Robert Walters plc (RWA) Earnings Call Transcript & Summary

Hello, and welcome to the Robert Waters Q3 Trading Update Call. My name is Saskia, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, David Bower, to begin today's conference. Please go ahead, sir.

Thank you, Saskia. Good morning, everyone, and welcome to the Robert Walters Third 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 seen the 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 regional segments and then our full year outlook. Unless otherwise stated, all net fee income percentage movements are in constant-currency terms. As you will have seen, group net fee income of around GBP 80 million was down by 12% year-on-year in the third quarter, mirroring the year-on-year performance seen in the second quarter. In that sense, the trading backdrop remained largely consistent with what we were seeing in the summer with clients and candidate confidence levels yet to show signs of material improvement. One contrast to our second quarter, where you might recall, we saw a particularly soft exit rate in June with a more consistent pacing to this third quarter just gone as implied by the September exit rate, which saw group fee income down by 13% year-on-year, and therefore, broadly consistent with the quarter as a whole. Looking at our service lines, Specialist recruitment fee income of around GBP 66 million was down by 12% year-on-year, within which both perm and temp, and as a reminder, temp comprises our contracted interim offerings, they were both down by 12%. In Recruitment outsourcing, net fee income of around GBP 14 million was down by 14%. Turning now to group head count and productivity. At the end of the third quarter, group head count stood at 3,466. That was a 4% reduction on the second quarter closing figure. Within this, there was a 7% reduction in the non-fee earner population as our front office support ratios continued to trend back towards pre-pandemic levels, consistent with the second building block of our program to drive higher medium-term through-cycle margins as detailed at our Capital Markets event last month. There was another 3% reduction in the fee earner population. We continue to be highly selective in replacing fee earner natural attrition, and our strategic imperative is to ensure that our average fee earner tenure remains strong, leaving us well positioned for when market conditions improve. With fee earners now down 20% versus the end of the first quarter in 2023, we broadly feel where we have reached is appropriate for the current market conditions. And indeed, looking at the volume productivity of our perm fee earners during the third quarter, this was down just 3% year-on-year. And when combined with mix and wage inflation benefits, this meant we saw growth in overall fee earner productivity in terms of net fee income per fee earner year-on-year. Following our Capital Markets event last month, I would remind you that we will be -- commence splitting out fee earners and non-fee earners as well as volume and overall productivity as part of our standard quarterly disclosures from our fourth quarter trading update in January. So finally for me, turning to look at the balance sheet. This continues to remain strong with closing net cash of GBP 50 million at the quarter end, consistent with one of the cornerstones of our capital allocation policy. So I'll now hand over to Toby, who will take you through trading in our retail segments and the full year outlook.

Thanks, David. Good morning, everybody. Let's first turn to look at our Specialist recruitment business. All net fee income percentage movements continued to be in constant-currency terms and at a segmental level, just related to Specialist recruitment. So looking first at our Asia Pacific business. Net fee income was down 10% year-on-year. As you know, Japan is a key market for us and it was pleasing to see another quarter of growth there with fees up 3%, albeit that was more than offset by softer conditions in South Korea. Southeast Asia grew by 2%, and that comes on the back of a bit of momentum that's built there in job flow, which has improved over the last 6 to 9 months, albeit from a trough position seen as 2023 closed. In Australia and New Zealand, which was down 23%, conditions remained very challenging, and in particular, with public sector temp hiring in New Zealand. As a reminder, we did see headwinds increase there around the time of the newly elected government shifting away from the use of temp labor towards the back end of last year. In Greater China we see down overall by 12% to positive performance in Mainland China, but more than offset by softer conditions in Hong Kong. Turning to look at Europe. Specialist recruitment net fee income was down 13%. As expected, in France, our largest European market, activity was more muted in the quarter due to Olympic Games. However, the September exit rate in France was slightly better than quarter 3 as a whole. Belgium, down 14%, continued to annualize tough comparatives. And you may recall that the first half of '23 was a record for our business there. Of our larger European markets, we did see slightly more resilience in the Netherlands, which was down 10% overall, but did deliver modest growth in perm, really for the first time since the fourth quarter of 2022. Germany, down 4% was also pretty resilient with a notable performance by the interim business there. Now turning to the U.K. Net fee income was down 26%, so a fair bit softer than the pacing we saw during the second quarter. And as noted in the statement, we did see clients generally choose to pause activity as they awaited clarity on the now published Employment Rights legislation of the new government. And combined with the budget taking place later this month, this has generally given incentives for clients to adopt a wait-and-see approach with fees down in quarter 3 by 19% and 29%, respectively, in London and the regions. In the Rest of the World, we saw the most resilient segmental performance year-on-year of our Specialist recruitment businesses with fees down 4%. We saw another good performance in the Middle East with fees up 12%, although this was more than offset by softer conditions in LatAm. And now turning to our Recruitment outsourcing business. As you heard from David a moment ago, fees overall were down 14%. Looking around the regions, where the fee income split in the quarter was just over 1/2 coming from the U.K., 1/4 coming from Asia Pacific and just under 1/4 from Rest of the World. U.K. Recruitment outsourcing was down 13% with Asia Pacific down 23% and Rest of World up 2%. Reflective of still greater caution among clients, non-perm volume hiring was slightly more resilient than perm. Before turning to the full year outlook, let me just give a few brief comments on how activity levels trended during the quarter. And by this, we're really thinking about job flow, interviews and placements, all on a per-fee earner basis. At the group level, job flow trended broadly as we'd expect with the reduction in August versus July, given the Northern Hemisphere holiday season. There was then a bit of a further reduction into September except job flow held up better than we saw in September last year. And interviews and placements followed a broadly similar shape. Commenting more selectively around the regions. In Asia Pacific, we have seen signs of stabilization in ANZ job flow, albeit at levels much reduced compared to last year and the peak. And I noted in my earlier remarks that momentum in Southeast Asia job flow continued to be positive. Meanwhile, in Europe, unsurprisingly, given traditional summer vacations, job flow and interviews came off in the latter part of the quarter, consistent with last year and as we would expect. We'll be keenly focused on trends through October, November to see if the buildup seen last year is replicated. And finally, just before we move to Q&A, some comments around how we're thinking about the full year outlook. As we referenced in the statement, hiring markets do remain challenging with a period of decline seen since the peak now running to about 2 years, and in that sense, longer, I think, than most of the industry expected. As we sit here today, our previously stated assumption that marked improvement in client and candidate confidence levels will be gradual and likely could not commence until 2025. That remains unchanged. The exception of last year and the COVID impact in 2020, we have historically seen a seasonal profile, whereby second half fees have been slightly bigger than the first half. However, as we called out in this morning's statement, given market conditions and the very near-term outlook, we think it is unlikely that fees in the second half will exceed the GBP 166 million we saw in the first half. That being said, we have seen progress on lowering our cost base this year and actions there continue, and we will continue to aim for profitable full year outcome. That concludes our prepared remarks. And with that, we'll open up for Q&A.

