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

Good morning, and welcome to the Staffline Group plc investor presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. I'd now like to hand over to Albert Ellis, CEO. Good morning, sir.

Good morning, everybody, and thank you so much for joining us earlier this morning than usual, bright and breezy. I've got with me, Daniel Quint, the group's CFO. I'm the group's CEO, and we're delighted to bring you the results for the first half to June 30, 2024. Moving quickly on to the highlights. The theme of this presentation and these results, as you will see recurs online trading results in line with the market expectations. Within, however, there are a number of variances, recruitment has been particularly strong, and we're delighted to have sort of gained market share in the last 12 months, 18 months. We've had a strategy for strong organic growth, and you'll see those results coming through very strongly in that division's results, and I'll get on to that in the operating review. I don't need to reemphasize the importance that we place on the hours worked. That's a driver of revenue and profits for us and our hours worked are up 9%. Despite the challenges in the recruitment market, the perm performance has been surprisingly good. I'll get on to the reasons for that as well later on. We have a new prison education contract. Publicly now, we're saying that we're in negotiations for the final contract to be signed. And this is with the -- Her Majesty's Prison in Millsike. It's a new prison. We've got a 10-year commitment there, GBP 49 million worth of revenue over those 10 years. Daniel will talk -- take you through the balance sheet strength, some good stuff and some points there in terms of the progress made not only on tight working capital management, but also on the average net debt. So, looking forward to the second half because the first half is always a little bit of an update and a check at the halfway stage of the year. Yes, we've made excellent progress, but actually, the momentum that the strong organic growth has given us into the second half, and this is without any assistance by market demand is that with the additional demand we are getting from our new business wins and expand market share means that we can really capitalize on the coming trading peak. Every year, we have a strong trading peak that lasts about a couple of months between October and the middle of December, and that is where we generate the majority of our revenues and activities. So we're looking forward to one of the best peaks that we've had in recent years, whilst we maintain an absolutely laser-sharp focus on delivery. We will successfully mobilize the contract wins that we've previously announced, particularly in Ireland, where we've got the majority of the new requirements coming out of the Republic of Ireland, that we've secured. We have got at least 50% of the candidates in a process where we are putting them in situ in the Republic. So I'll talk about that when I get to the results of Ireland. And then finally, we've talked about PeoplePlus a lot in the past and this time, we will give you some more detail on what the recent political turmoil and general election has had as an impact on the business. We still won good business and strong business you've seen, but I'll talk about the impact of that commissioning later on. And then finally, Daniel will, of course, talk about the cash flows in the next 6 months as well. Daniel?

