Hays plc (HAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Hays Quarterly Results Update for the 3 months ending 31st March 2025 conference call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kean Marden, Head of Investor Relations. Please go ahead.

Thank you, Nadia. Good morning, everyone, and thank you for joining us at our new slightly later 9:00 a.m. Analyst and Investor Call on what we appreciate is an unexpectedly busy morning. I'm Kean Marden, Head of Investor Relations, and I'm joined here today by James Hilton, Chief Financial Officer, to present Hay's Q3 '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 are on a like-for-like basis versus the prior year, unless stated otherwise. Group net fees decreased by 9%, with Temp & Contracting down 6% and Perm down 14%. The group's March growth rate was minus 7% on a working day adjusted basis. Perm exited at minus 13%, while Temp & Contracting was more resilient and exited at minus 3% on a working day adjusted basis. And despite ongoing macroeconomic uncertainties, we currently expect FY '25 operating profit will be in line with consensus. I would highlight the following key items from the results. In our Temp & Contracting business, net fees decreased by 6% with activity levels and volumes rebuilding through the quarter in line with normal trends, except the Temp in Germany, which remains subdued. Group Temp & Contracting volumes decreased by 7% year-on-year including Germany down 10%, ANZ down 12%, UK&I down 10% and rest of the world up 6%. Perm net fees decreased by 14%, driven by volumes down 19%. And this was partially offset by an increase in our group average Perm fee of 5%. Perm job flow and activity levels have returned to pre-Christmas levels in the U.K. and Ireland, Australia and New Zealand and in North America but remains subdued in EMEA, particularly in France and in Germany. And we continue to see slow conversion of Perm activity to placements in the majority of our markets globally. Our large enterprise clients had another strong quarter with net fee growth of 10% driven by headcount investment in existing clients, higher fill rates and geographic expansion. In addition, we have significantly improved our win rate over the last 2 years, securing 31 new client wins during the quarter and renewing existing contracts with Mitie and Kier. Despite tough market, our business line prioritization and resource allocation actions drove a 5% year-on-year improvement in average consultant net fee productivity. Once again, our momentum has been set leading over this period. And on a seasonally adjusted basis, productivity has increased now for 6 consecutive quarters. Consultant headcount reduced by 5% in the quarter and is now down 13% versus prior year. Our initiatives to deliver structural savings of circa GBP 30 million per annum by the end of FY '27, continued to progress well. And consequently, our current cost base on a periodic and constant currency basis has improved to circa GBP 76 million from circa GBP 77 million in Q2. We have removed duplicated costs, delayed management, outsourced selective opportunities, further standardized and globalized processes and expanded our shared service centers. Our non-consultant headcount exited the quarter down 17% year-on-year. And the group's net debt position was circa GBP 30 million, which reflected normal seasonal outflows and timing of month-end payments and a circa GBP 5 million cash exceptional impact. DSOs were maintained at 37 days, in line with H1, and we expect to return to a modest net cash position in Q4, which is seasonally stronger for cash flow. I'll now comment on the performance of each division in more detail. Our largest market of Germany saw fees down 9% year-on-year. Temp & Contracting fees decreased by 6% year-on-year. Contracting volumes remained solid overall with fewer finishes, offsetting lower starter numbers. However, Temp, where we have a greater exposure to the automotive sector was again more challenging. Temp & Contracting margin and mix was up 4% versus the prior year. And as I mentioned earlier, volumes declined by 10%. Average hours work remained sequentially stable and due to easier comparable year-on-year headwind is likely to be modest in Q4. In Perm, conditions remain challenging and fees decreased by 21%. At the specialism level, Technology and Engineering, our 2 largest specialisms were down 8% and 19%, respectively. Accounting & Finance was more resilient, up 2% while Construction & Property performed strongly and was up 34% since we saw strong growth in our infrastructure and energy businesses. Consultant headcount increased by 4% in the quarter and by 13% year-on-year driven by our ongoing resource allocation and back office efficiency initiatives, consultant net fee productivity increased by 5% year-on-year in Q3 and non-consultant headcount reduced further. In U.K. and Ireland, fees decreased by 13%. Following a good return to work, Temp & Contracting net fees were down 11% year-on-year, Perm down 16% remain challenging. Fees in the private sector declined by 10%, while fees in the public sector were tougher and down 19% year-on-year. At the specialism level, Accountancy & Finance and Technology decreased by 17% and 19%, respectively. Construction & Property decreased by 7%, but delivered a modest sequential improvement