Peoplein Limited (PPE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PeopleIN Limited HY '22 Results Call. [Operator Instructions] I would now like to hand the conference over to Ross Thompson, CEO. Thank you. Please go ahead.

Thanks very much, indeed, and good morning, everyone. My name is Ross Thompson, the CEO of PeopleIN, and I'm joined by Megan Just, the CFO of PeopleIN, and welcome to our half year results. So first of all, I just want to confirm our purpose to harness the talent in people to be extraordinary and our goal to be the leaders in the provision of innovative talent solutions that enable our clients and candidates to achieve excellence. The reason for reconfirming is our purpose and goal really set the direction for our strategy to date, but also our strategy moving forward. And I'll touch on this a bit later on in the presentation. So first of all, I just want to confirm some key messages. So these are really the key takeaways from the presentation. So the first, had solid results in the first half of the year with strong growth at both the revenue line of 30% and the EBITDA line of 27%. We've also delivered solid organic growth of both -- of 10% of both the revenue and EBITDA line. And this is largely due to the diversity of the business. So even though there's been challenges with COVID, et cetera, really drawn upon this diversity and realized the benefits of our diversification strategy over the past few years, to still deliver a solid result for the first half. Looking forward, very favorable market conditions for us. We've got a strong M&A pipeline, the capacity on the balance sheet of around $40 million to execute on further acquisitions in the second half of the year. Solid cash conversion of 91% of our EBITDA converted, around 9% was invested into working capital to drive that organic growth that we've seen in the first half, but also further organic growth in the second half of the year. And we're still forecasting to achieve earning within analyst consensus of normalized EBITDA range of $45 million to $47 million. So now I just want to touch a couple of highlights. So across all the key performance metrics were up, which is absolutely fantastic to see. And as I've talked about before, organic growth of 10% in the first half is a fantastic result for the business. Also normalized EPS of $0.146, so that's 15% up on the prior 6 months and our fully franked dividend of $0.065. So on the highlights front, we've got a couple of highlights here, but I just wanted to pick up on a couple. The first is 4.4 million hours billed in the first half of the year. This is 19% up on the previous corresponding period, which is great to see. 750 permanent placements made. This is a record for the business. And then the third highlight is 17,500 people that we -- or candidates that we've employed over the last 6 months. So back to the diversification point. As Australia is a largest listed talent solutions company, we've really got that diversity, both geographically and sector to make sure that we have a sustainable business and continued to deliver solid revenue and profit results. So you can see on the map there, the strong representation across the country, both in the metropolitan areas, but also regionally as well as our office in Singapore, which is really hitting its straps. And then down to the bottom right of the slide, you can see our sector diversification. So the strong in the health space is 32%, but also have a strong presence across a number of growth sectors. I wanted to highlight government as well of 8%. This is a focus moving forward to increase our government exposure, but still 8% is a strong foundation with which to build on. The other point I wanted to pick up on this slide is around our revenue mix from permanent recruitment and contractor, so contractor revenue at 96%, permanent at 4%. This really provides that predictability of longer-term earnings from having a strong contractor book. So now on market insights, strong market conditions for us throughout the year and also forecasting favorable conditions moving forward. So now I'd like to hand over to Megan to go through the financial performance in a bit more detail.

