PageGroup plc (PAGE) Earnings Call Transcript & Summary

Good morning and thank you all for joining. I would like to welcome you all to the PageGroup full year results conference call. My name is Brika, and I will be your moderator for today. [Operator Instructions] And now, I would like to pass the conference over to your host, Kelvin Stagg, Chief Financial Officer of PageGroup today to begin. So Kelvin, please go ahead.

Good morning, everyone and welcome to the PageGroup 2023 Full Year Results Presentation. 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 just over GBP 1 billion in 2023, which represented a decline of 6.3% in constant currencies against 2022. Our operating profit for the year was GBP 118.8 million, down from our record year of GBP 196.1 million in 2022, and our conversion rate was 11.8%. Earnings per share was 24.4p, and we ended the year with a strong financial position with net cash of GBP 90.1 million compared with GBP 131.5 million at the end of 2022. This was after returning GBP 100 million in dividends to shareholders in the year. Today, we are proposing a final dividend of 11.24p per share, an increase of 4.5% on 2022. Together with the interim and special dividends, this results in a total 2023 dividend per share of 32.24p. I will now move on to the financial review. This fee earner head count and gross profit chart demonstrates how our fee earner head count responds to movements in gross profit. As trading conditions deteriorated through 2023, we reduced our fee earner head count each quarter from the peak of 7,071 in Q3 2022, to 5,851 at the end of Q4 2023. Due to our action on head count, productivity remained at record levels, with gross profit per fee earner of GBP 159,000. Despite challenging market conditions, we delivered operating profit of GBP 118.8 million in 2023, while our conversion rate decreased from 18.2% to 11.8%. Looking at each of our regions, starting with our largest, EMEA, representing 55% of the group, gross profit grew 0.3% in constant currencies on 2022. EMEA delivered the group's highest conversion rate of 16.8%. This was reflective of the region experiencing more resilient trading conditions through 2023. EMEA also has the group's highest proportion of nonpermanent recruitment, which has been more resilient in the tough market conditions. In the Americas, representing 17% of the group, gross profit decreased by 9.2%. Additions in Latin America were more resilient than in North America and as a result, the conversion rate improved marginally to 10.2%. In Asia Pacific, representing 16% of the group, gross profit declined 14.3% due primarily to the prolonged downturn in Greater China. We made the strategic decision to hold on to our most experienced fee earners in this market, which impacted the 2023 conversion rate. It will position us for strong growth when conditions improve. In the U.K., representing 12% of the group, gross profit declined 16.4% on 2022. While the U.K. trading business was profitable despite the tough trading conditions, a high proportion of senior management and group functions based in the U.K. mean the region delivered a small loss in 2023. Conditions were tough across all disciplines in 2023, with clients in Canada uncertainty, impacting the conversion of activity levels into revenue. Our technology discipline, one of our key areas of strategic focus, now represents 14% of the group. This was despite the reduced confidence due to the well-publicized challenges in the technology sector. As part of our refined strategy, and our increased focus on our conversion rate, we have already implemented a number of initiatives to reduce our cost base. These initiatives focus mainly on removing management layers, some small office closures, including our onshore presence in Sweden, and ensuring our operational support functions continue to align to the lower fee earner head count. These initiatives have incurred a one-off cost in 2023 of around GBP 11 million. However, this was partially offset by associated cost savings of around GBP 9 million. The net negative impact was therefore around GBP 2 million. Going forward, we expect these initiatives to deliver annualized savings of around GBP 20 million per year. However, this benefit was partially offset by inflationary salary rises made in January, which added around GBP 10 million to our 2024 cost base. The tax charge for the year was GBP 40.4 million, which represented an effective tax rate of 34.4%, higher than the 28.5% in 2022. The U.K. tax rate increased to 23.5% in 2023 from 19% in 2022. In addition, the change in profit mix with more profit and higher tax rates in overseas countries also increased the tax rate. In 2024, the effective tax rate is expected to be around 30%. Our balance sheet remains strong. Intangible assets decreased by GBP 7.9 million compared to 2022, due mainly to the development of our global operating system, Customer Connect, being completed in 2022. Tangible assets increased by GBP 11.4 million due mainly to fit-outs and several office moves, including the consolidation of our three London offices into 80 Strand. Trade and other receivables decreased by GBP 57.2 million driven by the reduced levels of trading