through the quarter. And again, enterprise performed well and was up 8%, driven by volume growth in existing contracts and new wins. In Ireland, our fees decreased by 24%. Consultant headcount decreased by 11% in the quarter and by 20% year-on-year. We are not satisfied with our H1 performance and have taken action over the last 6 months to improve consultant net fee productivity which increased by 8% year-on-year in Q3, and we have made good progress with our operational efficiency initiatives. As a result, we expect an improved profit performance from the U.K. and Ireland in the second half. And as a reminder, our new U.K. and Ireland CEO joins in June 2025. In ANZ fees decreased by 11% year-on-year, while market conditions remain challenging, activity levels were stable through the quarter. Following a good return to work, Temp & Contracting fees decreased by 6%. However, conversion of Perm activity remained challenging and net fees were down 20%. The private sector decreased by 9%, with the public sector again tougher, down 14%. At the specialism level, Construction & Property decreased 17% while Accountancy & Finance and technology decreased by 19% and 8%, respectively. ANZ consultant headcount was down 4% in the quarter and down 16% year-on-year driven by our focus on resource allocation, consultant net fee productivity increased by 6% year-on-year. In our Rest of World division comprising 28 countries, these decreased by 7%. Temp & Contracting fees decreased by 2% and Perm by 10%. In EMEA ex Germany, net fees declined by 10%, France, our largest Rest of the World country was down 19%, and action is underway to address productivity and costs. Southern Europe was stronger with Spain and Portugal up 10% and 14%, respectively. In the Americas, net fees grew by 2% with growth in Canada and the U.S. up 1% and 5%, respectively. LatAm, down 6% remained challenging but stable, and we recently announced our intention to close our operations in Chile, Colombia, Rio de Janeiro and Campinas and focus on our 2 high potential markets by expanding our existing offices in Sao Paulo and Mexico City. Asia net fees decreased by 6% with mix but overall stable activity through the quarter. Mainland China increased by 9%, and the year-on-year decline in Hong Kong moderated to minus 15%. Japan was more challenging and was down 23%. For rest of the world as a whole, consultant headcount decreased by 3% in the quarter and by 9% year-on-year. As you may recall from the Q2 IMS and our half year results, we have several initiatives underway to build a structurally more profitable and resilient business, underpinned by our culture and talented colleagues worldwide. Before moving to current trading, I wanted to take a few moments to update you. Despite challenging markets, we are delivering on our strategy and have made good progress during the quarter. Consultant fee productivity increased by 5% year-on-year, and we were pleased to deliver 10% net fee growth with large enterprise clients and our structural cost-saving initiatives are progressing well. Within Temp & Contracting, year-on-year net fee growth was positive in 5 of our 8 focus countries in Q3 and at the group level, we exited the quarter with fees at minus 3%, driving real growth in consultant productivity through business line prioritization, optimized resource allocation and scaling our 8 focus countries, we'll establish a broader base and together with programs to structurally improve our cost base will enable the group to return to and then exceed our previous peak profits of GBP 250 million. Moving on to current trading and guidance, and I'd like to highlight the following. We expect near-term market conditions to remain challenging with greater resilience in Temp & Contracting. Perm markets remain difficult, notably in Germany and EMEA, due to longer time to hire. And although we have limited forward visibility, we believe this is likely to persist into FY '26. We have maintained good levels of productivity through Q3. I believe our consultant -- group consultant headcount capacity is appropriate for current market conditions and therefore expect it to remain broadly stable in Q4. We will continue to deliver further efficiencies, which will structurally reduce our cost base and focus on business line prioritization and optimal resource allocation to drive consultant productivity and position Hays strongly for when end markets recover. Easter falls entirely in Q4, while in FY '24, it was split evenly between Q3 and Q4. We expect this to have a circa 1% negative impact on year-on-year net fee growth in Q4 '25. And overall, while it is difficult to predict timing, we know our markets will recover. And when they do, we will be firmly focused on delivering a high drop-through of fee growth to profit growth. And at the half year results, we noted that due to the ongoing nature of our restructuring and transformation programs we expected to incur further exceptional costs in H2 '25. Following recent action to address productivity, performance and costs in several countries, together with ongoing actions in several back office areas, we currently expect circa GBP 15 million to GBP 20 million exceptional P&L charge in H2. I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] And the question comes from the line of Simon LeChipre from Jefferies.

