Staffline Group PLC (OSU.F) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Staffline Group plc investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Just please simply type in your question at any time and press send. The company may not be in a position to answer every question it receives in the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. And this meeting is scheduled for around 30 minutes. Before we begin, we'd like to submit the following poll. And if you give that your kind attention, I would be -- and I'm sure the company will be most grateful. And I'd now like to hand over to Daniel Quint, CFO; and Albert Ellis, CEO from Staffline. Good afternoon.

Good afternoon, and thank you, Mark. We're now going to share with you some of the detail following our trading statement last week. You might have seen that. I'm sure many of you did. And the context of this presentation is really to address and speak to those points that we made in the statement. And so it's not going to be a long update. And also, we don't have the detail yet in the public domain around the divisions or around the specific components for example, gross profit. But in terms of the headline figures, we felt that due to the positivity that we feel and the confidence we have and also the importance of our statement last week, we feel that it really deserves a short presentation and obviously, the opportunity for Q&A. Here's the topics we're going to be covering. This is in no way going to be a long presentation. So whilst there are 6 subsectors, we're going to be moving through them pretty quickly. We're going to really spend some time, I think, particularly on the balance sheet, where Daniel's got some really good insightful background in detail. And of course, I'll be talking to the operational points that we made in the statement. So without any further ado, you've seen -- many of you've seen or acquainted with our new strategy and the vision for the company. The benefit we have is the Staffline Group has really retrained all the best of what was -- what made it a great company many years ago. And it is truly a world-class recruiter and training group. We are the clear market leader. We're benefiting from that market leadership in the U.K. And my vision, my personal vision and my personal brand is to deliver a trusted partner status to the business. So that instead of just delivering, I'm going out and I'm meeting clients, I'm meeting customers, I'm reaching senior individuals or directors of our customers and indeed stakeholders within the public sector. In this regard, we're changing the market. We're changing the perception of the market about Staffline. So first point is we're capitalizing on our market leadership, and we'll demonstrate how we're doing that. And the gross profit increase of 11% is a real testament to how we've grown our market share in real net fees, not just in revenue. We're going to broaden the portfolio, and we've done that. We've seen and we reported on strong permanent revenues. And obviously, in Ireland, where we've got a white collar recruitment business, a strong white collar recruitment business...

Yes, just one second, do you mind just cutting in I think we just lost Albert, just lost him.

That's no problem. Just to continue the thing that Albert was talking about and he's mentioned that the bottom, the final strategy and that component there regarding the Republic of Ireland. We have an extremely well-established business in Northern Ireland, over 20% of market share and just around 2% to 2.5% market share in Republic of Ireland, and we see a really fantastic opportunity to enlarge our footprint in Ireland, and we're going to be investing money there to expand our presence in Republic of Ireland. So that really encapsulates our strategy and vision and something we -- that we feel is really very focused and allows us to take the business forward very positively.

I think Albert is now back with us.

Excellent.

