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

Good morning, and welcome to the Staffline Group plc Trading Update Investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions]. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Albert Ellis. Good morning to you.

Good morning, everybody, and thank you for joining us on this slightly chilly morning being beamed out from Central London. We're delighted to be here with you following our trading update this morning at 7:00. I'm joined by Daniel. Daniel Quint, my erstwhile CFO. And of course, my name is Albert Ellis, I'm CEO of the Staffline Group. Thank you for joining. And I just wanted to start, as we always do, with a brief reminder that the group is in a very, very strong position. And much of the positive news that's come out this morning has been the result of the leading market positioning, which the group commands. 35,000 temp workers, the largest by volume blue-collar recruiter in the country. We're over 400 sites with customers right across England, Wales, Scotland, Northern Ireland and the Republic. And of course, we've got many thousands of learners in prisons where in PeoplePlus, we are performing a vital role in education in prisons. So with that, we're going to start with the -- Daniel is going to take us through the highlights in a minute, and I'll be back in a few.

Good morning, everyone. Thank you very much, Albert, and Happy New Year to everyone to tell, I think, I'm pleased to take you through the key numbers and the key headlines from our trading update this morning. So again, to say a challenging backdrop of 2023, we set ourselves the aim of growing market share, and that's something we've achieved as is illustrated by revenue growth of 1.1% which is comparatively a good performance in the sector. This has been underpinned by expansion of strategic partnerships and renewals and contract wins, which Albert will speak about a little later. Additionally, driven by those good trading conditions, we delivered a good net cash number of GBP 3.8 million on a pre-IFRS 16 basis. And that is ahead of expectations that the market had for us and allowed us to carry out a GBP 5 million share buyback program. And finally, we ended the year with really strong levels of banking facility headroom of GBP 60 million plus. So that summary against that challenging market and economic backdrop is something that we're pleased to be entering 2024 with. A bit more of the detail about that now. You'll see that we -- our underlying operating profit is in line with expectations. And although the revenue was up 1.1%, we did see, of course, some of the similarities of other realities in the recruitment sector flow through to our numbers as well, where gross profit was down 2.1%, which is a mixture of some of the softening in permanent recruitment activity as well as some of the higher-margin contracts in PeoplePlus coming to an end, and therefore, that's flowing through to gross profit. But what's very important, of course, as we enter 2024 with -- as Albert will comment later, some improvement potentially in consumer demand, especially as inflation decreases and interest rates possibly come down is that we have 90% plus of a temporary worker activity in our group, and that's helped us be resilient in 2023 and will continue to support us as we come into '24 with consumer demand, hopefully, turning a corner. Just coming to the balance sheet and net cash. I think very important to recognize that we had strong trading cash flow in 2023 being materially ahead of expectations as I said, but we're left with some really excellent -- an excellent strong balance sheet as we come in '24, leverage at low and 0.5x EBITDA, interest rate cover at 3.5x and still protected by our interest rate cap through to October of this year in 2024 and at the end of last year, when we financed our banking facilities, so they're extended now for another 4 years with improved terms. And we're really pleased with that position as we enter a year 2024 with potential opportunity for economic recovery and all the banking facilities that allow us to take advantage of that potential position. And finally, just to comment on the net cash bridge, and you'll see this on screen as I've presented it, we wanted to point out that actually, we grew before share buybacks of GBP 5 million and growth working capital investments of GBP 2 million. We actually grew cash by GBP 5.8 million from GBP 5 million to GBP 10.8 million, but then we invested that in those 2 areas of our activity, the share buybacks and in our peak activity when we were able to grow and invest in working capital and greater opportunities for business over the medium term. So the delivery of those numbers during 2023 allowed us to come into 2024 with a very strong balance sheet and some good tailwinds there. I'll hand back to Albert now just to take us through some of the key operational highlights of 2023.

