Hays plc (HAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the trading update for the 3 months ending 31st March 2024 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 first speaker today, David Phillips, Head of IR at Hays. Please go ahead.

Thank you, Nadia, and good morning, everyone. 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 today at short notice. I'll present the key points and regional details of today's trading update before taking questions. As usual, all net fee growth percentages are on a like-for-like basis versus the prior year, unless stated otherwise. Market conditions in the quarter remained challenging. Group fees decreased by 14% or down 13% on a working day-adjusted basis. On an actual basis, fees decreased by 17%, with the strengthening of sterling versus the Australian dollar and euro reducing reported group fees. And the group's fee exit rate on a working day adjusted basis was in line with the quarter. I would highlight the following key items. In our Temp business, fees were down 12% or 10% working day adjusted against a record prior year comparator. In the U.K. & Ireland and ANZ, Temp volumes rebuilt through Q3 in line with the prior year, although remained modestly below pre-Christmas levels, and each decreased by circa 15% year-on-year. In Germany, Temp & Contractor volumes rebuilt circa 2% below prior year and decreased by 5% year-on-year. In addition, in Germany, increased client cost controls drove an 8% reduction in average hours worked, which led to a circa GBP 8 million fee and operating profit impact in Q3. Perm fees decreased by 18%, in line with the prior quarter, with volumes down 23% as we continue to see longer-than-normal time to hire globally, driven by low client and candidate confidence. This was partially offset by a 5% increase in our group average Perm fee. We have remained focused on managing our costs. Consultant headcount decreased by 6% in the quarter and by 16% year-on-year as we continue to manage our overall capacity on a business line basis. As a result, consultant productivity improved by 2% versus prior year despite the tougher markets. Since August, our actions have already reduced our cost per period by circa GBP 4 million, and we are well on track to deliver our planned GBP 50 million of annualized cost savings by the end of FY '24, of which around GBP 20 million is expected to be structural. Our cash position was temporarily impacted by the short-term timing of payments as Good Friday fell on the final day of Q3 with net debt of circa GBP 20 million. We estimate this had a circa GBP 50 million cash impact, which has subsequently reversed post quarter-end. And importantly, our debtor days remain in line with H1 at 36 days. I will now comment on the performance by each division in more detail. Our largest market of Germany saw fees down 13% or down 11% on a working day adjusted basis. Temp & Contracting fees decreased by 15% year-on-year or down 13% working day adjusted. And as previously mentioned, volumes declined by 5%, and increased client cost controls drove an 8% reduction in average hours worked, which led to a circa GBP 8 million fee and operating profit impact in the quarter. This was partially offset by a 1% increase in average Temp margin. Perm fees declined by 5% year-on-year and remained stable through the quarter. And consultant headcount decreased by 5% in the quarter and by 7% year-on-year. In U.K. & Ireland, fees decreased by 16%, although were sequentially stable through the quarter. Activity levels were also stable. And whilst some recent macro data has improved, we are yet to see any signs of material improvement. Temp fees decreased by 15%, with Perm down 18%. The Private sector, which is 68% of U.K. & Ireland fees, declined by 17%, with the Public sector down 14%. At the specialism level, Accountancy & Finance and Technology decreased by 11% and 31%, respectively, and Construction & Property decreased by 8% and Education was down 2%. In Ireland, our fees decreased by 11%. And we managed our capacity in line with fees with consultant headcount down 6% in the quarter and by 16% year-on-year. In ANZ, fees decreased by 23%. And similar to the U.K. & Ireland, fees and activity levels were sequentially stable through the quarter. Temp, which is 65% of ANZ, decreased by 16%, with Perm down 33%. The Private sector, 65% of ANZ fees, decreased by 25%, with the Public sector down 18%. And at the specialism level, Construction & Property decreased by 25%, while Accountancy & Finance and Technology decreased by 22% and 17%, respectively. And in New Zealand, fees decreased by 45%. Productivity increased slightly as consultant headcount decreased by 7% in the quarter and by 24% year-on-year. In our Rest of World division, comprising 28 countries, fees decreased by 11%. Perm, which is 61% of Rest of World net fees, decreased by 18%, with Temp fees up 1%. EMEA ex Germany decreased by 9%. France was down 10%, with Poland and Switzerland down 29% and 11%, respectively; whilst the UAE and Italy performed strongly and were up 14% and 10%, respectively. The Americas decreased by 19% with challenging but broadly stable conditions through the quarter. Canada and the U.S. decreased by 20% and 16%, respectively, with LatAm down 27%. In Asia, fees declined by 8%, with conditions stable through Q3. China was flat and improved modestly through the quarter. And fees in Japan were also flat, although Malaysia was more difficult and down 14%. Productivity improved across Rest of the World with consultant headcount down 7% in the quarter and down 18% year-on-year. Moving on to current trading and guidance, and I'd highlight the following. While significant economic uncertainties remain, we expect overall near-term market conditions to remain challenging, but broadly stable. The impact of Temp & Contracting hours in Germany will be an important sensitivity to fee and profit performance going forward, and it is too early to determine whether there will be a meaningful rebound in Q4. We are well on track to deliver our cost reduction and efficiency programs and are firmly focused on driving consultant productivity. And we are making good progress in implementing our updated strategy, which is underpinned by increased operational rigor. Once our end markets stabilize and recover, I am confident that our golden rule of profit growth exceeding fee growth, which in turn should exceed headcount growth, will lead to significant profit and conversion rate growth. I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] And now we're going to take our first question, and the question comes from the line of Kean Marden from Jefferies.