Thank you, Daniel. Thank you, Mark. Sorry about that. I don't have an idea of what was driving that. Looking at the highlights now, and this is -- I'm not going to talk about the financials. Daniel will talk about that. But let me just focus for a bit on the trading. We -- the group really continued to trade strongly across the second half of 2021, building on the positive momentum we reported in the first half. And we expect it to hit virtually GBP 1 billion in terms of revenue, just shy of GBP 1 billion in terms of revenues, which is a real milestone for us. But we did this despite exiting a low-margin contract, which is worth about GBP 40 million, GBP 48 million. So in terms of like-for-like, the revenue growth was still impressive. Underlying operating profit, obviously, you saw that, it doubled. And then Daniel is going to talk about the cash flows. In terms of the recruitment business, we saw high levels of worker fulfillment, and this is what our clients and our customers really expect of us is to be able to use our reach and our scale to attract workers and to find deep pools of talent despite the worker shortage. And this was underpinned by the technology that we have, where we're using technology to enable efficiencies and to drive contacts with workers and enable shift patterns to be filled as quickly as possible electronically and from a digital point of view. Cross-selling into our blue-collar customers has been very successful. We'll talk about that next month at our final presentation on the 22nd of March, that week when we announced our finals. And we'll talk about how we enabled that cross-selling of permanent recruitment, which is a big strategic objective for us into our blue-collar customers. In Ireland, the businesses did very, very well despite the sort of restrictions, Ireland was -- we experienced one of the most severe restrictions in the world in terms of COVID. I'm talking about the Republic now, but also Northern Ireland has had some severe restrictions. And that really held back the Irish business in the first half of last year. If you were with us and you looked at both interims, you'd have seen Ireland was flat. I'm delighted to say in the second half of last year's restrictions were released, Ireland really bounced back, and we've got a great story in Ireland as we pivoted the business more towards permanent, and we made a big difference in changing its margins and refreshing its appeal in the white-collar sector and also in the permanent recruitment market. And then PeoplePlus, well, we had a deep restructuring of PeoplePlus in 2020. We disposed of the apprenticeships business, and we rebuilt the business as core service of skills and employability. And I'm delighted to say that PeoplePlus has really turned around in the last 12 months. And when we show you the results in March, you'll be able to see the stunning turnaround both in profits but also in growth, in underlying like-for-like growth. And announced in June 2021 that PeoplePlus has secured a number of restart contracts. Those have gone well. We've mobilized those contracts. We're in Kent, we're in Wales and we're in the northeast of England. And those contracts are on track, and our business plan is looking accurate at this point, and we're very pleased with the performance we've done so far. So with that, that's the sort of operational summary. I've made some other points there, in particular, in those sub-brands of drivers, Omega, which is engineering recruitment; and Datum, which is recruitment process outsourcing, they all had a good year and built profits on last year to increase their profits on the prior year. So with that, over to you, Daniel.

