PageGroup plc (PAGE) Earnings Call Transcript & Summary

Good morning, and welcome to the PageGroup Full Year Results 2021 Conference Call. My name is Seb and I will be the operator of your call today. [Operator Instructions] I will now hand the floor to Kelvin Stagg, Chief Financial Officer, to begin. Please go ahead.

Good morning, everyone, and welcome to the PageGroup 2021 full year results presentation. I'm Kelvin Stagg, Chief Financial Officer. And on the call with me is Steve Ingham, Chief Executive Officer. I'll shortly present our 2021 headline numbers and financial review, before handing over to Steve, who will run through a brief strategic review and conclude today's presentation with summary. Although, I will not read it through, I'd just like to make reference to the legal formalities that are covered in the cautionary statement in the appendix to this presentation, and which will also be available on our website following the call. The group delivered a record gross profit of GBP 877.7 million, representing growth in constant currencies against 2020 of 49.1% and reported rates of 43.8%. Against 2019, our previous record year, we grew 7% in constant currencies and 2.6% in reported rates. All of our markets have recovered well coming out of the pandemic and our trading results have steadily improved throughout the year. In 2021, 22 of our 37 countries delivered record years. Our Large, High Potential markets delivered growth of 60% collectively, with all 5 being Germany, Greater China, Latin America, Southeast Asia and the U.S. delivering record years. Our operating profit for the year was a new record of GBP 168.5 million, up from GBP 17 million in 2020 and GBP 146.7 million in 2019. Our conversion rate was 19.2%, up from 2.8% in 2020 and earnings per share increase to 37.2p. We ended the year in a strong financial position with net cash of GBP 154 million compared with GBP 166 million at the end of 2020. This was after returning GBP 100 million in dividends to shareholders in October. Today we're proposing a final dividend of 10.3p per share, an increase of 9.6% on the 2019 proposed dividends. Together with the interim special dividends this gives a total dividend per share for 2021 of 41.71p. I will now move on to the financial review. This fee earner head count and gross profit chart shows the unprecedented scale of the decline in group gross profits in 2020, and the comparison to the global financial crisis in 2008. It shows how the decision to invest in our platform during the pandemic has driven the sharp recovery seen throughout 2021. Our fee earner head count increased by 937 during the year to 6,082, which is marginally above 2019 levels. Included within this net increase is the addition of around 700 experienced hires, who have helped to drive the productivity increase in 2021. Overall, the group's operating profit increased almost tenfold in constant currencies from GBP 17 million in 2020 to GBP 168.5 million. The conversion rate also improved significantly to 19.2% for the full year. Looking at each of our regions, and starting with the largest, EMEA, representing 49% of the group, gross profit grew 40.3%. Fee earner productivity improved by 38%, which drove recovery in our conversion rate to the 2019 level of 21.6%. In Asia Pacific, representing 20% to the group, gross profit grew 53.1%. Fee earner productivity increased 45% and the conversion rate improved significantly from 12.1% in 2019 to 21.8% in 2021. Our Large, High Potential markets of Greater China and Southeast Asia performed particularly strongly, as did Japan and India. The Americas, representing 16% of the group, was our fastest growing region, up 66.9%. Fee earner productivity improved by 68% and the conversion rate recovered to 2019 level of around 14%. Improvement in growth and productivity across the region were offset by our continued investments in the U.S. and Latin America, 2 of our Large, High Potential markets. In the U.K., representing 15% of the group, gross profit grew 58% against 2020. Fee earner productivity increased by 41% and trading conditions improved through the year with the easing of restrictions and the successful rollout of the vaccine program. The conversion rate improved to 13.2% ahead of the 2019 rate of 12.8%. This was, however, impacted by the repayment of GBP 3.4 million of furlough income during the year, without which the conversion rate would have been 15.8%. With both the gross profit growth rate and fee earner productivity improving as the year progressed, the conversion rate followed, with the group's H2 conversion rate rising to 22% compared with an H1 conversion rate of 15.9%. EMEA exited in H2 with the group's highest conversion rate of 25.2%. This was driven