Two questions, please. First of all, on the outlook, I mean, in which extent the recent macro developments have impacted your outlook expectations? When you look beyond the next quarter, basically, is there any change in the way you think about the shape of the business for the coming quarters and any potential recovery? And secondly, on the U.K., so you've reduced headcount by 11% in Q3. Could you give us details on the actions you have taken and with the new CEO coming in for the country, could you discuss any changes to be implemented in terms of strategy and execution?

I'll kick off with a question on outlook and clearly, we're in a fairly uncertain world right now, I think we've been clear on that. We have confirmed our current expectation for FY '25 is that we'll be in line with consensus. But clearly, the recovery is taking longer and we put in the statement today that we expect tougher market conditions will persist for some time and into the FY '26 year. Now it's difficult as you're well aware, that I don't have a crystal ball and can't really predict how these things will play out over the coming months or the coming quarters. But it is our expectation that the recovery will take longer given the uncertainties that are out there, and we felt it appropriate, therefore, to inform the market that we expect that these tougher market conditions to persist into FY '26. So I mean I can't really say that much more than that really at this stage, given everything where we are. Second question on U.K. and Ireland headcount. I mean, I think it's fair to say that we've taken some decisive corrective action in the U.K. and Ireland. We weren't happy or accepting of where our first half performance was. Overall productivity wasn't good enough and it wasn't acceptable being in a loss-making position. And I think we've made a pretty decisive response. We've taken out underperforming consultants where we felt that these couldn't be moved or effectively redeployed elsewhere in the business. And we've also made significant changes to management structures and layers into a number of back-office areas, which are clearly more structural in nature. And if I stand back from this, the impact has been material so what do I mean by that? If I compare March to where we were in September, we've turned the U.K. and Ireland business from being loss-making position in September to making more than GBP 1 million profit in March. And this isn't the market suddenly improving as we're all aware. But instead, we've taken GBP 1.3 million a period out of the cost base whilst holding the top line and driving material productivity improvement. I think that's a pretty good performance. And the U.K. and Ireland leadership team should take enormous credit for delivering this, and they are a superb team delivering in a tough market. And I think it's important that they've made these steps and laid the foundation for when Tom joins us in June. And I'm not here to say what the strategy of the U.K. and Ireland business is going to be going forward. I think it's important that Tom arrives in June and takes his time to understand the business and then decide how he wants to take it forward. But what I would say is that we've taken decisive action to improve the performance of the business, and I'm very, very pleased with how we've done that.

And the question comes from line of Andy Grobler from BNP Paribas Exane.

Three from me, if I may. Firstly, just kind of following up on the previous question. It's obviously been a volatile few weeks. Have you seen a change in behavior from your clients and/or candidates in the last few weeks by region, please? Secondly, enterprise is still very strong. Given that growth, can we assume the agency business is down kind of mid-double digit. And for that enterprise business, are you -- what's driving that strength? Is it the market? Or do you think it is Hays' specific actions? And then lastly, just on productivity, up 5% in the quarter which is great. Do you expect that to moderate through the back end of this fiscal year and into fiscal '26?