Excellent. Thank you very much, Albert, and good afternoon, everyone. Excellent to be presenting to you again. Last time was at half year in September and really great to be able to present to you the full year 2021 financials at a high level. As Albert said at the beginning, these are currently unaudited and are provisional and our full year official financials will be out on the 22nd of March, and we hope to still to be finalized to have an investor meet presentation on the 23rd of March, that will be a Wednesday. So I will just give some extra flesh on the bones of the financials as were presented in the trading update, just published recently. And for those of you who might not have been on the call, back in September. Just as a reminder, revenue for us includes all the temporary worker salaries that go through that line. And therefore, we very much see, in addition to revenue, very importantly, is gross profit as a real indication of the fees that we are delivering and charging to our customers and that we're earning. So really great to be able to present an 11% year-over-year increase in gross profit and very importantly, 0.8 percentage points of margin growth there to 8.8%. Additionally, the next very important ratio is our conversion ratio, and that's the conversion from gross profit. What I just said was a real indication of how well we're performing. Conversion of that through to underlying operating profit. And that improved again on an unaudited estimated basis to 12.1% and over 6.4% in the prior year. And all that allowed us to more than double underlying operating profit from GBP 4.8 million in 2020 to what is estimated at circa GBP 10 million in 2021. So a really great performance after the challenges of the business 2, 3, 4 years ago. And that takes me through to the balance sheet. So at year-end, we expect to be reporting a net cash number of GBP 6.9 million, which is GBP 15.7 million, up on 2020. And that is despite repaying GBP 40.7 million worth of the GBP 46.5 million of deferred VAT that we were allowed to defer by the government's COVID measures as implemented in 2020. And those -- that VAT has been paid back in 8 installments between June '21 and the final installment was actually paid 1.5 weeks ago at GBP 5.8 million on Monday, the 31st of January. So we now stand with no COVID liabilities or debt owed at all. So a really great position to be in. Of course, that improvement was achieved most substantially through the support of the equity raise of GBP 46.4 million net of costs that we carried out in June 2021. But in addition to that, and we'll see that in a moment, improved trading cash flow and cash collections. There are some timings of GBP 10 million, which might unwind, but just thought we'd give you a heads up on that. But really, a great position to end in on a pre-IFRS 16 basis, although we do report IFRS 16, just making this like-for-like to previous years and will gradually transition formally to only reporting IFRS 16 in subsequent periods. In terms of just to carry on that point regarding the transformation of the balance sheet, what I presented here is the last half year reporting points back to December '19. So you've got December '19, June '20, December '20, June 21, and then the most recently, December '21. So you can see on the right-hand side, the GBP 6.9 million reported, but I've adjusted all these reporting points for 2 variables. The first is an off-balance sheet nonrecourse, legitimately off-balance sheet nonrecourse receivable facility that the business has had for many years off balance sheet that we brought on balance sheet in June '21 when we refinanced the business last year. And what I've done is because it's on the balance sheet in the -- in the December '21 column on the right-hand side, I've added it on in the slightly darker shading -- shaded number in the previous periods, and that's the middle column over to the left-hand side. And then additionally, I've also adjusted in the reporting points when we had deferred VAT, so that's June '20, December '20, June '21. And then within the green column in December '21, you'll see I've commented that there's a further GBP 5.8 million. So the adjusted number at the year-end is GBP 1.1 million cash instead of GBP 6.9 million. And what this allows me to do is present on a like-for-like basis, the half year and full year adjusted net debt numbers, bringing it in line with how we've reported numbers at December '21. And you can see net debt on an adjusted basis has moved from GBP 85.2 million in December '19 to GBP 1.1 million in December '21. So that is an GBP 86.3 million improvement over that 2-year period, clearly significantly contributed to by the GBP 46.4 million equity raise, leaving another GBP 40 million of benefit. Well, where did that come from? What we know I've mentioned about GBP 10 million worth of timing, which could possibly most likely unwind. So that leaves you GBP 30 million. And where that comes from, it's over the 2-year period, GBP 10 million worth of trading cash flow contribution and then also really importantly, GBP 20 million worth of working capital, balance sheet tightening, cash collection improvement, debt and cash generation. So a really great journey both in terms of what we've done from a corporate finance perspective in terms of the equity raise. But as importantly, if not more importantly, actually, the in-house work that my team have done as well as the operational teams have done to really tighten the balance sheet and then, of course, delivered profit, as I mentioned, over that 2-year period. So really excellent to be able to report that position. Just as a reminder, this is the current financing facilities that the group has. So it's not changed since June, but just as a reminder, that we've got a great set of financing structures there, effectively a receivables facility of GBP 90 million with an accordion of GBP 15 million there. It's a 4.5-year arrangement with a 1-year extension possibility, margin starting at 2.75%, reducing to 2% on SONIA when leverage drops below 3x underlying EBITDA. And if you -- if we can -- if one sees the net debt and net cash position, we should be moving towards that position extremely rapidly. So that's an excellent position to be in. And now I'm going to hand back to Albert, who is going to take you through some jobs market insight.