Thank you, Daniel. Well, if you were with us at the half year, you would have noticed that we had quite a mountain to climb. First half of this year, in the U.K. certainly was a very challenging period. You remember that it was the back end of the energy crisis. Interest rates have taken off, and there was lots of doom and gloom. And our customers were affected by this. And therefore, demand was impacted. And in particular, the U.K. GB recruitment business was impacted, customers sending temps back, not seeing demand in the shops and in the retail stores. And so the first 6 months was challenging. And so we had a mountain to climb, but we had a pathway and we were confident, we set out some objectives and we've listed them on the left-hand side there. And I'm just going to touch on the outcomes for you. So under the first point, organic market share growth, the business really made a huge step in this direction with GXO Logistics, one of the world's largest pure-play logistics firms, American-based listed on the stock market in the U.S., very substantial business, highly acquisitive, fast-growing, one of our key customers. We secured a significant expansion in that business. And indeed, it came on stream in the second half of this year not the sort of elevated levels we were expecting. But because the economy was a bit softer, as you see retail sales have been down, but it's certainly all delivered as we expected. And then the Republic of Ireland really a major strategic win there with the police force in the Republic of Ireland. We're going to be doing back office, administrative operational hiring for them for the next few years. And this is in an area where we set out our store in terms of our strategy to be stronger and larger [indiscernible] in the Republic. And then last but not least, Morrisons is a very major retailer in the food business. We expanded our market share that we have almost 100% sole supply ship both in Morrisons and AM FRESH. And then in Tesco and M&S, both of those retailers doing very well during the Christmas period. And we were extending our market share in our footprint within them. And indeed, we extended the contracts that we have. So very, very good performance on market share growth. Now the second point is where are we going to see the traditional peak? And there was a lot of nervousness in the market up to and including Christmas. But as you've seen, even indeed this morning with Evri, the online logistics business, how they've delivered record parcels over the Christmas period. And indeed, there have been good reports of the Christmas peak in many areas coming in line. And so we expected to see an increase, and indeed, in [indiscernible] quarter 4, we saw 5% up, and this compares to 12% down in the first half. So it shows you the sort of game of 2 halves that 2023 was or revealed itself to be. We did exit the skills market, as we promised at the half year. That is all detailed in the statement. And then finally, consumer sentiment indicators. This is a mixed bag because whilst we were seeing a little bit of positives and some light at the end of the tunnel, inflation persistent obviously coming down, but still elevated but retail sales were tipped to have fallen quarter 4 versus 3. And I think the market was a bit disappointed about that, that would have affected our logistics, some of our logistics business and also our retailers. So what we've done in the next slide is just give you the brand names of some of our largest clients, where we've added in there at the top, the Gard, which is the Garda, which is the police force of Republic of Ireland as a key win we'll be working with them as their key strategic recruitment partner. Another name just to mention is Sainsbury's. They also had a robust Christmas and also they are looking to help -- we are looking to help them indeed expand our business there. So there's the names, and there's some of the detail in terms of sites with GXO and the sort of contracts that we've enjoyed in the second half. And this is our strategy was to really drive organic growth whilst the market was uncertain. On to the advertised vacancies, which is some stats that obsesses some of the economists in the market. As you would have known, if you've been reading and you've been putting your head into a business section of any newspaper or broadsheet every now and again, there's a doom and gloom article on falling vacancies. And indeed, you can see from May, in June, you can see the vacancy data has been falling. And that's been widely reported by Michael Page group, by Hays and also by Robert Walters in the last 2 weeks that the permanent recruitment market is actually in decline. You can see that it started in -- earlier in the year, but actually, the steeper falls were in November, December, which is obviously in line with the recruitment sectors reporting over the last 10 days. I will say 2 things about this. One is we've been at very high and elevated levels. As you can see, if you go back to the beginning of COVID, we're still actually ahead of the first 6 to 9 months of the 2-year period, the 3-year period under review. But the second point, the more important point is customers tend to postpone their hiring activities, particularly if there's a bit of uncertainty in November and December, you get lots of international companies working on December year-end will just postpone those start into January. And indeed, when we've looked at our permanent recruitment business, or white collar in particular, with the OMEGA Engineering niche we have seen that whilst we also suffered a little bit of a downturn in the quarter 4, we actually are seeing that the first quarter is relatively okay and our January starts are in line with