I'll pick each one up, starting with what have we seen in recent weeks. Well, I think fair to say that March was performed in line with our expectations. If I look overall at March as a month, we were about GBP 2 million lower than where we were in September. For me, March and September are pretty comparable months, similar -- same number of working days, both important Perm periods for us. We're about GBP 2 million lower, and all of that was EMEA and Germany Perm. So outside of those 2 parts of the business, we've seen a pretty stable trend over the last 6 months. I think that's a confirmation that our return to work in Temp & Contracting outside as we spoke about in Germany in Temp which is largely autos related, has been in line with our expectations and in line with previous years. So that's been helpful. And actually, Perm elsewhere outside of EMEA and Germany has been pretty stable as well. And I'd highlight the U.K. and Ireland. As I said before, its March performance was pretty much in line with September and similarly with Australia and New Zealand as well. So I think -- and North America. So I think overall, Andy, we're pretty satisfied with where we landed in March. I guess perhaps your question was perhaps more interested in have we seen anything in very recent times around the announcements on tariffs et cetera. I mean, look, you have seen clearly that I haven't mentioned tariffs in either the statement or in the script. Quite frankly, I've got 1 weeks' worth of data from last week and having done ops reviews with all of our businesses globally in the last 2 days, all of those reviews were very consistent, but it's just too early to predict what impact this may have on our business. So we know that anything that impacts client and candidate confidence may well impact our business in time. But at this stage, we simply don't know. And you know me well enough to know that when -- if and when we do see something, we'll be clear and we'll share this with you. But I mean, in the meantime, we're just resolutely focused on delivering on our strategy, and I think we've made good progress on that. And I think that leads on to your next 2 questions, Andy, actually, which is first of all, enterprise where we were up 10% in the quarter. Again, we were up 10% in the first half, and it's good to continue that growth into this quarter. What's driving that? Put simply the majority of our business in enterprise is in MSP. And in those MSPs, we've been resolutely focused on improving our own fill rates on those clients. And I think we've made good progress on taking market share within those fill rates, we've had a number of good client wins as you will have seen in the announcement and some good retentions as well which are important for us. And I think all of those together mean that we're taking share in that market and we're performing strongly. So I'm very pleased with how we're performing in that area, and that's a strategically important area for us. And the last part was around productivity. And again, we're pleased to be up 5% in the quarter. In my mind, delivering real growth in productivity i.e., productivity growth in excess of inflation is an important part of how over the long term, we'll rebuild the profitability, sustainably of the business, and it's really good to continue about 6 quarters in a row that we've built and improved our productivity now, which is important. Again, it is difficult for me to forecast how that will change or whether we'll sustain that. I mean it's our ambition over the long term to sustain real productivity growth. Now will it be impacted short term by factors? Yes, it could do. But we'll also respond to those market factors as we have been doing in the last 18 months by redeploying consultants, by challenging the business on operational rigor and making sure that we've got the right people in the right desk ultimately and are performing at the level we need. And if they're not doing that, we'll make corrections. But I think for where we are today, Andy, we're happy with where our consultant headcount is. We think it will be broadly stable over the next quarter. But under the covers, we'll be busy redeploying and moving people around on the ground, and that's what we're resolutely focused on doing. So it's difficult for me to say whether the short term, we'll see a productivity impact of any market disturbance. But over the long term, it's our ambition to drive real productivity improvement.

And the question comes from the line of Karl Green from RBC Capital Markets.

A couple of linked questions on the U.K. following on from the prior question and then a separate one. Just in terms of the GBP 1.3 million per period cost base -- per period cost -- sorry, GBP 1 million plus profit that you're delivering in March, just to double check that includes the central cost allocation? Or is that just the trading business in the U.K.? And then also, again, just drilling down into the U.K. and Ireland headcount, you've indicated the consultant headcount reduction in the quarter. What was the aggregate U.K. & Ireland headcount movement in the quarter? And then the last question is sort of you're thinking a year or 2 out, just in terms of that ambition to drive high drop-through, I appreciate you can't in a month of Sundays determine what the shape of the fee recovery is going to look like. But could you just help us get some sort of sense, say, you got 5% to 10% fee improvement across the group, what the drop-through would look like or, say, 15% to 20% in a more optimistic scenario, just to try and scale what the range of drop-throughs might look like, please?