Thanks, Ross. The financial performance of the group is going from strength to strength with positive growth across all 4 performance metrics of revenue, EBITDA, NPATA and earnings per share. This growth has been derived from a combination of organic growth and acquisitions during the 4.5 years of PeopleIN as being listed. We believe that growth trajectory that we have displayed demonstrates consistent and predictable performance and delivery to our shareholders. The strength of the business through the recent uncertain time and volatile economic market has been attributable to those diverse industries within which we operate. Given the first half of last year included receipts from JobKeeper, it's more relevant for us to compare the second half of last year to the current period results. The normalized EBITDA contribution was $21.6 million from revenue of $316 million, being an increase of 27% and 30% from the second half of last financial year. We've been able to maintain EBITDA margins of 7% compared to industry average of approximately 3%. The increased demand for services has been prevalent this year as clients struggle to source their own employees. We have seen this across all of our divisions. There has been some impact from lockdowns mainly impacting brands located in New South Wales in the health and community division. However, this division has been able to pivot candidates into other services relating to COVID during these periods. The technology division has also seen a significant bounce back from last year with a really strong performance in their permanent recruitment space. This is an extension of the growth they began to see in the final quarter of last financial year. We've continued to invest in the corporate services function to drive benefits across the entire business. If we added resources in this function, there are a number of strategic initiatives and programs underway to improve efficiencies, gain synergies, improve the integration process and ensure that we are able to collect and analyze data at the group level. This will enable us to be agile in identifying where improvements of systems and processes can be undertaken to ensure our employees are engaged and supported whilst also being cost-effective. The performance of acquisitions acquired late last financial year and during this half are on track and performing as we forecasted. Combined, the 3 acquisitions that contributed $3.4 million in EBITDA during the half, and there are no indicators that they will not continue to perform strongly as we have already informed the market. Most acquisitions have been a significant contributor to our results in this half, our organic growth continues to be a key contributor to our performance with each of the divisions contributing a combined $56.3 million revenue to the group compared to $59 million from acquisitions. We are really pleased with the organic growth during this half being 10% for both revenue and EBITDA contribution. This puts us in a great position leading into the second half of the financial year. Cash flows from operations have been solid this half, contributing to normalized operating cash flows of $11.1 million. Over the past few years, our cash flows have been impacted by the settlement of deferrals obtained as a result of COVID. This has continued into this half with only one more payment of $1.2 million remaining, which was settled last month. Our net receipts from customers is $18.1 million compared to normalized EBITDA of $21.6 million, resulting in 91% of our EBITDA being converted into operating cash flows. Normalized operating cash flows were $12.7 million compared to a normalized NPATA of $13.9 million. With growth in our cash flow -- with growth, our cash flows were impacted by the increase in debtors as they are longer payment terms than our largest expense being wages Therefore, the remaining 9% has been invested in our working capital due to the organic growth the group has seen. At 31 December, we're in a net debt position of $29.2 million, up $4 million from 30 June. There has been an increase in our commercial bills as a result of the acquisition of Vision Surveys, Queensland and also there has been an increase in the realization of our working capital facility, reflective of the increase in our trade receivables. Aging of receivables remains solid, with debtor days remained exceptional at 38 days, continued focus on the collection of debtors and driving these days down remains at core of this result. We're still in a strong position to undertake future acquisitions. This has been estimated to be approximately $40 million, based on maintaining a gearing of less than 1.5x EBITDA. Our current net debt-to-EBITDA ratio is 0.67x. We are forecasting an increase in capital expenditure through the second half of this financial year and into the next financial year. This is to support our investment into our systems and processes to continually improve our service delivery internally. We've estimated this to be in the range of $2.5 million to $3.5 million in financial year 2022. I'll pass it back to Ross now to provide an update on our strategy and future outlook.