Thank you, Albert. Now just moving on to the financials. It's been a really interesting half year, a half year of real progress that we've made based on relationships that we've been working on over the last 2, 3 years. And specifically, I talked about that in our recruiting businesses. And that really is the key driver to the 11.7% increase in revenue in H1 compared to H1 last year in 2023. The propulsion that we have received from the hard work done in our recruitment businesses on working on those core customers and gaining their trust and now really delivering for them throughout the U.K. is a really fantastic site to see, and we see that in the revenue numbers. In terms of gross profit, where we're just marginally up 0.3% on prior year, I think it's also important to reflect on the mix in that, which Albert will do a bit later on in the divisional review, but underlying that is real progress made in the recruitment businesses. And as we signaled at the beginning of the year, some movement backwards in PeoplePlus, but it really is a sign of success in the recruitment businesses when the rest of the recruitment sector is finding it's quite challenging times, and you would hope that a temporary business -- a temporary worker business model is our own. We'd really be able to deliver in these times. And yes, we are. And Albert will go into that in a bit more detail in the division, but to be 0.3% up in gross profit at this time is really good. And in terms of underlying operating profit, group just marginally down year-over-year, but we have seen some relatively steep declines in operating profit in U.K. businesses within larger groups. So I'm pleased with that. And more importantly, within the group operating profit, we're over 50% up in our recruitment business operating profits. And I think that's very important to recognize as well. Final point for me on the key numbers in the bottom right here, we have decided to take an impairment charge against goodwill in PeoplePlus. Albert will go on to talk about the relative political uncertainty leading up to the election and now the transitional uncertainty in some of the commissioning worlds within which we operate in PeoplePlus, does mean that 2025 and -- have some questions in terms of the -- the delivery of the number, and we're making sure we're laser-focused on cost in that business, but we have decided to take an impairment at the moment and taking a cautious position on that business as we stand going forward. So just move to move on to the balance sheet. Over the last 12 months, we've seen a strong underlying trading cash generation of GBP 7.7 million. This has allowed us to continue with our share buyback program as well as be able to fulfill and drive forward that growth in blue-collar hours, which has used up some working capital, but for the right reasons, for growth reasons. We have, as you will see in the top right-hand corner, there's been a tick-up in interest costs. And of course, we all know that interest rates have stayed a little higher than expected for a little longer. We'll see what happens this Thursday in terms of the Bank of England announcement and in the ensuing months around interest rates, but we're watching that very carefully. But what's important, I'll come on to in a moment is that our 3 months average daily -- KPI that we're presenting for the first time. So that's a rolling daily average for 90 days is GBP 3.3 million less at GBP 2.8 million of net debt at the 30th of June. But I've got a graph on that, which I'll show you. And very, very importantly, what's key in terms of the last bullet point on this slide, but also the boxes in the bottom right-hand side of this slide is that the financing and the covenants have lots of headroom, so over GBP 50 million of financing headroom, very low leverage, multiple to EBITDA and good interest covenant position. So we're in a good position as we enter H2 with a balance sheet to take advantage of the opportunities that the -- our businesses have delivered on the front line in our operations. And that should really help us to drive forward H2 as Albert has already referred to. So just coming on to the year-over-year net debt position, which has increased from GBP 3.5 million to GBP 9.2 million, but I wanted to just break that down a little bit. And you'll see us split it into 2 halves. You'll see that we generated some very strong trading cash flow of GBP 13.3 million. And actually, at the end of the first half of this presentation, in the middle, you'll see the first blue column of GBP 4.2 million of net cash. And that is before share buybacks, the share purchases as well as non-trading cash flows. So our trading cash flow took us from net debt of GBP 3.5 million last year to GBP 4.2 million of net cash. And then we did deploy that capital in both terms of share purchases totaling -- and share purchases and funding totaling GBP 9.1 million as well as the closure of our skills business over the last 12 months, amongst other reorganization costs, making sure that we're fully primed for 2024 and beyond of GBP 4.3 million. And that's how we get over a 12-month period to the GBP 9.2 million of net debt. And just moving on to my final slide on net debt, which is a new slide, something we've been monitoring generally, is having a look at net debt, not on a spot basis, on the 30th of June, but on an average daily basis over 3 months leading up to the 30th of June. I'm sure you'll be aware that a business like ours has some peaks and troughs in terms of the money we spend from day to day, from week to week from month to month. So a business like ours spends money and pays HMRC, PAYE and VAT and those happen on various days in a month. And therefore, if you look at over a 3-month period, that's actually quite a useful way of looking at our performance on net debt. And you'll see at the 30th of June on an average 3-month daily -- the average daily rate over the 3 months preceding the 30th of June 2024, our net debt was an average of GBP 2.8 million. On the same basis, last year, the 30th of June 2023, the 90 days, 3 months leading up to that day, if you looked at the average daily net debt, that was GBP 6.1 million. So that shows a GBP 3.3 million improvement and that smooths out any ad hocs that have happened over the 90 days leading up to those dates. So I think that's quite an important analysis to be able to look at. And it's a good platform and springboard that we enter H2 2024 on. And I'm going to hand over to Albert now to just reflect a bit more on our divisional performance.

