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 September 2024. [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, Kean Marden. Please go ahead.

Thank you, Sanja. Good morning, everyone, and thank you for joining us. I'm Kean Marden, the recently appointed Head of Investor Relations. And I'm joined here today by James Hilton, Chief Financial Officer, to present Hays' Q1 '25 results. Before we begin, please be aware that this call is being recorded, and the replay is 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, Kean. 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 on a like-for-like basis versus prior year unless stated otherwise. Group fees decreased by 14%, with Temp, down 10%; and Perm, down 20%. Net fees in the quarter were down as expected, reflecting the tough market conditions, particularly in Perm, where we see longer time to hire and low levels of confidence, which we expect to continue. The group's September net fee exit rate was in line with the quarter overall. I would highlight the following key items from the results. In our Temp business, fees decreased by 10% against a strong prior year comparator. Group average Temp volumes decreased by 7%, including Germany, down 9%; ANZ, down 17%; U.K. and Ireland, down 10%; and EMEA, up 6%. And on a sequential basis, Temp volumes remained stable overall and average group Temp margin was flat year-on-year. Perm fees decreased by 20%, driven by volumes down 23% and this was partially offset by an increase in our average group Perm fee of 3%. Activity levels remain subdued, but stable through the quarter and we continue to see longer-than-normal time to hire impacted by low levels of client and candidate confidence. Consultant productivity was up 5% year-on-year, driven by our continued focus on operational rigor and resource allocation. Consultant head count was reduced by 2% in the quarter and is now down 18% versus prior year. We also closed 7 offices across the group, predominantly in the U.S. and in the U.K. Our program to deliver structural cost savings of circa GBP 30 million per annum by the end of FY '27 is progressing well. And as a result of our actions, our periodic cost base is slightly below GBP 80 million per period, lower than our previous guidance of GBP 82 million, and we expect this to reduce further through Q2 as we continue to make progress on this program. The group's net cash position was nil, in line with our expectations, down from GBP 56.8 million in June '24 and driven by normal cash outflows through the summer months and circa GBP 10 million cash outflow from exceptional items. I'll now comment on our performance by each division in more detail. The largest market of Germany saw fees down 13% year-on-year or 15% on a working day adjusted basis. Temp and contracting fees decreased by 12% or down 14% working day adjusted, with contracting showing greater resilience but more challenging conditions in Temp, where we have a greater exposure to the automotive sector. Temp margin and mix was flat versus the prior year. And as I mentioned earlier, volumes declined by 9%. The headwind from fewer average hours worked moderated to minus 5% in Q1, driven by client cost controls and adverse placement mix changes. In Perm, activity levels remained subdued and decreased by 17%. At the specialism level, Technology and Engineering, our 2 largest specialisms were down 15% and 18%, respectively. Accounting & Finance (sic) [ Accountancy & Finance ] was more resilient and up 1% and with Construction & Property, up 3%. Consultant head count decreased by 1% in the quarter and by 11% year-on-year. In U.K. and Ireland, fees decreased by 20%. Temp decreased 16% with Perm down 26%. Activity levels remain subdued, but sequentially stable in the private sector where