PageGroup plc (PAGE) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the PageGroup 2023 Third Quarter Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and on the call with me is Nick Kirk, 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 to this presentation and which will also be available on our website following the call. The group delivered gross profit of GBP 242.2 million in the quarter, a decline of 7.9% in constant currencies against Q3 2022. This was a resilient result despite a slower end to the quarter. Our largest region, EMEA, was our best performing. However, tough market conditions affected performances in Asia, the U.S. and the U.K. In line with the continued challenging trading conditions, our fee earner headcount reduced by 310 or 4.8% in the quarter, with reductions in all regions. Our fee earner headcount ended the quarter at 6,075. 996 or -- sorry, or 14.1% lower than in Q3 2022. The group had a total headcount of 8,140. Due primarily to this reduction in fee earners, gross profit per fee earner, our measure of productivity, increased 4% compared to Q3 2022. We have a strong balance sheet with net cash at the end of September of around GBP 136 million. This compares to GBP 96 million at the end of Q2 and is before the special and interim dividend payments to be paid on the 13th of October, totaling GBP 66.2 million. I will now give a brief financial review. Growth in temporary recruitment remained stronger than permanent during Q3, which is indicative of the current uncertainty in the market with many clients seeking more flexible options. Temporary recruitment grew 5.8% against Q3 2022 with permanent down 12.1%. Reflecting this, our ratio of permanent to temporary gross profit was 72:28, down from 74:26 last quarter and down from 76:24 in Q3 2022. In Michael Page, permanent recruitment represented 82% of gross profit, while in Page Personnel, it was less at 48%. At lower salary levels, there is often more choice between permanent and temporary solutions. And accordingly, the current market uncertainty led to a bigger differentiation between permanent and temporary performances in Page Personnel. In Q3, we decreased our fee earner headcount through natural attrition by 310 or 4.8%, with reductions in all regions. This followed the fee earner reduction of 255 or 3.8% in Q2. Our operational support headcount also decreased by 122 or 5.6% in areas such as operational support and candidate acquisition. Our total headcount is now 971 or 10.7% lower than in Q3 2022. Driven by the action on fee earner headcount over the past 12 months, productivity increased by 4% in constant currencies compared to Q3 2022. Candidate shortages remained acute and are supportive of continued high fee rates. Salary levels also remain elevated, albeit salary increases offered to candidates reduced compared to Q3 2022. These lower offers, combined with lower candidate confidence led to a further increase in the number of offers rejected by candidates, either through employer buybacks or unwillingness to risk the move for the size of incentive on offer. The increased time to hire that we saw in Q2 continued. I will now present a regional review. The group delivered resilient results in the quarter despite a slow exit. The strongest performance was in EMEA with Germany delivering a new record quarter in Q3. Latin America also achieved robust results and a record quarter. However, tough market conditions continued in Asia, the U.S. and the U.K. Overall, group gross profit declined 7.9% in constant currencies against Q3 2022. Foreign exchange had a negative impact on the quarter's growth rate compared to the prior year, decreasing the reported gross profit growth rate by 2.6 percentage points or GBP 7 million. In our largest region, Europe, Middle East and Africa, which represented 53% of the group, we declined by 1.3% on Q3 2022. Michael Page, which is focused on higher income, permanent recruitment, was down 3% for the quarter, while Page Personnel, which is focused on lower level recruitment with a higher proportion of temporary was flat. Germany, the group's largest market during Q3, which represented 14% of the group, delivered a record quarter up 5%. The standout performances were delivered by Page Personnel at our Michael Page Interim business, which is focused primarily on technology. France, the group's second largest market in Q3, representing 13% of the group was up 1% with Michael Page up 2% and Page Personnel up 1%. Growth was stronger in temporary recruitment, up 12%, whereas permanent was down 5%. Elsewhere in Europe, trading conditions were tougher due to weaker candidate and client confidence. The Middle East and Africa grew 17%, with good growth in all markets. Having reduced fee earners in the region by 79% in Q2, we reduced our fee earner headcount by a further 93% or 3% in Q3. The Americas, which represented 18% of the group, declined by 13.3%. North America was down 25% with the U.S. also declining 25% compared to the decline of 16% in Q2. The conditions we saw in Q2 continued into Q3 with uncertainty around market conditions continuing to impact both candidate and client confidence. In Latin America, gross profit grew 7%, and we delivered a record quarter despite the macroeconomic uncertainty. Mexico, our largest country in the region, was down 4% compared to a decline of 7% in Q2, and Brazil was up 4%, an improvement on the decline of 9% in Q2. The remaining countries grew 19% collectively and Argentina, Chile and Colombia all achieved record quarters. Across the region, fee earner headcount decreased by 96 or 8.9%, mainly in the U.S. and Mexico. In Asia Pacific, which represented 17% of the group, Q3 gross profit declined 11% on 2022. Permanent recruitment across the region declined 12%, whilst temporary declined 3%, reflecting the continued market uncertainty. In Asia, 13% of the group, we declined 11%, due mainly to tough conditions in Greater China. In Greater China, 5% of the group, we declined 22% compared to a decline of 32% in Q2. Mainland China was down 23%. Our fee earner headcount in Mainland China is now around 210, down from around 340 at the end of Q2 2022, albeit now 1/3 of managerial grade or above with an average tenure of over 6 years. Market conditions are stable, but showing little sign of improvement. Hong Kong declined 21% in the quarter. Southeast Asia declined by 12% against Q3 2022 with Singapore down 13%, due mainly to the broader influence of Greater China across the region. India, which represented 16% of Asia delivered a new record quarter, up 3% on the prior year. Elsewhere, Japan grew 4%, while Australia declined 11%. Our fee earner headcount decreased by 85% or 6.4% in the quarter, mainly in Southeast Asia and Japan. In the U.K., which represented 12% of the group, gross profit declined 18.9% following the decline of 17% in Q2. Michael Page was down 20%, whilst Page Personnel declined 17%. We continue to see clients defer in hiring decisions and increased caution from candidates. We also experienced an increase in offer turndowns and candidate buybacks in our permanent business during September. Reflecting the uncertain market conditions, clients sought more flexible options, and as such, temporary recruitment was more resilient, down 5%, whereas permanent recruitment declined 24%. In line with the more challenging trading conditions, our fee earner headcount reduced by 36% or 4.3% in Q2 and is now 17% lower than Q3 last year. I will now provide a brief summary of our results. Group gross profit declined 7.9% in constant currencies against Q3 2022 with a slower end to the quarter in September. EMEA was our best-performing region. However, tough market conditions affected the performances in Asia, the U.K. and the U.S. In line with the challenging market conditions, we reduced our fee earner head count by 310 or 4.8% in Q3, with reductions in all regions. Productivity measured as gross profit per fee earner increased by 4%. Despite the slower end to the quarter, which presents a higher degree of uncertainty in the short term, we are confident in our ability to implement our new strategy, driving the long-term profitability of the group. We're also seeing the benefits from our investments in innovation and technology. We also have a highly diversified and adaptive business model, a strong balance sheet and a cost base which is under continuous review and can be adjusted rapidly to match market conditions. At this stage of the year, the Board expects 2023 operating profit, excluding the previously disclosed one-off costs of around GBP 5 million to be between GBP 125 million and GBP 130 million. Nick and I will now be happy to take any questions you may have.

