PageGroup plc (PAGE) Earnings Call Transcript & Summary

Hello, and welcome to the PageGroup Q1 2023 Trading Update. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Kelvin Stagg, CFO. The floor is yours, please go ahead.

Thank you, Elliot. Good morning, everyone, and welcome to the PageGroup 2023 First Quarter Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and on the call with me is Nick Kirk, Chief Executive Officer. While I will not read 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. You will also find our 2022 annual report and sustainability report are now live on the website and available to download. The group delivered gross profit of GBP 262.7 million in the quarter, and against Q1 2022, we declined 2.4% in constant currencies, albeit this was a particularly tough comparator. We delivered a record quarter in our largest region, EMEA, despite the ongoing challenging market conditions throughout the group. The group benefited from positive foreign exchange movements, increasing our reported gross profit by GBP 10.8 million. And as a result, we grew 1.8% in reported rates. In line with the continued challenging trading conditions, our fee earner headcount reduced by 4.4% in the quarter through natural attrition, with reductions in all regions. Overall, the group ended the quarter with 6,639 fee earners and a total headcount of 8,798. Due to the reduction in gross profit as a result of reduced confidence levels, combined with a 6.2% higher year-on-year headcount, gross profit per fee earner and measure of productivity declined 8% on Q1 2022. We have a strong balance sheet with net cash at the end of March of around GBP 105 million. This compares to GBP 131 million at the end of 2022, having paid out annual and quarterly bonuses in January, as well as having purchased GBP 6 million worth of shares for the Employee Benefit Trust in March. I will now give a brief financial review. Overall, growth was stronger in temporary than permanent recruitment, which is indicative of the current uncertainty in the market, with many clients seeking more flexible options. Temporary recruitment grew 14.9% against Q1 2022, with permanent down 7.2%. Reflecting this ratio of permanent to temporary gross profit was 74:26, consistent with the last quarter but down from the 78:22 in Q1 2022. In Michael Page, permanent recruitment represented 83% of gross profit, while in Page Personnel, it was less at 55%. As is often the case in uncertain times, trading was stronger at lower salary levels, where the financial commitment from clients is less. Accordingly, Page Personnel was the stronger performing brand, up 7% compared to a decline of 6% in Michael Page. Growth was notably stronger in temporary recruitment in both Michael Page and Page Personnel. In Q1, we decreased our fee earner headcount through natural attrition by 304 or 4.4%, with reductions in all regions. Our operational (sic) [ nonoperational ] support headcount rose by 82, as we continue to build out our capabilities in Page Outsourcing and move candidate acquisition activities into our delivery centers. In total, our headcount remains 510 or 6.2% higher than Q1 2022. Due to the reduction in gross profit as a result of the continued weakness in both candidate and client confidence in the quarter as well as the higher year-on-year headcount, productivity decreased 8% in constant currencies compared to Q1 2022. As can be seen in the chart, when compared to Q4 2022, productivity was marginally higher. Reflecting continued candidate shortages, fee rates remained at high levels and above the prior year. Salary levels also remained strong. However, salary increases offered by clients reduced compared to Q1 2022. The increased time-to-hire that we saw in Q4 continued and further increased during the quarter. Accordingly, whilst activity levels such as the number of jobs and interviews remained high, conversion into placements slowed due to both clients being less urgent to commit to or raise offers and candidates being less likely to accept than switch roles. I will now present the regions. The group delivered strong results in the quarter, with a record performance from EMEA, where the standout result was Germany. However, tough market conditions continued in Asia, the U.S. and the U.K. Overall, group gross profit declined 2.4% in constant currencies against Q1 2022. Foreign exchange had a favorable impact on the quarter's growth rate compared to the prior year, increasing the reported gross profit growth rate by 4.2 percentage