Robert Walters plc (RWA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Robert Walters Second Quarter 2024 Trading Update. I'm David Bower, Chief Financial Officer. And joining me this morning is Toby Fowlston, our Chief Executive. Hopefully, you've all seen the short statement we published earlier this morning. Before we move to Q&A, I'll make a few remarks around performance at the group level, before Toby touches on trading across our regions and our near-term outlook. Unless otherwise stated, all net fee income percentage movements are on constant currency terms. So looking first at group trading. Net fee income was down 12% year-on-year in the second quarter. That performance was reflective of 2 big drivers. Firstly, and what is now well-documented industry-wide, we continue to see higher markets globally rebase relative to the post-pandemic peak of late 2021, '22 and early '23. Secondly, and more specific to certain geographies, we saw macroeconomic turbulence and political uncertainty further dampen client and candidate confidence as we progressed during the quarter. The second of these dynamics is well illustrated in the profile of fee income we saw across the quarter. We continue to observe our typical quarterly profile, with May sequentially better than April, and June better than May. However, the degree of ramp-up through the quarter was reduced versus quarter 2 last year. As such, this drove a relatively weak end to the quarter, with fees in June 18% lower than a year ago. Across the quarter as a whole, we saw specialist professional recruitment net fee income of around GBP 72 million, which was down by 10% year over year. Within this, perm was down by 11% and temp, being our contract and interim business, was slightly more resilient, and down by 9%. Meanwhile, in recruitment outsourcing, net fee income of GBP 13 million was down by 23%. Turning now to group headcount and productivity. Notwithstanding the current challenging conditions, we remain focused on delivering the best outcomes for our clients and candidates, whilst maintaining tight cost discipline. People-related costs are around 70% of our total cost base, and group headcount of 3,625 was down by 5% quarter-on-quarter and down by 15% year-on-year. Whilst we seek to maintain our core muscle, that being experienced fee earners, we're also committed to ensuring headcount is appropriately matched to current demand conditions across our markets, hence driving productivity improvements. We are maintaining a data-driven, and therefore highly selective approach to replacing fee earner natura attrition, and we will continue to do so as we trade through these challenging market conditions. We have continued to enable proportionately more headcount to flow out of those markets where, conditions are the toughest, and/or where productivity since the peak has been lower than expected. Looked at on both placements and fee earner and a fee income per fee earner basis, we are seeing an improving trend in productivity across many of our markets, and we believe there is still more to be achieved here. Finally, looking at the balance sheet and cash. The balance sheet remains strong, with quarter end closing net cash of around GBP 49 million, excluding IFRS 16 leases, broadly in-line with our targeted level of minimum net cash. Toby will now take you through trading in our regional segments and the near-term outlook.

Thanks, David, good morning everyone. And I'm going turn first to Asia-Pacific. Net fee income was down in APAC by 9% year-on-year. And in the context of, obviously, an overall tough trading globally, it's pleasing to see a strong performance, particularly in Japan, which as you know is our largest single market, fees were up 7% there. But also continued improvement in Greater China, which was up 5%. It was here actually more the Mainland that offset the year-on-year declines in Taiwan and Hong Kong. Conditions in Australia and New Zealand were down 19%. That remains tough. And if we're going to benchmark that to the very height of the post-pandemic peak, indicators like job flow per fee earner, they remain the furthest away from these highs in ANZ more than anywhere else in Asia Pacific. And lastly, in Southeast Asia, we did see improved consultant productivity versus the end of 2023. However, time to hire has increased, particularly at more senior level. In Europe, where net income was down 13%, France, where fees were down 20%, already sort of muted client and confidence was obviously impacted by the recent political uncertainty. Fees in Belgium were down 8%. This is partly comparative to a very tough period in -- sorry, this is comparative to a strong performance in '22 and a tougher comparative in '23. Meanwhile, The Netherlands, down 5%, was among the most resilient of our larger European markets. Turning to the U.K. Net fee income was down 18% within which specialist professional recruitment fees were down by 14%. And though conditions remain tough, London, where fees were down 6% year-on-year, did register further sequential improvement, notably driven by our specialisms in accounting, finance and technology. Trading was weaker in the regions, albeit stable on the prior quarter. In our Rest of World segment, net fee income was down 12%. Conditions in the U.S. remain very muted, whilst we delivered a resilient performance in Mexico and we also saw fees uplift by 6% in the Middle East. In our recruitment outsourcing business, which enables organizations to transfer all or part of their recruitment needs to Robert Walters, fees were down by 23% year-on-year. Our client base today predominantly comprises financial services business, and though client confidence has moved off the recent lows in March last year, which you remember, saw stress in the sector related to various events, such as Credit Suisse, this is still yet to pull through into higher volumes. So in terms of our near-term outlook, consistent with when we last spoke to you shortly after the end of the first quarter, client and candidate confidence still remains muted, with a period of adjustment for the post-pandemic peak now longer in duration than previously expected. So mindful of our experience over the year to date, and in particular, indicators such as new job flow in the month of June, our near-term planning now assumes that any real material improvement confidence levels will be gradual and likely not occur before 2025. Given the quantum of the fee income reduction, the actions that we are taking on costs and productivity, although meaningful, do not currently fully offset the top line impact, but we continue to believe that the actions that we are taking leave us well positioned going into the second half of the year. So as you can appreciate, given all the market uncertainties we face, how trading develops over the second half is more difficult to predict than in the past. And as such, the range of potential outcomes for the full year is wider than we've seen historically. So in that context, we continue to focus on the factors within our control. We have a highly experienced leadership team and we are focused on furthering our medium-term plan to strengthen the business, and we're looking forward to setting out more fully at our Capital Markets event in September. So with that said, we'll be happy to take any questions.

