Peoplein Limited (PPE) Earnings Call Transcript & Summary

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PeopleIN Fiscal Year '24 Half Year Results. [Operator Instructions] I would now like to turn the conference over to Ross Thompson, Chief Executive Officer. Ross, you may begin your conference.

Thank you very much, and welcome, everyone, and thank you for attending PeopleIN's first half results for financial year '24. I'm joined by our new CFO, Adam Leake. So as you're all aware, we're a major people business and our purpose is to inspire excellence in our people, both our internal staff and also the 15,000 people that we provide employment to every week. So now to the highlights of our results. So we've continued to grow our revenue, which is positive, but earnings are down due to a shift in contract worker mix and also permanent recruitment being down, especially off the high of half year financial year '23. Revenue was $602.7 million, 1% up on last half. Normalized EBITDA is in line with consensus at $20.3 million, which is down 37%. Our net debt to normalized EBITDA is 1.86x, and that's based on our bank covenant calculation. Normalized EPS of [ $0.109 ] and a fully franked interim dividend of $0.03. This equates to a 4.8% yield, which is similar to the full year and really reflects a prudent capital management approach taken by our Board and the executive. And our return on equity show a solid of 17%. Now a bit more detail on our highlights. As we flagged at the AGM and our full year results, challenging economic environment, and that's continued in H1 '24 driven by high installation and interest rates and in turn, low business confidence generally across Australia. As I said previously, we've continued to grow our revenue, delivering $602 million, up 1% compared to H1 FY '23. And this is attributable to our strong sales culture and ability to take market share, especially in resilient operational sectors like food services and infrastructure construction, albeit lower margin [ roles ], which has had an impact on our EBITDA, which is down 37% to $20.3 million, primarily due to this shift in contract mix, but also a significant reduction in permanent recruitment, especially of historic highs in H1 FY '23, and that's really been driven by low business confidence across Australia. As planned and for a couple of years now, we continue to drive efficiencies across the business by leveraging our scale and streamlining systems and processes and our costs are down $4.7 million on H1 last year. Sustainable capital management with low levels of debt gearing and adequate covenant headroom for net debt to normalized EBITDA of 1.86x and evolution of our banking facility, and we've appointed CBA, as our new bank, which will enhance our capital efficiencies, allowing for future growth. As you're all aware, there's been a lot of noise in the media around the new IR industrial relations changes, but on balance, it presents an opportunity for PeopleIN, and I've talked about this previously. What these changes will do is that will add more complexity, especially for our small to medium clients to deal with, and they don't have the internal infrastructure and capability to deal with this complexity, so they'll look to businesses like PeopleIN large, reputable staffing businesses to solve those -- that complexity for them. Let's say, on balance, we see that as an opportunity. So given our sector diversity, our strong sales culture and our efficient operations, we are confident we'll quickly return to a strong growth footing when interest rates stabilize and business confidence rebounds. Now I'll just delve into the results in a bit more detail. So this slide compares our performance between H1 FY '22, '23 to '24, and there's 2 main call outs. The first is the exceptional performance in H1 FY '23, and the majority of our markets were running hot. The second point, I want to call out is, we've returned to FY '22 performance in a really challenging economic conditions. And we're still delivering a profit, a solid profit, and this is due to that predictable baseload of operational workers, albeit at a lower margin. And this second slide, I'll go through this point around baseload in more detail. We're growing this resilient baseload. So I'll pick up on the graph bottom left, which is our industrial business, and this graph shows that billable hours, and that's over the past couple of years, so H1 FY '22 through to H1 FY '24. The green is all of our industrial businesses, apart from FIP, which is represented in black. So you can see those industrial hours are really stable over the period, and that gives us predictability of earnings within our ISS division. And then pleasingly, when you look at FIP, and we've actually used pre-acquisition numbers for FY '22, H1 and FY '22 H2 to show the growth in the FIP business. So significantly growing, and this is in the food services space. So it's resilient operational roles that provide that predictability of earnings. So a really solid acquisition for the business. Then we'll go to the chart in the middle, so that's our healthcare and community business. So the gray is our government work, and the green is our private work. So overall, hours are down in H1 FY '24 by 9 -- just over 9%, and that's really been driven by a decrease in private hours. But our public health and our community hours are up, and you can see that slight increase there. It's a really good sign. However, public work and the community work is at a lower margin, but it's stable and it's predictable. And then going to the last graph on the far right, that's our professional services contract hours. And again, to highlight that high in H1 FY '23 and then coming off in H1 FY '24, but still up on what we saw in financial year '22. So what's the overall takeaway from this slide, we're growing our predictable baseload of resilient operational work, albeit at a lower margin. But when business confidence improves, we'll be able to quickly return to growth, and we'll have a higher baseload, which the higher-margin work will come on top of that. And also, we've got a lower cost base as well. So that gives us confidence that we can return to a strong growth footing when that business conditions, business confidence improves. Now I'll hand over to Adam to take you through the finances in more detail.