Thank you, Daniel. So we just pulled out some of the really current and important statistics, which is the backdrop to the recruitment market. And if any of you are investors or you like the sector, as I have been in the sector for 30 years almost and invested in the sector for many -- for much of that time, you'll know that these stats, the payroll -- number of payroll employees, the hours worked and the job vacancies are probably your 3 most important statistics when -- in evaluating the market. And I'll tell you why in a minute. Firstly, payroll employees is at a record high. So this is for December 2021. It shows that in the month 200,000 employees were added to payrolls. And since the pandemic, we're up 400,000 in terms of payroll employees. Now think about payroll as our market. Employees will move from job to job. The quicker they move, the more they resign, the more vacancies there are, the higher the velocity of the market. So tight labor markets benefit recruitment. And that's why the whole sector has benefited and has risen on the back of this. But also, we're confident that whilst we've got almost 29-30 million of payroll employees, our market continues to grow. Now secondly, hours worked. Now this is really important to understand how it impacts us and other companies. First of all, much of our margin is charged on an hourly basis. So you can see that disappointingly, and this is to the broader productivity challenge that COVID has impacted in the market is that the quarterly change is 2.6 million hours down. And the pre-pandemic levels were some 33.5 million higher than where we are today in the quarter, December to February. So hours worked is really important. So the problem is people aren't working for hours. And that's because there's a lot of friction. There's isolation. There's the so-called pandemic. There are sick people like ill people are taking time off and so on and so forth. So hours worked is well below pre-pandemic levels. Now one of the most important reasons it's low is because sectors haven't opened so travel and manufacturing are 2 obvious ones. Aerospace, for example, their manufacturing and supply chains acquired, and of course, you've also got travel. Now some of those individuals or cohorts have actually been employed in the online market, in the distribution market. But essentially, we're having lower hours. And this means that when those sectors do open and when they do an economically inactive individuals return to the marketplace and the hours increase, so our gross profit will increase. And then finally, job vacancies. Well, look, the sort of short answer on this is we've got unprecedented demand for labor, and that's because people are resigning, they're moving and they're creating job vacancies and companies are growing. But companies are growing in a different way. We're seeing the online sector, we're seeing logistics sector, we see in the transport sector, really, I think the latest stats on one of the big job boards was 500% up year-on-year. And then manufacturing and travel is more subdued, much, much lower levels of growth. But essentially, we've got record job vacancies, which means recruits become very important in the supply chains of our customers. Now finally, just to take you through the outlook, but perhaps to give you a little bit more color, obviously, the company has developed and delivered an excellent performance. We're very proud of it. I don't -- we didn't have the visibility of exactly where we would end up in the year. And Daniel being very, very cautious and also doing his job as CFO, wanted to nail those facts and the evidence and make sure that when we reported that we would report numbers that had been reviewed and thoroughly checked. So that's why we didn't report those numbers at the end of the year, but we waited for 2 weeks into January to 3 weeks into January. And we set out the results, including the cash position, which was well ahead of our expectations in the markets. Look, we've had 3 upgrades in the year, and that's terrific. And we're hoping that this year, we're expecting -- we've got the confidence that this year, we'll see the similar sort of momentum in the market, but we've got a better backdrop because we know with the Prime Minister just announcing in the last couple of hours that he was bringing forward the relaxation of the rest of COVID restrictions in England and in particular, all the legal restrictions. So that should take away the last of the headwinds that relate to COVID, which is really important. Now there's 2 strong recruitment sectors, which historically Staffline had been really strong and that automotive and the travel sector. So automotive part of manufacturing, you know what's happening there. secondhand cars are rising, new cars are not being delivered because of supply chain issues, shortage of chips, et cetera. And travel, of course, is obvious with all the challenges with testing in countries that have been -- that have not been opened. So we expect those sectors to really come back to life in the second half of this year. And that's why we're flagging it in the outlook that it should be a key driver of growth in the second half of this year. And we've got anecdotal evidence to support that expectation. In addition, we've been really active on the business development front, and we'll be very pleased to be able to update the market from time to time where we've secured a new contract or we've further developed our revenue line in a way that, that would make sense to make an announcement. So we're looking at all of those positives as underpinning the pipeline of the business. And therefore, that's the confidence the Board has in the growth prospects for the medium to long term. And then one of the most important things we did, obviously, was recapitalized and refinanced the group. So now we have the balance sheet strength to move from an operational standpoint to a growth stance. And with the operational agility that we've now developed with the transformation, the deep transformation, we can now execute on more ambitious organic growth plans. Of course, we won't rule out M&A. Our cash flows are doing very well, but we're going to be cautious. But we -- bolt-on acquisitions in the next 3 to 5 years is something that we'd certainly include on our menu. But for the next 12 months, it will be focused on organic growth. So with that, I mean, Daniel, I think you're going to be just talking to the attendees on how we're actually reorganizing our investor communications to the people, have a much -- and now where to find stuff and being a lot more open with our communications.

Yes. Thank you, Albert. So yes, just -- really just a final couple of a moment or 2 on our Investor Relations website. You'll be able to find that, of course, on our plc corporate website. What we've upgraded it and we've also provided an analyst research note section. There's an additional research firm who's been writing on Staffline, which is use. And one is able to access that note if you go through the analyst research note subsection. There are additional notes on there. They've also done an interview, et cetera. You'll see on the front of that website just on the left of the slide there, you'll be able to click on that. Albert also did an interview a week or 2 ago in terms of giving his perspective on the market, on the business, et cetera. So there's some more information for investors to be able to understand the business and the sector we operate within much further. So what we will now do is take some Q&A.