[Operator Instructions] And our first question comes from Tom Callan from Investec.

Hopefully you can hear me. I've got 4 questions, if that's okay. So I'll just go sort of sequentially. So on France, please, could you just give us a bit more color as to what you expect to see there in Q3, mindful of the fact that we've got the Olympics coming up as well as the political uncertainty with the elections and stuff. So a bit more info on that would be helpful. And specifically maybe on sort of the interim business. I remember, sort of historically, that's always been a pretty strong performer in France, so would be helpful to sort of get sort of a split between sort of interim and perm in terms of what you expect to see there moving forward. On Germany, clearly, some of your peers have reported a pretty difficult market in Germany in recent quarters, especially on the contract side. So would be good to sort of understand what you guys are seeing there. I appreciate it's not a particularly material component of Europe for you, but again, it just would be helpful for sort of context. On Japan, clearly, a very strong sort of Q2, noted that the comments you just made around sort of natural sort of headcount attrition. But clearly, it's a really strong region and, therefore, would you potentially be looking to selectively sort of hire into that market if conditions continue to remain favorable? And then lastly, just on branding. I think I saw on LinkedIn last week what looked like a pretty sort of fundamental brand refresh, bringing different parts of the business sort of together under one banner. I just wondered if you could provide a bit more color on that as well.

Sure. Thanks, Tom. So I think we've got France, Germany, Japan and then rebrand. So maybe David can cover France and then I'll cover Germany, Japan, the rebrand.

Thanks, Toby. So yes, we've got France -- we were already planning for certainly a quiet Q3, given the Olympics. Real sense that with the Olympics in town as it were, in Paris and across the country, that a lot of businesses would be otherwise engaged, otherwise focused. So we were already planning on a slower Q3. I think the election and the challenge that's bringing probably exacerbates that and makes the challenge in France probably a little bit harder in Q3 as a consequence. So we'll see how that plays out. With regards to interim, particularly versus the rest of the business, we don't obviously split out the individual disciplines by country, but it's fair to say that our interim business in France is very strong. It's got a really good leading position and, more importantly, has real critical mass. So that's holding up well and it's a good proper business. It's one of those areas, perhaps back to your piece around the headcount, is one where we have actually increased heads over the last 12 months in response to its strength and resilience.

