengthening in time to hire than most Perm markets. Currency translation had a positive impact, increasing headline net fees by 5%. I would like to highlight the following. With Temp volumes down 2% overall, our growth in Temp was again driven by our actions to increase fee margins and our focus on higher-value markets, together with the positive effects of wage inflation. Overall Perm volumes increased by -- sorry, decreased by 11%, partially offset by continued increase in average Perm fee, which is up 9%. We delivered quarterly fee records in 8 countries, including a standout performance in our largest business of Germany up 23% and also in EMEA. Our largest global specialism of Technology, 26% of Group fees also delivered another record quarter, with fees up 8%. We also saw an excellent performance in our Engineering business, up 23% and now our third largest specialism at 11% of Group fees. Consultant headcount decreased by 2% in the quarter, as we continue to align our consultant capacity to the underlying levels of activity and demand in each of our markets. Consultant headcount increased by 4% year-on-year, exiting the quarter in line with fee growth with average consultant productivity at good levels. Our cash performance was solid with debtor days unchanged at low levels. Our 31st of March net cash position of circa GBP 80 million, in line with our expectations and after GBP 12 million of 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 32% of Group fees, delivered another record fee performance of 23%. Fees increased sequentially through the quarter, driven by ongoing skill shortages in our high salary markets, higher-than-normal level of contract extensions and solid client demand for new projects. We ended the quarter with near-record Contractor and Temp volumes. Contracting, 60% of Germany fees, delivered another record quarter, up an excellent 27%. This was driven by 10% growth in contractor volumes together with 16% via the mix of improved fee margins and higher contractor rates. Average weekly hours per contractor increased by 1% versus the prior year. Temp, 24% of Germany fees increased by 20%, driven by 13% volume growth, and Perm increased by 13%. At the specialism level, Technology, our largest specialism was up 17%, Engineering up 27%, Accountancy and Finance up 30% and HR up an outstanding 64%. Consultant headcount was up 1% in the quarter and up 10% year-on-year. The U.K. and Ireland, 20% of group fees decreased by 2%. Performance was led by Temp, 58% of U.K.&I fees, up 3%, entirely driven by increased margin and mix with Temp volumes down 5%. Perm fees decreased by 8%, driven by volumes down 20%, as Perm markets became more difficult through the quarter. Private sector fees, 69% of U.K.&I fees, decreased by 5%, with the public sector up 6%. Most regions traded broadly in line with the overall U.K.&I business, apart from Northern Ireland and North East, which increased by 19% and 4%, respectively, and the North West, which was down 12%. Our largest region of London decreased by 6%, including London City down 7%. At the specialism level, Accountancy & Finance and Technology decreased by 4% and 1% respectively. Engineering increased by an excellent 32% with Education up 6%, while Construction & Property decreased by 7%. Ireland delivered another good performance with fees up 9%. Consultant headcount decreased by 3% in the quarter and was flat year-on-year. Our ANZ division, 14% of group decreased by 8%. Perm, 40% of ANZ fees declined by 7% with volumes down 18%. Temp fees decreased by 9% with volumes down 14%, again, partially offset by improved mix and margin of 5%. The private sector, 67% of fees decreased by 7% with the public sector down 10%, as we continue to see more challenging Temp markets at the federal government level. Australia fees decreased by 9%, with New South Wales down 11% and Victoria down 13%. Our largest specialism in ANZ, Construction & Property, decreased by 4%, with our second-largest, Technology, down 6%. Our other smaller specialisms fell 10% in aggregates. New Zealand, which represents 10% of ANZ fees, continued its record run and increased by 3%. Consultant headcount decreased by 2% in the quarter and by 1% year-on-year. In Rest of World, representing 34% of Group fees and comprising 28 countries, fees grew by 2%, including 6 countries delivering quarterly records. Perm, 65% of Rest of World fees decreased by 2% with Temp up a good 9%. EMEA-ex Germany produced record fees up 11% or 13% excluding the impact of our Russia closure 12 months ago, with broad-based growth across the region. France, our largest Rest of the World country, grew by 15% with Switzerland up 16%, both delivering record performances. Belgium increased 15% with Poland up 14%, and the UAE was an outstanding performer, up 58%. The Americas contracted by 15% with activity flowing through the quarter, particularly in Perm. Growth of 3% in LatAm was offset by challenging conditions in Canada and the U.S., which were down 6% and 23%, respectively. Asia declined by 4%. Japan grew by 4% and Malaysia was up an excellent 30%. The China decreased by 26%, although Hong Kong was up slightly, significantly outperforming Mainland China where the pandemic continued to impact performance. Excluding China, our Asia business grew by 11%. Overall, Rest of World consultant headcount was down 2% in the quarter and up 6% year-on-year. Cash flow and balance sheet. Net cash at the end of the quarter was circa GBP 80 million, in line with our expectations and after purchasing $12 million of shares under our share buyback program. Our buyback program has a residual balance of GBP 6 million outstanding as at 31st of March, which we expect to complete in our fourth quarter. Current trading and guidance. I'd like to make the following points. One, clients and candidate activity remained solid overall in our Temp and Contracting business, with modestly lower numbers of new assignments broadly offset by higher numbers of contract extensions. In Perm, we've continued to see further lengthening of time to hire driven by increased clients and candidate uncertainty. Two, demand in our core markets continues to be underpinned by skill shortages globally. 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. Three, driven by our actions over recent quarters, Group consultant headcount growth is now in line with our fee growth with improving average productivity, and we have appropriate capacity for current market conditions. We expect consultant headcount will be broadly flat in Q4 overall as we focus on further driving productivity. Four, the group's cost base per period was stable over the quarter, and we remain highly focused on managing cost. And five, assuming overall activity levels remain stable in our fourth quarter, we expect H2 FY '23 operating profit and conversion rate will be modestly above H1. In conclusion, we delivered a record quarter and exited with Group fee growth of 4%, led by strong growth in Temp and Contracting and our largest market of Germany. Our focus is on driving productivity, further increasing fee margins and closely managing our overheads, whilst capitalizing on the significant opportunities we see in the longer term. Clearly, we remain vigilant of macroeconomic uncertainties. We have a flexible business model, and our highly experienced management teams will react swiftly to any changes and are watching lead indicators closely. I will now hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] And your first question comes from the line of Rory McKenzie from UBS.