by strong performances across a number of mature markets and a very strong performance from Germany, our Large, High Potential market in EMEA, partially offset by Page Personnel in France were lower level tech was slower to recover. Asia Pacific, having entered the pandemic first, recovered the earliest, with the group strongest conversion rates of 18.8% in H1. This improved to 24.3% in H2, despite differing challenges remaining in Hong Kong, and Australia. In the Americas H2 conversion of 13.4% was slightly behind the H1 conversion rate of 14.3%. This was due to the significant fee earner head count investment of 17% in H2 in our 2 Large, High Potential markets in the region of the U.S. and Latin America. In the U.K., the second half conversion rate at 17.9% was significantly better than the 7.5% conversion in H1. Although excluding the furlough repayment it would have been 13.3%. The tax charged for the year was GBP 48.3 million up from GBP 40.8 million in 2019. This represented an effective tax rate of 29%, broadly flat on the 28.3% in 2019. The effective tax rate is higher than the U.K. rate of 19%, due to the impact of higher tax rates in overseas countries, and to a lesser extent disallowable expenditure. The 2020 effective tax rate was significantly higher at 136.9% due to a combination of overseas taxes, unrecognizable losses, and disallowable and other permanent differences. In 2022, we expect the group's effective tax rate to be around 28%. Our balance sheet position remains strong, intangible assets increased by GBP 7.4 million compared to 2020, mainly due to capital expenditure on our new operating system, Customer Connect, which went live in France during February, leaving only Latin America to complete the program in Q2. Net trade and other receivables increased by GBP 103 million driven by the recovery in trading activity. After returning GBP 100 million to shareholders by way of ordinary and special dividends in October, net cash at the end of 2021 was GBP 154 million. Overall, net assets have increased from GBP 115.9 million to GBP 140.1 million (sic) [ GBP 315.9 million to GBP 340.1 million ]. This slide shows the key movements in our cash through the year. Our EBITDA inflow was GBP 229.2 million, an increase of GBP 144.9 million from 2020, driven by the strong trading results. Working capital increased by GBP 42.9 million. Our tax and net interest paid increased from GBP 31.6 million in 2020 to GBP 37.6 million in 2021. Net capital expenditure was GBP 25.7 million for the year, up from GBP 21.7 million 2020, with spending due mainly to Customer Connect, office fit out expenditure and additional technology to support flexible working. With the rise in the share price from 447.4p at the end of 2020 to 633.5p at the end of 2021, employees exercise 3.6 million share options during the year, adding GBP 16.4 million to our net cash position. This was an increase from GBP 0.4 million in 2020. The group also purchased shares costing GBP 10.4 million in March into the Employee Benefit Trust to hedge our liabilities under the group share plans at an average price of 479p. Payments made in relation to lease liabilities reduced cash by GBP 37 million. The largest outflow of cash totaling GBP 100 million related to dividends. I'll expand on this further on the next slide. The overall impact of these cash flows was to decrease the group's net cash position by GBP 12 million to GBP 154 million at the end of the year. At the time of deciding the quantum of the special dividends in early August, we targeted having around GBP 120 million in cash at the year end. This comprised net cash at the end of January a GBP 50 million, GBP 30 million for bonuses paid in January, and an additional GBP 40 million held back to rebuild temporary working capital. However, as a result of improved trading, and upgrades to profit in the final 5 months of the year, we closed in December with net cash of GBP 154 million. Today the group announced a proposed final ordinary dividend of 10.3p per share an increase of 9.6% from the 2019 proposed final dividend. This increase represents 2 years of 4.5% growth at typical growth over the final 2019 proposed dividend of 9.4p per share. Subject to shareholder approval at the AGM, this will be paid on the 17th of June to shareholders on the register as of the 25th of May. When combined with the interim dividend of 4.7p per share, this gives the total ordinary dividend of 15p. Together with a special dividend of 26.71p per share paid last October, total dividends for 2021 were 41.71p. Over the past 5 years we've returned over GBP 347 million in ordinary and special dividends to shareholders. I will now hand you over to Steve for a brief strategic review and summary.