I've got 2 questions on Germany, please. Firstly, would you just mind helping us with a bit of historic context for average hours worked in Germany? So whether you were moving from a, you might want to say, to sort of particularly tight period or not where current hours worked in the quarter sort of sit relative to a more normal through-the-cycle range? That would be helpful. And then secondly, are we now in a position where we're seeing fee rates starting to roll over in Germany? Or is scarcity and the labor market tightness still allowing them to remain at elevated levels?

Sure. Thanks, Kean. I'll pick the first question up around average hours worked per contracts with Temp. Clearly, as we flagged, 8% down versus the prior year. The prior year was pretty normal. In the post-pandemic world, I think what we have seen, Kean, in the contracting side of the business is, over a longer period of time, a more structural reduction in the average hours worked if I compare back to sort of 2017, 2018, typically about 10%, 15% lower than we were back sort of 6, 7, 8 years ago in the Contracting business. And I think that we did see an impact of the change in the market employment that we saw some time ago have an impact. But then we've seen a pretty stable picture maybe for the last 3 or 4 years. And then clearly, this is an impact that we've seen more [ laterally ]. As I mentioned on the call, it's predominantly been driven by our clients and their own respective cost control measures. So we estimate about 75% of the reduction we've seen in hours has been driven by our clients who are clearly managing their own cost base and their averages as well. And around 25% of that hours reduction, it's been a combination of illness and there has been a flu season in Europe. And a combination of that and vacations as well is probably around 25% in aggregate. So it is clearly down on where we would expect it to be. And that's been a relatively stable trend in hours worked over the last 2 or 3 years until this last quarter. And remember, we were down minus 2% in Q2 as well, but it's clearly an acceleration of data this quarter.

Can we compare -- I don't know if you've got the data at hand, and it might be a little unfair, particularly given sort of the structural post-COVID trend that you touched on, James. But if we look at that German business in, say, in '08, '09 recession, do you know where hours worked currently sit relative to that? Just trying to get a sense to how much more downside potentially there is or actually with a reasonably firm base here?

Yes, we -- Kean, we saw the movement in hours, and I have been working in that business back to the GFC actually. And we saw pretty stable hours trends in contracting right through from 2008 right through to around 2016, 2017, and then it was the changes in the market employment legislation in Germany that drove a more structural reduction. As I say, it was around about 10% to 15% reduction in average hours. And that was really driven by more contractors having more than one assignment, and that's something we saw. And then it's been a pretty stable picture since then until, as I say, until this more recent development, which is much more cyclical in nature rather than structural. But what we are seeing, I think, on the counterbalance to that are 2 key trends. We're seeing longer duration of assignments. And particularly, we're seeing a reduction in finishes. It's a really quite interesting statistic that our volumes are down 5% versus the prior year. Our actual number of new starts is down somewhere between 10% and 15%, typically on a sort of week-to-week basis versus prior year. But we're seeing around about 10% reduction in finishes in Germany. And we see that as our clients are hanging on to skilled talent. There's still a skill shortage out there and getting hold of good contracts, which is still a challenge. But clearly, they are managing that against an environment where they're managing their own costs and their own budgets as well. And I think that's played through into the hours equation this last quarter and has accelerated. And I think that's logical in a world where they're having to manage their way through their own budgets. I think just the question on the fee rate in Germany, we did have a modest benefit of margin in Germany. As I mentioned, it was up about 1% versus the prior year. So it is still a tailwind. Like elsewhere in the world, it's more normalized now versus where we were this time last year. So we're not continuing to see the same level of tailwind from margin and rate increase in Germany as we're not seeing in the U.K. and Australia either. But I think it's much more normalized now and broadly in line with where we were at the time last year, but we're not seeing that roll over at this stage.

