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 30th of June 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 speaker today, David Phillips, Head of Investor Relations. Please go ahead.

Thank you, Sandra. Good morning, everyone. I'm David Phillips, and I'm here with James Hilton, Group Finance Director, to present his Q4 '24 results. 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 will now hand you over to James.

Thank you, David. Good morning, everyone, and thanks for joining us today. 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 prior year unless stated otherwise. Group fees decreased by 15%, with a June net fee exit rate of minus 18%. Market conditions remained challenging in the quarter and we continue to see longer-than-normal time to hire in most markets, as both our clients and confidence levels remain low, leading to lower levels of activity and longer decision making. However, despite more difficult trading in Q4, our cost actions mean that we will still expect FY '24 pre-exceptional operating profit of circa GBP 105 million around the bottom end of current market expectations. I would like to highlight the following key items from the results. In our Temp business, fees decreased by 12% against a strong prior year comparator. Group average Temp volumes decreased by 7% year-on-year including Germany down 6%, ANZ down 18% and the UK&I down 12%. Our average group Temp margin was broadly flat year-on-year. In addition, and similar to the trend that we outlined in the last quarter, in Germany, increased client cost controls, together with the impact of placement mix, drove a 10% reduction in average hours worked per contractor. This led to a circa GBP 8 million fee and profit impact in Q4. Our Perm fees decreased by 20%, driven by volumes down 27% and this was partially offset by a 7% increase in our group average Perm fee. We continue to see low levels of client and candidate confidence. And overall Perm activity levels reduced through the quarter. We remain focused on managing our costs and productivity on a business-by-business basis. During Q4, our consultant headcount decreased by 5% and was down 18% year-on-year. Therefore, despite tougher markets, our average consultant productivity improved by 3% year-on-year. We also closed 12 offices in our network in the fourth quarter, ending FY '24 with 236 offices, down 16% year-on-year. Since the start of FY '24, our actions have reduced cost per period by GBP 5 million. We have delivered circa GBP 60 million of annualized cost savings, an increase of GBP 10 million versus our previous expectations and importantly, around GBP 30 million of these savings are expected to be structural. We continue to have a strong balance sheet with net cash at 30th of June of circa GBP 55 million, an increase of GBP 75 million versus Q3 and in line with our expectations. I'll now comment on the performance by each division in more detail. Our largest market of Germany saw fees down 17%. Temp and contracting fees decreased by 16% year-on-year. Temp margin was flat versus the prior year and as I mentioned earlier, volumes declined by 6%, with a 10% reduction in average hours worked. This said, the negative impact of lower contract in Temp hours started to ease through the quarter. As a result, our June Temp and contracting fee exit rate in Germany was minus 13%, which was slightly better than the overall quarter. In Perm, activity slowed through the quarter and decreased by 20%. At the specialism level, Technology and Engineering, our 2 largest specialisms were down 19% and 18%, respectively. Accountancy & Finance was more resilient and down 11% with Construction & Property flat, in part supported by a more resilient public sector, which was down 7%. Consultant headcount decreased by 5% in the quarter and by 9% year-on-year. In U.K. and Ireland, fees decreased by 17%. Temp decreased by 