Rory here, 3, please. Firstly, within the exit rate at 4% growth, can you split that Temp and Perm? Secondly, can you give us more detail on the really strong growth in engineering, which is now crept up to be the third largest specialism. I guess that's majority Temp and Contractor like your Technology business. But can you explain a bit more about where you've been investing over the past few years and within your SGI programs and which of the areas that are driving that impressive growth? And then finally, you added the word modest to the statement on your outlook to increase profits in H2. Should we take that as adding any caution there? Or is that just kind of realistic now it's more clear where you're going to land for H2?

Thanks, Rory. I'll pick each of those. If I fail to get back to any, let me know. In terms of our exit rate between Temp and Perm, our Perm exit rate was 4% down year-on-year, and our Temp exit rate was 11% up. So not overly inconsistent with what we saw through the quarter and very much a kind of continuation really of the trend that we saw overall. And obviously, that comes back to 4% overall for March, which was a record quarter for us versus remember, this time last year, we hit a record in March. The second question was around Engineering and what are we doing and where are we in Engineering. And this has been an area of focus. Clearly, it's been a bedrock of our business in Germany for some time, and we have a very large business in Engineering. It's our second largest specialism in Germany, and we were up 27% there, which is a fantastic performance. A lot of that was underpinned by really strong dynamics in the automotive sector in manufacturing generally and also our switch there into inspectors such as utilities and renewables, which really come through positively in Germany. We also have been investing more broadly actually and -- take the U.K. and Ireland, for example. That's been an area of key strategic investment for us in engineering over the last 3 years since we came out of the pandemic, and we built up there quite a sizable team that have made some real progress in that market, which has been really pleasing. They were up 32% in the quarter and really started to get some traction in that market. But the vast majority of our business in Engineering is in Temp and Contracting space and not rather than the Perm market. So there is a Perm market, but our focus has been to build Temp and Contracting and really leveraging knowledge that we have in the German business more broadly around the world, and we're pushing that into Europe, for example, as well. And it's a good example outside of the U.K. and in Germany, our Rest of World business had nearly GBP 7.5 million fees in engineering in the quarter, it was up 11%. So it's not just a Germany play. It really hasn't come out of the German business, but we've really pushed it hard around the group. And it's fantastic that, that's now our third largest business and 11% of our overall group fees. So I think we're really encouraged by that. And Third question was around the guidance, and I guess the word modest and what does that mean. And -- so we still expect our second half profits to be higher than the first half profit of GBP 97 million that we delivered. What we have seen, though, Rory, is the Perm market get tougher through this quarter. We're really pleased with the Tamp and Contract performance. That was resilient. 11% growth this quarter was consistent with the growth that we achieved in Q2, if we adjust for the working days in Germany in Q2. But we have seen the Perm markets all around the world get tougher, and we just have to be mindful of that as we head into the fourth quarter. So we don't have a crystal ball, as you know, we'll say what the Q4 results are in July. But at this stage, I do feel that we should just be a little bit more mindful of that Perm market as we head into that fourth quarter, and hence, the word in the guidance. But we are happy with overall consensus overall with where it is. I think it's about GBP 197 million. And bear in mind that we're keeping our headcount pretty flat. Our cost base is pretty stable at the moment. We expect that to continue into the fourth quarter. And we would hope to push the productivity in the fourth quarter and hopefully push that ahead of headcount growth.