And the question comes from the line of Rory McKenzie from UBS.

It's Rory here. Yes, first question on the average hours worked in the German Contracting business. Can you give us just a bit more background on when did you start to see this tightening from clients really, really worsened? I guess it will always be most impactful in March given the size of the month for you. But did trends keep worsening through the Q3? I guess just trying to think about how sticky or how recurring that drive could be as we think about forecast in profits in Q4. And then secondly, headcount reduction, I think, was slightly more than we expected for this quarter. Is there any change in the plans or any new thinking resulting from the weaker German net fee run rate?

Thanks, Rory. I'll take the first question on hours in Germany and when did we see that through the quarter. The key -- as I said, the backdrop to it, we did see hours come down slightly in Q2. We were down about 2% in the previous quarter. And we saw the reduction in January, and it stayed pretty consistent through the quarter. It's not -- we've not seen an acceleration of that trend. So it's not as if it's kind of a minus 4% in January and minus 12% in March. It's been pretty consistent throughout the period. So hence, why I think that's important in terms of factoring into the exit rate that we've talked about overall, which is in line for the quarter overall at the group level and at the German level as well. There's no material deviation in the exit rate in Germany versus the performance in the quarter overall. Your question on recurring and how does that play out into Q4 is a fair one. And clearly, that's an unknown at this stage, and we'll talk about it, I'm sure, in even more detail in July. But I mean, logically, as I've said before, we see about 75% of the impact on hours has been driven by our clients who are managing their own costs. And really, that's a combination of reduced overtime. It's kind of, right, you can finish at 3:00 on a Friday and not carry on. So it's around the edges, but clearly has a material impact on us, and about 25% of that impact has been more, perhaps, more seasonal, perhaps a combination of illness and vacations. So logically, we would expect to see some level of sensitivity going into the next quarter. Clearly, I don't know what that is at this stage, and we'll talk about that once we know what we're dealing with in July. Just on your second question with regards to headcount reductions. Our overall group headcount was down 5% in the quarter, which was a little bit ahead of where we guided. We guided at 3% to 4% down in the quarter. So broadly in line, but perhaps slightly higher. We're happy with that. I think we've made some appropriate reductions in cost in the respective regions. And that's been an important contributor to the productivity performance, which I think was -- given the markets we're dealing with, which was creditable up 2% versus the prior year. I expect headcount reductions will be much more modest going forward into the final quarter. So we do have the tail end of a couple of projects that are ongoing, but I expect to see a much smaller reduction in the final quarter, so much more modest going into Q4 given the markets we're dealing with today, which as we've talked about, feel broadly stable overall.

And now we're going to take the question from Remi Grenu from Morgan Stanley.

Two questions, if I may. One, to elaborate a little bit on the question from Kean already on the pricing. I think it's the second time in today that we are hearing that clients are turning somehow a little bit more cost-conscious. So I just wanted to understand, through your discussion with the clients, you've sensed that they are a little bit more cautious on the pricing and that you're seeing a little bit more pressure and that this could have an impact going forward? I mean, in the end, what -- how do you see this more cost-consciousness on the client side impacting your pricing? So that's the first question. And the second one is on -- I think you mentioned that there will be some one-off costs in H2 as well related to your cost-saving program. So if you could give any more flavor on or quantify a little bit how much it could be?

