PageGroup plc (PAGE) Earnings Call Transcript & Summary

Hello, everybody, and a warm welcome to the PageGroup 2022 Interim Results. My name is Melissa, and I will be your operator. [Operator Instructions] I now have the pleasure of handing over to our host today, Kelvin Stagg, CFO, to begin. Kelvin, over to you.

Thank you, Melissa, and good morning, everyone. And welcome to PageGroup's 2022 Interim Results Presentation. I'm Kelvin Stagg, Financial Officer. Sadly, Steve Ingham, our Chief Executive Officer, has been called away at short notice for a funeral overseas. So I have Nick Kirk, Regional Managing Director for the U.K. and North America with me for the Q&A session at the end of the presentation. I will now present the headline numbers and a financial review before moving on to a strategic review and concluding with a summary. Although I will not read it through, I would like to make reference to the legal formalities that are covered in the cautionary statement in the appendix of this presentation and which will also be available on our website following the call. The improvement in trading conditions we saw as 2021 progressed continued into H1 2022. Consequently, the group delivered gross profit of GBP 538.9 million, a record first half, up 33.3% on 2021. Our operating profit was GBP 115.3 million, up 79% from GBP 64.3 million in H1 2021. Our conversion rate was 21.4%, up from 15.9% in H1 2021 due to the favorable trading conditions and improvement in fee earner productivity. Earnings per share more than doubled to 25.6p, and we closed the first half in a strong financial position with net cash of GBP 136.2 million. The record trading in the first half and our continued strong liquidity position has ensured that we were able to maintain our capital allocation policy. We are today announcing an improvement in the interim dividend of 4.5% and to 4.91p per share or GBP 15.6 million. In line with our policy to return surplus cash to shareholders, the Board has also announced a special dividend of 26.71p per share, in line with 2021. This represents an additional return of GBP 85 million. Both the interim and special dividends will be paid on the 14th of October to shareholders on the register on the 2nd of September. I will now take you through the financial review. This fee earner headcount and quarterly gross profit chart shows the unprecedented scale of the decline in group gross profit in 2020 due to COVID-19 and the comparison to the Global Financial Crisis in 2008. It also shows how we chose strategically to maintain and invest in our platform, which has driven the sharp recovery seen throughout 2021 and in the first half of 2022. Overall, the group's operating profit was GBP 115.3 million, up from GBP 64.3 million in 2021. Our conversion rate was 21.4%, up from 15.9% in H1 2021 due to the strong trading conditions as well as Q1 2021, still being impacted by COVID-19 restrictions. Together with the repayment of GBP 3.4 million of furlough monies to HMRC, our H1 2022 underlying conversion rate, excluding the accelerated amortization of certain software assets of GBP 4 million, was 22.1%. Gross profit per fee earner, our measure of productivity, increased by 9.2% compared to 2021, which I will discuss in more details later on. Looking at each of our regions and starting with the largest, EMEA, our conversion rate was 24.5% up from 17.6% in H1 2020. We saw strong trading results throughout the region, driving EMEA to have our highest regional conversion rate. We invested a total of 368 or 10.7% in head count in the first half. Asia Pacific delivered a conversion rate of 20.5%, up from 18.8% in H1 2021. This was slightly behind its full year 2021 conversion rate of 21.8% due to tougher trading conditions in Greater China in H1 2022, a result of COVID lockdowns and restrictions. We continue to invest in headcount in the region of 133 or 7.8% in the first half, particularly into India and Southeast Asia. In the Americas, our conversion rate was 14.7%, slightly ahead of H1 2021, which was 14.3%. Gross profit increased 44.1% in constant currencies, and we invested significantly in headcount, up 252 or 18.3%. In the U.K., our conversion rate increased significantly from 7.5% in H1 2021 to 20.1%, driven by an improvement in productivity of 16.8%. The prior year conversion rate was also impacted by the furlough repayment of GBP 3.4 million to HMRC. Excluding this, the H1 2021 conversion rate would have been 13.3%. Headcount increased by 77 or 5.9% in the first half. We saw continued strong growth across all our disciplines in H1, and a further diversification away from accounting and financial services. As a result, all of our other disciplines now represent 68.8% of the group, up from 67.8% in H1 2021. Both our higher potential disciplines, Technology and Healthcare and Life Sciences, delivered a record first half, justifying our investment strategy. Technology within our professional services category remains our second largest discipline, representing 14% of the group and delivered growth of 53% compared to H1 2021. We've also continued to focus on Healthcare and Life Sciences, which, although a smaller part of the group, also grew 53% in H1. The tax charge for the half year was GBP 33 million. This represented an effective tax rate of 28.8% broadly in line with the 29% for the full year 2021. Going forward, we expect the full year effective tax rate for 2022 to remain around 29%. Most significant item in our balance sheet was trade and other receivables, which increased by GBP 137.2 million versus H1 2021. This was due primarily to the strong growth in trading across both permanent and temporary recruitment. Lease assets increased by GBP 9.4 million and lease liability broadly offset up GBP 10.6 million. Overall, net assets increased from GBP 346.2 million in H1 2021 to GBP 387.3 million in H1 2022. This chart lays out the movements in our uses of cash during the first half. EBITDA was GBP 151.8 million. Working capital increased by GBP 59.3 million driven by growth in revenue, increasing debtors. To date, we have seen no deterioration in the quality of our debtor book. Tax and net interest payments were GBP 30.2 million, and net capital expenditure was GBP 19 million driven by investment in customer connect and new operating system