[Operator Instructions] And up first, we have Tom Callan from Investec.

Three questions from me, please. Firstly, can you just touch on in terms of what you're seeing in terms of margins and fee rates on the sort of temp side of the business? And secondly, good performance in the Middle East, I think second quarter on the [ balance ] of really strong growth. What drove that specifically? Any sort of read across to what was flagged at the CMD in terms of the sort of really helpful dynamics in that Southeast Asian market? Is there sort of any sort of similarity there? And then thirdly, could you please touch on job offer sort of rejection rates that you're seeing currently? How that's evolved, if at all, post the Q2? And how does that dynamic vary from region to region?

Tom, so Toby here. So I'll answer the Middle East and Southeast Asia question on the job offer rejection rates and I'll pass over to David for margin and fee rates. Middle East, really, I mean, it's a good tenure. We've been in that market for well over a decade now. It is a good market with strong activity levels. As you know, obviously, there's a good strong influx of foreign labor. And obviously, it's clearly an attractive market for employees there. Oil and gas remains fairly significant. And as you know, there's a commitment, certainly in the Middle East, to build a very competitive tech ecosystem and we're well set up to deliver there. And we're seeing obviously some bigger boost in sectors like tourism and banking -- Islamic banking as well. Similar, to SEA, yes, in a sense a strong productivity growth. I mean, Southeast Asia, 4 out of our 6 countries that we operate there have grown year-on-year in quarter 3 and probably in Malaysia is a particular call-out. And again, a product really a good tenure and good management. Job offer rejection rates, it hasn't really changed. I mean, the general trend, as you know, '21 and '22, we were seeing sort of 3 to 4 candidates being interviewed before they were being offered the role. That has extended out to more like 8 to 10 candidates now. So it unfortunately continues to be a confidence issue. Rejection, largely down to counter-offers, which we've seen probably more now than we've ever seen before. We know it's a sticking plaster solution, but that's the reality of the current confidence challenge that we're in at the moment.

This is David. And on the margins and fee rates holding up really, really well. And indeed, probably the temp margin are up ever so slightly year-on-year. I think, overall, really reflecting on that point that Toby just referenced on the number of candidates that clients are wanting to see, et cetera, I think it's generally that's meaning that clients accept that we're doing a lot of work to get them great candidates. And when we land them a candidate, they're happy to reward. So fee rate is holding up really well at the moment.

And our next question now comes from Steve Woolf from Deutsche Bank.

Just a couple from me. I'm left with just comments on Germany, please, on the interim business in terms of what end markets are, given -- it's a good performance given where the economy and the macro signals seem to be [ at, at the ] minute. Secondly, on Japan, another great performance. Again, what roles, what industries are you perhaps feeding into? And then, thirdly, with your comments about buybacks from companies, what sort of wage inflation are being offered out there that companies are then confident to buy back with, if that makes sense.