expectations. So a little bit of a bounce back. So I'm very interested to see the next set of stats, which will tell us as Hays put it, what the return to work looks like. And then the company's view, this is an outlook view. So it's not perfect in the sense that it the REC and the recruitment and employment confederation, they canvass their members and they get a reading. So this is sort of not perfect, but it does give you a direction of travel and you can see the company's view of their own prospects are slightly improving, although they remain pessimistic about the overall economy, which I see is still in the negative. So a mixed view there from the market in terms of recruitment, we are a 90% temp business. Therefore, we're slightly adjacent to this market. In fact, if customers are quite nervous about hiring, they will tend to use temps more. And indeed, in the last recession, Staffline did see a surge in temp towards the end of the -- once the recovery set in and once the economic stat started to improve. With that, I'm going to come to the outlook. I'm going to spend a bit of time with some of the macros and also PeoplePlus in particular, as we haven't really spoken too much about PeoplePlus or Ireland but starting with the macros, look, headwinds are going to continue. I'm not going to stand out as someone who doesn't believe the headwinds are in the market when all of the sector reporting at the moment is uncertain. But I will say this that it will affect permanent recruitment, of which we have about 5% to 10%, 90% of our business is temp and it would affect confidence, of course. So volumes and demand in our end customers may still be affected. But we do think that this year will signal some sort of recovery. We don't know when. But the macroeconomic environment is going to stay challenging, we believe. In PeoplePlus, it's been a year of mixed fortunes. One, we've had to close and exit a business. Skills where in-person classroom-based training is just really not economic in a high inflation environment and where we have high levels of employment and low levels of unemployment. So we've exited that market. But we've seen super success in Justice where we've been extended during the year for 2 years. And indeed, we've now bid for GBP 400 million and -- about GBP 400 million worth of Justice contracts over the next stretching from 2025 through -- and some of them are up to 10 years. So we've got the largest bid pipeline that I've seen since I've been associated with the business. And of course, we had the tough decision to make very recently where we looked at all of our options. And we decided not to cut costs further in PeoplePlus, but to maintain the transformation, the new management team is setting in well and to invest in our bid and operational capacity. We've got lots and lots of bids outstanding. We're waiting indeed in the next 2 quarters for some results. And then in the second half, we'll be hearing about our big justice but we're bidding for more than we currently have. That, of course, means that profits will be hit this year, and we've indicated by about 65%, 67%. But we're looking through that to the upside and if we win these contracts that we're very positive about, we will see that impact '25, '26 and '27 and indeed give the business really some real visibility. So on to recruitment. Recruitment is 80% in terms of our results of the business. And as I said, customers are facing headwinds and permanent recruitment is certainly not expected to improve in the short term. Other than in niches, like engineering, in the public sector, we think that, that is a little bit more resilient and whilst it doesn't boom, it also has minimum levels of recruitment and we'll see that in Ireland this year, I think, a little [indiscernible] but our efficiency programs, which are detailed in the statement, those cost-cutting programs where we've taken a view that we need to keep our cost base very tight with the inflationary pressure on wages and salaries and on staff and employees. We've had to make those productivity savings to pay for some of the inflationary pressures. And so I'm delighted that the management team have done that and delivered these savings. The Garda contract, I can't emphasize how important this is for us. We've been investing in the Republic of Ireland for some time, and this is a landmark win, our first win of real scale in the market and just delighted for the team in Ireland that they've managed to achieve this. and their numbers will jump this year as a result of that and [indiscernible] absolutely delighted. And my final comments are that the blue collar temps will be in demand. H2 '23 we saw growth. That should continue into H1 '24. H1 '23 was very tough. H1 '24, I think hopefully, we will be showing some increases, and that will annualize out and that will support the results. And then finally, just on a few thoughts around the business from a financial point of view, but not wanting to step on Daniel's toes, but as an investor myself, I'm delighted that '24 is going to have a positive profit after tax with no amortization, no goodwill write-offs or amortizations that we faced in the past. Certainly, we're looking at a higher cash generation year in 2024 than we've seen for many, many years, a clean year, a year that the businesses have been transformed. We don't -- we're not budgeting for a recovery in '24. We're looking through '24 and to '25 and '26, where we'll see the fruits of our market share growth as the economy improves during that time. So with that, thank you for listening. Thank you for watching. It's just a short presentation. We're only preclose trading update today. So I don't want to waste too much of your time and very happy to answer questions.