activity. After returning a total of GBP 100.1 million to shareholders by way of ordinary and special dividends in 2023, net cash at the end of the year was GBP 90.1 million. Overall, net assets decreased from GBP 352.2 million to GBP 306.5 million. This slide shows the key movements in our cash during the year. Our EBITDA inflow was GBP 191.9 million and an unwind of working capital also increased net cash by GBP 20 million. Tax and net interest payments were GBP 57.8 million. Net capital expenditure was GBP 30.8 million for the year, broadly in line with 2022, with increased spend on office fit-outs, offset by reduced spend on Customer Connect. Payments made in relation to lease liabilities reduced cash by GBP 40 million. Share option exercises remained low due to the subdued share price with only 0.6 million exercises during the year, adding GBP 1.9 million to our net cash position. The group also purchased shares costing GBP 17.5 million in March into the Employee Benefit Trust, hedge our liabilities under the group share plans. The largest outflow of cash, totaling GBP 100.1 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 41.4 million to GBP 90.1 million at the end of the year. Overall, despite the tougher trading conditions in 2023, we delivered a pretax cash conversion rate of over 100%. PageGroup operates a highly cash generative business model with very high levels of cash conversion. We have a clear capital allocation strategy with 3 defined and well-established uses of cash. The first and primary use is to satisfy the operational and investment requirements of the group, such as investing in additional head counts and continuing to roll out technology as well as to hedge liabilities under the group share plans. The second use of cash is for the payment of ordinary dividends where our policy is to maintain these through a downturn, which we have done in all years apart from 2020 and to increase them when trading conditions are more favorable. Finally, any remaining cash surplus is to be distributed to shareholders by way of a supplementary return. Today, the group announced the proposed final ordinary dividend of 11.24p per share, an increase of 4.5% on 2022. Subject to shareholder approval at the AGM, this will be paid on the 21st of June to shareholders on the register as at the 17th of May. When combined with the ordinary dividend of 5.13p per share, this gives a total ordinary dividend for the year of 16.37p. Together with a special dividend of 15.87p paid last October, total dividends in 2023 was 32.24p. At the year-end share price of GBP 4.87, this represents a total dividend yield of 6.6%. 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 2023 special dividend, we've returned over GBP 410 million by way of special dividends since 2015. Together with share buybacks totaling GBP 276 million and ordinary dividends in excess of GBP 600 million, we've returned a total of GBP 1.3 billion to shareholders since implementation. I will now provide a brief summary of the full year results. We produced a resilient performance in 2023 in challenging market conditions. We saw good activity levels through most of the year, albeit the conversion of final interviews to accepted offers and therefore, gross profit became increasingly challenging due to lower levels of candidate and client confidence. Overall, gross profit in constant currencies declined to 6.3% and we delivered operating profit of GBP 118.8 million at a conversion rate of 11.8%. We saw a slower end to 2023 due to macro uncertainty, impacting candidate and client sentiments, which has continued into January and February, albeit they are 2 of the smallest months of the year from a trading perspective. Today, the Board has proposed a final dividend of 11.24p per share, a 4.5% increase on 2022, reflecting our confidence in the long-term strategic progress of the group as well as the strength of our balance sheet. Looking ahead, macroeconomic uncertainty persists. However, we have a highly diversified and adaptable business model, strong balance sheet and our cost base is under continuous review and can be adjusted rapidly to match market conditions. We are also seeing the benefits from our investments in innovation and technology. Customer Connect is supporting productivity and enhancing customer experience. Page Insights is providing real-time data to inform business decisions for both Page and our customers. And we continue to work with our partners to deploy AI and automation tools into our working environment. We made improvements to customer engagement with our client Net Promoter Score increasing to 55 in 2023 from 52 in 2022. We also continued to develop our social impact programs. And as a business, we changed 133,575 lives in 2023. Given these fundamental strengths, we believe we will continue to perform well in the current challenging market conditions and we're confident in our ability to implement our new strategy, driving the long-term profitability of the group. That concludes the formal presentation for this morning. And Nick and I would now be happy to take any questions you may have.

[Operator Instructions] We have the first question from Hans Pluijgers of Kepler Cheuvreux.