Thank you, Daniel. So looking at the divisional results, and I'm going to start with PeoplePlus, as Daniel has alluded to, we've had a good year so far. And this year is expected to be in line with expectations. PeoplePlus has also secured the substantial contract with Her Majesty's Prison in Millsike, GBP 49 million over 10 years. So there's plenty to be optimistic about. However, because it's in the public sector and the majority of its revenue is derived from the public sector, the recent change of administration and political uncertainty leading up to that has meant we've seen a commissioning trough. Bids being paused, our outstanding results being delayed right across the piece. And so that has pushed back in effect, our 2025 and 2026 earnings. And so PeoplePlus is marking time, but we're very confident that the new administration, as all of them do, once they get their feet under the desk, they prioritize the spending and they allocate the budget. It's just a matter of waiting through that transition time. Anyway, that's PeoplePlus, pipeline delays, but a new contract with HMP Millsike, however, it's in line with expectations. Looking at recruitment Ireland and moving to the middle there, that really has bounced back from last year. Last year, our Irish business was affected by the white collar recruitment declines, but has bounced back tremendously. As you can see, the true test of a recruitment business is a gross profit performance, and that's up 6.6%, the highest gross profit increase in the group, mostly driven by a strong performance in permanent fees, comprising not only placement fees and commissioning, but also the testing, the consulting and the assessment side of placing permanent candidates into work in Ireland. So strong results there from the permanent side of the business, which for me, having been in the sector for many years, is a really good indication of strong relationships and an excellent understanding and execution ability on your permanent debt, challenging in a difficult market, but nevertheless, very impressive, up 30% year-on-year. Very strong Half 2 contract pipeline continues into the autumn and into the final quarter of the year. We're expecting the second half to be much more significant than the first half as these contracts start coming on stream. And so with tight cost control, we're expecting recruitment in Ireland to be a strong performance by the year-end, even beating a strong performance in the first 6 months. And I don't want to sort of elaborate, but if you look at the 50% increase in operating profit, it does infer that, that cost base has been held rock steady and with a tight control of management over the overheads. And now finally, to Recruitment GB really is at the heart of these excellent results that we're presenting this morning with revenues up 15%, somewhat flattered a little bit by the fact that we have wages that pass through our revenue and our cost of sales lines. Those wages, some of the minimum wages have been raised with the recent minimum wage uplift and, of course, the uplift last year. So there is an inflationary element there but that's only about 8%. The rest of it is above minimum wage. The rest of our revenue is unaffected by the lift in minimum wage and represents a true strong organic growth performance. And as you can see, that's converted to gross profit of 5% increase and an underlying profit that's up 55.6%, quite phenomenal in the current market. Really, it's about temp hours. The news -- the new business that we've won and the new business that has been taken on the expanded business in existing customers has yielded an increase in temp hours of over 9%. But that's not where the story ends. The permanent recruitment division has also increased revenues by 11%. It's a small number, yes, but it's still an improvement. And this is a result of a contract win in the past 18 months as well. So Recruitment GB really doing well compared to last year, so did Ireland PeoplePlus marking time. Now, I want to look on the next slide at some of the reasons and the names behind the results. And I'm not going to go into too much detail. What I'm going to do is try and give you an insight as to why these household names, names that are recognized anywhere in the U.K. I doubt we've done so well. The first point is that the business is committed in a way that I've not seen in any other recruitment business to a delivery culture of absolutely excellent in quality. You cannot work with those sorts of brands without absolutely being committed to delivering a quality service at the very highest level. And that's been the key driver for expanding our market share, outperforming competitors in delivering temporary candidates into work on time and at the right sites. Now, that's part of the story. That's the majority of the story, but it also relies on a very strong compliance culture. And that's very important for these brands, these publicly-listed brands, they want to work with partners that not only can deliver, but can deliver in a compliant fashion. So we're very proud of all the controls and the structure that's being put in place to provide that assurance. And thirdly, last but not least, it's the ability to finance the payrolls, substantial payrolls in some cases, up to 40,000 temps across the U.K., averaging about 30,000 to 35,000 on a weekly basis to be able to fund that safely on time every week, every time that's very important to our customers and our confidence for our workers. Now I just want to pick out on the bottom left-hand side of that slide, a little interesting indicator of quarter 3, quarter 4, which is that you can see in quarter 1, the difference year-on-year is smaller than quarter 2. So quarter 2, we've actually seen an acceleration of ours, which that momentum should feed into quarter 3 and quarter 4, I'm confident that we will see that momentum continue, which actually means that the 9% average includes a slightly weaker first quarter year-on-year versus quarter 2, which has got measurably stronger. So that is clearly an indication that the underlying rate of hourly -- weekly hourly uplift is stronger than the average 9% at the end of June. And then finally, just to give you some information on the market share to show you the signs behind what we're saying with 41% on average in our top 20 customers in blue collar. The market share has increased by 7 percentage points to 48%. And you that know -- and steady market share will know how challenging that would be over 20 customers and what a success that has been. So that's the core reason for this morning's results and the success that we're presenting. Daniel?