Yes. Thank you, Albert. So we are now going to answer some of the questions that have already been posted. There have been a couple, 1 or 2 that have already been pre questioned, and we'll continue to answer the ones that you post in the question-and-answer page on the right hand side. So Albert, the first one is for you on the right hand side.

Yes, a question about shareholders being rewarded and asking us whether resuming a dividend payment would be better money spent than on buybacks. Well, the buyback, the lobby posed the same question to us whether we should be focusing on buybacks and that would be better spend than particularly at low levels when the share price is at these levels, whether that would represent more value for shareholders. So we have the 2 competing arguments all the time on the Board, the debate rages outside of the company with our investors. And indeed, we make sure that with our investors and with the Board and with our advisers and everybody, all of our stakeholders that we make the right decision when it comes to shareholder returns. And at this point, we have felt over the last 12 months that we got good value for our share buybacks, and we reduced the shares by 10%. And as you know, that means if you're a continuing shareholder, your value would have increased in terms of your share of earnings.

Thank you, Albert. Second question, which I think you may respond to as well, just a bit more detail about the Republic of Ireland Garda contract, what type of staffing we're providing, how long it's for and how significant it is to the division in Ireland?

Yes. I mean, certainly, in the Republic, it's very significant. I would say that our Northern Ireland business is the market leader and is 20% of the market in Northern Ireland. So they're used to -- the team in Belfast is very used to winning material contracts in Ireland. But the Republic where we've been investing in the last few years, this is definitely a landmark win for us. And the nature of the recruitment is back office finance support and administrative. Obviously, front line is a totally separate activity, which is undertaken by the Garda themselves but all other recruitment will be done by us, it's for 2 years initially, and we're expecting over GBP 1 million worth of fees, and we would expect a healthy flow-through from that as we've actually already made the investment in Ireland to cope with that sort of growth, we won't have the sort of cost increases that we would normally associate with winning a large contract. And this was a strategic position we took 2 years ago, which was to maintain our infrastructure, our operational capacity is the same strategy we're doing with PeoplePlus. So that when we win, we can actually deliver, we can mobilize.

Thank you, Albert. Next question for me, which is to what extent is the strong cash balance is a function of slightly lower volumes versus good working capital management. Actually, it's a result of good working capital management because our cash position at the end of the year is actually directly impacted by volumes in the last 4, 5, 6 weeks of the year. And those volumes are actually higher, as Albert already talked about our chargeable hours in our main division of Recruitment GB in the last quarter, Q4 of 2023 were up 5%. So the cash balance is a direct result of strong working capital management across all 3 of our divisions, whether that's Recruitment GB, the team in Ireland and PeoplePlus, all teams are really humming and have really delivered a very strong year in terms of maintaining tight control over cash collections and working with our customers and suppliers to that end. Next question is how should we be thinking about capital allocation going forward? Is there an intention to do more share buybacks? I think from the first question that Albert answered, you probably take an indication that, that's very possible, I think, is a fair answer to that question. Next question, brokers use has reduced both '24, '25 forward earnings forecast by around 30%. Can you give some more color on why the future trading outlook has deteriorated by so much? I think Albert -- we, in our trading statement and Albert in a number of comments today regarding PeoplePlus and the slight commissioning trough we're in has meant that's been the key driver as to why there's been that downgrade. Clearly, additionally, if the recovery had come earlier -- if the economic recovery had come earlier, may be in '23, then clearly the recruit business would be further along sooner although they performed very well comparatively in 2023 and with the Garda contract 2024 Ireland looks strong. But those would be the key drivers with PeoplePlus being the primary one and economic recovery and the lag driven by those interest rate increases from last year just delaying some of that consumer sentiment improvement a little bit as to why that's just been pulled out a year further on. Albert, if you have anything to add.