as well as an increase in total headcount of 830. Payments made in relation to lease liabilities reduced cash by GBP 17.1 million. The group purchased GBP 14.8 million worth of shares into the Employee Benefit Trust to satisfy future committed obligations under our group share plans. We also paid out GBP 32.7 million in June in relation to the 2021 final dividend. GBP 0.3 million was generated from employees exercising options, down from GBP 6.9 million in H1 2021 as a result of the lower share price in 2022. Overall, the impact of these cash flows decreased the group's net cash position from the year-end by GBP 17.8 million to GBP 136.2 million at the end of June. I will now present strategic review. The strong gross profit growth seen in the first half was driven by an increase in both fee rates and volume of placements with video interviewing and talent shortages resulting in a shorter time to hire. The increase in number of placements is a result of both our investment in new technologies, such as Customer Connect, as well as the sharp increase in virtual recruitment, significantly reducing time to higher. This is combined with candidate shortages, meaning clients made faster decisions to secure talent. Our first half productivity increase of 9.2% was achieved despite a fee earner headcount increase of 24%. In terms of margin, average fee rates across both permanent and temporary recruitment have increased versus the first half of 2021, with significant increases noted in all our largest markets, including the U.K. France, Germany, the U.S., China and Italy. We are also seeing wage inflation across the majority of our markets, again driven by candidate shortages with clients needing to offer higher salaries to attract the best talent. PageGroup operates a highly generative -- cash generative business model with very high levels of cash conversion. We have a clear capital allocation strategy with 3 defined uses of cash. The first and primary use is to satisfy the operational investment requirements of the group, such as adding additional head count and continuing to roll out technology and innovation as well as hedging liabilities under the group's employee share plans. The second use of cash is for the payment of ordinary dividends, where it is the group's policy to maintain these through a downturn, which we have done in all years apart from 2020 and to increase them when conditions are more favorable. Thirdly and finally, any remaining cash surplus is distributed to shareholders by way of a supplementary return. Today, we are announcing an interim dividend of 4.91p per share for a total of GBP 15.6 million. Our policy has been to grow the dividend over the course of the cycle in line with our long-term growth rate, which historically has been between 4% and 5%. As such, we've increased the ordinary dividend by 4.5% on the 2021 interim dividend of 4.7p per share. After this interim dividend, the group's Board has concluded that we are still holding surplus capital. Accordingly, we are also announcing today a special dividend of 26.71p per share, totaling GBP 85 million. Together with the interim dividend, this amounts to a cash return to shareholders of just over GBP 100 million. The special dividend will be paid at the same time as the interim dividend on the 14th of October to shareholders on the register as at the 2nd of September. This chart shows our proven track record of shareholder returns with capital returns made in all years since flotation, except 2020 due to the pandemic. Including the 2022 special dividend, we've returned over GBP 360 million by way of special dividends since 2015. Together with share buybacks totaling GBP 276 million and ordinary dividends totaling GBP 564 million, we have returned a total of GBP 1.2 billion to shareholders since flotation. We continue to make great strides in sustainability. In April, we published our second sustainability report, where we articulated progress against our sustainability vision and our 4 targets. As a reminder, these are to positively change over 1 million lives in the 10 years to 2030; to increase gender diversity in our senior management team to 50-50 by 2030; to establish a meaningful sustainability business by 2026; and to become carbon net 0 with the ambition of becoming carbon positive by 2026. The results from this year indicate 2022 will be another successful year for our sustainability agenda. We remain focused on increasing the numbers of lives we change, both through candidate placements and through the volunteering of our time and recruitment skills to social impact programs. Our female representation in senior management continues to improve. And this year, we completed the UN Global Compact Target Gender Equity -- sorry, Equality Accelerated Program. We have also grown our sustainability business, making placements into dedicated sustainability roles in over half of the group's market. It is likely that our greenhouse gas emissions will increase slightly this year, as our regular business activities return post COVID. But overall, our emissions are still trending downwards from 2019. This half year, we've transitioned to further 11 offices to green energy which now gives a total of 57% of the group, and we remain committed to achieving operational net 0 emissions by 2026. I will now finish with a brief summary of the first half. We achieved a strong H1 performance across our geographies, disciplines and brands and delivered group operating profit up nearly 80% and a conversion rate of 21.4%. This was particularly pleasing, given that 2021 has been a record year for gross and operating profit. We are pleased to be making further capital returns to shareholders with just over GBP 100 million to be paid out in October. Looking forward, we recognize the heightened degree of global macroeconomic and geopolitical uncertainty, particularly with regards to increasing inflation around the world. In July, we noted a slight slowing in time to hire in some of our markets and we continue to closely monitor our forward-looking KPIs. However, at this point, our expectations for 2022 full year operating profit remain in line with the company compiled consensus of GBP 206 million. Nick and I will now be happy to answer any questions you may have. Over to you, Melissa.