That's great. Daniel, Albert, thank you very much indeed for updating investors. No problem at all. Ladies gentlemen, please do continue to submit your questions using the Q&A tab situated on the right-hand corner of your screen. While the company take a few moments to review those questions submitted already, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor Meet company dashboard. Albert and Daniel, obviously, investors submitted a couple of questions beforehand, which I know you've provided a written response to which we will make available after today's meeting. But perhaps if I could hand back to you just to read out the questions received from investors today and give a response where it's appropriate to do so, and I'll pick up from you at the end.

Yes, of course, let me pick up, and thank you for -- there's quite a few questions, which we will try and get through them. So I give brief but detailed answers, if we can. The business has undergone deep transformation. This is from Oliver, which has resulted in excellent results, the stronger balance sheet and the pipeline of opportunity for growth. However, it's yet to be reflected in the current share price at 55p. You asked, do we foresee a risk that the company could be an acquisition target before its true value is recognized? Well, first of all, all public companies are targets, if you like, they certainly are. The system is such that if someone wants to acquire a company, there's a set of rules and a way that, that can happen in an orderly way. So as a public company, yes, we're always, if you like, up for sale in that sense, someone -- anybody can acquire the company should they persuade the Board and shareholders in that direction. However, in our particular case, we agree that the share price seemed not to have responded to the results in the way that one would expect. And I can give you some assurance that having known the shareholders, as I do, and the top shareholders of HRnet, Andy Bukich, Schroder, you've got Henry Spain, you've got Aberdeen, you have Gresham and others. These individuals and these funds know what the value that's in the company. And so they would not be active if they didn't feel that there was value in the company. So I think you can just take it from the fact that we've got strong shareholders who have a view about the value of the company that they would not allow the company to realize value, which to not realize the true value. Then we've got -- thanks to the team for holding the call. So yes, thank you acknowledge that. We really are going to make sure that we do as much as we can. You asked about the disruption that took place for business with the NHS as a result of the vaccination mandates now reversed. That doesn't affect us in the sense that we don't actually supply the NHS as materially and all the care sector, so it doesn't quite affect us. But obviously, with the logic behind the reversal being that the vaccination -- that the Omicron still in fact, although obviously, is a milder version and doesn't result in the sort of death and hospitalization. The fact that, that's happened, I think, means that the vaccination mandates were just simply not logical in that sense. So I don't think it'll have any effect on our business. But what is really important is that the advent of the Omicron, there is being milder raises confidence and increases economic activity and people will be -- will feel much more free to go out and do their business and that will mean that people will be much more accepting in terms of joining our firm, joining our clients and going to work in the morning. So it's all about the fact that people have been -- they've been isolating that's been a challenge. Daniel, maybe -- yes, thank you.

Yes, I'll take the next one. So the question was asked. It's great to see the improved financial discipline with the company, no doubt about the fundraising. Are there any customer types struggling with payments and/or difficult to deal with right now? Well, many of you will know that I focused the last 2 years while here in really tightening the balance sheet, implementing a very rigorous process in terms of assessing any credit risk with any customers. I was just looking at the debtor books last week. And actually, they're fantastically tight and clean as always, small bits and bobs and small smaller customers that might be challenging. But actually, I would say we're at the cleanest and tightest we've been. And I would add to that, whenever we see any potential risk and looking at any particular sectors that might be struggling and particularly in companies, we keep a credit watch on companies. We would immediately ask for upfront payments or to make sure that our credit risk is absolutely mitigated. So in summary and answer to the question, there isn't significant or material issues with struggling payments at the moment, which is a good position it's been, but we're always cautious in always keeping -- trying to stay ahead of the curve on that. Albert?