points or GBP 10.8 million. In our largest region, Europe, Middle East and Africa, which represented 55% of the group, we grew 6.8% on Q1 2022, a new record quarter. Michael Page, which is focused on higher-income permanent recruitment, was up 5% for the quarter. Page Personnel, which is focused on lower level of recruitment with a higher proportion of temporary, grew 9%. France, the group's largest market, which represented 14% of the group, grew 3% against the strong comparator in both Michael Page and Page Personnel. We saw consistent performances across both permanent and temporary recruitments. Germany, which represented 13% of the group, delivered another record quarter, up 11% against the tough comparator, with standout performances from Page Personnel and our Michael Page Interim business, which is focused primarily on technology. Elsewhere in the region, we delivered robust results, with Belgium, Spain and Turkey delivering record quarters. Having added 534 fee earners in 2022, in Q1, we reduced our headcount by 37. The Americas, which represented 16% of the group, declined by 7.6%. North America was down 14%, with the U.S. declining 15%. The conditions we saw at the end of 2022 continued into Q1, with uncertainty around market conditions affecting both candidate and client confidence, particularly with our technology and banking discipline. In Latin America, gross profit grew 4% despite the tough market conditions, particularly in Brazil and Mexico. Driven by increased delays in decision-making, Mexico, our largest country in the region, was down 4%. Brazil was down 13%, while the remaining countries grew 23% collectively. In line with the more challenging conditions across the region, overall fee earner headcount decreased by 134 or 10.3%, mainly in the U.S., Mexico to Brazil. In Asia Pacific, which represented 16% of the group, Q1 gross profit declined 17% on 2022. Permanent recruitment across the region declined 21%, whilst temporary grew 12%, reflecting the continued uncertain market conditions. In Asia, 12% of the group, we declined 21% due mainly to tough conditions in Greater China. In Greater China, which represented 4% of the group, we declined 42%. Mainland China was down 46%. Whilst COVID restrictions have been lifted, trading remains challenging, with fluctuating levels of COVID infections during the quarter and a particularly slow start in January. Hong Kong was also impacted and declined 36% in the quarter. Southeast Asia, our other large, high-potential market in the region, declined by 12% against Q1 2022. India, which represented 14% of Asia, was flat for the quarter against growth of 79% in Q1 2022. We now have around 230 fee earners in this highly profitable market. Elsewhere, Japan grew 5%, another record quarter, and Australia grew 1%, broadly in line with Q4. Our fee earner headcount decreased by 67 or 4.6% in the quarter, broadly similar to the decrease in Q4 2022. In the U.K., which represented 13% of the group, gross profit declined 9.4%. Page Personnel, which operates at lower salary levels with a greater proportion of temporary recruitment, was up 4%, while Michael Page declined 14%. Growth slowed from a decline of 1.9% in Q4 '22 as we saw more clients deferring hiring decisions and increased caution from candidates. Reflecting the uncertain market conditions, clients sought more flexible options, and as such, temporary recruitment was more resilient than permanent recruitment. In line with the more challenging trading conditions, our fee earner headcount reduced by 66 or 7.1% in Q1. I will now provide a summary of our results. The group delivered strong results for the quarter, with a record performance from EMEA, where the standout result was Germany. However, tough market conditions continued in Asia, the U.S. and the U.K. Overall, group gross profit declined 2.4% in constant currencies against Q1 2022. Looking forward, there remains a high level of global macroeconomic and political uncertainty in the majority of our markets. However, against this backdrop, we continue to see candidate shortages and good levels of vacancies. Given our highly diversified and adaptable business model with a cost base that can be adjusted rapidly and a strong balance sheet, we believe we are well positioned to continue to perform well despite the uncertainty. At this early stage of the year, we expect 2023 operating profit to be in line with company compiled consensus of GBP 140 million. Nick and I will now be happy to take any questions you may have.