Sure. Okay. Thanks, Remi. I'll pick the pricing question first. And we've seen on the Temp side of things, as you've seen in the statement, a normalization of the pricing tailwind. I think this time last year, we were seeing quite substantial pricing tailwind, both in Temp and in Perm. And we've seen that moderate, I think largely to be expected, and there's 2 parts to that equation. First of all, we are seeing lower levels of wage inflation around the world than we were 12 months ago. I think that has normalized, and all the job data I've seen in all of our major markets would support that wage inflation is less of a tailwind now than it was 12 months ago, and I think that's relatively straightforward. I think on the pricing dynamic and that discussion with clients, it's always -- it's a function of the supply and demand, really. And clearly, we're in a tougher market now, and there is more labor availability. You will see vacancy rates and labor availability rate data would support that. And I think whilst we're not seeing pricing go backwards, it's clearly more competitive in a more challenging market. So I think that's to be normal and clients are clearly managing their own cost budgets as well. So I think that again factors into that equation. But you can see on the Perm side of things, our average Perm fee was still up 5% versus the prior year, and I think that's an important tailwind. And I don't expect to see that reverse, but clearly, there's going to be less of a support going forward. In terms of the one-off costs, we obviously had the exceptional -- our cash was exceptional in the first half, and we did say that we expect to have an exceptional in the second half as a number of projects are in flight around the world. At this stage, I don't have -- and clearly don't have a number for the full year, and we'll talk about that in much more detail at the prelims in August. Broadly and directionally, I'd expect it to be a similar level to where we were in the first half. So we had GBP 12.6 million of kind of cash exceptional costs in the first half, and I'd expect it to be a broadly similar amount in the second half. And remember, that's driving a GBP 20 million ongoing restructuring savings, structural cost savings. So I think a relatively good payback on where we are with the cost plans, which, as we said, are well on track, and we're comfortable and happy with the progress we've made on that.

[Operator Instructions] And now we're going take our next question, and it comes from the line of Karl Green from RBC.

A couple of small ones from me. Just back to Germany, just on the 25% of the hours worked that were attributable to illness and incremental vacations. Again, it's a bit of an unfair question, but do you have any sense how much of it was vacation, which took rebound in the fourth quarter, and how much was incremental illness? That's the first one. And then secondly, just around German headcount, down 5% sequentially. Is it fair to assume, given the volume position at the moment, that there's probably not a huge amount to go to accelerate sequential headcount reductions in Germany in the fourth quarter?

Thanks, Karl. So I'll pick up that question on the remaining 25% illness and vacation. It was about 15% was illness and 10% was vacation. Whether that vacation was actually driven more by the clients or not, you could probably have a long debate about the fact that people certainly have more holidays than they would normally take, but potentially could be the client suggesting to them that they do take holidays. So maybe that is more client-driven than, perhaps, than seasonal. And then clearly the illness, I think it's probably driven more by the flu rates we've seen across Europe. But I think that is the -- I think the key point we wanted to get across is that the majority of this is driven by our clients and the actions that they are taking to manage their costs in their own businesses. With regard to German headcount, yes, we -- that reduced by 5% through the quarter and was down 7% year-on-year. If I put that against where our volumes are, and we're pretty comfortable with where that headcount is, we may trickle down a little bit in the next quarter, but I don't think it will move materially. It's important that we maintain our capacity in Germany for the long term as well because we still see that as an incredibly strategically important market for us. It's our biggest business, the biggest profit driver. We remain incredibly confident and positive about the long-term prospects there. So look, we're managing such circumstances today, which are consistent with the world that we're operating in. And Germany is no different than any other economy around the world. And I think we've managed it pretty well by and large through this downturn. But we want to maintain our capacity in Germany because the long-term structural growth opportunities are still absolutely there. And I think while it may reduce modestly further, I don't expect it to be material.

Now we're going to take our next question, and the question comes from the line of Afonso Osorio from Barclays.