Two questions from my side. First of all, on the trends in January and February. Yes, you already indicated that December was soft. Yes, could you maybe give some feeling on January, February, is it even softer? Or is it really comparable? And secondly, do you see any, let's say, difference, let's say, by region in trends going into 2024? And secondly, on cost savings. You already indicated, let's say, that you have, of course, your general cost savings program, which you already announced the CMD. But how do you see, let's say, head count progressing during Q1? And yes, especially, how do you see, let's say, drop-through rates developing through H1? Can you give some feeling on that?

Okay. Thanks, Hans. So I'll take the first two, and then Kelvin can pick up the last one. I mean we're conscious today that it is a full year results presentation rather than a 2-month trading update. But we wanted to, at least give you some signposting because we thought that would be something that you'd all ask about if we didn't anyway. As regards to January and February, I mean, what we're calling out really is no change in candidate and client sentiment. If you wanted more of a view around activity, the activity levels by that, we'd be talking about new jobs registered, first interviews, et cetera, are similar to what you've seen in October and November, but sentiment has been the issue. It has been all the way through last year, and it continues to be a problem. At the bottom end of the pipe, we work with candidates that are looking at typically management and leadership roles. Most of our recruitment is permanent. It's white collar. It's, therefore, at the more senior end of the market. Most of our candidates, therefore, as we said in the Q4 trading update would have been sat in December and thinking that, well, I'll wait to see how my January appraisal goes. I'll wait to see what bonus I get. I'll wait to see what pay rise I get. I'll wait to see what my boss says about 2024 and the prospects of the company and my prospects within the company. Therefore, when we came back in January, we just had a month where all of those meetings were happening. And so I suppose as you move into February, then we start to get a bit more movement. But as we said in the update is that it's going to be a lot more about March, always is. It's a big month for us. And we'll be able to call that out for you when we give a Q1 trading update in about 4 weeks' time. As regards to your second question, differences by region, again, I'm not going to do that as an update for January and February. But towards the back end of last year, as you know, we saw some slowing, particularly in Europe. It's our biggest region. That was more felt in perm than nonperm. And so start they started to have some of the market conditions that we've experienced in places like the U.K. and the U.S. earlier in the year. So that clearly is a concern. So nonperm is more resilient, but we are predominantly a perm business. I think, generally speaking, most of the commentary is that perm is tough right now, and we're certainly experiencing that as well. But that would be the only region I'd particularly call out.

Yes. With regards to head count, I mean, our fee earner head count has drifted a little bit in the first couple of months of the year. I don't think that's a surprise. I think we had a slowing into the end of last year. We would have hesitated on recruiting fee earners. I don't necessarily see that as being an ongoing trend through the year. It really does depend on how we trade and what level of trading. In certain markets, and we've mentioned these before, certainly China and the U.S., we're now intending to hold on to the head count we've got there. But the productivity is actually very good because it's the more junior people that have left and actually, therefore, our more experienced fee earners as an average higher cost because of their experience but are performing well in what is tricky markets in both of those. Possibly, we'll see a slight readjustment in Europe as we go into this year just depending on how Europe performs given that we were record levels in a number of countries in Europe, including Germany, Belgium, Sweden -- Belgium and Spain this time last year. With regard to non-fee earner headcount, there will be a slightly unusual balance when we get to the end of the quarter. So we took the opportunity to rationalize our shared service centers with a lease break that was up on our U.K. shared service center. And a tough decision, but we are shutting U.K. shared service center and moving that activity into Barcelona for the U.K. and into Buenos Aires for North America. That work is ongoing at the moment, and we will actually have 100 people leaving out of the U.K. in the beginning of April. So you'll actually have double running of about 100 people at the end of the quarter, but that's a temporary thing, and we'll be able to explain that again when we get to Q1.

Your next question comes from Steve Woolf of DB Numis.

Just one for me, please. I'm just thinking sort of fee rates. And in this kind of market where the candidates are the blocker more than the actual companies themselves, what typically tends to be the trend for fee rates? Is it more a question of they rise or are consistent because they -- companies are still desperately to find the right people? Or is it a question of them drifting down because you're unable to find the right people at this point? So just any thoughts on fee rate trends, if possible.