[Operator Instructions] Our first question today comes from Maddy Jobber from Morgan Stanley.

I have 3 to start with, please. So firstly, just on China, would you be able to give a little bit more color around the kind of activity levels you're seeing there, any pickup and also your expectations of pickup and how that develops through the coming quarters? And secondly, on EMEA. Just wondering if you could give a bit more detail around the sort of pillars driving the growth there, so the proportion of wage inflation versus a mix. And then finally, just on headcount, a little bit more detail around your expectations for that going forward and how that will develop in the quarters to come as well.

Thank you. Maybe if I take the China and headcount question and then Kelvin will pick up on EMEA. So China, first of all, yes, it's been a strange quarter in China with the Chinese New Year being at a different time to what it normally is, huge outbreak of COVID impacting candidates, impacting clients, impacting our own consultants. And the net result of all of that is that I sense that probably the pickup in China, which we were expecting to perhaps begin in Q2, I sense now is more likely to be in H2. So probably just pushing back to the pickup that we believe will happen but probably expecting it 3 months later in the year than perhaps we did at the start of the year. As regards to headcount, we've made adjustments in markets through Q1 where we were seeing the most significant impact of lack of confidence and a bit of slowdown. So predominantly in the U.S. and the U.K. is where we've taken out the majority of headcount and a little bit in China as well to reflect the conditions that I just talked through. Based on that, I mean, if conditions don't change in Q2, then our headcount is in the right place. Now I suppose that's a big if. If conditions do change, then we'll need to do something on headcount again. But right now, we feel comfortable with where our headcount is based on the KPIs that we're seeing, the activity that we're seeing. Clearly, we want to hold headcount at a level where we can service the jobs that are coming through from our customers and make sure we deliver against their needs. But at the same time, if that flow of job count started to fall, then we'd obviously take action at that point. Over to you, Kelvin.

Yes. So on EMEA generally, we have a higher proportion of temp in EMEA than we would have in pretty much all of our other regions around the world. And that provides us with a certain degree of protection against what you'd expect in a market with uncertainty. We saw records and continued records in Germany but also in Belgium and Spain, and they will be 3 markets where we have a sizable amount of nonperm activity. Breaking down into the component parts, wage inflation was still there -- or not really wage inflation, but in terms of the offers that people were getting to change jobs, but it was down from what it would have been last year. So if, for example, this time last year, people were getting offers around 20%, they were probably getting offers around 10% during Q1. Fee rates remain at pretty much record levels. So it's different in different countries across Europe. But in Germany, it will be in the high 20s. In somewhere like Portugal, it would probably be in the high teens. But that's going to be at the top of where we would generally expect to trade and have done historically. So fee rates reflecting shortages of candidates primarily remain high. Time-to-hire slowed, but the big difference was really more around the conversion of offers into acceptances. So we're running high levels of jobs, not dissimilar to which we would have been about a year ago. The first interviews, second interviews remain high and robust. And actually, the number of offers that we're putting out to candidates is still very good. But the number of those offers that are being taken up has dropped off. And if I looked at somewhere like France, where historically, you'd expect the turndown rate to be somewhere around 20%, in the last quarter, it was nearer 35%. And that's a mixture of clients who aren't putting offers on the table, as I say, 20% last year. They're putting in 10 -- candidates may be disappointed with 10 and holding off for a better offer, or they're going back to their boss and saying, "Sir, can you match it?" And -- or actually, they're just looking at the news feed and thinking, "Maybe it's not worth moving for that. I'll sit where I am." So a mixture of different reasons. But generally, we're seeing some wage inflation at lower levels, fee rates at record levels, but just that sensitivity of the candidates to move and we need that confidence to return a bit in order for things to pick up. But that would be the same elsewhere in the world. Europe is going to be the best place in terms of our trading certainly at the moment.

Our next question comes from James Rose from Barclays.

Two, please. Firstly, could we talk about how activity and vacancy numbers tracked through the quarter in March, I mean, how they're tracking year-on-year? And then secondly, on the guidance of GBP 140 million operating profit, what are your own assumptions as to how we get there when we think of vacancies, confidence, headcount, et cetera? And what deterioration in the second quarter, second half is assumed to get to that figure?