Thank you, Albert. I just wanted to dwell once again, as we do at the year-end on the value that the group in combination between its off-line recruitment brands across the U.K. as well as PeoplePlus brings to our customers. And Albert spoke about this a little bit just before in terms of compliance, but we're also delivering social value, finding our workers' jobs and making sure that they're paid on time and get into good work opportunities. As you'll know, in PeoplePlus, we educate prisoners. And of course, that's a very, very topical theme, post the election of our new government for the -- following the 4th of July. And we believe that our business and our group is well positioned to work in the new environment, both in terms of in recruitments and our PeoplePlus businesses where our focus is to make a positive difference to people's lives and deliver social value to the communities in which we operate. And we do that in a number of ways and just to reflect on some of the realities of what we're doing and delivering out there in 4 businesses and for disadvantageous groups throughout the U.K., trading circa 8,500 people for vacancies available through our social recruitment partners, getting nearly 100,000 people into work annually. We've had -- maybe 3,500 unemployed people into work during half 1 already and over 8,000 learners and 72 prisons have started over 14,000, nearly 15,000 courses in H1 2024. And we really feel as though we can add value to the people that we work with, the companies that we work with. And of course, that translates through to a variety of our stakeholders. And I think it's important just to emphasize those areas that we contribute to the U.K. And now just handing back to Albert to conclude.

Thank you, Daniel. Just a point on the environmental, social and governance aspects, which obviously is very important. But for me, there's a commercial benefit in the businesses working together. We've actually seen tangible results where customers appreciate and indeed use services and consulting for both sides of the divide between recruitment and PeoplePlus. So in PeoplePlus as transformation, one of their objectives was to generate more diverse and nonpublic sector-derived revenues. And that has assisted the group in terms of its broader approach to customers. And we've seen referrals from people placing to Staffline GB, and we've seen the reinforcement of relationships from one division to the other. So working hand in glove very synergistic. So not just nice words, but also meaningful activity and P&L benefit as well. So finally, current trading and outlook. Look, I mean, I've gone through the Recruitment GB. And as I said at the outset of this presentation, this is an update. It's a half year sort of quick report card on where we are. The majority of the revenues and profits will come in the second half. And what we do in the first half always informs what happens in the second half. And with the momentum that I've just explained in terms of hours exiting quarter 2, into quarter 3 and quarter 4, Daniel and I and the management team are confident that we should see a strong peak, stronger than recent years, just purely based on the amount of volumes, the strong organic growth that had been secured in the last 6 to 18 months. So with working hours up 9% on average in the second half -- in the first half, we expect that momentum to continue. We're also seeing a trend in our customers for -- particularly in logistics, for consolidation. And that puts the supply chain where we are at the head of that particular supply chain, and we've got the largest share. It puts us in a unique position to expand our services into businesses that we may not have the sort of market share that I've just been talking about. So the logistics sector consolidation really does present opportunities for the business. So Recruitment GB, second half, expecting a good peak, a strong peak, working to make sure that we can deliver on it and benefiting from consolidation in the sector. In Recruitment Ireland, look, I've talked about the new contracts, both in March and earlier on in the presentation. But I can't emphasize this enough. All the revenues coming from those contracts, majority will come through in the second half this year's allocation at least. So we're expecting those new contracts to bring benefit into the second half in Ireland. The Republic of Ireland continues to be a strong source of growth for us. We've invested in the Republic in recent years, and we are benefiting from the different drivers of economic growth and demand in the Republic. Having said that, Northern Ireland has suffered a little bit from the mass installment. It has suffered a little bit from public -- from the sort of contraction in public sector spend as a result, but that's all being freed up by the new arrangements and the new developments with the Northern Irish government, and we're confident that, that's going to improve continue into the second half, we'll see public sector spend coming into line really with the rest of the U.K. So very confident in the results recruit in Ireland. And as I've said, PeoplePlus, look, these current -- we've had extensions restarts been extended till 2028. We've seen new business wins. The pipeline impacted really just is a shift of demand and earnings from 1 year to the next as we wait for that transition period to conclude. And I'm very confident that the current government's focus on economically inactive, a huge pool of job seekers and individuals, adults that are not in currently in work, I am confident the government will have programs to enable those that are not currently in work to get support to get into work. And that means the PeoplePlus employability business, which has suffered from the recent political uncertainty will stage a nice comeback for us. And then finally, obviously, just to reinforce that overall and individually, the businesses are all performing in line with our expectations, and we expect that the Board is confident in the full year 2024 outcome. So with that, thank you for listening, and thank you for your patience. I have been a little bit earlier this morning. Hopefully, that's a benefit. And so I hand you back to our Chair.