Thank you, Kelvin. I'll now touch on a couple of strategic initiatives. In Q2 2020 when we felt the full impact of COVID-19, we made the rapid decision to invest more aggressively in experienced recruiters due to the unique set of circumstances represented themselves. We then added around 400 experienced hires during the second half. We continued with this investment during 2021, adding a further 700. This compares to a typical year where we would normally add around 300. Overall, we added around 1,100 experience fee earners to the group. Combined, these experienced hires, as they get up to full productivity, have already contributed around GBP 77 million of gross profit in the year. They're also bringing several additional benefits to the group, including building up to productivity faster than recruits from outside our industry. They're also bringing new customer relationships, and in many cases, specific experience of our High Potential disciplines, Technology and Healthcare & Life Sciences. This initiative has also delivered a number of softer benefits, including a reduced need for training and lower attrition, since these hires have already decided on a career in our industry. Going forward, we will continue to invest in experienced hires where possible, supplemented by recruits from outside the industry. We believe this will support our ambitious growth plans for 2022 and beyond. The group wide increase in fee earner productivity has been driven by significant improvements in 3 main factors, namely, the volume of placements, the margin we're able to charge and the salaries of the candidates leaving jobs. In terms of volume of payments, we've seen a significant increase in 2021 even compared to the pre-pandemic levels in 2019. We're benefiting from candidates short markets, driving wage inflation as well as the need for clients to make faster decisions to secure these candidates. This increase in the number of placements is due to a combination of factors, including our investments in new technologies, such as Customer Connect on Page Insights. In addition, structural changes in the industry with the use of video interviewing, together with clients' and candidates' willingness to make an accept offers using virtual recruitment has significantly reduced time to hire. This reduction in time to hire has driven improvements in our productivity by increasing the number of placements that each of our fee earners is able to process on a monthly basis. When comparing the number of permanent placements per fee earner by quarter, we saw a significant increase from the average of 2.6 placements for fee earner per quarter in 2019 to an average of 3.1 in 2021. In terms of margin, average fee rates across both our permanent and temporary businesses increased in 2021 compared to pre-pandemic levels. There was shortage -- candidates shortages in most of the markets in which we operate, meaning clients are willing to pay higher fee rates to be able to attract the best people. While fee rates vary by market and discipline, in 2 of our key markets of China or in Germany, for example, the average permanent fee rate in Q4 2021 was up 1 percentage point on Q4 2019, to a fee rate of 23% and 29% respectively. The U.S. increased 3 percentage points over the same period to 26% in Q4 2021. Other large markets, including Italy and Spain, have seen similar increases. Finally in terms of salaries, we're also seeing wage rises -- wages rise when candidates move jobs across the majority of our markets, again driven by candidate shortages, with clients having to offer larger packages to ensure they're able to attract the best people. All 3 of these factors have driven a significant increase in productivity during 2021. So in summary, the group delivered record gross profit in 2021 of GBP 877.7 million, an increase of 49.1% in constant currencies, versus 2020. 22 of our countries delivered record years. Also our 5 High Potential markets each had a record year and now represent 38% of the group, having achieved our vision in Q3 of 40%. Our operating profit was a new record of GBP 168.5 million and our conversion rate improved significantly to 19.2% compared with 2.8% in 2020 and 17.1% in 2019. This was a result of our trading improving significantly in 2021 combined with our strategic investments in technology, data and back office infrastructure. Our fee earner head count ended 2021 at 6,082, which was slightly ahead of the pre-pandemic level at the end of 2019. We selectively invested in more than 1,100 experience fee earners to the group since quarter 2, 2020 and this has helped drive improvements in productivity and strong growth in our High Potential disciplines of Technology and Healthcare & Life Sciences. We continue to be highly cash generative and ended the year with a cash balance of GBP 154 million. This was after paying interim and special dividends of GBP 100 million during the year. Today we're announcing a final dividend of 10.3p per share, which is an increase of 9.6% on the 2019 proposed dividend. As we emerge from the global pandemic, we're benefiting from improving trading conditions. This combined with worldwide candidate shortages, driving wage inflation, and reduced time to hire resulting from video interviewing drove record fee earner productivity. The latter we believe is a structural change in the industry. We will continue to invest in our High Potential disciplines and markets and continues to seek new opportunities for growth, such as Page Outsourcing. As we entered 2022, we're alert to the macroeconomic uncertainties that exist. However, we have a flexible and highly diversified business model which allows us to adapt quickly to changing market conditions. We continue to grow our platform, invest carefully in head count, and prioritize the rollout of new technologies. We're the clear leader in many of our markets, with a highly experienced senior management team, which positions as well to take advantage of opportunities to grow our business. We maintain our focus on the vision for the group to be the leading specialist recruiter in each of the markets in which we operate. That concludes the formal presentation this morning. We'll now be happy to take any questions you may have.