Thank you, Ross. We'll now look at our financial performance for the half year. A big thank you to you and your executive group has certainly allowed me to hit the ground running ahead of this presentation. As Ross has outlined, the business has performed well in changing economic conditions. Consistent baseload demand for labor hire has seen revenues for the 6 months to December 2023 grew to $602.7 million, up 1% from this time last year. This result is underpinned by the continued demand for our industrial and specialist services resources, in particular, our food industry expertise under the FIP brand. Revenues in our health and professional services brands have both come off from their highs. As was flagged in our FY '23 full year results and at the Annual General Meeting, the favorable economic conditions of FY '23 have reduced demand in these sectors. These business conditions have also seen clients' trend towards lower rate and lower margin labor hire activities. Our normalized EBITDA for the half was $20.3 million, down 37.7% from the previous half and down $8.5 million from the second half of FY '23. This results in a statutory net profit after tax of $5.7 million. A full reconciliation of statutory profit before tax through to normalized EBITDA is included in the appendices. Focusing in on some of the components of our results on Page 8. Total billed hours reduced slightly from the highs of the first half of FY '23, down 1.2% to 10.9 million hours. Industrial and specialist services being the strongest area of growth, up 1%. Unfortunately, the business has seen a reduction in net margins across all divisions. This has been a combination of higher client demand in lower rate operational roles away from higher-margin skilled work. Growth has continued in our lower-margin business units of industrial and food away from the higher-margin units of health and professional services contributing to a reduction in overall gross profit margins for the half. Our most significant impact has been the reduction in permanent recruitment in the half. This decline was flagged in the previous half result and has continued to fall from the peaks experienced in the first half of FY '23. This has contributed a $6.9 million decline in earnings for the period. Changes in government policy have also seen a reduction in available employment subsidies. The business has been quite proactive in its operations, finding ways to reduce its overhead costs in the economic environment. This has seen the reduction of overhead costs across most categories by $4.7 million in the half. As we move to our operating cash flows, our strength in our operations continues to be its cash collections and its use of cash. As flagged at the Annual General Meeting, despite the lower earnings for the period, cash collection to normalized EBITDA was in line with our [ 90% ] guidance. Our debtor days remained steady at 31 days, reflecting the quality of the clients in the portfolio. A couple of items I would like to call out here. Many of you are aware of a $9.1 million set of payments that missed the [ 3rd June '23 ] cutoff and increased our cash balances. These were paid in this half, reducing overall balances. There was also call out made of $14 million of additional receipts on the 30th of June 2023. This is a bit of an anomaly in the sense that most of the [ cedes ] occur on a Friday, thus inflating this FY '23 result. After recognizing that impact, our collection is in line with our target levels. Also, there is a material difference between our tax paid in cash and income tax expense for the half. The cash paid is based upon the installment rates from last year's profit activity. With the lower earnings in the half, these installments have now been revised down significantly for the next 6 months and will favorably assist cash balances for the rest of the year. With lower earnings across the half, we have ensured -- we ensured we maintain sustainable and appropriate capital management strategies for the Group. Net debt levels increased to $80.3 million at the end of the half, marginally higher than the previous trends. This increase was due to payments for deferred consideration in the FIP acquisition. Overall net debt to normalized EBITDA is at 1.86x. This is a level that the Board remains very comfortable with and conservative to our peers. Further, this is well below our covenant levels. Since joining in November, I've had the opportunity to review our banking facilities to ensure they are the right fit to the Group. I'm pleased to announce new banking facilities have been negotiated with the Commonwealth Bank. These facilities give us further capacity to grow, unlock some capital and operational efficiencies and further improves our covenants. This further derisks capital raise concerns and allows even greater capital management strategies to the Group, as the business conditions improve. And with this, I'll turn back to Ross.