[Operator Instructions] Our first question today comes from the line of Steve Woolf from Numis Securities.

Just really a couple from me. Firstly, on Germany, I'm just thinking, you've got a decent performance there again. I know you flagged it was at these sort of Page Personnel level. But anything you can give me on volume versus wage growth or perhaps which key markets are giving the strength?

And the second question?

Second question was on the U.S. and the performance there and the feeling that things might have got a little bit less worse during that period. And again, just sector thoughts on the U.S. market.

Okay. So Germany first then. I mean we've seen increases in fee percentages and salary ranges. But in the permanent side, certainly, we've seen longer time to hire coming through, and we've seen more activity levels are needed to place the job, so similar to other markets, as we've discussed. But the Temp business and the contracting business still remains pretty stable. Activity levels are good. So I suppose there's kind of the split there, which is if you look at the kind of the non-perm side, so that being the interim business or contracting business and Temp is in good shape, perhaps reflecting what Kelvin spoke about in the statement, this flight to more flexible options. And then on the perm side, probably a replica of what we're seeing elsewhere, which is just the sense of a lack of confidence on both sides of the equation from a candidate side and from a client side. And the metrics within that are, for instance, candidates needing probably a bit more persuasion, which is typically via a better offer and clients being quite reticent to give that higher offer because of a concern around their own cost base. So they're kind of caught in the middle there on the permanent side. And then moving on to the U.S., I would agree with you. I mean my view of the U.S. is that perhaps it's starting to get to a point now where we're somewhere towards the bottom. Clearly, I'm guessing, I don't have a crystal ball, but I do have a sense, certainly, when I look at the performance of the U.S. business, it was one of the only businesses or one of a very few number of businesses that did actually have a bit of a rally at the end of September when some of our other businesses didn't, the U.S. business did have that. It did see some additional revenue coming through in the final couple of weeks, which is what you kind of typically expect in more buoyant conditions. So yes, perhaps we are there in the U.S. I mean it is a bit of a wait and see. I mean interestingly, and this is very small scale at early stages, but we spoke to you probably a year or so ago about some of these SaaS operations and these kind of early-stage technology companies that we recruit for really kind of winding things down, not hiring very much in the shadow of the job losses on the West Coast. It fell to this through Q3, we started to see some activity picking up in that area. And if it is, then we had a really nice business covering that across East Coast, West Coast up until about a year ago when all the job losses were announced and that shadow came across the sector. So if that were to start to come back, that would be one of our older revenue streams from a year ago coming back online, which would be lovely. So we'll wait and see, but I think there is some merit in your assumption there, Steve.