Yes. I mean I'd like to just add that, first of all, in terms of operational underlying EBIT, that number is around about 25%. The forward earnings forecast also contains some interest because of higher interest rates. So there's 2 elements there. So the operational EBIT is down by about 25%. And that is over 12 months not just in the last -- so it's over a 12-month period, that's been the total downgrade. And you know that there's been significant deterioration in the market since January 2022. And geopolitically, the world is in a much more dangerous place. So that is the extent of the downgrade a 12-month period is 25%. However, if you look at the sector, Page is in the middle at about mid-30s, 38% over the last 12 months and indeed double digits just in the last month. Walters is slightly less probably in the mid-20s. And if you look at Hays, that's the largest downgraded over the last 12 months. Their '24 outlook has been adjusted downwards by almost 60%, I think the exact number is around the mid-50s, high 50s, 58%. So in that sort of context, we have not seen the downgrade and outlook over the 12 months that the rest of the sector has seen. And ours is specifically to do with the look-through impact of the PeoplePlus commissioning cycle. We're in the last year of this government, governments don't tend to spend money or commission large initiatives in their final year. So there's a political hiccup that one always gets, which will hopefully be fired up by any new incoming administration which is likely to be '25, '26. We've also got all of the business that we bid for now coming in '25, '26. So we're looking through that downgrade this year, to be honest, and looking to the value of PeoplePlus to us as an enterprise.

Thank you, Albert. And some more questions. Another one about with the net cash being higher than expected that free cash after share buybacks. I think I've answered that already. Another question about dividend which Albert answered first off. Another question here, the bid pipeline of PeoplePlus is impressive at GBP 400 million. One assumes that competition will be tough, do you envisage PeoplePlus returning to previous high margins or this business transition to a low-margin business?

Very good question. And you are right that it is -- I mean, the actual number, I think, is GBP 400 million for Justice, GBP 250 million for employability and GBP 200 million for other contracts, community services, local authorities and other contracts. So some significant numbers there in the bid pipeline. Yes, the Justice ones are the ones where we have the most market share and but we are targeting higher market share because we're performing well in Justice. In the prisons, we're the highest performing business in terms of the performance and the measurements for KPIs in which you judge, we are the highest in our markets. So we're confident that we can win. We're also very enthusiastic to bring new practice and to bring best practice to all of the prisons in which we're working. And we're doing that in the employability arena as well, specifically restart. We really are performing well in restart. And where we are struggling a little bit, we are actually looking at best practice and we're totally focused on our operational excellence. So we're confident in the prospects for PeoplePlus but the world is actually in a high inflation environment, and that has affected margins of all companies, particularly services companies where getting the best people can cost. And so we would look to seek to maintain our margins in the medium term as opposed to improve them, that would be a good result for us.

Thank you, Albert. Just a few other questions here. Just go to further buybacks. We've answered that question already. Regarding the receivable facility at year-end. Yes, very low drawdown at year-end in terms of our financing, and we're in net cash position. So nil draw down at the moment. Talking through some of the opportunities for PeoplePlus. I think, Albert, you covered that just now. And what we see is the impact of increased regulation in the market for Recruitment GP? Albert, you might want to...

Yes. I mean, the impact of the -- look, we're seeing lots of government and opposition talk about flexible markets, how good they are, what are the weaknesses in terms of job security, specifically, the labor administration is talking about how they guarantee -- how they can ensure the company's guarantee minimum hours, which we're, of course, in favor in terms of people working a minimum 10 hours so that they can earn the sort of money that they wish to earn. We wouldn't like to see a sort of iron fist approach, which has unintended consequences. But we're very encouraging of our clients giving our teams and our temps some job security and minimum hours. Those are the big regulatory pushes we see, and we see them as endorsing our very high level and high compliance and good work strategy. We see that supporting us. We also see the actions against tax evasion particularly in the sort of gray market of national insurance and other areas where you see umbrella company, you might have read about umbrella companies and other vehicles, offshore trucks and loans and some of the television presenters have been involved and have actually well publicly been hurt by those schemes. I mean we do not have anything to do with that sort of gray market. And indeed, it works to our favor and our customers do not want to be involved. So we see our compliance and our good work strategy as actually a supporting stride for our strategy.