Great. Thanks very much, indeed, Adam. So we're well positioned for growth when business conditions and in turn confidence rallies, and we've got a couple of graphs and a table on this slide. So on the far left, we've got the NAB's latest business conditions report, and you can see that decline from really January 2023 to where we are now, and conditions are now more the long-term average. So we need to see that pick up again, get confidence back in the market. And then when we see that, we'll get back on a growth footing, and I'd say we have confidence that we can return to that growth footing quickly. And the reason why we highlight quickly really goes to the terms that we have with the majority [ of ] clients. They are master service agreements, so they can be turned off quickly, but it can be turned on quickly as well, and that can change in the space of 1 week. So say, when that confidence returns, then we expect to see that pickup in hours or pick up in permanent recruitment and particularly in those higher-margin areas, where we've seen the decline in H1. The next graph in the middle is from ABS and that shows job vacancy, so still high, still a lot higher than 2019. There's a lot of vacancies, there's a lot of demand there. But because of this lack of confidence then we're seeing a delay or a pause on processes until those conditions improve. But when they do, then there is a built-up demand for talent, built-up demand for people, we have the people to be able to supply, so again, supports us getting back on that growth footing. And then the table on the far right, that breaks it down into sectors and where you see those more [ growth side ] demand sectors than we have exposure to those sectors. So we're well positioned for growth when conditions improve. Then a couple of key takeaways. The first sustainable capital management. Adam's talked about that in a lot of detail this morning. Our net debt to normalized EBITDA of 1.86x. So plenty of headroom for us. And with a new bank facility as well, it will support future growth. Second point I want to make around IR changes, a lot of noise over the past 6 months, but we believe this is an opportunity for a large retro staffing business like PeopleIN, given the complexity that this will bring, particularly around casuals, and we are set up. We have leading infrastructure to really support our clients to navigate and solve that complexity. And then last point around that well positioned for growth. Given our sector diversity, given our strong sales culture, which has proven, it's a tough market out there, but we're continuing to grow our revenue, albeit lower margin work, but the sales teams are out there and hungry. We're driving efficiencies and Adam talked about that as well, $4.7 million down in the half cost base. We're confident that we'll quickly return to a growth footing when that business confidence rebounds. So thank you very much, indeed, for your time this morning, and we will now move to Q&A..

[Operator Instructions] Your first question comes from the line of Ben Wilson from Wilsons Advisory.

Ross and Adam, well, though it looks like conditions have sort of stabilized a little at the Group level. Just firstly, the baseload hour slide was very helpful. Good to see that. Slightly hard to sort of prioritize the questions, but I might just ask about the cost out. Can you just expand on that a little bit. Firstly, I'm pretty sure it is an underlying cost out given the normalized EBITDA bridge slide, but can you just firstly confirm that's unaffected by the sort of statutory gain on the fair value movement. And then sort of more importantly, can you just elaborate or break that cost out down a little bit by segment. It looks like you've consolidated management in the health and community segment, but if you can just sort of expand a little bit on how sustainable that cost out is?

Yes. Thank you, Ben. You're right, the $4.7 million cost out that Ross point out -- Ross and I pointed out, is for the 6 months. It is a -- coming across all our different categories. So this includes all discretionary areas, but also much more structural areas. We are becoming more efficient in people terms, more efficient using all of our different resources. As for sectors, again, there across all 3 sectors, our ISS is obviously our biggest sector, so it has probably seen a higher proportion of those costs. But the change in management structures were put in place has seen a much more operationally efficient organization. So we're pretty confident they'll continue on into the future.

Yes. Ben, and if you go to the appendix, we've got a slide there on the health business and our professional services business, and that talks more around those structural changes. But for both divisions, we now have a national leadership team that sits across a number of brands. And as Adam said, [ that points ] is driving efficiencies, but it's also driving our cross-sell initiative as well. You've got a monthly management meeting of those leaders around the table that represent a number of brands, and there's a lot more sharing, a lot more collaboration in our client engagement initiatives, et cetera. So benefits to the cost base, but also benefits at the revenue line as well.

Your next question comes from the line of Liam Schofield from Morgans Financial.

Just on the underlying adjustment, just a write-off of receivables on the restructuring cost of $3.5 million there. Can you just talk us through those 2 items?

Yes, of course, Liam. So let me start with the write-off of receivables. So when we acquired the FIP business sort of just over 12 months ago, there was a number of client receivables. Receivables, how do I say it, receivables that we had to collect back from the customers, from the -- they were sort of written-off as part of the acquisition. We saw this as a problem when we acquired the business, but that is fully recoverable against the sellers of FIP. So what's happened is we have written-off those client receivables, but we've also taken an equal and opposite deduction in the deferred acquisition payment that was required to be made. On the restructuring costs -- yes. On the restructuring costs, yes, there's circa $1 million worth of restructuring costs. Some of that -- about $100,000 of that are residual costs coming out of the project [indiscernible], but most of it is people-related costs that happened earlier in the year to help try and drive those structural changes and structural cost outs that we received.