Thanks Nick. And just going back to that German market, I see sort of from a candidate perspective and the type of candidate. But is there any -- the people hiring in that market? Is that the -- we looking at the IT market within there? Or is it broader than that, would you say?

Well, we're looking at more technology as a sector -- sorry, technology as a discipline rather than as a sector. So we're placing technology candidates into all sorts of organizations rather than focus specifically on the IT sector. And within that kind of demand for technology candidates, whether you're a retailer or a manufacturer or a financial services company because of skill shortages, that is still very much there.

Perfect. So it's fairly based -- broad-based IT into other areas. That's perfect.

Yes. I mean, yes, it's a structural issue, isn't it? I mean, the demand isn't going to go away and organizations are after these very niche talents. We spoke in the strategy launch about this element of hyper-specialization and where one job used to be kind of a job title that's converted into 5 job titles 3 years later, and therefore, to have that specific knowledge of that area, you need to kind of really dig deep in the market to find it. And that's typically where we come in to support those clients.

The next question today comes from the line of Karl Green from RBC.

Just one for me. Just thinking about the change in the full year EBIT guidance ex the one-offs. I mean, just looking from the outside in Q3 like-for-like net fee growth was sort of in the right ballpark versus where consensus was looking for. So could you just talk through the building blocks as to what's driven that downgrade to the profit guidance for the full year, just in simple terms, please?

Sure. So I guess, -- as of a couple of days ago, consensus was sitting at GBP 132 million. We saw the note from UBS that came out yesterday that came in at GBP 120 million, which moved consensus to GBP 130 million. In terms of actually where we landed at the end of Q3, we were pretty comfortable with where consensus was at GBP 132 million. Having then had what was a softer end to the quarter in September, we obviously went out to the business and reforecast Q4 and got back a softer view on what might come through in Q4, which probably moved us more in line with the GBP 130 million as it had moved really certainly at the GBP 130 million than the GBP 132 million. So that's probably what moved us down to that. As you know, we announced the Capital Markets Day on the 20th of September, we were going to have this one-off GBP 5 million, which was a net of GBP 5 million of costs to move certain costs or people out of the organization, and it would have an offsetting GBP 5 million positive movement in the year. And that we were going to take that through the P&L. So that's the GBP 5 million movement that then moves you from GBP 130 million to GBP 125 million. We set a range of GBP 120 million to GBP 125 due to the uncertainty that has come about as a result of this slightly surprising drop off at the end of September. I would say, at the moment, we're towards the top of that range, as I just outlined. But on the basis that things are uncertain, and it would be helpful for us not to have to come and update you again before January, we've set a range within which we can -- we feel that we can hold the profit for the year. Talking a bit more about the end of September. I mean, we traveled through the first 2 months of the quarter actually broadly in line sort of comp adjusted for the -- with Q2. So there wasn't really any big surprises there. Our expectation when we saw the mid-month, which is, as it sounds, halfway through the month in September was that like all the other quarter-end months because our consultants are remunerated on a quarterly bonus scheme was that we will get a bit of a push towards the end of the month, and that would move it up not a lot, but a little bit more than it landed. And therefore, the growth rate in September would have been fairly similar to the other 2 months. That push at the end of the month just didn't really come through, which is unusual and could have been for a number of different reasons. I think anecdotally, in Continental Europe, it was felt that it was a bit slow to get started in September. September is always a difficult month to try and engage because more so than the others, you come into September with a pretty empty pipeline coming out of the summer. And therefore, you've got to get started relatively early in order to get candidates through the process to ensure that they've resigned, and they've signed their contracts with their new employers by the end of the month. And so there's a possibility that some of those deals that were -- that didn't make it into September come into October. But there's also a possibility that it reflects a softening in the market. And given really the move was in the last week or so in the month, we don't have that much forward visibility. That's where we're just giving ourselves a bit of a range looking forward. But I would say, I think we will be towards the top of that range as we sit here today.