Hays plc (HAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the trading update for the quarter ending 30th of September 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, Head of Investor Relations. Please go ahead.

Thank you, Sharon, and good morning, everyone. Welcome to Hays quarterly update call for the 3 months ended 30th September 2023, the first quarter of our 2024 financial year. 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 by 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. FY '24 has begun in line with our expectations with group fees down 7% versus a record quarter in the prior year. Temp continued to outperform perm and delivered a resilient performance with fees flat and volumes broadly stable through the quarter. As expected, Perm was tougher and declined 15% with increased time to hire globally. The group's September net fee exit rate was in line with Q1 overall at minus 7%. And currency translation had a 2% negative impact in the quarter primarily due to the weakening of the Australian dollar versus sterling. I'd like to highlight the following in the results. Our key strategic markets continue to face skill shortages, and our fee performance 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 globally. Our resilient performance in Temp was entirely driven by 6% growth from margins and positive mix, offset by lower volumes year-on-year. As with recent quarters, the decrease in perm fees was entirely volume-driven, down 26% and partially offset by an 11% increase in our average Perm fee. Regionally, growth was led by our largest business of Germany, up 7% or 8% when adjusted for 1 fewer working day year-on-year. EMEA fees were flat, while ANZ, Asia and the Americas remain the most challenging markets. Fees in our largest global specialism of technology, is 25% of group fees, declined by 7% versus a record prior year performance with temp significantly outperforming perm. Accounting and finance declined by 4% and show greater resilience in more senior markets, and engineering, our third largest specialism grew by 10%. Group consultant headcount decreased by 2% in the quarter and 9% year-on-year as we continue to focus on driving productivity, which remained at good levels overall. Our balance sheet remains strong with quarter end cash of circa GBP 75 million, in line with our expectations and reflecting a normal working capital seasonality. I'll now comment on the performance by each division in more detail. Our largest market of Germany delivered a strong performance with fee growth of 7% or 8% working days adjusted. Contracting our largest German business delivered another good quarter, up 6% or 8% working day adjusted, this was driven by 1% growth in contracted volumes, together with a 7% benefit from higher margins. Temp increased by 12% or 14% working day adjusted, with volume up 5% and higher margins, adding another 9%. Perm fees increased by 2%. At the specialism level, our 3 largest specialisms Technology, Engineering and Accountancy & Finance, increased by 1%, 17% and 4%, respectively. Consultant head count increased by 1% in the quarter and by 2% year-on-year. In U.K. and Ireland, fees decreased by 11%. Temp decreased by 8% with Perm down 14%. The private sector, which is roughly 2/3 of U.K. and Ireland fees, declined by 16% with the public sector stronger up 4%. At the specialism level, Accountancy & Finance and Technology decreased by 6% and 20%, respectively. Education increased by 7%, although Construction & Property decreased by 10%. And in Ireland, our fees decreased by 10%. Our consultant head count decreased by 1% in the quarter and by 13% year-on-year. In ANZ, fees decreased by 17%. Temp, which is 62% of ANZ decreased by 13% with Perm down 24%. The private sector, which is 2/3 of fees, decreased by 20% and with the public sector down 11%, and we continue to see challenging Temp markets with the federal government. At the specialism level, Construction & Property decreased by 24% while Accountancy & Finance and Technology decreased by 12% and 21%, respectively. In New Zealand, fees decreased by 17% and our consultant head count decreased by 6% in the quarter and by 14% year-on-year. In our Rest of World division, comprising 28 countries, fees decreased by 11%. In which Perm, which is 63% of Rest of World net fees decreased by 17% with Temp up 4%. EMEA ex-Germany fees were flat. France, our largest Rest of the World country, grew by 6% with the UAE and Italy up 25% and 10%, respectively. Belgium and Switzerland increased by 2% and 3% and while fees in Poland declined by 21%. The Americas decreased by 28% with conditions difficult through the quarter, particularly in Perm. Canada and the U.S. continued to be tough, down 31% and 27%, respectively, with LatAm down 29%. Asia declined by 17%, Japan decreased by 4%, with Malaysia down 15% and China decreased by 25%, with Mainland China not yet showing any post-pandemic recovery and underperforming Hong Kong, which was down 15%. Overall, our Rest of the World consultant head count decreased by 2% in the quarter and by 10% year-on-year. Moving on to current trading and guidance, and I'd highlight the following points. Overall, our Q1 was in line with our expectations, and our fees continue to benefit from the positive effects of wage inflation and pricing and mix globally. Volumes remain broadly stable in Temp and Contracting, with only the Australian public sector below pre-summer levels. This reflects modestly lower numbers of new assignments, offset by greater contract extensions. And in Perm, we continue to see lower clients and candidate confidence with increased time to hire. With group fees down 9%, including FX in Q1. As we stated at our prelim results in August, we expect group conversion rate and operating profit will also decline in H1 '24. As many of you know, historically, we have seen such percentage fee declines usually drive a 2 to 2.5x multiplier to the percentage operating profit decline in the short term as we protect key strategic investments to benefit from future recovery and structural growth opportunities. And as previously reported, we have also 2 fewer working days in Germany in H1, which will have a further GBP 3.5 million negative profit impact in H1. We remain firmly focused on driving consultant productivity and managing our cost base. We expect group consultant head count will reduce by circa 2% to 3% in Q2, as we balance short-term cost management with protecting our infrastructure and longer-term investments. In conclusion, while we remain vigilant on macroeconomic uncertainties, we are market leaders in many of the most attractive structural growth markets globally. Our focus is on delivering excellence of execution, including driving consultant productivity and increasing group profitability. Our strong balance sheet and flexible business model means we are well positioned to adapt to near-term market conditions while continuing to target structural growth opportunities. I will now hand you back to the administrator, and we are happy to take your questions.