Your next question comes from the line of Ian Munro from Ord Minnett.

Ross, Adam, just in terms of the commentary in your presentation sort of few references back to sort of FY '22. Are we sort of thinking that, that is more like a normalized year for PPE plus obviously, what contributes once conditions get back to normal? And just with the new banking facility, can you please just help us understand what, if any changes in covenants included in that?

Yes. Thanks, Ian, and I'll take the first part of that. Look, we [ make ] the point around FY '22 and more of that point that we reduced to those -- that level of performance in a really challenging market. But that's my comment isn't flagging what's that sort of load moving forward or the performance moving forward for us. It's still too early, as we're working through, still more opportunities for cost efficiencies, for opportunities, for revenue growth as well. So not flagging that as the base performance for -- under a more stable market condition. The point is more reduced to that in a very challenging market. And I'll hand to Adam on the covenants question.

Yes. On the covenants, look, we've worked with the Commonwealth Bank to come up with a set of covenants that are not materially different to what we have now, but are much more flexible, much more in line with the growing business that we have, more modern in their interpretation of how we've approached things. So each of those sort of give us a little bit more headroom, but the material different -- the materiality or the material issues around the total size of debt and the covenant levels haven't changed significantly.

And just with respect to the level of cost taken out of the business, so I haven't seen much in terms of the outlook for the second half in terms of quantitative guidance. But just curious to how you kind of been tracking post balanced phase and some of the gives and takes in the outlook for the second half?

Yes. Look we've [ deliberately ] haven't given any quantitative guidance on the second half of the year. It's going to continue to be challenging. I don't expect that business confidence to pick up until we get into the new financial year at the earliest. January is always a challenge month just because of people on leave. So it's always hard to sort of take that as a base and then form a view for the next 5 months. We're a couple of -- we've got a couple of weeks of our data for February. And in some areas, we've seen a pickup, but in some areas have been impacted by the wet weather on the East Coast, whether that be our outdoor work in construction, et cetera. So we're very much focused in on that and obviously driving performance, but we're not at a point to give any formal guidance on that for the second half of the year.

Your next question comes from [ Mariam Lee ], who is a private investor.

I hope I can have 2 sort of related ones. Just an ordinary person, so they'll probably see me [indiscernible]. Anyway, you've actually done pretty well controlling expenses better than I expected. One relates to the occupancy being down. Is that because of being able to combine places of work or something to have fewer offices?

That's right. That's been a plan for the past couple of years. It helps collaboration as well. That wasn't something that we've just started to focus on because market conditions have been challenged. It's more part of our overall plan to drive better collaboration, but drive efficiencies across all of our brands. So yes, absolutely, that's part of that cost efficiency that we've called out this morning.

Right. And the other one, I hope, you spoke to you on the phone a few months ago about the -- what the depreciation and amortization referred to, and you said we didn't have a lot of capital expenses, but it's referred a lot to computer programs and software and trying to get some of the businesses that you've taken over up to speed with that. And I sort of noticed also that you've got software expenses down. And sort of how does that all fit in with the businesses that you're trying to get up to speed on computer systems and get the software [ spend is ] down there?

Yes, and absolutely still committed to that program of bringing all of our businesses onto a common platform that the -- an accounting system, a payroll system and a workforce management system. We are getting to well, the tail end of that program of work. So we've seen a reduction in the cost still a significant investment for us that we have seen a reduction, as we really narrow in and drive efficiencies through that team that is delivering the project. But it is key, number of businesses that we've acquired. They've brought their own legacy systems that are coming to the end of their life. But also, being on a common platform, a more contemporary platform, will also help us drive revenue growth as well.

Your next question comes from the line of Ken Wagner from Petra Capital.

Ross, Adam, just returning to your waterfall chart on Slide 8. The $3.4 million reduction from contract rates, was that across the board? Or was that in specific areas? And if so, which areas did you see that sort of rate reduction coming through? And also, was that consistent across the half? Should we expect a similar number in the second half?