Yes. Okay, Steve. Yes, no problem. So fee rates coming out of COVID started to really move up due to talent shortages. And they've remained at the same levels. They're at record levels. We haven't seen any softening in the fee rates. And it's very explainable really because we already had talent shortages. Then you throw into the mix candidates that are consciously not coming to market because they don't see the upside of a move in terms of a salary increase that makes it worthwhile. There's also this kind of shadow that's playing around in the background around work from home. I think a lot of people have potentially negotiated a deal with their employer through COVID and are worried that, that agreement that they have would disappear if they move to a new employer. So again, that's certainly at play in a number of markets. But coming back to your original question, no, the fee rates have remained robust, even in the most challenging markets, they're still at really good levels and pretty much bordering on record levels, which is reflective of talent shortages.

[Operator Instructions] And we now have Karl Green of RBC on the line.

Yes. Just 2 questions from me. Kelvin, I think you just referenced on the U.K. conversion ratio, the impact of the central cost, which are allocated to that region. Could you just remind us roughly how much they account for? So just thinking about the potential for leverage to the upside as we come out of the current top spot. And then the second question, just unrelatedly, last year, you talked a lot about Customer Connect, Page Insights and the fantastic productivity benefits that could accrue from that. Just any kind of update on the feedback you've had from consultants, in particular, as to how they're finding that in terms of intuitiveness, usability and most importantly, kind of effectiveness of doing the day job?

Yes, no problem. Thanks, Karl. Well, I'll talk about the second question because yes, I think, with technology, it's something that, as you know, just continually evolves. So the product that we had that we showed you in the summer is now a product that has more iterations, more developments and more features as we adapt the product based on the feedback. So we're always trying to give our consultants a product that really fits with what it is that they want. And alongside that, what we're also trying to do is innovate, and I mentioned this in my statement around AI and automation to make sure that we're also giving them other tools that can help them do the job. So one that we're just rolling out of the business, it should be in about 80% of the business by the end of the year, is what we call a job ad generator, which allows AI to write adverts for our consultants rather than them doing it themselves. We generate around about 25,000 new jobs per week. But only about 11,000 of them price this innovation turned into adverts because consultants would often take the view of, well, I might know the candidates that could fill this anyway. I don't want to run an advert. I've already got an advert out there that's similar to the last one. And that all came back to the fact that they took them typically about 30 minutes to write an advert, and they wanted to do other things that were more related in their eyes to generating revenue. With the job advert generator you're suddenly looking at a process that has gone down to about 3 or 4 minutes. So the AI does what it needs to do. It generates the advert for them. They then check it and it then get posted. So we get 2 benefits. We had a productivity gain for the consultant, so they're given time back. We estimate that it's around about 3.5 working days per year that we're giving them back that they would have spent writing adverts. And secondly, it means that the higher proportion of the jobs that we actually generate turn into adverts, which helps from an SEO perspective. So I think the whole technology journey is something that continues to move forward. And I guess, as we come out and see you and the other shareholders over the next few weeks during the road show, we're quite keen to give an update on some of the things that we've got either in the innovation lab, a proof-of-concept, a pilot stage or now moving to rollout because there's quite a lot of interesting stuff that fits all around, not only Customer Connect and Page Insights, but really that kind of ecosystem that we want to put around our consultants to make them more productive. Kelvin?

Coming back to you on that U.K. number. The number is just shy of around GBP 15 million. A lot of the exec order are based here, which therefore had salary costs, but also higher share plan costs. We've got a fairly sizable business technology function based here, and our data function is based here. And so when we look at it on its more statutory basis, there are a number of costs in there that are relatively fixed. Obviously, if the U.K. trading business picked up, that number stays about the same, and it has less of an impact on conversion rate. But with things being slightly challenging in the U.K., the U.K. business did make a decent profit in the conditions it's operating in at the moment, but it was dragged down by just shy of about GBP 15 million of fixed costs.

[Operator Instructions] And we now have Rory McKenzie of UBS.

I have 2 questions, please. Firstly, just to pick up on your comment on, I guess, that pay differential on changing jobs. What do you think that's come down to now? Am I right in that it's over 15% kind of pay left back in the peak of the market and now is maybe down to single digits? And how does that compare to I guess, long-term average levels firstly? And then secondly, can you comment on how you're seeing activity levels or conversion rates differ by average candidate salary levels? So I guess trying to unpick which parts of the market are slower than others. And could you maybe remind us of your average salary levels by region ideally? Or how you'd characterize your position there?