14% with Perm down 22%. Fees in the private sector and the public sector each reduced by 17%, both slower in June, given the impact of the election and increased market uncertainty. At the specialism level, Accountancy & Finance and Technology decreased by 20% and 35%, respectively. Construction & Property decreased by 15%, although Engineering was more resilient, up 9%. In Ireland, our fees decreased by 18%. Our consultant headcount decreased by 3% in the quarter and by 16% year-on-year. In ANZ fees decreased by 22%, although fees were sequentially stable through the quarter. Temp, 67% of ANZ, decreased by 16% with Perm down 32%. The private sector decreased by 23% with the public sector down 19%. At the specialism level, Construction & Property decreased by 23% while Accountancy & Finance and Technology decreased by 21% and 19%, respectively. New Zealand remained tough with fees down 43%. Our ANZ consultant headcount decreased by 10% in the quarter and by 32% year-on-year, driving an increase in consultant productivity. Encouragingly, this has driven an improvement in ANZ conversion rate in Q4 and we enter FY '25 with improving profitability. In our Rest of the World division, comprising 28 countries, fees decreased by 11%. Perm, 59% of Rest of World fees, decreased by 16%, with Temp down 1%. EMEA ex Germany decreased by 10%. France was down 13% with June particularly impacted by the election. And Poland and Switzerland decreased by 16% and 14%, respectively. Portugal, the UAE and Italy performed significantly stronger, up 12%, 3% and 2%, respectively. The Americas decreased by 11%, although conditions were stable through the quarter and our actions to improve productivity and manage costs drove a return to profitability in North America through H2. Canada and the U.S.A. fees decreased by 14% and 7%, respectively, with Latam down 19%. Asia declined by 13% with mixed but overall stable conditions. Mainland China increased by 8% and was consistently profitable, although Hong Kong was tough and down 30% and Japan was also more difficult, down 13%. Rest of the World productivity increased with consultant headcount down 6% in the quarter and 20% year-on-year. Moving on to current trading and guidance, and I'd like to highlight the following points. Overall, we expect near-term market conditions will remain challenging. Activity levels are sequentially stable in ANZ, the Americas and Asia. And in the UK&I and France, we expect the recent activity slowdown will lead to a subdued summer trading and it is too early to determine when we will see a meaningful recovery. In Germany, we expect lower Temp starter numbers will further reduce volumes by 2% to 3% in Q1 '25. This said, the impact of lower Temp and contractor hours that we experienced in H2 '24 have started to ease, and we expect sequentially less fee and profit impact going into Q1 '25. Given our focus on driving consultant productivity in recent quarters, we believe our current capacity is appropriate for today's market conditions. We, therefore, expect overall Group consultant headcount will remain broadly stable in Q1 '25. As I mentioned, our June fee exit rate was below the Q4 average and supported by our significant cost reduction actions, we expect to deliver GBP 45 million profit in H2 '24. It is difficult to predict the shape of FY '25, given we only have 4 to 5 weeks forward visibility, but based on what we currently know, unless we see a material recovery in end markets, I think it is likely that profits in H1 '25 will be sequentially lower than H2 '24. Overall, while it is difficult to predict timing, we know our markets will recover. And when they do, we'll be firmly focused on delivering a high drop-through of fee growth into profit growth. I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] We will now take the first question coming from the line of Remi Grenu from Morgan Stanley.