net fees declined by 18%. The public sector was tougher with fees down 25% year-on-year and where we saw modest sequential Temp volume reductions through the quarter. Perm remains tough, but sequentially stable and was down 26% versus the prior year. At the specialism level, Accounting & Finance (sic) [ Accountancy & Finance ] and Technology decreased by 23% and 32%, respectively. Construction & Property decreased 12%, although Enterprise was more resilient and up 1%. In Ireland, Northeast decreased by 24%, and our consultant head count decreased by 2% in the quarter and 17% year-on-year. In ANZ, fees decreased by 20%. Temp fees were down 13%, with Perm down 32%. The private sector decreased by 21% with the public sector down 17%. And while market conditions remain challenging, activity levels were sequentially stable during the quarter. At the specialism level, Construction & Property decreased 19%, while Accountancy & Finance and Technology decreased by 20% and 12%, respectively. New Zealand remained tough with fees down 42%. ANZ head count was flat in the quarter and down 27% year-on-year, which drove an increase in product -- consultant productivity for the third consecutive quarter. In our Rest of World division, comprising 28 countries, fees decreased by 9%. Perm was down 16%, with Temp fees up 3%, driven by volume growth. EMEA ex-Germany, the Americas and Asia were down 11%, 2% and 10%, respectively with overall activity stable across all 3 regions through the quarter. In France, our largest Rest of World country, fees were down 17% against the prior -- record prior year comparator. However, the Olympic impact was more modest than feared and consultant productivity increased by 7%. North America has been an early beneficiary of our business line prioritization, resource reallocation and operational efficiency initiatives. These actions have improved consultant productivity by 30% year-on-year and significantly improved profitability versus losses made in Q1 prior year. In Asia, profits increased by 7% versus the prior year, driven by Mainland China fees up 11% and returning to profitability. For Rest of World as a whole, consultant head count decreased by 2% in the quarter, and by 20% year-on-year. Moving on to current trading and guidance, and I highlight the following key points. Overall, we expect near-term market conditions will remain challenging. Activity levels in both Temp and Perm are sequentially stable in Australia and New Zealand, EMEA, Asia and the Americas, but remain at subdued levels driven by low levels of client and candidate confidence and longer time to hire. The U.K. and Ireland has seen a modest sequential reduction in Temp volumes in the public sector, while Perm remains tough with stable but no clear signs of improvement in activity. In Germany, contracting volumes are stable and in line with our expectations, whereas Temp is more challenging due to our exposure to the automotive sector. We continue to see the impact of lower Temp and contracting hours worked and currently anticipate a circa 5% headwind in Q2. Perm activity remains subdued, but stable levels. We believe our consultant head count capacity is appropriate for current market conditions, and we expect this will remain broadly stable in Q2 '25. It is difficult to predict the shape of FY '25 given we only have limited forward visibility. But based on what we currently know, unless we see a material recovery in end markets, we continue to expect the pre-exceptional operating profit in H1 '25 will be sequentially lower than H2 '24. And overall, while it is difficult to predict timing, we know when our markets will recover, when they do, we will be firmly focused on delivering the 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 Rory McKenzie from UBS.