Fantastic. Thank you very much indeed for the presentation. [Operator Instructions] I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A can be accessed via Investor dashboard. As you can see, we've had a number of questions submitted throughout today's presentation. So if I may just hand over to you. Just click on that Q&A tab and where appropriate to do so, just read out the question and give you a response and I'll pick up from you at the end.

Thank you very much. So I will share this if that's the case. So the first question, can you expand on the significant deterioration in working capital? So I think I've covered that. I would just like to reiterate 2 messages there. The first is that we've had growth in our temporary worker out and you can see that coming through in our Recruitment GP profits and revenue growth and also gross profit growth and operating profit growth. So that is, I would say, working capital investment. And secondly, as announced over the last 12 months, we've also handed cash back to our shareholders through share buybacks. So those are the 2 drivers of that. But I'd like to emphasize the first one that we look at this business as a real investment opportunity. So that's the primary driver there. In terms of second question, what the next steps and the strategy to transform PeoplePlus into a stable annuity business? I think, Albert, you touched on that, but you might want to maybe just give an additional moment on it.

Yes. We have actually got a program of keeping our costs in line with current demand. So when we look at our revenues and our revenue forecast, keep trimming our costs and keeping them in line with the revenues. We certainly don't want to reduce the business's operating capacity because we've got GBP 190 million worth of prison education services bids outstanding, which are being pushed back and we're expecting a good result from those bids. And so we want to maintain the capacity of the business to deliver. And therefore, our objective is to just trim and keep our overheads in line with revenues until, as I've said in my presentation, we see more demand coming through from across the piece there in government. We've also focused on generating revenues from the public sector. So, we feel we made good progress from the private sector. We feel we made good progress in that. We are generating a lot of interest from large companies who want social value recruitments as we want to more than just transactional approach to hiring mainly people in work in -- on minimum wages from very challenging backgrounds. The companies are very interested in that. And that is starting to generate some revenues. We've got a long way to go. But in terms of transforming it into a stable annuity revenue base, I think we haven't finished that business by any stretch of the imagination, but well on our way.