A few questions on my side. So the first one is on the exceptional costs that you are guiding for, for the second half of this year, it's slightly larger than anticipated. So can you maybe give a little bit more flavor on the actions that you've taken there and which relates to the delta of exceptional cost versus what you were expecting initially? And on the offices that you've closed, can you just tell us where are these located? And if these are focused on any specific specialism and does it mean that you're exiting any specific verticals in some countries? And then just a third question on the headcount, which is expected to be stable in the first quarter of 2025. Given the environment, the muted outlook and the fact that you expect the summer might be difficult, aren't you tempted to try to further reduce that headcount and streamline a little bit the cost base further? Just want to have your view on what's the balance that you need to strike between headcount reduction, the short-term impact and where you think that you can't really go further in terms of headcount cut before hurting the business?

Thanks, Remi. I'll pick those up in order. So I'll kick off with the question on our exceptional costs. So you're correct that it is higher than what we previously guided. If you think back to H1, we did GBP 12.7 million of effectively cash exceptionals rather than the noncash element. And we expect in the second half that to be higher between GBP 25 million and GBP 30 million. Now why is that? Well, to be honest, we have done more on the cost reduction program than we had previously set out, and you can see that in the increase of our annual cost savings from -- which I previously said GBP 50 million, of which GBP 20 million was structural. We're now at GBP 60 million, of which GBP 30 million is structural. And put simply, we have actually got on and got a few more things done in this half than we previously expected. And therefore, we have got a higher exceptional charge in H2, but we also have a higher level of cost saves to go with it, which I think is -- better position the business going forward. It kind of leads on slightly to the third question that you asked around headcount and why we think going into Q1, we're at the right level for the current market we're in today. If you stand back from where we are, Remi, overall, our group headcount is down 22% from where we were at peak, which is pretty substantial and is also -- it's important to get the right delicate balance of making sure that we don't go too far in that. And I think we've done a pretty decent job of managing our capacity for the market that we're in today. That's appropriate for where we are today. We feel there may be 1 or 2 areas that we look to trim a little bit further. There may be 1 or 2 areas actually that we would put headcount back in, in a very selective and modest way. So clearly, if the world changes materially, we reserve the right to review that. And again, we would be looking to get that balance right. But I think from where we stand today, there may be some selective reductions in -- modestly in some places. But overall, on balance, I think the majority of our markets are in the right sort of space. The second question was specifically around office closures. And again, that's partially ties back into the exceptional question as well. So we did close 12 offices or merged 12 -- closed or merged 12 offices in the second half. There was a combination of moves actually, Remi. A good example is here in London, where we merged our 2 biggest offices together into our Cheapside office and we've moved out of our office in [indiscernible], which was -- that's a big cost save for us, best part of GBP 1 million a year is a good example. We've also looked at some of our smaller offices around the business as well and [ why ] do we need to be in each and every single one of those, if they're not where we think they're strategically important. There are -- has been an opportunity to modestly downsize that. And I think that's important rigor that we've put into the business. And I think the business has responded well, and there may be 1 or 2 others going forward. But I'm quite happy with some of the actions that the business has taken on that. And I think it's all part of the focus of rigor in the business and rightsizing the capacity. It's not as if we've closed specific specialisms and it's really just pulling out of strategically some of the offices that we felt that we didn't need to be in.

We will now take the next question from the line of Rory McKenzie from UBS.

It's Rory from UBS. Three, please. Firstly, on the net fee decline in June. Can you describe when and how you saw signs of that coming through? Was it a sudden change in trends from clients or candidates? And also, is there anything in particular you would want to call out around the impacts of election cycles and deferred decisions or is it too soon to talk about any rebounds? And then secondly, can you say more about the dynamics in Germany? Interesting that you think the pressure on hours per contractor is perhaps lifting. But then you're, of course, just seeing steeper volume declines elsewhere. What do you think clients are trying to do there to manage their budgets? And is there anything, I guess, structural changing in use of contractors? I guess, I'm wondering if in a normal market, will that hours per contractor fully recover? And then finally, thanks for the comments on the kind of exit rate and then profitability. Can you just talk through the periodic cost base and what seasonal factors to be aware of into the start of next year?