[Operator Instructions] We'll be taking our first question today from Anvesh Agrawal of Morgan Stanley.

I've got 2 questions. First, really, if you can comment on China, how things been in July after the lockdown being lifted at least in parts of the country and how that is trading? And second, just your comment around slowing time to hire in July. I mean, when we spoke back during Q2 update, everything was sort of fine. I mean you did flag that you are mindful of the economic uncertainty out there. But if you can just elaborate like what exactly have you seen? Is it China specific or it is across the board? And can the slowing time too have also because of there is less video interview probably now and there is more in-person interviews, is that also sort of impacting that?

Sure. Let me start on those, and then I'll probably hand back to Nick for a little bit more color on the second question. So in terms of Greater China, I mean it is largely Mainland China, but there is still an impact in Hong Kong, albeit less so. There are lockdowns and they are rolling lockdowns, and they are quite severe in terms of the impact. Strangely, we've seen a bit of a reversal of what we saw earlier during last year in terms of trading. Insofar the last year, actually, we had a greater proportion of our business in domestic Chinese clients than we had before as the multinationals who were dealing with COVID at home invested less into China and focused on trying to resolve their issues elsewhere. And COVID has now hit particularly Mainland China, but also Hong Kong, but the conditions in the countries that the expats come from are actually generally okay now. We've seen quite an exodus of foreign expats within China. And therefore, actually, they were mainly in the multinationals. And therefore, it's the multinationals that are now trying to hire to replace that exodus of talent that's now left the country. So yes, we were negative in Mainland China and just slightly in Hong Kong in July. I think it's hard to tell over what period of time and to what extent the zero COVID policy will remain in place. But certainly, at the moment, it's impacting the businesses that are there. But certainly to a lesser degree than it did in the Western economies when COVID sort of let across Europe in 2020. Moving on to slowing time to hire. I think it's simple really. In the first 6 months of the year, we were really flying across pretty much all of our countries, and we had people taking multiple candidates of short lists. People really were making decisions very fast. There was no issue around what having to get multiple levels of sign-off within an organization, and therefore it felt very frothy. More recently, and it was really only in July, we saw that the decision-making from clients has just taken a little bit longer. And whether that was because some of the managers were on holiday possibly. We had very good weather in July or whether it was just they had got to get another level of sign-off or they were just feeling a little bit less confident about the future is at this point fairly unclear. And going into August, it won't become any clearer, I don't believe, until we get into September. September pipeline is always relatively light obviously coming out of August. And so it's the last couple of weeks in September that will really tell us whether things have slowed or whether actually this really was just a slightly early pack up for summer. But as that -- I mean, we still had a very good exit in July. It just wasn't quite as good as previous, but some of that is also because the comps are better. And Nick, if you have anything to add to that?