[Operator Instructions] Our question comes from Madeleine Jobber at Morgan Stanley.

Two for me, please. Firstly, how should we think about your drop-through rates in 2022? And secondly, what kind of FTE additions are you looking to do in FY '22?

Actually, before I answer that, can I just make a quick correction? I believe on the balance sheet slide, talking about net assets, I mentioned they've increased from GBP 115 million to GBP 140 million. As it says on the slide, clearly, that should have been GBP 315.9 million to GBP 340.1 million. Coming back to your question, drop-through rates. Our drop-through rates in the second half of last year were in the high 50%. I mean I would expect that if we carry on at the rate that we are, therefore as we go through this year, that might edge up into the 60s. I mean broadly, as we have incremental profit coming from productivity, apart from our profit share, which varies, but can be around 30%, the rest of it should drop-through. So it's likely to be somewhere around 60%.

In terms of the second question, trying to predict the number of FTEs that we'll hire into the business. It's difficult because, obviously, you're in effect asking me to also predict the growth rates that we'll achieve. I mean the reality is that, we believe we can maintain the productivity we're currently seeing if the market conditions are also maintained. Obviously, if things got more difficult, then productivity will go down, if things got easier, they should go up as well, because we're not yet feeling the full benefit of all the experienced hires being up to full productivity. They're moving towards it rapidly and faster than inexperienced consultants, but they're not there yet. So I'm still hopeful. Equally, we are in the latter stages of rolling out Customer Connect, and we're not feeling the full benefit of improved technologies. So our focus is to maintain productivity with similar trading conditions. However, if we continue to grow at the growth rates we were seeing at the end of last year or things were to improve, we are going to have to hire more fee earners in. And I suspect that the source of experienced hires is going to slow down and probably, therefore, we're going to rely more on inexperienced tires into the business. But it wouldn't be inconceivable if we grew at similar rates to Q4 that we would need to hire about 1,000 fee earners this year. But that would be, and if, in other words, we would have to grow at that rate for the rest of the year. In terms of total full-time employees, we're striving in our vision to get to a ratio of fee earners to support staff of about 80-20, and we're very close to that now. Because of a lot of the technologies that we rolled out, the fact that we centralized our support services into shared service centers, I think, can allow us those efficiencies. And so if it was 1,000 fee earners we hired this year, if the trading conditions were similar, it would be about 20%, maybe slightly lower of support staff.

Our next question comes from Rory McKenzie, UBS.

Two for me, please. Firstly, just a follow-up on that comment that the drop-through could be in the 60% range. I guess, that suggests that all that would require that be little head count additions, because you mentioned that would have to come mainly from productivity. Again, I hate to dance around this question of how much you think head count needs to go up this year. But just to clarify, could you see drop-through in the 60% this year whilst still increasing heads -- I don't know, call it, another 500 to 1,000. Could you kind of get both sides of that equation? And then secondly, in your comments in the statement, you talked about an increase in your temp margin and per margin. Could you isolate how much of that was maybe mix? How much of that was rising candidate salaries? And how much of it is effectively your pricing?

Okay, Kelvin can come back to the second one. Just on the head count, just to explain. I mean, this year 30% of 6,000 people have been hired. So what I mean by that is we've roughly got 6,000 fee earners. This year 30% of those will have joined this year. They won't be at full productivity or some of them may be, if they joined in January, February. But large majority of those that joined, so 1,800, will not be at full productivity. So we can continue to sustain growth at those rates without hiring. Of course, we have to hire, because we have to anticipate assuming that we're still seeing the right KPIs and so on, we will have to hire to basically fulfill the needs of the business, should we be still growing in the second half of this year. So that's why we'd add the fee earner head count that I mentioned, should we continue to see the growth rates that we experienced in Q4. But we can still produce more from what we already have due to the fact that a lot of the people that joined last year are not up to full productivity. On top of that, you've got the benefits of continuing wage increases, which we're seeing coming through, very significant. And if I -- I can obviously look back into the business a long way, the sorts of salary increases that we're seeing candidates get between what they're earning now and what they're offered by our clients, I probably haven't seen since 2007-2008. So that will also help us achieve what we expect to achieve.

Yes, coming back to you on fee rates. I mean, it's very difficult to disaggregate the movements in fee rates, because they're quite different, particularly by geography, but also across disciplines and the vast majority of everything we do is priced on a spot basis. So it will be down to supply and demand for particular candidates in place. I mean, generally, I can say that our fee rates come off by about 10% of the fee rate. So if we had a fee rate that was around 21%, it might have gone down to around 19% during the sort of the pandemic period, that's pretty much recovered. If I look at fee rates around the world, there is a bit of a mix difference. That's certainly true. I mean our large, high potential markets that were sort of 40% of the group in Q3, they always fall back a bit with Thanksgiving and the like in Q4, but they were 38% for the year. The fee rates in 4 out of those 5 are much higher or certainly a fair bit higher than the group average. So in the U.S., it would have been nearer 25%, Germany 28%, in China probably 25%, Southeast Asia low 20s, Latin America is probably in the high teens. So given a group average of low 20s, you're going to be somewhere around there. In terms of how it actually moves outside of that, it's going to be slightly stronger in certain of the shortage discipline. So probably Technology and digital, clearly, in things like retail, it's going to be a bit softer. So temp tends to be a couple of percent -- 1% or 2% higher than perm. But outside of that, that's probably all the granularity I can give you.