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

Three questions, please. The first two are about the shape of the quarter. So firstly, can you talk about the Temp book rebuild in September? And maybe picking out some of the more one-off items like U.K. Education, or what's happening in Australia. At what level did the -- or what stage did the Temp rebuild to the pre-summer levels? And then secondly, on permanent hiring net fees. It looks like they take to kind of step down this quarter, but you're reporting a stable exit rate. So can you comment on how and when you saw candidate or client behavior change in the quarter? And maybe those two for now and I've got a follow-up on the cost base.

Thanks, Rory. So I'll kick off with the Temp question and the trends that we've seen through the quarter. So it's normal, we do see temp volumes drop down in the summer for obvious reasons as people go on vacations, and added to that in the U.K. specifically, where we have a large Education Temp business, clearly, for obvious reasons, while school holidays are off that drops down as well. So what we look at is to see how that trend rebuilds through September and gets -- how quickly that gets back to the levels we were at pre-summer. And what we've seen is the continuation of stable trends in our Temp and contracting business around the world such that outside of Australia in -- specifically in the public sector, the rest of our markets have got back to our pre-summer levels by the end of September which is for us a good sign of overall continued stability in that business for us, which is clearly important because it's 58% of our group. So that's an encouraging backdrop to the market. We've already spoken previously about Australia in the public sector, and that's specifically into the federal government there where now for best part of, probably 16, 17 months or so since the elections last May, we have seen reductions in our Temps into the public sector there, which is consistent with the market overall. But outside of that, we've had a good recovery overall in Temps, which we see as a pretty stable trend. Going on to the question about Perm. And clearly, we've had a tougher quarter this quarter in Perm. We were down 15% in the quarter, and we were down 9% in the previous quarter, so clearly a step down. And if we look across the trends we saw through the quarter, we had a clear drop down in July. And then I think we've had a pretty stable trend since then. If we look at it on a year-on-year perspective, it's been pretty stable right across the quarter. And we've not seen any deterioration through the quarter. And September overall was in line with the rest of the quarter, which is what we talked about. If we look at our overall levels of activity, so we clearly look at job flow and the numbers that we're doing on those, those have recovered well as well. We're back now in September and into October at the levels we were in -- we're at in June, pre-summer. So there's lots of jobs coming in, lots of work going on. What we don't have complete clarity on is how that converts into successful placements, and we did see that step down in the summer. And we've had a pretty stable trend through the quarter. But clearly, we'll watch that very carefully as we go forward. But at least there are good levels of job flow coming into the group, and there's lots of activity. It's just about conversion.

Okay. Great. And then I just wanted to ask a question on the kind of reminds you gave about the drop-through impact of declining fees and also ask about what your head count plans were into Q2? And I guess that typical math about 2 to 2.5x multiplier already considers that you tend to be adjusting head count in a weaker market. So this should be seen as part of that normal mechanics.

Yes, of course. So I'll answer the first part of that question, Rory. What do I mean by that 2 to 2.5x multiply. But to put simply, at a headline level, so including the impacts of FX, we were down 9% in this quarter. And I mean, I'm not going to talk about the second quarter for obvious reasons, but if I apply 2 to 2.5x multiplier to that, I'd expect our profit reduction year-on-year to be somewhere in the region of 20% to 25%. So that's what we mean by that guidance. And that's the kind of drop-through that we've seen historically in the group when we've seen a downward trend in the business. In terms of our head count plans, clearly, we -- our heads are down 9% versus prior year, we took it down by a further 2% through the quarter. And for the last 12 months, we've been managing that capacity in the business to make sure we keep it in line with where our fees are. And I think we feel like we're in about the right sort of place at the moment. We expect, as I said in the script to bring it down a little bit further in the next quarter, again, primarily through natural attrition. But that 2 to 2.5x ratio is driven by the reductions in the cost measures we take. Clearly, if we hadn't made those reductions, it would be a lot higher multiplier. So that does incorporate those cost savings, which are in focus for us.

[Operator Instructions] And the question comes from the line of Karl Green from RBC.