Thank you, Albert. Next question is with a diverse offering, how do you look to balance capital allocation between growth and market expansion opportunities and that of returning capital to investors? That's a really excellent question. I think our perspective on that certainly is open to adjustments over time the -- over the last 12 months, and that's predominantly in the second half of last year and in the first quarter of this year, we carried out share buyback programs and funded the Employee Benefit Trust at share prices of low 20s, high 20s, circa 30p. And in that position, the -- those decisions were certainly compelling. Of course, we will approach their decisions in terms of returning capital to investors in a dynamic fashion as we go forward. But as I mentioned a bit earlier, the opportunities to grow our market footprint, especially in our recruitment divisions. As we have started to see the benefits of, again, in gross profit and in operating profit in H1, and we hope -- obviously, see that continue in H2, is a decision that we took that decided we should invest in that expansion. There are core customers and key leaders and key brands in the U.K., which we are partnering with, and we see real value in continuing that expansion. So it's a dynamic process and we will continue to evaluate that on a -- in a very dynamic fashion. But not a decision that you make in one day and then this is only stick with that firm decision. You need to see the way the landscape adjusts et cetera, as you move forward. Next question, please, can you talk through the pipeline in PeoplePlus.

Yes, that's relatively straightforward. In March, we said that we had a pipeline of GBP 310 million. GBP 120 million of that, GBP 120 million has now been announced, of which our share has been GBP 49 million to just under 50%, which we're pleased about. It is -- the mighty contract with HMP Millsike is a long contract. It's over 10 years, provides a lot of visibility and goes to stabilizing that strategic objective with PeoplePlus in the long term. Of the risk, which is GBP 190 million, we are still awaiting an outcome for that. And so those results have been delayed quite significantly into 2025. So we will wait for those, but we're more than confident that we will be able to win our fair share of those. So that's GBP 310 million announced, of which we've had GBP 120 million, of which GBP 49 million, we've got news, positive news, and we've secured. And then the rest, the remaining GBP 190 million, we're awaiting news on that, which is likely to be first quarter, second quarter next year.

Thank you, Albert. I think this is the final question, which is given that PeoplePlus is still profitable, why is our need to do the goodwill impairment at this time. Good question. The answer to that question is it's really based on the carrying value of goodwill that, of course, was incepted on acquisition of the businesses and the primary business of A4E when it was acquired in 2015, which brought -- was brought together with a couple of other early acquisitions to create PeoplePlus within the Staffline Group. And although correct observation that PeoplePlus is still profitable and will be going forward. The level of profit didn't necessarily, at the moment, substantiate the carrying value of the goodwill and the value that was on the balance sheet at this point in time. And that is the basis upon which we took -- taken that impairment charge and have reviewed those numbers at this time quite simply. So I think that is the last question from me before I just hand back to Albert for one moment, I'd just like to say, thank you very much for all those who come to the presentation this morning. And thank you very much to all our stakeholders, whether those are investors, customers and very importantly, our employees for what has been a really good first half in a challenging environment, especially in the context of the wider recruitment sector and also to our employees, again, thank you for your hard efforts and especially in advance of H2, which we see lots of opportunities in, which will require lots of hard work, but we see some real opportunities for success in H2. So thank you very much from me. Albert, over to you to finish it.

Yes. Thank you. And as I said, just to leave you with the key message, there's a lot of focus on PeoplePlus because there's quite a bit of information and new information. PeoplePlus is 10% of the group's -- the contribution of the divisions, 90% is the recruitment business where we've seen in excess of 50% uplift in operating profit in the first half of this year, and we are more than confident that, that momentum will continue into the second half. So for first half, summary on our reports here at the 6-month point, we're more than confident that the full year is going to be in line with expectations. We feel proud that the group, its customers and its supply chain has beaten the sector in terms of its results, and its management of its strategy, its strong organic growth, it's focused on excellence in delivery, which you've seen coming through those results. And finally, very important to us is the share buyback, our returns to shareholders. We're generating at the trading cash flow year-on-year level with generating strong cash flows underlying, and those will be used to buy shares in the future, as we've announced, and of course, to strengthen -- continue to strengthen our balance sheet. So with that, thank you very much.

Fantastic. Thank you very much, indeed, Albert, Daniel. Thank you for updating investors today. Can I please ask investors not to close the session? It should be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. It's going to take a few moments to complete and it's 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, and good morning to you all.