And it's logical, if I can add to that. I mean, I talk to a lot of CEOs, I'm sure you do. And the reality is, at the moment clients are more worried about whether they can find the talent rather than what they're spending to attract it. And so a conversation -- you have to remember that a lot of our business, 80% of our business in the U.K., for example, is with SMEs. So as Kelvin said, it's spot price. Somebody rings in, Steve, Hi, we've got another vacancy. We need to find an accountant, we need to find them quick. They're not going to sit there on the phone discussing the fee rates. They are going to discuss are we going to be able to find this candidate and what we're going to have to offer? And so we've moved from a year ago in the pandemic companies not wanting to spend money and people saying, look, before we press the button on this, exactly what's it going to cost us? Do we need to shop around? Do we need to negotiate, can we negotiate? And yes, they could, to a situation where that's not even on the table.

Our next question is from Karl Green, RBC.

Just coming to the Ukraine/Russia situation, rather than dwelling on what it might or might not mean for the short-term macro outlook, just in terms of the potentially structural changes we're likely to see in global markets in terms of a focus on energy and power networks, defense spending, et cetera. Could you just remind us roughly how much exposure you have to areas such as energy and power engineering in terms of placements, and ditto maybe some of the specialist defense areas. And even if it's relatively small, how quickly could you actually reorient some of the consultants to tap into potential structural changes in demand for expertise in those areas, please?

And look, the first thing to say is that, obviously, it's terrible what's going on in that part of the world. We are fortunate not to have an operation in Russia or the Ukraine, and I can confirm we don't have any clients in Russia either. So just to be clear, about 5% is the answer in terms of what we do within the energy sector and defense sector. That does vary from country-to-country, as you can imagine. If you go to the Middle East, it's clearly a lot higher. Yes, we can move people to focus from one industry to the other. We do generally have specialists. However, they're specialists as well in the jobs that they fill. So they tend to specialize in accountancy roles or engineering roles or technology positions. So to move them from one discipline -- or one industry to another is not too difficult. And of course, that's what we're always doing. If one particular market is hot, one particular industry sector, then yes, we rapidly deploy people to that industry sector to make sure that we take advantage of it and we will, in energy and defense if required.

Our next question is from Thomas Truckle from Jefferies.

And just stepping in on behalf of Kean Marden here. I have 3, if I may. The first of which is, looking at the Americas, I can see that was slightly below what consensus was expecting. And I was wondering if there were any particular reasons that had driven that? My second question is regarding Omicron, whether there was any noticeable impact in any of your core geographies that we should consider? And then my third question is just coming back to Rory's point about a drop-through of 60%. Again, I appreciate it's difficult or one cannot guide towards head count currently. But can I just clarify that, that 60% drop-through is post the investments in FTEs just because 60% seems a bit higher than historic?

So yes, just on the Americas, I'm a little unclear. So I'll just make a guess that you were talking about conversion rate, that's the only thing I can assume. I mean, it is largely because we've added a lot, considering more than anywhere else, head count. And the reason for that is that both Latin America, where we are not just the market leader, we dominate the market and are substantially, in multiple terms ahead of any competitor. We want to continue to capitalize on that. And we're seeing very strong growth. So we've invested a lot of head count into Latin America and also in the U.S., where we see an enormous opportunity. We've got the office footprint, any investment is head count, but that did cost us. And therefore, because that is -- those 2 markets really consume 95% of what we do in the Americas, that does reduce our conversion rate. In terms of Omicron not a significant impact anywhere except one or 2 places in Asia where the lockdowns was so prohibitive, and that makes me think immediately of Hong Kong, where -- now they're, obviously, in their attempts to try and keep it away from their shores are literally vaccinating everybody. So it's proving to be very, very difficult there. And so ongoing challenges, totally unlike, for example, the rest of Asia and Mainland China. But elsewhere, no real significant impact anywhere. Look, yes, we can confirm the 60%. Kelvin is going to just talk to it a little bit more just to confirm why.

Yes. I mean, I think when we talk about pure drop-through, I'm really talking about productivity drop-through. So if we're having a pure productivity increase that's coming through, it would be about 60% that drops through to bottom line. As you say, in terms of the head count investments that going against it, that will offset partially. I think in terms of what's in current consensus, it is probably nearer a 30% drop-through if we had 1,000 heads in. So depending on the growth rates that we're expecting on the top line, it would probably be nearer 30% if we add 1,000 heads in. If we actually drive it through productivity and we add in less heads, then the pure drop-through will be nearer 60%.

[Operator Instructions] At this time, there are no further questions on the call.

Excellent. Well, look, thank you, everyone, an early start. As there are no further questions, thank you for joining us. Our next update will be the first quarter 2022 trading update on the 13th of April. Have a good day.

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.