Thanks, Rory. Okay. Well, firstly, pay differential. Yes, I mean, it was certainly over 15% at peak. I remember being in the U.S. on a roadshow when we popped into our office in Chicago, and we're talking to our team there. And we have a big construction business, as you know, in the U.S., and they were talking an entry level to try get a candidate to move with 20% increase, and it could have been upwards from there 2025, et cetera. So yes, I would say that in most of our markets, it was well north of 15% through '21 and '22. I think where it is now is probably, historically, the norm. I don't think that it's particularly frugal. I don't think it's particularly generous. I think it's where I would have experienced it being for most of my 30-year career at Michael Page, so something around about 5% or 10%, something in that region. So that's kind of the -- where it was, where it is and how it can compare, which I think was the three parts of that question. I don't sure I fully understood your next question, activity levels by salary levels. Do you want to just kind of make sure that I understand that and clarify what you want me to comment on?

I guess we probably still expect there are still shortages for the higher skills, maybe more senior staff in some areas versus maybe a bit more surplus labor or less willingness to commit to the jobs at the lower skill levels, if that makes sense. That's just kind of a theory. So I was wondering if you're seeing still more movement in staff at higher skill levels with salary being a proxy for that compared to maybe a much slower market for the more entry-level staff or -- yes, lower paid staff basically?

I mean we don't really trade down at the bottom end of the market. So our entry level would be kind of GBP 30,000, GBP 35,000, for instance, in the U.K. So we're not really trading at the kind of staffing end of the market. I would generally say, Rory, that a good candidate's a good candidate, and they're always in short supply, whichever level you're looking at. So if you're speaking to consultants in Page Personnel, they'll be looking for that really strong candidate that's got the right experience, the right motivations, terms of welling interview, et cetera, et cetera. And that would be same if you're chatting to someone in Page Executive. You're still looking for the same generic features through the CV, a person who can come in and interview well, can put themselves across well when they're in front of the clients. So I don't think there's any real separation there. I think if you wondered around the desks, we're in the London office today, and chatted to consultancy, Page Personnel, Michael Page or Page Executive, they all broadly give you the same commentary, which is there's always candidates on the market. Always. That's not really the challenge. The challenge is finding the best candidates and the candidates that are going to go in and do a great job on behalf of our clients. So I think that is still just something that we see in all places. Kelvin, I don't know if you want to add anything?

Yes. I would say probably the only thing to add in, in terms of seniority of candidates is that you tend to think there's more jeopardy the more senior you are. So actually, if you're a highly paid candidate, you're probably going to think more about a move than a more junior candidate who's probably younger with less responsibilities, financial and family-wise. So that's not really about the activity. The activity is the same. But the likelihood of that activity turning into revenue is probably more, added to which the real driver at the moment is probably more perm to temp, but that's not really about matter of salary.

Yes. That was very helpful, both.

The last one on average salaries that we operate around different regions of the group. I think the easy ones are probably -- I mean the U.K. is somewhere around GBP 45,000. That's a decent chunk of Page Personnel in the U.K. that bring that back down a bit. In Europe, it's probably a bit higher. I mean we do a bit more senior work in parts of Europe. It's probably going to be somewhere around GBP 48,000 to about GBP 55,000, and so about GBP 55,000 in Germany, about GBP 48,000 in France. The country -- or two countries, I suppose, a bit of an outlier, the U.S. The average salary we place on in the U.S. is nearer GBP 95,000 as would be the case in Japan. And everywhere else is probably going to be -- well, Latin America will be a bit lower. It's probably about GBP 40,000 in Latin America in somewhere like Portugal. The majority of the other countries are going to be somewhere between GBP 45,000 and GBP 50,000.

[Operator Instructions] We have no further questions registered. So I would like to hand it back to Nick and Kelvin for any final remarks.

Thank you. So as there are no further questions, thank you all for joining us this morning. Our next update will be our first quarter trading update on the 15th of April. Have a good day.

Thank you all for joining. I can confirm that does conclude today's conference call with PageGroup. You may now disconnect your lines and please enjoy the rest of your day.