Yes. So Japan, I'll touch on straightaway. Roles in industries, I mean, it's such a specialized business in Japan. I think I've used the example before, just our sales and marketing division has 17 different teams. So we've gotten to a lot of tenure there. You've got good fee rates there, as you know. We have got excellent retention there as well in terms of our people. And very much it's a market-leading force for us. So that's held us in good stead. And really, particularly with AI, what we're seeing is we're seeing more and more data coming at our clients. And the speed of application of candidates is far, far greater now than it's ever been. Now the consequence of that, of course, is that our clients are just inundated with more and more information and that they need someone to help them with that information, and they also need to understand the truth. So the importance of relationships, and I talk about relationships being the currency of the future, is so critical. So the clients know that they're getting the truth in terms of what they're actually being sent. Japan, so we're not particularly heavy in the automotive sector, which obviously has been under quite a lot of pressure in Japan. It is still, for us, a relatively fledgling business, so it is growing. And interim is a big growth area for us, particularly in that sort of Northern European, Continental European businesses and that's held us in good stead, and that continues to grow in Germany. And then in terms of buyback and wage inflation, I mean, it largely depends on what sector -- or sorry, what discipline rather. So I can give you some examples right now. Tax, employment lawyers, real estate lawyers. Particularly with what we're seeing at the moment in terms of Employment Rights, you've got obviously the minimum wage increase. You've got almost certainly national insurance increases coming with the budget. So all of that points to higher wage inflation in some of those types of roles.

Okay. Clear. And then one -- just one follow-up. I mean, this is slightly holistic. Confidence is what everybody is -- obviously has been the theme for the last 6, 12 months. What is it in your view that gets this broken, that gets people moving, sort of job churn can recommence. Is it just better headlines on the TV, newspapers, confidence, New Year, post bonuses maybe and any pay rises. What do you think is going to be the catalyst that starts, hopefully, improving the world?

Yes. I think it's all of those. I mean, media definitely. I think we've got, obviously, elections U.S., we'll see. Obviously, we'll get some certainty, whatever way that goes. I think, obviously, things like -- and I think actually, this is really important, interest rates as well. With that, of course, you start to see greater investment and borrowing from certainly the larger corporations that stimulates more sort of job creation and increased productivity. So I think there's a whole range of different factors, to be honest with you. So once we start seeing some of those signs improving, and then I think we'll start to see that confidence pick up and create more movement in the job market. And it really comes down to candidates. Fundamentally, candidates actually physically moving jobs.

[Operator Instructions] And up next, we have a question from Sanjay Vidyarthi from Panmure Liberum.

David, just one for me, please. In terms of the year ahead, would 3% underlying cost inflation be a fair assumption? I know, obviously, there'll be a lot of initiatives underway to mitigate that. But are we looking at maybe GBP 9 million, GBP 10 million of cost growth just in terms of the inflationary side of things. Would that be a fair start point?

Yes, not unreasonable. We -- as we talked about at the Capital Markets Day, 70%, 80% of our cost base is people-related. And we've got good people. We've retained some really great people. So we'll want to ensure we reward them appropriately for their work. Clearly, we are working on productivity improvements. We're working on other aspects of the building blocks whether it be business partner functions and procurement. So we are working very hard to mitigate cost increases by being more productive, more efficient, more selective. But yes, ultimately, on average, an underlying inflation would not be a bad assumption to start with.

[Operator Instructions] We just received a follow-up question from Steve Woolf of Deutsche Bank.

Sorry to come back. It's something -- PageGroup mentioned yesterday about clients becoming increasingly picky over hires and making sure they want to get the right one. So they would go through that process that you have flagged, 3 to 4 candidates up to 8 to 10, but still get to the final 1 to 2 and then not be happy enough and saying, "Please go and start the process again." Is that something as trends you've seen? Or is it generally, it is just that part of 4 to 5 candidates has gone up to 8 to 10 candidates. What do you think sort of regarding their comment? Is it a similar trend?

Yes, I think it is. I think it comes down to what hiring clients want to believe. Do we believe that these are the best candidates that are available? We know that unemployment is low from a client perspective. We know that there is a reticence to move. So I think it's that niggling doubt in the back of clients' mind thinking, am I seeing the very best people here? At a point where they're also under quite a lot of cost pressure to make sure they get the hire right because, of course, you get the hire wrong, then there's a cost impact to that. So again, for me, that plays very much into tenure. And I think we mentioned in the CMD, our tenure of staff now, over 80% of our fee earners have more than 12 months' experience. If I go back to September '22, it's more like 60%. So the importance of tenure specialist recruiters, and I'm an advocate for flexibility but having people together in the office and building those face-to-face relationships. And I've said before, relationships are the currency of the future. The ability to influence and to really make that incisive comment with the client around, these are the best people, we now need to make a decision is critical. I think also, Steve, one other thing as well is speed. And we all know that in the recruitment business, the speed of decision is critical. So unfortunately, because, again, clients are second-guessing, is it the best person and really I'm under pressure to make certain this hire really works. So again, the importance of trying to get speed into the process is very important.

And as there are currently no further questions in the queue, I'd like to hand the call back over to you, Toby, for any additional or closing remarks.

Nothing more from me or David, just to say thank you very much to everybody who joined the call this morning.

Thank you. And that concludes today's call. Ladies and gentlemen, you may now disconnect.