Okay. Thanks, Rory. I'll go back to the first question, which was on June and what did we see in June? As I mentioned on the call, our fee decline was 18% down in June. And if we look at that exit rate, the biggest natural factor was actually on the Perm side rather than Temp. If I broke that exit rate out into Temp and Perm, our Temp was down 15% in June, and our Perm was down 23%. So it was predominantly a Perm deceleration in that month. And specifically, as we mentioned in the statement, we saw a weakening in the U.K. and in parts of Europe and principally in France. They were the ones that I would highlight, as been lower than where we were through the rest of the quarter. And I think there is a clear correlation with the ongoing political environment in those 2 countries. I think your question as to around how that plays out and do we see a recovery? I think it's fair to say with the activity through June and activity, I mean forward activity in terms of number of jobs coming through, the interviews that we put on those jobs over the last 6 weeks, I think it's fair to say we'll have quite a subdued summer in those markets. The other one that I would highlight is Germany and Germany had a similar deceleration in Perm through the quarter, whether that's politically driven or more economically driven, I probably would clearly more economically, but we did exit Germany down 23% in Perm in June. So clearly, that was worse than the quarter overall. I think actually in Australia, we had a pretty stable quarter overall. And as I said, it was sequentially stable, similar in the U.S. So I think that was pretty stable, both of those businesses, we've worked hard on productivity and actually saw improved profit performances through the quarter. So I think some of the actions we've taken around self-help have actually started to move the profitability of those businesses forward. So it's a difficult landscape to predict, but I do think that the Perm markets are that bit softer today than where we were when I had this call 3 months ago, and I think that's reflected in the exit rate. Regarding Germany and the dynamics we've seen there, it's been quite interesting and difficult picture to try and unpick over the last 6 months. And on the last call, we spoke about the impact of hours, which we clearly saw in Q3, and that has continued into Q4. I think the peak of that impact was in the February, March, April time scale, and we certainly saw quite a dramatic impact around the Easter timing. So what we did see, as we exited this quarter, was a modestly lower impact of hours headwind in Germany, and we were actually at minus 6% to 17% in June versus minus 10% overall. As I say, we saw more of an impact earlier in the quarter and slightly less of an impact towards the end. But we've got kind of conflicting forces there because we're seeing a slight less of a headwind on hours, but we are seeing lower starter numbers, particularly in our Temp business and in particularly within our Temp business in the automotive sector and that's a material part of our Temp business and we've seen about a 40% reduction in new job flow coming in from the automotive sector in the last 6 to 8 weeks. And I do think that, that will create a headwind going into the next quarter. And therefore, I expect the year-on-year volumes to move from minus 6% in the quarter in Germany. They're actually minus 7% on exit rate, and I think we'll probably be down minus 8%, minus 9% or-so in the next quarter as a result. So where that all lands, is quite difficult to tell. But overall, our exit rate in Germany was minus 13% in Temp & Contracting. It was minus 23% in Perm and the minus 15% overall. And I think directionally, that's probably the right sort of direction for where we go into the next quarter. The last one was just our periodic cost base. And I think we -- if we stand back from where we were in Q1, with cost base per period was around GBP 87 million and as we exited the year, our cost base per period was around GBP 81 million, and that GBP 6 million reduction, about GBP 1 million of that is commission savings and the rest of it is the actions we've taken to reduce our headcount through the year and also other cost save initiatives of things like properties that I've talked about previously. That's what together equates to the GBP 60 million annualized and part of -- that's what drove the exceptional costs in H1 and H2 as well. That GBP 81 million, clearly, we have a bit of a reload on salary reviews. So I think starting the new financial year, I'd expect that to be sort of around GBP 81.5 million to GBP 82 million as we start the new financial year. But importantly, that's still materially lower than where we were starting this financial year, and I think that's important. It's important that we keep that under close review. I think I've clearly given quite clear headcount guidance on where we expect overall Q1 to be not materially different than where we are today. And therefore, I suspect that will be a relatively hopefully stable cost base going into Q1.

We will now take the next question from the line of Allen Wells from Jefferies.

Three for me, please. Maybe just start Australia. It looks like peak to trough net fees are down about 30%, headcount looks similar. So maybe just can you just comment if the conversion rate has now bottomed and will the second half look better than the first half? And maybe just more broadly, we are starting to see some stabilization in net fees now which I guess is sort of indicated by some of the jobs data coming through? That's kind of the first question. Then secondly, just on kind of the time to hire extending. I think you talked about the number of interviews required to place Perm candidates went from 6 to 7.5. Given what we saw from [ page ] earlier in the week, can you maybe just comment if that's increased further? And then finally, just on perimeter change, which you've talked a little bit about, maybe can you just give an update on the action taken on business units that can't deliver that desired conversion rate over the medium term? So where are we on that?