Thank you, Daniel. You've asked if there's more to aim for in terms of permanent placements across the group. And if so, what sort of growth we might expect from this activity and in which key areas? We really are seeing a swing to perm. We're seeing it across the board. It really is the way customers have decided they're going to retain their top talent even in the blue collar sort of market where customers would rather retain labor across the quieter periods of January and February and in advance of sort of the Easter holidays, et cetera, and sort of mini-summer peak than lose that labor, which is something that I hadn't seen over the last couple of years until now. There's such a desperation to retain labor and to not suffer from a shortage of labor that customers are prepared to retain. And in so doing, they're very open to permanent recruitment. So you can certainly expect to see us improving our exposure to perm. And it's higher margin. It's cash generative. It's 100% flow through to operating profit. In existing customers, it's just simply a no-brainer. You've also asked if there are any missing services from the group portfolio. And if so, what we're going to do? Look, there's no -- when I can't see any obvious holes. We've got recruitment process outsourcing. We have a white-collar recruitment sector offering right across the U.K. and Ireland, and we've got our strong blue collar. So we really are a complete generalist. We've even got an executive recruitment business in the Northern Ireland, where we started looking at that market, and we have a consultant who's heading it up and we're hiring into it. So we're a true generis in that sense, which is our vision. Thanks for the great update. Well done on the significant progress. What is your view on M&A? I said that we certainly have a view that M&A would be part of our growth story, but not in the immediate 12 months, settling down, driving that organic growth, making sure the balance sheet is strong and continues to generate cash, getting the foundation right, that's our focus. You've asked how operationally and financially centered the business or is it incremental contract gains? Well, it depends if we -- if it's a service introduction on an existing contract. So for example, when we hire people permanently into Ocado, Ocado is an existing account, so we're hiring people permanently into that business, then that is incremental. That's very sensitive and very highly incremental to our operating profit because we've already got some costs. When we look at a completely new service or a new customer, clearly, we have to build out cost base and overhead and that's less likely. However, what it does do is it provides -- it gives you synergies. So you get synergies by exploiting and squeezing your overhead over a broader client base sort of a broader wall of customers. And therefore, you get sort of, I would call it, indirect benefits as you add those contracts. So growth has got many, many attractions, not least of all, the fact that you should be getting at least 20% of your additional GP flowing through to operating profit in a normal market. And 20p in every pound of additional gross profit in a normal market, normalized business as usual should be dropping down to the bottom line. And then finally, what's the current debt position employing, okay, so maybe, Daniel, you just want to answer that one, I think, in terms of the IFRS.

Yes. No problem at all. So in terms of the debt position adjusted IFRS 16, we'll be reporting those formal numbers on the 22nd of March, but I can draw you to the half year and the year-end accounts when -- which illustrates that there is probably a few million -- no more than a few million of additional recognized debt that is counted as a part of net debt post the IFRS 16 accounting adjustments. Of course, for companies such as the Tescos or pub companies, et cetera, where there's vast amounts of leasehold properties, that will be quite substantial. No way near a substantial for us. But previous accounts have shown it's a few million and it won't be a million miles away from previous accounts when adding the leaseholds on to that. With that, I don't think there are any further questions.

Absolutely not. So Daniel, Albert, thank you very much indeed, you've answered every question from investors, and thank you for all those that have taken time to submit questions and perfect timing as well. Daniel, Albert, I know investor feedback is important to you guys and are shortly redirect to investors so they can provide you with their thoughts and expectations. But Albert, perhaps before doing so, I could just ask you for a few closing comments.

Yes. Thank you, Mark. First of all, I just wanted to answer a question that was raised in one of the bulletin boards and it seems to have gained some traction. And I just want you because it's an important one, and that was -- is the CEO going anywhere? And I just wanted to say on the record that rumor is certainly untrue, and there's no -- I have no intention of going anywhere. So any uncertainty as regards my sort of -- my appetite from new challenges, I'm certainly wrong, the challenge at Staffline is yet to really be fulfilled in its fullest full. The value is yet to be realized in its fullest form, so I'm super motivated by that. So just a quick answer on that one. But really to have achieved such a strong profit performance, I think, during the year, during the second year of COVID presented huge headwinds that we were facing off to, including the fact that we had to do a fund raise, we had to refinance our balance sheet. We have to bring in new banks, we have to bring in new investors and then to double our operating profit and end the year in a cash position, I think, I'm delighted. So I just wanted to just say that, that's a real -- really -- it's a real testament to the underlying strength of the market-leading position of the company. So thank you for attending. Thank you for your time, and we'll see you soon, hopefully in March.

That's great. Daniel, Albert, thank you very much indeed for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you in order that you can provide the company with your real thoughts and expectations via the feedback form. This only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Staffline Group plc, we'd like to thank you for attending today's presentation. Good afternoon to you all.