PageGroup plc (PAGE) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the PageGroup Q3 Trading Update. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Kelvin Stagg, CFO of PageGroup, to begin. Kelvin, please go ahead.

Good morning, everyone, and welcome to the PageGroup Third Quarter Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and on the call with me is Steve Ingham, Chief Executive Officer. 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 of this presentation and which will also be available on our website following the call. We continue to deliver strong growth in Q3, with gross profit of GBP 270.5 million. We grew 14% in constant currencies against Q3 2021, which, adjusted for the tougher comparator, was broadly in line with our Q2 growth rate. The strengthening of the dollar in the quarter had a favorable impact on the growth rates compared to the prior year, increasing the reported gross profit growth rate by 4.6 percentage points or GBP 10.5 million to 18.6%. In Q3, we increased fee earner headcount by 337. To support this growth, our operational support headcount rose by 106. And as such, our ratio of fee earners to nonoperational staff remained at 78:22. Overall, the group had 7,071 fee earners and a total headcount of 9,111. We have a strong balance sheet with net cash at the end of September of around GBP 186 million. This compares to GBP 136 million at the end of Q2, but it's before the forthcoming special and interim dividend payments on the 14th of October, totaling GBP 100.5 million. I will now give a brief financial review. Overall, growth was stronger in temporary recruitment, which is indicative of the current uncertainty in the market, as clients seek more flexible options. Overall growth was stronger in temporary recruitment, up 20.9% against Q3 2021, with permanent up 12%. This was the first time since 2019, the growth has been stronger in temporary recruitment. Reflecting this, our ratio of permanent to temporary gross profit was 76:24 compared to 78:22 last quarter. In Michael Page, permanent recruitment represented 83% of gross profit, while in Page Personnel it was less at 57%. Page Personnel was the stronger performing brand, up 17.4% compared to growth of 12.8% in Michael Page. Growth was stronger in temporary recruitment in Michael Page and broadly consistent across permanent and temporary in Page personnel. We continue to focus on our 5 large high potential geographic markets of Germany, Greater China, Latin America, Southeast Asia, and the U.S. Collectively, they represented 41% of the group in Q3, a new record, albeit aided by the weakness of sterling against the dollar. In Q3, our large high potential markets grew 11%, and excluding Greater China, which was impacted by COVID-19 lockdowns and restrictions, growth was 21%. We now have 2,840 fee earners in these 5 markets, which compares to around 800 in 2010, as we recovered from the global financial crisis. Our high potential disciplines of Technology and Healthcare and Life Sciences continued to deliver strong results and Technology remained our second largest discipline. We are pleased with the performance of our newest brand, Page Outsourcing, which continues to outperform its plan. In Q3, we increased our fee earner headcount by 337. We added fee earners into markets with particularly strong trading conditions such as Germany, as well as those where we saw the highest potential for future growth. The majority of these fee earners were nonexperienced as the availability of experienced fee earners has become limited. Nonexperienced hires take longer to reach average productivity. As a result of this investment in fee earner headcount, challenging trading conditions in Greater China, as well as a slight softening in client confidence, which resulted in a slowdown in time to hire, productivity decreased 8% compared to Q3 2021. To support this growth, our operational support headcount rose by 106. And as such, our ratio of fee earners to nonoperational staff remained at 78:22. Our attrition rate currently remains relatively low at around 30%. We remain confident in our ability to adjust on our headcount, if needed, with our flexible business model and staff attrition. This fee earner headcount and gross profit chart shows the unprecedented scale of 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 2022. While Q3 was down on Q2 in absolute terms, this was partially due to the usual seasonal impact. I will now hand you over to Steve for a regional review and a summary.