Three quick ones. Just following up on the Germany trends we discussed, I think, just now. But just to be clear on that minus 8% in Q3, so how do you expect that into Q4? And what's the comparable number in Q1? So you got minus 8% in Q3, minus 2% in Q2 or the like-for-like number in Q1, just trying to see the full trend in the fiscal year. That's the first question. Actually, are you seeing any kind of differences in April from March and Feb? Or is it more or less the same assets on Germany? And on the headcount plans, I think you touched on Rory's question before, but for -- I appreciate Q3 was slightly ahead of what's initially planed at [ minus 5% ]. But as we start thinking about FY '25, I believe you mentioned before that you were running at some overcapacity at the moment and preparing for a recovery. So how should we think about headcount growth as we go into FY '25? And should we expect that fairly stable, even factoring in a recovery? Or should we expect some movements there? And then finally, so the question is a little bit more niche, but I was just looking at the press release and seeing the minus 27% in LatAm. That is particularly surprising to me given the level of inflation you're seeing there and your peers doing fairly well in LatAm. So just can you quickly just provide us a bit more info on the puts and takes in LatAm and why that minus 27% is taking place?

Okay. Afonso, I'll pick those up in order. So Germany overall, minus 8% impact on hours in Q3. And what do we expect in Q4? I mean I think I've mentioned already on the call, it's difficult for me to try and predict that with any degree of accuracy. And clearly, we'll talk about it once we know what the Q4 results are. But I have tried to give as much of a color as I can on potentially what element of that could be more of a timing issue around seasonality and how much of it could be more structural or more cyclical, should I say, around the client budgets and that 75%-25% split is kind of -- that's where I was going with that. So really difficult for me to say. In terms of the like-for-like number in Q1 in terms of hours, we saw pretty much flat hours in Q1 versus the prior year. It wasn't a notable trend either way. And it was -- as we moved into Q2, we saw it go down to minus 2%. Clearly, then it's accelerated this quarter. And in regards to April in Germany, it's too early for us to say. Clearly, we haven't closed the books, and we've only got kind of 1 week's data in there at this stage. And just so you're aware, the way that our invoicing cycle works in Germany is on a monthly basis. So it's not -- we don't capture weekly time sheets in Germany given the salary levels of the individuals that we place. We do monthly time sheets. I don't have any visibility at this stage on Germany time. So I think that they were all the questions on Germany. I'll just come on to headcount plans and how we're looking at that. And I mean, standing back from our consultant headcount, it's down 16% on prior year, which is in line with where our fees are overall. It's slightly ahead of that, which drove the slight improvement in productivity. And I think we've got a pretty sensible balance of headcount reductions in the right markets. And I think the team have done a great job of managing that over the last 18 months, and we're pretty comfortable with the position that we're in right now for the markets we're in. And provided we see -- continue to see broadly stable trends, I'd expect, as I said before, to see relatively modest changes going forward into the next quarter. Where does that move beyond that? Afonso, I don't know. I mean it really depends on the bigger picture and what we've seen in our end markets, and we'll continue to manage that on a country-by-country and a business-line-by-business-line basis. What I would say is, going back to the golden rule that Dirk set out at the interim results, I think we would like to see a good level of profit recovery that comes from the capacity that we've got today. And it's important that we drive that mentality and drive that dynamic going forward in the recovery at some point in the market. I'm sure we'll inflect and we'll recover. And when we do so, it's important that we stay true to that and we drive our profit growth ahead of fee growth and fee growth ahead of headcount growth. That's, for me, a relatively simple equation and one that I'd like to make sure we deliver on recovery. The LatAm question, it's worth bearing in mind that LatAm is a 100% Perm business. We don't have any Temp & Contracting there. And also, there's some pretty challenging markets. And look, I don't want to talk about what others may or may not have done. We're not in any economies with significant inflation in LatAm. And it continues to be a pretty challenging market. But before, it's all Perm. We have quite a high-end business there in Technology. It's quite a big part of our business around the Rest of the World. Technology has been a really difficult place in Perm over the last 6 to 9 months. And remember that LatAm for us is less than 2% of our fees. It's about GBP 1.5 million of fees a period, so relatively small for us as well. So yes, a bit behind where I wanted it to be, of course, but it's not unlike Tech Perm around the Rest of the World.

There are no further questions at this time. And I would like now to hand the conference over to your speaker, James Hilton, for any closing remarks.

Thank you. If that's all for the questions for today, thank you again for joining the call. I look forward to speaking to you next at our Q4 results on the 11th of July. And should anyone have any follow-up questions, David, Rob and myself will be available for the rest of the day to take any calls. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.