We will now go to our next question. One minute, please. And your next question comes from the line of James Rose from Barclays.

I've got 3, please. Firstly, coming back on Perm volumes, where has the volume slowdown being most evident across your businesses? And secondly, in your view, does the Perm decline foreshadow what could happen to Temp volumes in a few quarters' time. And then thirdly, could you touch a bit more on the U.S. business, it's particularly weak and just your -- just want to know what's going on there?

Thanks, James. In terms of the Perm market and the slowdown we've seen, it's been pretty consistent by geography, all of our markets have slowed. If you look at the growth rates in Q2 versus where we are in this quarter, all of our regions have slowed. And it's been consistent across specialisms as well. I would add to that, though, that we have seen more slowdown in the more junior end of the Perm markets and I think more resilience at the more senior end. And if you take, Accountancy and Finance is a good example, we're seeing more of a slowdown in the junior end of Accountancy and Finance than -- and areas of sort of office support and business support than we are in the senior end of finance. I think that's fairly logical at this stage in the cycle where if you've got a large team in a more junior area and someone leaves, you might be more hesitant to replace that person whereas if a senior member of the team leaves, you will go straight back and replace. And I think there's a sort of logic to that, I think. In terms of whether that Perm trend is a lead indicator for temp, I mean that's a difficult question for me to answer because I think what this cycle has shown, and this is recovery from the pandemic, it's been completely unlike anything we've seen before. It was a dramatically strong Perm recovery out of the pandemic, and Temp was lagged Perm and that's quite unusual in a recovery. Normally, the recovery would be led by Tamp and Contracting and Perm would come later in the cycle. So this has been quite unusual in many aspects. And our Temp and Contracting performance has been really consistent, and it's been really consistent globally as well. Especially, in this quarter we haven't deviated from where we were in the previous quarter. It's -- whether we see a change in that or not, it's difficult to say. But we're a strong believer in Temp and Contracting as a mega trend in our industry and an area of long-term value for us as an organization. I think we see higher quality of earnings and stability from Temp and Contracting. It's now just a fraction in the 60% of our business, and that's important as we come into this stage of the cycle when that market is performing well and how long that continues to do so, it's difficult to say, but I'm very glad that we've deliberately built a large business in Temp and Contracting over many years in the end markets that we want to be in. And final question was on the U.S. and the business there, which was down 23%. And clearly, a weaker performance. The large part of the weaker performance has been in the Perm end of the market and particularly in the Tech Perm area, which has been quite tough in the States. Areas of Construction and Property, Accountancy and Finance, life sciences have actually been reasonably resilient over in the States as our tech contracting business. So it's the Tech Perm area, which has been weaker there. And that's -- it is more challenging there than in other parts of the world. I think that's fair to say. But bearing in mind though around the world, our tech market and our tech business is about 75% Temp and Contracting and about 25% Perm. So we are heavily weighted to the Temp and Contracting business, but we do have more Perm exposure in the States, and that's where the difficulty has been in that market.