Thank you, Kelvin. The strong growth we saw in quarter 2, 2022, continued into Q3. Overall, for the quarter, we grew 14% against 2021. Nine individual countries delivered record quarters despite the typical slower summer months. We exited the quarter strongly, delivering our third month of gross profit in excess of GBP 100 million, albeit aided by the strengthening of the dollar. This had a favorable impact on the quarter's growth rate compared to the prior year, increasing the reported gross profit growth rate by 4.6 percentage points or GBP 10.5 million. In our largest region, Europe, Middle East and Africa, which represented 48% of the group, we grew 22.1% on Q3 2021. Overall conditions continue to be more favorable in Michael Page, which is focused on higher income, permanent recruitment, and was up 27% for the quarter. Page Personnel, which is focused on lower level recruitment with higher proportion of temporary, grew 15%. Germany, which was the group's second largest market in Q3, representing 12% of the group, delivered another record quarter, up 29%, with strong growth in all 3 brands. Our Michael Page Interim business, which is primarily focused on technology, was the best performing, up 46%. We now have over 700 fee earners in Germany, having added around 150 in the last 12 months. This positions us well for ongoing growth in this large high potential market. France grew 12% in both Michael Page and Page Personnel, with strong growth in permanent recruitment in both brands. Belgium, The Netherlands, Italy and Spain all delivered strong growth. The Americas, now the group's second largest region, representing 19% of the group, delivered growth of 18.3%. North America grew 15%, where in the U.S., the consistently strong trading conditions seen over the past 18 months continued into Q3, and we delivered growth of 14%. Growth was particularly strong in our Boston, Chicago and Houston offices. Property & Construction, our largest discipline in the U.S., continued to deliver standout results. In Latin America, gross profit grew 24%. Mexico, our largest country in the region, was up 18%. However, Brazil was down 1% due to the heightened political uncertainty from the recent elections. The remaining countries in the region were up 50% collectively. In Asia Pacific, representing 19% of the group, Q3 gross profit declined 3.9% on 2021. In Asia, 15% of the group, we declined 6%, driven by the challenging conditions in Greater China. In Greater China, 6% of the group, we declined 26%. Mainland China was down 32%, driven by the ongoing COVID-19 lockdowns and restrictions. Hong Kong was also impacted by these restrictions and declined 20% in the quarter. Southeast Asia, our other large high-potential market in the region, delivered growth of 17%, with all markets growing against Q3 2021. India, which represents 14% of Asia, delivered another record quarter, up 35%. We now have around 230 fee earners in this highly profitable market. Elsewhere, Japan declined 4%, whilst Australia grew 7% against Q3 2021. In the U.K., which represented 14% of the group, gross profit grew 9.5%. Page Personnel, which operates at lower salary levels and has been slower to recover from the pandemic, was up 56%, in line with Q2. Michael Page declined 4%. We exited the quarter slower in September, impacted by the national period of mourning following the death of Her Majesty, The Queen, as well as economic uncertainty following the mini-budget. I'll now provide a summary of our results. We continue to see strong growth in Q3 with group gross profit up 14% against Q3 2021, which was a significantly tougher comparator in Q2. We delivered a good broad-based performance across the majority of our geographies, disciplines, and brands, with record performances in 9 countries despite the typically slower summer months. We exited the quarter strongly, delivering our third month of gross profit in excess of GBP 100 million, albeit aided by the strengthening of the dollar. However, Greater China, 6% of the group, continued to be impacted by lockdowns and restrictions, down 26% for the quarter. We also saw a slight softening in client confidence across the majority of our regions. This led to a small number of jobs being withdrawn and a slowdown in time to hire in a number of our other markets towards the end of the quarter. Temporary recruitment outperformed permanent as clients look for more flexibility in their resourcing and cost base, reflecting the current economic uncertainty. We continue to make targeted investments in headcount in markets where we saw the strongest growth as well as the highest potential for the future. Overall, we added 337 fee earners in Q3, the majority of which were nonexperienced hires. Looking forward, there remains a high level of global macroeconomic and political uncertainty, particularly regarding increasing inflation in the majority of our markets. However, given our highly diversified and adaptable business model, with a cost base that can be adjusted rapidly, we believe we're well placed to progress towards our vision for the group, to be the leading specialist recruiter in each of the markets in which we operate. We have a strong balance sheet with net cash of GBP 186 million at the end of the quarter. This is before the forthcoming special and interim dividend payments of GBP 100.5 million to be paid this Friday, the 14th of October. We are pleased with the group's performance in Q3 and currently expect 2022 full year operating profit to be in line with company compiled consensus of GBP 204 million. Kelvin and I will now be happy to take any questions you may have.