Excellent. Thanks very much, Megan. And as you've just heard, our solid results for the first half of the year, which is great. So I just want to spend some time to take you through the strategy, but also touch on our outlook as well. And as I said previously, the strategy, I've been a new CEO and there is more how we evolve that strategy, and that the strategy to date has really delivered for the business. So with the leadership, we will be getting together in March and April to really review the strategy and determine how -- what is the next evolution as we move forward. And I'll touch on some of those key points over the next few slides. So I wanted to introduce here our complete talent solution, which is made up of 4 elements. So the first is around advisory and management. And we are providing these services in a number of the divisions at the moment. But part of the strategy is looking where we can provide these services in all the divisions as we move forward. So advisory management is around that front-end business planning. So it's getting in early with our clients and helping them identify what are those resource plans that they require in order to implement on their strategy in order to roll out a project like an ERP project. So we have our project partners business at the moment, which is an IT consultancy that's doing exactly that for a number of clients across the country. And then there's the [ baton pass ] from the advisory team to our staffing services, which is made up of our permanent recruitment, our contracting and our business-to-consumer solutions. And then we have upskilling. And this is really providing that sustainable model for our clients, where we can provide training, whether that be micro-training or longer-term training to really upskill and help them fill critical roles or high-demand roles that are just challenging to find. And clearly, at the moment, with the lack of resources across the country, they're now upskilling piece and hiring people on potential rather than having done the job for many years. It's becoming more of a focus for our clients as we move forward. And then all of those areas, it will be supported by technology. So technology-enabled services for the business. So in order to cement that concept, I did want to use technology as an example and being one of the largest talent-technology-solution providers on the East Coast, we are seeing our clients come to us requesting support across those 3 areas. So as I said we are project partners in advisory space and they are providing solutions, whether that be in the ERP side or whether that be supporting companies in order to bring in more remote technology infrastructure, which is obviously being fast tracked through COVID. So our project partners team then pass on to our Halcyon Knights team if there's any requirement for permanent resources for our clients or whether the clients just need contracting resources for a period of time to roll out those projects. And then on the upskilling side, we've recently been working for a number of banks, financial institutions across the country who have been asking us to support as they look to change their model to be more online than what do they do with their bank tellers. And we've been helping them with the solutions on how to upskill those bank tellers so they can be utilized on some of the technology programs in the business. It's all about our sustainable model and making sure we have that throughput of candidates coming through. So I just wanted to introduce that talent solution, and as I said it's one that's been in the business, but we haven't defined it in this diagram before. And as we move forward for future presentations, then we'll talk more about this in the evolution of the talent solutions model across the business. So the next key strategic point is around cross-selling. This is really the low-hanging fruit for the business. How do we cross-sell services by leveraging existing client goodwill? It's a busy slide, but it's a clear slide as well, and it really shows across our 4 disciplines now with Paragon with that finance and business services, what are the sectors that we are currently operating in, which is the black tick. And then where are those growth opportunities to leverage the client goodwill that we have to then introduce other disciplines. So there's a lot of work that's been done already in this space. And the key here is to transfer that knowledge across all of our staff. So 550-plus staff across the business on what other disciplines are we providing. And that calls action to staff to ask them to introduce those services to their clients and leverage that goodwill. And that was a big part of bringing the Paragon Group into the organization -- is really -- that finance and business services is needed across all of our sectors. All clients need accounting support, just like all clients need technology support as well. So as you saw last week, we had the pleasure to announce the acquisition of Paragon Group. And as I said, the key strategic driver there is cross-selling. It's a solid business, a really strong leadership team. And then the buildup to signing the deal with Paragon Group had a lot of discussion around that growth plan. And there is so much energy for our leadership and their leadership and how we collaborate and really drive the growth of the business moving forward. So EBITDA contribution is expected to be $4.3 million annually and looking for a contribution in the second half of this financial year, $1.5 million. I also wanted to take the opportunity today to introduce our shared value framework. This is a framework that will evolve over time. As I said, wanted to introduce and introduce the concept that it shared value for our people, our clients, our investors and the communities in which we work. So this isn't about giving a check to a charity. It's about supporting the community, but with commercial enterprise that really is sustainable as we move forward. And as you can see from some of the highlights there, really brings that shared value concept home. So if you look at Pillar 1 with First Nations, over 9 months ago, we set partners on country. And this is a joint venture with a number of orders across Queensland on how we can provide resources into key projects, including defense projects like Shoalwater Bay, which is the Singapore venture with the Australian defense force but also key infrastructure projects across the country. And over a 12-month period, we've provided employment for over 600 candidates, which is a fantastic result for the business, and we're very proud of that joint venture. On Pillar 2, in sustainability, 5 million trees planted over the past 12 months through our Timberwolf business. And recently, they just picked up a carbon credits project for a client as well, which again, is great for us to be involved in projects -- sustainable projects like that. And then on Pillar 3, see a number of initiatives there, including our Women in IT online community initiative that is run through our Halcyon Knights business with over 11,000 followers. So great initiatives that are practical and really providing a solid impact, again, to our staff, to our clients, to our investors and to the communities in which we work. Outlook remains strong with PeopleIN continuing to support its client's response to their talent needs. So at low levels of unemployment and higher turnover of our clients' employees, which is driving demand for our recruitment services and our complete talent solution services. Also with the international borders opening, this will provide us access to more clients which will drive further organic growth. And given our size, it's a real opportunity for us to capitalize on that size, capitalize our balance sheet to really fast track bringing those candidates into Australia and meeting the needs of our clients. Wage inflation for us will drive higher margins given how we engage with our clients and our business model. And we don't foresee any short-term impact as a result of the elections coming up or any regulatory change. And we will continue to manage COVID as we have done over the past couple of years and really built up resilience in the business. And again, drawn upon our diversification across sectors, but also geographically as well to overcome -- continue to overcome any challenges. So our strategic focus, as I said, we'll come together as a leadership in March through to April just discuss what is the next 3 years looks like, but what is the current focus for the organization. The first is around that international talent, how can we fast track that talent coming into Australia and a number of initiatives that we are looking at, including the Pacific Australian labor mobility scheme, so the PALM scheme and signed up to a pilot there, which we are launching across the business. Cross-selling, as I said before, low-hanging fruit for the organization to drive further organic growth. And there's a real appetite from our leadership to really get to know what are we doing within the people in a family and how can they help by leveraging the goodwill that they have with their clients to introduce other disciplines. That investment in upskilling, we see that as key to make sure we have that sustainable talent candidate pipeline coming through. We'll extend our federal government work, which includes leveraging the GMT acquisition that we made in the back end of last year. And as Megan said, we continue to drive efficiencies across the business by implementing systems that really provides better visibility around data, but also that automation of low-value processes, so that our staff are involved in those high-value processes. And we've got a solid acquisition pipeline with which to execute on and there is capital there that we can leverage, as Megan said, around $40 million. Some of the key areas that we will focus on in the acquisition front of the technology upskilling and how do we fast track that international recruitment, particularly to support food services, which we see as a strong growth sector, and also extend our government work as well, as I pointed out earlier on, 8% mix up of our net revenue. So again, we want to balance that out further over the coming years. So just confirming our key messages, so solid organic growth, a 10% contribution of revenue and EBITDA, favorable market conditions looking forward, got a healthy acquisition pipeline, strong cash flow, really good cash discipline in the business. And we're on track to deliver that estimated on consensus to normalize EBITDA range of $45 million to $47 million. So thank you very much indeed for your time. And now we'll take questions.