So thank you for the first question on U.K. and Ireland. And yes, it's helpful for me just to put that into context. So the profit that we delivered in March is before our group central cost allocation. But still that is a turnaround from being in a loss-making position to GBP 1 million of profit in the last couple of periods, which is important, but it is before our group central recharge. Going to your question on the aggregate U.K. headcount reduction, so what does that actually mean over the last 3 months. We reduced our consultant base by 163 consultants and we -- which was 11%. And overall, our headcount -- employee headcount was down by 232 employees. So that was about an extra 70 or so headcount in non-fee earning areas, about broadly 2/3, 1/3 split there. And also, we did exit a number of offices over the last 6 months. And as I say, we've been focused on a number of areas of cost as well. So I think it's a combination of all of those things that have led to that improvement. Question on the long-term drop-through, wow, geez, that feels like an interesting -- probably a lot of question I was expecting on this call, Karl, but an important one because I think we are resolutely focused on driving productivity growth over the long term. And what does that mean is I think it's safe to say that when we do see an inflection and we returned to a positive top line, we would expect to see a good proportion of that drop-though to the bottom line. It's difficult to say for every pound of extra fees where we see 50p of profit or 60p of profit. I kind of need to see what the shape of that recovery is really to be able to make that call. But I certainly would expect certainly in the early stages of the recovery to see a pretty high drop-through. And I think really why is that? First of all, we're focused on driving productivity growth in excess of cost growth, and that's important. And secondly, we should see the impact of our efficiency programs come through as well, which will drive the bottom line. So in the early stages of the recovery, I would expect to see a very high drop-through of fees into profit. Clearly, as the recovery takes shape and sustain, then you clearly would get back into investment and that drop-through would come back down to a more moderate level. But I would expect it to be in the sort of 50% plus range.

And the question comes from the line of Remi Grenu from Morgan Stanley.

Just one remaining on my side. On the German Temp business, I mean it has been an issue over the last few quarters and you were still flagging that it's rebuilding at slower pace. So I was -- can you help us quantify and understand the drag there and whether you are seeing any signs of further deterioration there or positive inflection a little bit on the phasing through the quarter, please?

Yes. So we've been talking about Temp weakness in Germany, and it's auto related actually outside of the autos in Temp, we're seeing things pretty stable and solid as we are in the contracting business. But in the Temp, auto sector we're down about 50% year-on-year in a number of new starters, which is -- that's -- we -- this time last year, we would be putting in about 100 Temps in a period. About half of those in autos. But clearly, that 50 Temp starters that we would normally expect is that volumes now down in the 20s, and that's been fairly consistent over the last quarter. So well down on where we would expect to be. But I mean, I would highlight that typically, we're putting in 350 to 400 starters a week in Germany across our Contracting & Temp business. So when you look at the impact of autos, yes, it's material to the Temp business, but actually to the business overall, it's relatively small versus the 350 to 400 starters that we put in a month in Germany. So yes, I mean eventually, it does become a relatively small proportion of the business. I guess going on to your question, have we seen any material shift in that? Not really. I think we've been flagging weakness there for 12 months. I wouldn't say there's been any significant deviation in that in the last 3 months or so.

[Operator Instructions] And the question comes from line of Steve Woolf from Deutsche Bank.

Just one for me on France. You flagged it here as an area obviously still waiting to be restructured to some degree. Is that really just a question of headcount on the consultant side and how long it takes to get -- remove headcount in France? Or is it more something more fundamental in terms of areas that you're operating in, which might not have as higher conversion ratio prospects in the longer term. So really it's sort of head count versus reshuffle in terms of sectors, if poss?