[Operator Instructions] And our first question today comes from Anvesh Agrawal of Morgan Stanley.

I've got 3 questions. First, focusing just on Asia. Could you comment on trends in China through the quarter? Any signs of it getting better? And what really drove the negative performance in Japan this quarter? The second question is really around the headcount. I mean, the investment was certainly higher than what we had in our model. So what drove it? And what's the latent capacity in the business now? And how should we think about the headcount going forward? And finally, not specifically trading, like there was a proposal from the U.S. administration yesterday I think just targeting the classification of contractors. I think it's mostly towards gig economy. I was wondering any impact that it could have on your business on the temp side.

Okay. I'll answer the first 2 and Kelvin will try to work out your third question. So in Asia, starting with China. To be honest, no, there hasn't been any real progress or improvement in China, and there really won't be until next week when the National Congress gathers. I mean, there are a lot of, I think, businesses that support a lot of people holding their breath and they are hoping big decisions will be made next week, potentially including some relaxation on COVID and lockdowns and so on. So it's a hinge moment, or not. So that will tell us a bit more about the future. So it's been steady throughout the quarter. I would just remind you, and I'm sure you're aware, it was Golden Week last week. So we've got Golden Week in October. Clearly, we've got National Congress next week. So significant disruption from both of those 2. But then the rest of the year should play out depending on any decisions that are made by the Congress. In Japan, yes, I mean, slightly lower, I suppose, than we'd expect. We did particularly well, if you remember, this time last year. So Q3 for us in Japan was very, very strong. And so I'd always prefer to see a larger positive number. But to give you an idea, we grew 36% this time last year against 2019. Obviously, comparing last year to 2020 was a little irrelevant. So we had a very strong performance against what was a good year in 2019 for Japan, so they had a very difficult comp to compete against. In terms of headcount, yes, we've added slightly more heads than we expected. I mean, what you always have to do in a business like ours is balance attrition with recruitment. So clearly, we don't know when someone is going to resign. We have a staff attrition, roughly speaking, of 30% over a year. We try to anticipate that happening every month in a consistent way. Some months are higher and some months are lower, clearly. Clearly, over the summer, it's not a good time to be actually recruiting people. But also, in many of the European countries and a few others around the world, we have to make recruitment decisions 3 months in advance of when somebody will actually accept and join. And so the people that joined us, for example, in September, which is when quite a lot of that number landed, were offered jobs back in June on the anticipation of an attrition rate over the quarter, which was slightly lower. So in terms of expectations for the rest of the year, look, every time you pick up a paper or read analyst notes, there's caution in there, and there's a lot of negative news around at the moment. So we're going to be very cautious about our hiring of new headcount going forward, except in markets where we are growing at 30%. It will be very difficult to maintain 30% growth, and we're not seeing any slowing of that. KPIs are still good. So we've got to make sure as well that we don't suddenly announce that we've slowed as a result of the fact we haven't got the people power to make the revenue. So it's that fine balance, but we are going to be cautious on headcount going into the fourth quarter. I just think that's sensible. We've recruited a lot of people over the last 3 quarters because of the growth we're seeing, and we remain confident. But if the rest of the year plays out well, then I'm sure at the beginning of next year, we will be hiring going into Q1.

Yes. And I'll pick up question number 3. Thanks, Steve.

It's a difficult one.

Yes. Well, it is, because actually, I haven't heard anything about changes to temp regulations or legislation or even discussion of it to date. I mean, the only thing I would say in that regard is, we don't do much temp in the U.S. So actually, our U.S. business is predominantly a permanent business. And that probably is part of the reason why we haven't been massively aware of it. But if there's anything material coming, I'll find that this afternoon when we open in the U.S. and then let you know.