And then touching on Germany. So I mean, Germany was fairly resilient for us, down about 4% in the quarter, so it did outperform our overall European performance. You might recall, we opened an office in Berlin during 2022. And so that, combined with our offering in Düsseldorf, Hamburg and Frankfurt, we believe we're well placed to serve the Berlin tech, fintech and start-up scene. But obviously, we're very aware of the peer commentary. Our exposures in Germany are quite different to some of our competitors in that we're not particularly heavy in automotive or general manufacturing sectors. So I'd say, overall, resilient performance in Germany, but, obviously, is borne out by the fact the likes of France, Netherlands and Belgium are referenced in the statement. We do have larger businesses there in our European segment and what we believe is a well diversified portfolio. Japan. So as you know, it's globally our biggest business. It's highly differentiated. We are very well known in that market for serving multinational enterprise businesses. Looking for bilingual and, in particular, English-speaking professionals. And we've built a very competitive advantage in Japan over time. So our performance reflects that. We saw pretty broad-based growth across both perm and temp during the quarter. Osaka, we are going to continue to build in headcount. And that headcount number has actually increased, which is our growing business, obviously, outside of Tokyo. Tokyo, we will also continue to build in headcount, but we're just keeping a very close eye to ensure that we have the productivity gains. And then lastly, Tom, you touched on the brand unification, more of that at the half year. But you're right, obviously, that's happened. That's over LinkedIn. It was the right thing to do. We had 3 brands: Robert Walters, Resource Solutions, Walters People. It's all about ultimately making as simple as possible for our customers. And we've been through the last 9 months of preparing for that. There'll obviously going to be efficiency gains from that, but most importantly, it's about bringing together our recruitment, our agency business, our outsourcing business and what is our fledgling but growing advisory business, and they will now all come together winning as one as Robert Walters.

Our next question comes from Sanjay Vidyarthi from Panmure Liberum.

Just one for me, please. Can you give any indication of what the -- what proportion of the reduction in headcount was from non-fee earners in H1 and how that might evolve in the second half, please?

Sanjay, overall, headcount down 5%. There hasn't been a particular -- both proportionately on the non-fee earner piece as we talk about the efficiency of our sort of support functions as well as the productivity, efficiency within the fee earners. We don't, as you're aware, historically split out sort of non-fee and the fee earner mix. But it's fair to say that such a high proportion of the fee -- of the headcount reduction within the non-fee earner space with the average of all of it being 5%.

Would you expect that to...

Sanjay, sorry, just to add to that. Of course, we're looking at it market by market as well. So that's an overall number. Clearly, that number is higher or lower depending on the performance within each of our markets.

Okay. And would you expect the same kind of trend in the second half?

Yes. We will continue to focus on sort of balancing the headcount appropriately to the demand we see, and that's obviously for fee earner with a job flow but then also making sure that the support functions and the fee earner support functions are appropriately based and efficient. Yes, more to come in H2.

[Operator Instructions] And our next question comes from Steve Woolf from Deutsche Bank.

Just a couple from me. If you can give any comment about the time to hire and whether that's more on the interview side, sort of nervousness by candidate, I guess, versus the requirements by companies. Also, the job flow into late May and then into June itself. Just any thoughts or comments whether that is purely new jobs coming to market or also there's evidence of sort of mandates actively being pulled from the market itself. And then any comment you've got around about fee rates at all from maybe where they were 6 months ago, 12 months ago. So any more color you can give on that.

Sure. Steve, I'll cover time to hire and job flow, and I'll let David maybe touch on fee rates. Time to hire, so -- I mean job flow in a lot of our markets has actually held up reasonably okay, not all markets. Australia is a good example where we've seen a material drop in job flow. And actually, when we think about all the components that we have, which is, obviously, inflation is still there, we have low unemployment, these all ingredients that we would normally welcome. The confidence continues to be the challenge. So it's very frustrating. We're getting more counteroffers than we've historically seen in a long, long time. So the importance of actually close relationships with both clients and candidates to get that conversion from interview to placement is critical, and that's the real challenge area at the moment. So obviously, that continues. Job flow I mean, really, when we look at the exit rate in June, which is 18%, it's partly a product of job flow, perhaps in some markets that we perhaps didn't see coming through May, but I still think it continues to be this simple lack of confidence of clients and candidates. Everybody is obviously seeing what's going on in the world, and until we start to see that confidence pick up and we start to see candidates actually accepting offers, we're going to continue to be in a relatively challenging market.

And, Steve, with regards to fee rates. Overall, they're holding up really well. Obviously, it varies by market and by discipline. But overall, fee rate is holding up well. We're not seeing any markets come under any particular pressure on fee rates to the downside. And in actual fact, we are seeing some increases in some markets. So I would say fee rates are, on average, are sort of flat to slightly up. Certainly no significant downward pressure.

And it appears there are currently no further questions at this time. With this, I'd like to hand the call back over to Toby and David for any additional or closing remarks.

Nothing more from me. Thank you. Thanks very much.