It's Rory from UBS. Three questions, please. Firstly, on Germany, can you split the volume trends by Temp and by contractor? And also just how much of the region is the auto Temp business that you called out? And more broadly, in Germany, given that the weakness in that key sector, how are the rest of the KPIs looking? Is there any sense that the weakness there could spread elsewhere? Secondly, in Rest of the World, where you've talked about a generally sequentially stable picture. Can you focus on the Americas? It sounds like in what's a tough market, you've managed to perhaps improve your underground productivity there? And whether there are similar improvements for other regions to come? And then finally, just on the costs and the exceptionals. Should we expect any other exceptional costs expensed this year? And could you just give us guidance on the cash exceptional impact of last year's exceptional, please?

Right. Thanks, Rory. I will take that. I think I managed to get 7 or 8 questions in there, but I'll pick them all in turn. So I'll start off with Germany and the volume trends between our contracting business and our Temp business. And just to put some numbers around that, we continue to see year-on-year volume decline in contracting at around 3% to 4%. And that's pretty consistent with where we were in Q4. And in the contracting side of the business, while we continue to see lower starters year-on-year -- lower levels of starters versus where we were 12 months ago. We're also continuing to see lower levels of finishes and clients continuing to hold on to workers. So overall, you put that together and it's a relatively stable trend. So as you know, we lose a certain amount of volume in the summer as people come to the end of the contracts. And then we look at the rebuild through -- obviously through the -- as we come out of the summer and that's in line with normal trends and that gap has not widened. Temp, on the other hand, is more challenging, as I highlighted in the statement. And if I put that into context, we had a normal level of finishes in the summer. And then the rebuild in post summer has been slower than what we would expect, and that's clearly widened the gap from a year-on-year perspective. So from a gap of around about 9% as we exited Q4, they're currently at about 17%, 18%, on Temp volume year-on-year down. So that is clearly wide. And you put all that together, that gets you to the 9% year-on-year reduction in volume. I would highlight that the Temp business for us is clearly smaller than the contracting business. We have about 14,500 total workers and around 3,700 of those workers are in Temp. And of that Temp number, about 40% are in the automotive sector, so roundabout 1,600 or so at Temp in that. So it's about kind of 10% to 12% of our overall German -- it's about 10% of our overall German business is in the automotive sector. And clearly, that's more challenging. The number of starters we're putting in specifically into the autos is about 50% down on where we would expect to be. Actually elsewhere in Temp, it's pretty resilient actually, and we're seeing pretty resilient trends similar to what we're seeing in contracting. And the other key thing I'd highlight, and I mentioned in the statement, Rory, which is relevant is the -- we clearly talked last year about the headwind of hours working being lower year-on-year, while that's still the case, and we expect it to continue into Q2. It's less of a headwind than where we were 6 or 9 months ago, and that's feeling pretty stable. I hope that's given you a feel for, I guess, overall, the run rate in Germany and how we're looking at it. And then clearly, will that Temp weakness continue into Q2 in the auto sector? Yes, it could do. And I think we have to be reflective of that. And clearly, that's fairly challenging. But elsewhere, I feel that things are pretty stable overall. Second question I'll pick up on with the Americas question and specifically around the U.S. And actually, we -- I think at the top line, Rory, we've seen a relatively stable trend now in the U.S. since around February, March time. But certainly, I've been pretty encouraged by the action on the ground by the team there. And I think this is, for me, a good example of the focus and rigor that we put into the business in the last 12 months there. You can see our consultant head count is heavily down, but we -- it's not just we've taken the consultants out if we refocused on and doubled down on our core specialisms within Technology and Construction & Property. We've closed a number of peripheral offices around the business and refocused back into our heartland, which is kind of on the eastern seaboard and in the Southeast of the states. We've switched consultants back out of 180 model where we felt that in a tougher market, there was less sales focus than we'd like and got more consultants back on to 360 desks. All that has been really quite positive on our productivity, which is up 30% year-on-year. And actually, at the bottom line, transform that business from a loss-making business 12 months ago into a decently profitable business now, and that's about GBP 1 million a month swing on the bottom line, which I think is quite significant for a business of that size. And do we have opportunities to replicate that elsewhere? Yes, we do actually. And that's what we're busy working on. So it's not sort of overnight success. It's hard yards of good basic operational rigor and attention to detail, but I think that's been a really good story. And I think the team over in the Americas have done a really good job on that. The third question was on costs and exceptionals. I mean, clearly, we've put in there in the guidance around the H1 on the year versus the H2 on a pre-exceptional basis. And partly that was, Rory, discussed in the prior year first half, we had an exceptional. So we have to be reflective of that in the wording we use. Whether we have one or not this half, it remains to be seen. I'm only 3 months into the year, and clearly, there's lots of tests around what's exceptional and what not. Clearly, we are incurring some nonrecurring items in the projects, specifically in the back office projects, which are progressing well. Whether they ultimately tick all the boxes of an exceptional and which obviously, there's a relatively high bar for that, we'll have to wait and see where we get to for the half year. But we are incurring some nonrecurring costs at this stage, which we expected to as a result of those projects. And those projects are progressing quite well, and you can see that impact on the cost base as we've moved through this half. Hopefully, that -- does I have cover everything? Rory, forgive me if I missed something.

James. Sorry, I gave you 3 broad topics rather than 3 questions, but very helpful.

We will now take the next question coming from the line of Remi Grenu from Morgan Stanley.

So the first one is on Perm and the job flow. I think you previously said that was that obligation that the job flow had weakened in June and that was one of the driver of the weakness at group level. So I'm just interested in hearing what you're seeing these days is what you've seen through Q1 in terms of job flow on the Perm side and conversion rate on the interviews and the meetings you've been doing. That's the first question. The second one is on if we put the U.K. and Germany on the side where you flagged some specific pockets of weakness, any other countries where you saw lower volumes and probably more specifically talking about France and what you're seeing there is the overall macro and political environment had an impact or any -- has contributed to weakening of trends through Q1? And then the last question is on the cash position, which is down quite significantly year-on-year. So just wondering if you might consider taking more drastic measures to preserve cash like cutting the dividend, for example.