[Operator Instructions] And your next question comes from the line of Hans Pluijgers from Kepler.

A few questions from my side. First, on Germany, very strong performance. First of all, do you believe, let's say, due to the quite shortage of candidates, you see an accelerated shift to using intermediates for the recruitment. Because if you look, let's say, at unemployment rates, which are broadly now stable and even looking at some areas also manufacturing, there's still some, let's say, some slowdown visible. It's a little bit contradictory to what you see in other countries with respect to the normal trend. So you believe, let's say, that the high candidate shortage in a relatively low penetration of intermediates in the Perm and temporary staffing market is really resulting in an accelerated shift towards your services. Secondly, China, of course, has been the slowdown sorry, the lockdown has impacted, of course, Q1. Do you see some signs that it is really now opening up? And again, you should expect some improvement there? Can you give maybe some feeling on that? And then lastly, on the buyback, you already said you would, let's say, finalize it this quarter. Looking at, let's say, your policy on returning of cash, looking at current share prices, is it more logical to expect that going forward, buybacks will be more the way to go? Or if you could maybe some feeling on that.

Great. Thanks, Hans. I'll start off with the Germany question and I guess the penetration question around agencies into the market and whether that could change with any slowdown in the market. As you highlighted, this is -- Germany is probably one of the most skill-short markets in the world. There is a significant shortage of skilled engineers and skilled technicians, the skilled technology professionals. And those are the hearts of the markets that we -- which we operate in. And I don't think that's going to change anytime soon. And -- you're right to highlight that we have relatively low penetration of agencies in Germany if you compare to other major markets around the world. And you put together the strength and the size of the German economy with the relatively low agency penetration rates with the skill-short market that we're operating in. And I think that all comes together with the fact that we are the leading player in Germany by some distance. And I think that really contributes in sort of several factors behind our performance. And I do think we've had an outstanding performance in Germany, and it's been very, very broad-based. It's not just in technology, it's not just in engineering. Our HR business was up significantly. Our Accountancy and Finance business was up over 30%. We positioned that business over time from -- when I originally worked with the business, it was solely a contracting business in technology, and we've diversified that into Engineering. We've diversified into other contract forms and launched Temp business. We've launched perm businesses, and we've branched out into new specialisms. And I think the team there have done an absolutely outstanding job actually. And I think they should be -- they should be very, very highly regarded for that. It really has been an excellent performance. And we're really pleased with it. Second question was on China and whether we're seeing any early signs there of things coming back after the pandemic. It's been a difficult quarter, Hans. As you can imagine, the pandemic hit through the Christmas period. We then had Chinese New Year came a little bit earlier this year, and we kind of ran straight into that at the end of January into February. So it was a really, really challenging January and February. Our March results was a little bit better actually than January and February. How much of that was getting the new year out of the way, which is always a slower time anyway, how much of it was a bit of a pickup in the market. I think it's a little bit too early to say. So whilst it was a better month for us, I've not seen enough underlying fundamentals coming through in the activity, in the job flow, in the interviews, in the CV sends and so on and so forth, which we look at carefully to really to get a sign that the Q4 could be materially better. So I think it's early days at this stage, but we're watching it closely. And the last question was on buyback and policy of returning cash. We -- as you know, we've done buyback this year GBP 75 million program from the 1st of July. And we're towards the tail end of that. We've just done $12 million this quarter, and we've got about GBP 6 million to go, which we'll finish off in the fourth quarter. And that will get us to a position at the 30th of June, and we'll -- our policy hasn't changed in terms of distribution of cash. We will -- as you know, we pay a core dividend, which is progressive and appropriate and is well covered by earnings. And then we look at what to do with our surplus cash. And again, we'll revisit that at the year-end and that will be a decision for them. And we have a clear policy, which is just turned surplus cash above GBP 100 million at the year-end. And -- but we'll take a view at the year-end hands around what the most appropriate form of distribution is.

[Operator Instructions] As we have no further questions at this time, I will hand you back to James and David for closing remarks.

Thank you. If that's all the questions for today, we'd like to thank you all for joining the call. I look forward to speaking to you at our next Q4 results on the 13th of July. Should anyone have any follow-up questions, David, Rob and myself will be available to take calls for the rest of the day. Thank you very much. Bye-bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.