Okay. Thank you. I'll take the question around activity, first of all, then. So activity levels across the quarter were broadly in line with what we were seeing 12 months ago. And I'm specifically talking there about top end of the funnel. So we're talking about new assignments coming through to us. We're talking about first interviews. So as a result, you still have very busy consultants working on high levels of activity, with candidates still willing to go to interviews and clients still willing to see them. I think that one of the trends that's made that probably more likely now than it would have been pre-COVID is the advent of video interviewing. If you think about it, before COVID, that getting an interview and going to an interview typically involves some kind of spurious excuse around a dental appointment or whatever else it would be, turning up in a suit and everyone wondering why you're wearing a suit that day, et cetera, et cetera. With video interviewing, it's so much easier for our candidates to shop around, but it's also so much easier for the clients to shop around. So therefore, the level of commitment at the top end of the funnel is a lot lower than it would have been pre-COVID when people were expected to attend interviews face-to-face. So it makes that a bit of a tricky read in terms of whether that's going to lead to an output of revenue at the bottom end. As Kelvin has already indicated, we saw in, not just France but also the U.K., higher turndown rates than we typically would during Q1, reflected in the reasons that Kelvin said a few moments ago. But overall, as I say, there was no real shape to the quarter in terms of either improving or getting worse through the quarter. Broadly, it held in line with Q1 at that top end of the funnel activity all the way through until the bottom end. And then the issue that we saw was a higher turndown rate than we typically would do due to confidence issues amongst candidates and with clients.

Yes. And coming back to you, James, on shape. I think at the moment, broadly in line with consensus, we see GP being pretty flat for the year on last year, with a drop therefore in productivity that is bringing down the operating profit number. And that would change -- well, change in the second half in so far that our comps are certainly easier in the second half of the year and considerably so in Q4. So what we're missing in the first quarter, we hope to make up in the second half in terms of GP. Our headcount is now a bit lower than it was at the beginning of the quarter, and that's improving on the cost side. So it's a mixture of those, but I think we see the productivity unfortunately eating into conversion during the year and a relatively flat GP number.

[Operator Instructions] We now turn to Kean Marden from Jefferies.

I've just got a few questions sort of on tech and data. So could we just touch on how you expect Page Insights to evolve? I suppose, Nick, is Page as agile as you would like it to be? And also, you added Babak Fouladi to your board as NED, I think, very recently, actually. So just wondering what was in his skill sets that you thought would be helpful to the group given his tech background, please?

Okay. Well, I'll run through those questions. So in terms of our Board appointment, we wanted to replace Patrick, who was stepping down from the Board, and we wanted to bring in some skills that were in line with Patrick's. So really, that was that focus around tech. It was the focus around digital but also some broader global knowledge that he brings to the Board that we thought was quite exciting. So yes, we're looking forward to having him on Board. He hasn't actually attended the main Board meeting as yet. So I can't really comment much more than that apart from an induction and interview. So we're early days. As regards your question on Page Insights, I mean we're very excited about the product. We've had it out in market for quite a long time now and getting some really interesting feedback from our clients in terms of the level of insight that it gives them, the ability to help them make decisions. And we're going to be piloting a product into the market in France during the next quarter to actually see whether the product there that we can give to our clients or sell to our clients indeed that they can then use without our input. So yes, I think there's an opportunity there for us to build out potentially a different revenue stream, whether that's in terms of just making our relationship with the clients closer or whether it being a separate data source for them to use for their own hiring. We'll wait and see how that progresses. But it's a great product, and it's also a product that we'll be demonstrating at our Capital Markets event in June. So you'll have a chance to have a look at that firsthand alongside Customer Connect, where you'll also get to climb into the sand pit and have a bit of a play with it. So we're hopeful that after that day, you'll have a better understanding of where we feel positioned around some key selling points in terms of the tools that we're giving our consultants that give them competitive advantage in the market.

Great. And without trying to preempt June, how does the revenue model potentially look for Page Insights? Is this sort of a monthly subscription or one-off or still to be determined?

It's a mixture of both, Kean, to be honest. There is going to be a subscription model, but also, we will be able to use it with maybe bigger clients who want us to do some research for them. So we can use the data, provide them with a research report. If they were looking into some DE&I, for example, in depth. Or we can give them a subscription model, and they can use it themselves. We can also sell training around how to use it. So I mean it is very early days, but we've got a light-touch version of how we think that we might use it with certain big clients. Particularly in something like Page Outsourcing, it might just be part of the package. So a number of different ways to deploy it.

This concludes our Q&A. I'll now hand back to the management team for any closing remarks.

Thank you, Elliot. Whilst there are no further questions, thank you all for joining us this morning. Our next update to the market will be our Q2 trading update on the 12th of July. Thank you all.

Thank you.