Thank you, Albert. A few more questions. PWC suggests that hiring is likely to pick up January FY '24. We're broadly in agreement with this. I think our comments are that we are broadly in agreement with that. When that happens, of course, is the question, but I'm sure interest rate reductions possibly and potentially the 6th of March budget statement by the Chancellor may have a bit to do with that as well. Is the focus still on organic growth? And if so do you expect to anticipate further contract wins during FY '24 to increase market share?

Yes and yes.

Yes and yes. Are there any issues with days beyond terms, and then we, at the moment, we always have small things around the outside. But at the moment, we are keeping a really tight ship in both -- in all of our businesses, specifically the recruiting business, the finance and credit control team is doing an excellent job there. Historically, as the recruit market recovers, those who've struggled financially during recession can find the working capital requirement of the recovery the final shore. Are you aware of any of your direct competitors being in financial distress? I think it's fair to say that we come into this year as we did last year with a strong balance sheet as the only listed large-scale blue collar recruiter, I think that gives a level of transparency and insight into our business that our customers may not have from other businesses and I'm sure there are some businesses which are finding it quite challenging out there. But with headroom of over GBP 60 million in our business, we're pleased to be entering 2024 in that position. Almost GBP 1 billion -- next question, almost GBP 1 billion turnover for another year, but no substantial profit, how long can this go on? Well, I think it's important the key measure in our group is gross profit, and that's where the fees are attracted and come into play, the GBP 1 billion turnover includes temporary worker salaries, which, of course, are affected by inflation. I think the performance in 2023 was resilient especially on a comparative basis to the recruitment sector in general, and it's very important to see that. And the group continues to drive its organic growth strategy that delivers ongoing growth in that sector. Next question, in comparison to competitors, how have we fared? Have you seen any changes with your competitors et cetera? I think it's fair to say that our competitors have all reported their trading updates over the last 2 weeks, and Albert's already commented on that. And the -- our 90% plus temporary worker base provides some defense to the softening in permanent recruitment, which we have seen a little bit of but of course, with 90% being in temp, then we do see some of the defensiveness and resilience around that in the last 12 months. So we see ourselves holding up quite well on a comparative basis. Have any of your major shareholders taking advantage of the share buybacks? Yes, a number of our major shareholders have and so that has been a successful process that we carried out last year to the tune of GBP 5 million. And how much do you anticipate to pay in interest costs next year? Well, as we move towards March, in our results we'll see further information coming through regarding interest rates, a lot does depend on interest rates that will be coming in. But through to the end of October, we are protected by our interest rate caps. So therefore, I wouldn't, necessarily in 2024, expect any material differences from the current level of interest rates. And I think that brings the questions to a close. So thank you very much. Albert, do you want to say a last final word?

Yes. I mean, after 2 years of growth, exceeding expectations in '21, '22, we faced very challenging macros last year along with the rest of the sector, but we delivered in line with our targets and the group delivered an excellent cash flow result, which I've always believed that cash is key, particularly in a downturn. And that's where indeed we did excel. It's too early in the year. We're not budgeting for a recovery in the first half. The economic backdrop, I think, will be mixed, and we'll see a range of reporting. Evri is a good one this morning with a very, very good Christmas for the underlying parcel market. And retail sales was down last week reported that it was lower in quarter 4 than it was in quarter 3. So with that, we'll continue. We will, however, see our market share gains continue to increase. Some of our direct competitors locally in the blue-collar market are struggling, we're seeing that. It's particularly with tightening credit and higher interest rates. Many of these companies rely on debt to grow. And our cost savings underpin the strength of the profit after tax result that we're going to be generating this year, clean result with higher cash than last year. So we're really optimistic about that. We've got a tremendous range of blue chip clients. Those are just some of the tip of the iceberg there. And with the Republic win of the Garda contracts in the Republic of Ireland. I'm excited and expecting us to be able to use that when we leverage the expertise in other areas. So with that, we remain confident in the group's prospects. We're glad that 2023 and COVID is behind us. And actually, the economic recovery will unfold at some point. And when it does, we're perfectly poised. Thank you very much.

Perfect, Albert, Daniel. Thank you very much indeed for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of management team of Staffline Group plc, we'd like to thank you for attending today's presentation, and good morning to you all.