Yes. That $3.4 billion is coming from all 3 different business verticals. So we are experiencing contract mix to lower-margin clients in all 3. So it really is the shift from the higher, more skilled workers in ISS to more hours going into the food area, which are at slightly lower margins. In health, we talked about Ross carefully, talked about, a shift away from the public hours are staying quite stable, in fact, growing slightly, but private hours are coming down, and those private hours are slightly higher margins. And we are seeing a shift in professional services, the really high-end IT worker is coming down and being less hours in that area into a much more stable baseload of professional services hours. So it's really just the mix of hours happening inside of each one of those divisions. It's been pretty stable. It's probably stabilized a little bit more in the last couple of months. So we did see probably the bigger reductions earlier, but it has come down each and -- has come down across the period.

So it's not coming from charging lower rates just to individual customers, it's more a mix question? Is that...

Yes, absolutely.

Yes, absolutely. It's more just a client base mix, it's not a reducing cost -- reducing price conversation.

Right. Okay. So I'm just not sure how much goes into divisional mix and how much is in contract rates and also the permanent one you mentioned as well that sort of would have thought that would be ticked up in the [ 6.9% ]. So I guess, it's also lumped together.

Yes. Ken, just to clarify, with Adam's points on professional services, that's the contractors that we've got in professional services and yes, perm has picked up in that [ 6.9% ].

Right. Okay. No, that's helpful. And I guess, similar question on employment subsidies. Do we expect a similar number second half for the [ 3.9% ]?

Yes. Look, with that employ, we have reduced number because the changes in government took effect in the second half of the year. What exactly that number is, we still start working through that. But yes, the biggest impact would have been in that first half. And so this is a government change that was made and had an impact on us.

Your next question comes from the line of Ben Wilson from Wilsons Advisory.

Ben [indiscernible] on for a second one.

Yes. That's right. Keep a good man down. Just one follow-up. I promise it won't be a third. Just on the health and community side and the shift more towards the government sector. I understand that the private hospital sector has been looking to sort of bring more nursing recruitment in-house. Is that likely in your view to be a sort of permanent shift? Or is it more of a temporary sort of cost out initiative on their part that might unwind sometime soon?

Yes. Ben, look, it's temporary. From my side, there is such a shortage of healthcare workers in Australia. So every tool or support, you can get hold off if you're running a hospital to bring those workers in. And I've spent the last few months engaging with those private health business as well to really understand what they are looking to do strategically, both in the short term and longer term. So I think, again, comes to business confidence that private health hasn't been immune to the slowdown in the economy here. So what we've seen in that first half is where they can just slow on spend and especially given that all the cost items are up, but we expect that to come back. And again, we're growing our government work, so we're growing the baseload. So when that private health work comes back, then we'll get back on that growth footing and be in a better position than we were going into this economic downturn.

Thanks, Ross. And sorry, just also on the health and community side. Can you just expand on the U.K. recruitment pipeline? Or maybe you said the [indiscernible] campaign looks like it's a good campaign, but I think by people in its own admission, was probably rolled out a little bit to late last year to sort of capture that winter or post winter [ exiters ] from the U.K. Do you think you're positioned to get a much better integration inflow this year this time around?

Yes, absolutely. And whether that's meeting government demand or private sector demand, there's a long-term shortage of healthcare workers and community workers. That's not going to change. And Australia is not unique, either you have Canada, U.K., the U.S., all vying for those resources. So the fact that we're investing in that international recruitment and particularly the U.K., where what we found is there's a lot of healthcare workers that want to come to Australia, better conditions, better pay. So we've got a solid database, fresh database now of those candidates, over 7,000 people have expressed interest coming across. So when we see that demand pick up, we're well positioned, and I believe [ UCLA's Aussie ] is industry leading. So it will give us a competitive advantage over our -- the competition. But also, it's been a really good discussion point with those private healthcare companies that I've talked about previously. I've been meeting with them and one of the leading discussions is how we can help them with that international piece because some of them just can't afford to run international programs. We've done that. We've got a good brand, and we can actually help them deliver on their international recruitment objectives as well.

Your next question comes from the line of [ Mariam Lee ], who is a private investor.

Hello, again. Just about the cash flow being negative, that's not a question of bad debtors, I suppose. Is it just a question of delay because it's over Christmas or something?

Yes, you're absolutely right. We haven't had any significant write-offs in our clients and our client debtors. The first 6 months are seasonally a little bit slower, and we get that Christmas delay in lower -- slightly lower work in December and collecting those funds. So no, it's just a bit of a seasonal thing. First 6 months is always a little bit lower than the second 6 months.

And we have no further questions in our queue at this time. And with that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.