[Operator Instructions] Your first question comes from Kurt Gelsomino from Morgans.

Ross and Megan. I just got a couple of questions, if that's okay. Ross, maybe first, could you just talk to, I guess, the trend in underlying growth you've seen across the business in the second half yet to date relative to maybe the 10% organic growth you sort of achieved in the first half?

Yes. So obviously, you could just talk to the first month, but we're seeing hours pick up across the business, and we'd be expecting that organic growth to be -- for the second half to be in the range of that 3% to 5%.

Is that 3% to 5% half-on-half Ross, or?

Yes, that's right. So that would be on top of what we've seen already. So that would be for the second half.

Got it. And in terms of the M&A contribution in this first half, I think you flagged the $3.4 million. How much of that came from the Techforce and Vision Surveys acquisitions?

Yes. So the majority came from those 2 or majority from the Techforce acquisition.

There was only one month of GMT in there, so.

And we had 5 months of Vision Surveys as well.

And are you still expecting those acquisitions in I think it was maybe $7.8 million incremental contribution you flagged in August. So are we still expecting maybe what other sort of $4.4 million for those businesses in the second half?

That's right. I think we flagged at the time because of the growth trajectory of both businesses, so Vision and Techforce. So it's around that 40%, 45% coming in the first half and then the balance coming in the second half. So yes, that would be about right your numbers there, Kurt.

Awesome. And just thinking about maybe at the upper end of that guidance range, I guess it hit $47 million. I guess what do you sort of need to see from the operating environment over the second half? Do you think there's any, I guess, handbrakes to the upper end of that range at the moment?

Yes, that's right. It's always a bit crystal ball when you're looking at COVID. But where we are sitting now the market conditions have really improved for us. So we do have confidence in hitting those numbers. So we take the health sector, we've got elective surgeries in the private sector really kicking on and in the public space in New South Wales, they will be back to around 75% in mid-March, and then we see that just going from strength to strength. So as long as we don't see any other variants, which trigger significant lockdowns in key states for us, then we'll expect all of those major sectors to continue to grow. And also at the moment, have shortages in resources. So it's all about just finding the talent, which we have been able to do to date. And as I said, to drive further organic growth, we'll be more leveraging international candidates coming in as borders open but also that upskilling piece as well, our candidates that we have now into high-demand roles.

Yes. So when you sort of think about that maybe 3% to 5% organic growth half-on-half in the second half, is it really just the candidate shortage piece that's, I guess, limiting you to grow faster than that?

Further to that, then that would be an element of it. I think it really is all around the talent and finding that talent. And again, for us, the size that we are then we do have that advantage to leverage our size to really fast track those initiatives to generate accelerated organic growth. But I would say that 3% to 5% is a solid organic figure for the second half based on what...

Sorry, just maybe a final one too from me. Just on that international sourcing piece, I think you're working through in the second half. I guess, can you maybe provide any sort of feel for, I guess, how much you're looking to, I guess, bolster your candidate pool sort of heading into FY '23?