Thanks, Remi. The line just broke up slightly on one of the questions. So if I missed a bit of it, just please come back to me. So the first question on Perm job flow, you're absolutely right. We did have a disappoint in June, if we think back to Q4, but it was largely U.K. in the run-up to the election. And also in France, if we remember back to that quarter where in the run-up to their own election on the Olympics, we saw a bit of a stall in activity. Actually, interestingly, if I look at job flow through the summer and if I look at interview numbers on jobs and then if I look at conversion of that into placements, adjusting to what we would normally expect to see through summer because clearly, we get lower job flow as people go on holidays and all around. But actually, it's been -- I'd say it's been a relatively stable period of time. So when we talk about activity overall at the group, that for me kind of put it all together in terms of the level of business that's coming in, the activity we've got on that and ultimately, the conversion of that through to successful placement has all been pretty stable overall. And haven't seen a movement in trend around the conversion. I think we've talked for some time around longer times to hire and elongated processes and fragile confidence. I would say that, that's still the case, and you can see that in our Perm numbers across the business. But there's still reasonable amounts of job flow coming through. I haven't seen a real change in that dynamic through the last 3 months and it's pretty consistent with where we were overall for the previous quarter. So I don't think there's any real trend to highlight there. And hence, our comments, Remi, the Perm has been stable across the business overall through the quarter and that goes into September as well. Second question was just I think -- and this is where the line broke up, so forgive me if I missed it. But the U.K. public sector, clearly a little bit more challenging. Germany Temp, a little bit more challenging. Is there something else around the group that's offsetting that, I think, was the sort of the overall question to be pretty stable overall. We have some little pockets around the group where things are a little bit better. Actually, China was better through the quarter. You can see that in our numbers, and that move forward from the previous quarter and importantly, consistently profitable, which is good. Actually, 1 or 2 pockets of Europe continue to be pretty good. We actually had a record quarter in Italy and Portugal was up. So Southern Europe generally, it continues to be more upbeat. And actually, in the Americas, North America, the U.S. is pretty flat, but actually in Canada, we had a better quarter as well. So not major markets for us, but a few areas around the group that were a little bit better. And -- but it's kind of been offset, I'd say, overall, with a bit of weakness elsewhere. And finally, I'll pick up on cash and your question around dividend. And the cash performance, we -- if you look over the last 5 or 6 years, we've typically had a swing from June to September of around sort of GBP 40 million to GBP 50 million of cash outflow and this quarter was the same. And if I put on top of that, the cash impact of exceptionals. Actually, I think Rory already asked that question. I'll cover it now. We had GBP 10 million in the quarter of cash out on the prior year exceptionals. So you add that on top and that's kind of where we are at a nil cash balance. I do expect that to improve. In Q2, we normally have a better cash month in a quarter in Q2. Clearly, it's a higher profit quarter because we don't have summer. And also, we tend to -- that we get out the summer where people are slower are paying and expect to have a better cash. Of course, clearly, I've got a GBP 30 million dividend to pay in November as well. Regarding future dividends. Now clearly, that's the discussion and decision for the Board at a future event and date in time, and that will be made against the situation then. So I've got no comment on that at this stage. Remi, did that pick up everything? I'm just conscious that the line did crackle a little bit halfway through.

Yes, you addressed 95%. Just one thing remaining. Is there specific to call about France, given the political macro environment? I mean we just had the budget. So I know it's very early days, but discussions with clients there and if there is because to me, the environment would feel like might put a little bit more pressure on hiring decision, hiring intentions there. Just your view on that.

Yes, France has been an interesting period, actually. As I spoke about, we had a bit of a slow end to the previous quarter as we run into that election period. And then we were quite cautious to be fair, partly because of that and also because of the Olympics and what impact that would have combined with French summer holidays, which clearly impacts us quite heavily in July. Actually, you know what, it's not been quite as bad as we said it would be. You can see that whilst we're heavily down year-on-year, actually, France last year had a record August, September and October. So 3 months in a row, they hit an all-time record, so pretty tough comparatives. And if I look overall in France, it's pretty stable, and that's slightly ahead of what we were expecting actually. So I think that -- I wouldn't say it's suddenly bouncing back strongly, but certainly, it's not as bad as we feared it might be. And about 70% of our business is in France is in Perm. So clearly, it's how's that element of volatility as well. Hopefully, that gives a little bit of a feel for where we are in France.

We will now take the next question from the line of Afonso Osorio from Barclays.