Yes. I would just say in terms of the points around slowing time to hire, it's probably worth contextualizing where we're coming from. Kelvin and I were over in the U.S. in late April. And we popped into quite a few of our offices. And we were being told stories then of consultants that were being WhatsApped by clients, 20 minutes into an interview asking whether we felt it was too early for them to offer the job because they wanted to land the talent. I mean that's the type of market that we're coming down from, which is a market I don't think any of us have really seen in our time in recruitment. So I think it's important just to give that sense that this is slowing from a very, very high level of the Kelvin called it frost. And I guess as regards to the second part of your question, is there a flight towards face-to-face from virtual? No. I mean, where clients can get a candidate in for a face-to-face meeting certainly for more senior roles, they probably will. But no, I mean, the front end of the process is still very much virtual.

That's very clear. Just to clarify, on China, really, is July -- has July been better than sort of, let's say, June, just to put it in context?

No, it wasn't best in June. I don't think it was a huge amount worse than June, but it wasn't better than June.

Our next question today comes from Rory McKenzie of UBS.

Three from me, please. Firstly, just a follow-up on the outlook comments. It sounds like the slowdown, if any, has been seen mainly on the client side, given what you just said. Just wondering if you can comment on any of the kind of candidate confidence KPIs and if that's changed at all? And secondly, I wanted to go into the different disciplines laid out on Slide 7, maybe particularly ahead of any slowdown. Can you maybe talk about your salary ranges across those different disciplines, and also maybe the different rates of wage inflation across those different areas. Just trying to get some sense of maybe how strong any kind of structural hiring backlog there could be. And then lastly, just on the special dividend, can you just talk about where you would expect to land for kind of December this year in net cash? And how you -- I know if that's what sets your thinking on the size of the special.

Yes. So I'll work through those in order. And I'm sure I'll miss a bit, but Nick can add in. Client versus candidate, at the moment, it is really on the client side that's slowing things down. We're not seeing really any impact on candidate confidence. And certainly, we're still seeing candidates who are motivated to move partly or probably a large part because of the wage inflation that people are getting when they move jobs. So probably not a huge amount else to add into that. I think looking at disciplines and salaries, most of our disciplines will be across all the salary ranges. The salary ranges are more linked into paid personnel that in most businesses would probably top out at around 40,000, maybe 45,000 nowadays with a bit of wage inflation in there. Michael Page will trade up to about 120,000, 125,000 and then Page Exec will go above that. I can't -- apart from maybe secretarial, which probably caps out -- well, it caps out but then you look into sort of London Secretary role, but you can go as high as 60,000, 70,000. So I mean it's probably the only one that doesn't go right way up. But outside of that, all of the disciplines go to the bottom and up to the top. In terms of differences between discipline in terms of rates, if we're talking about wage inflation rates, then there are some hot disciplines. I mean, digital technology, logistics in certain parts of the world, the more technical disciplines, engineering, property, construction, procurement, supply chain are going to be the ones that have probably got the highest wage inflation rates. It's also a little bit by geography as well, certainly, in terms of wage inflation. I think is probably highest in the U.S. as much as anywhere else around the world, but it's going to be pretty robust in places like Germany and certain parts of Europe. And then I'll just mention the special divi and then Nick, if you want to add in anything else to that. On the special dividend, I expect that we will probably turn the year somewhere around GBP 110 million of net cash. That's slightly higher than we've targeted in the past. So we would normally have said we'll have GBP 50 million of spare cash at the end of January. The January bonus round is normally about GBP 30 million. And therefore, we try and target GBP 80 million, and we normally miss it a bit and end up at GBP 95 million. I think our net cash of GBP 50 million is still broadly where I want to be. I think we're a bigger group at the moment, and we've obviously had a good half, first half of the year. So maybe the bonuses will be a little bit higher, so maybe in total that now comes to about GBP 90 million. I felt that we might need some more for working capital. And if I'm honest, I also thought the expectations from both the market and what we paid last year probably meant that we didn't need to go more than the GBP 85 million, which is in line with the previous year. And that was the thinking around coming to special dividend. But in overall terms, our thought process around how we decide what supplementary cash we've got and, therefore, how we return it hasn't changed. We spoke to 13 of our top 50 shareholders and the majority of them ask for a special dividend. And so we follow their advice and tyr and to be consistent in the application of that policy. Nick, can I use anything else you want to add?

No. Probably going back to the first question, I think it's a very sensible question and something that we'd be watching very closely right now around candidate confidence. As Kelvin said, it has predominantly been client confidence impacted first. But I think if we've learned anything over the years is that the next thing that tends to follow is candidate side confidence as they're potentially worried about being into an organization. And then changes coming and they're last in, first out. So it's one we're watching. We're not seeing anything just yet, but just want to keep a close eye on because naturally that tends to follow.