No, you're right to highlight France was a little bit behind where we wanted it to be, to be fair. I think it's a challenging market, don't get me wrong, and I think you've seen that across the sector. But I think there's -- it's safe to say there's been some Hays specific factors that have contributed to that result. We're still 80% Perm and only 20% in contracting, for example, and that isn't a high enough proportion and it's something that we need to increase. And also, if you look at the mix of our Perm business, we're still heavily weighted to the more junior end of the market in France versus the senior end of the market. And again, that's clearly, where we've seen more weakness globally in Perm recruitment over the last 18, 24 months. So I think all those are factors of how we want to reposition that business. We have made some changes in leadership in France in the last 3 months. Really to accelerate our focus on driving more non-Perm into the business and also to move further up the food chain into higher, more senior end of market in Perm. And I think those are important strategic initiatives that we want to get on and execute. So I think it's a bit of a combination, Steve, in France. I think the -- it is a tough market, and I think across Europe, probably the most challenging market we've got. But still, we're not happy with the speed of travel in our business, and we're making -- taking steps to address that.

Presumably, a decent chunk of that exceptional charge for the second half relates to France. Is that fair?

You're not wrong. It's an expensive place to make changes. We're all aware of that. That's the regime and the world that we're in, in France. So yes, there will be some -- there are some significant changes going through right now in France, and it comes with a relatively hefty price target, unfortunately. But no, look, these are -- it's an important business for us. It's one of our focus countries. It's a business that pre-downturn, we were making GBP 15 million a year in profit, and we will get back to that level of profitability with a business which is more structurally aligned to where we want to take the group. So it's important that we take these steps now. It's not easy and there's a lot going on in France right now. The team there are doing a really good job. But no, it's important that we make these changes because France is a really important market.

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

Two questions, please. Firstly, in Temp & Contractor. Can you talk about the current impact you're seeing from hours per contractor, and wages or fee rates and anything that reveals about kind of budgets or behavior? And then secondly, on the profit outlook you've confirmed, it suggests that absolute adjusted EBIT will be a bit higher in H2 than H1, which I think is normal seasonality, which is good to see. Should we think about the underlying EBIT base is, therefore, being broadly stable from here? Or do you have more visibility on further cost reductions to annualize in that profit run rate, again, kind of ignoring top line cycle that we don't know about just yet?

I'll pick the first one Rory, on Temp & Contracting. And are we seeing any movement on hours or fee rates? Actually, it's been pretty stable to be fair, over the last 6 months. If we cast our mind back 12 months ago, we were seeing an impact in Germany, specifically of reduced hours in our Contracting & Temp business there as clients would pulling back on their budgets, and we were seeing that reduction really less over time and a little bit less spend from clients. I think we've been in a pretty steady world actually over the last few months, both in terms of the hours worked per contractor or temp and also in the fee rates that we get in. If you look, for example, in this quarter in Germany, our Temp & Contracting business was down 6%. And that was off the back of 10% reduction in volumes, and therefore, the impact of margin mix and hours was plus 4%, year-on-year. Within that, hours is pretty stable, and we're continuing to see modest improvement in our pricing and margin as well. So I'd say that's a pretty stable environment that we're in right now and therefore not indicative of any real change in client behavior. Second question on EBIT. Yes, you're right. If we -- full year consensus is just a fraction under GBP 57 million, which would mean that we'd have about GBP 32 million of profit in H2. That's a kind of a combination of 2 things. We've clearly had a deceleration in the top line through H1 and if we continue through a stable second half, that would be a slight drop in overall top line. But we -- on the counterbalance of that, we've got the annualization of cost savings that come through the year which would mean our second half profits are slightly better than the first half. It's difficult for me to predict much into the future, as you know, Rory, in FY '26. But I think we'll exit the year with a cost base around -- we were at GBP 76 million now, I'd expect to be a tad lower than that by the time we get to the end of the financial year as we still got some things in flight, which will come through. And then really, it's all about kind of what do we -- where does it go from here? Do we start seeing the change in the top line? Who knows? It's just too difficult to predict, I think, at the moment and -- but I think our base case and central case is that we'll expect to see challenging markets persist into FY '26. So I'm not sitting here today forecasting the top line recovery, but we'll continue to drive the business as hard as we can, and we'll continue to run an efficient business as we can and focus on the costs.

As we have no further questions for today, I would now like to hand the conference over to your speaker, James Hilton for any closing remarks.

Thanks, Nadia. So 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, Kean, Rob and myself will be available for the rest of the day to take any calls. Thank you.

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