Yes. Look, it's a good question and probably a premature one of exactly what those numbers that we convert, but I can give you some data on what we've seen to date because we have had the marketing campaigns out in the U.K., in Ireland, in Canada for a couple of months now. And across the business, we've identified over 400 candidates that are willing and want to come here. One of the key things for us is around visas and been able to bring them in and just the processing time to do that. But as I said we've got 400 candidates that have identified that they want to come in across a range of discipline. So we've been happy with that marketing campaign. And -- but it's a bit premature to see what that will yield, given there's a number of factors there that we've got to work through, including getting them into the country and getting those fees as processed.

Your next question comes from Ian Munro from Ord Minnett.

Just with regards to the Halcyon Knights acquisition looks like the earn-out provision has increased. Can you perhaps just give us a sense of the timing of that earn-out in the second half and the quantum? And also from a qualitative perspective, interested in some of the things that are driving that outperformance?

I'd take that question. So there's probably 2 -- there were 2 tranches. One of those were settled in August this year, so fulfilling this half. And there's 1 remaining tranche that's left, which will be settled in August in 2022. So that $4 million that's hitting the P&L there relates to both those tranches. So one, we've settled already in shares in August. The main driver for that increase is definitely the performance of HK looking back at 30 June, they were starting to get an uptick. And the valuation around that is around those probabilities of them achieving certain earn-out targets that would significantly increase that probability based on their performance during this half.

And I'll just add to that Ian, around sort of the market drivers there. And it comes back to that cross-selling piece that across all of the sectors, our clients are looking at those digital transformation programs as the workers are looking for flexibility and working from home. So they're having to upgrade their infrastructure, which is then driving either demand for permanent recruitments or contractors. And we see that continuing to be strong for the foreseeable future.

And just with respect to the pricing environment, the comments around wage inflation effectively being supportive of margins. Is there any constraining factors in that translation from a perspective of increased wage inflation, skill shortage, obviously, but is there anything getting in the way of that conversion occurring?

No.

And then just a final one, please, perhaps for Megan. Just with the data days at 38. Is that maintainable? Or should we think about that as an over-the-cycle target for the business?

At the moment, we are seeing some movement in the aging, which is reflected in the notes to the financials that we're not predicting any significant deterioration. We are implementing processes internally, where we're very focused on that. But at the moment we're moving in a positive direction rather than a negative direction, and I can't foresee that changing.

[Operator Instructions] We have a follow up from the line of Kurt Gelsomino from Morgans.

Just I guess, Ross, around the M&A strategy and I guess the areas of focus. I think you sort of talked about potentially looking to expand into food services too. Maybe can you just flush out, I guess, the strategic rationale of that potential vertical you're looking at?

Yes, we just see it's a strong growth market, and it's one that we're currently supporting. But there's so much more potential in that space. So you're currently looking at 5% of our net revenue. But looking at the demand coming from our clients, it's an area that we can grow and grow quickly. So part of that is organic. So we talked about the PALM scheme. And bringing resources into support food services is one of those sectors that were tied to the PALM scheme. But it is an area that we could accelerate through acquisition and there is opportunities when we look at our pipeline to do exactly that, both domestically, but also that international recruitment and fast tracking those individuals.

Yes. Okay. That's interesting. And in terms of multiples for that sort of business, that again be sort of consistent with your 3 to 5x EBITDA target or where that scale would get?

No, that's right. That's 3% to 5%.

And I think I just got a quick follow-up. Just in terms of your balance sheet capacity, again, can you just remind me how much capacity do you think you have? And would you look to increase your debt capacity at all to maybe accelerate that acquisition pipeline?

Yes, it's $40 million that takes us up to 1.5. For the right deal, we could push to 2, but it would be for the right deal, which would obviously increase that capacity, but comfortable at the $40 million for the second half of the year.

Thank you. There are no further questions at this time. I will now hand back to Mr. Thompson for closing remarks.

Excellent. Thank you, and thank you, everyone, for your time today. I know you're all extremely busy. So I really appreciate you taking the 45 minutes out. And I just wanted to confirm the key messages again. A solid organic growth 10%, favorable market conditions moving forward, healthy acquisition pipeline and around 3% to 5% multiplier, strong cash flow, really good discipline in the business. And even what we're seeing in the first month or so of this half, that conversion is around about that at 110%. So as Megan said we see that continuing to be strong in the second half of the year, on track to deliver, that's estimated analyst consensus of normalized EBITDA range of $45 million to $47 million. So thank you very much, indeed. I hope you have a good weekend. Cheers.

Thank you very much. That does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you.