Trading Update

Jan 16, 2020

Earnings release

My name is Rosie, and I'll be your coordinator for today's event. Please note this conference is being recorded. And for the duration, your line will be on the phone only. However, you will have the opportunity to ask questions at the end. If you require assistance, please press star 0 and you'll be connected to an operator. I will now hand you over to David Phillips, Head of Investor Relations to begin today's conference. Thank you. Hey, Rosie, and good morning, everybody, and welcome to Hayes quarterly update call for the 3 months ended 31 December 2019 the second quarter of our 2020 financial year. I'm David Phillips, Head of Investor Relations, and here with Paul Venables, Group Finance Director. Before we begin, please be aware that this call is being recorded with the recording accessible using the number and the code provided in the release. Be aware, our discussions may contain forward looking statements that are based on current expectations or beliefs, as well as assumptions on future events. There are risk factors which could cause actual results to differ materially from those expressed in or implied by such statements. He has disclaims any intention or obligation to revise or update any forward looking statements that have been made during the call, Regardless of whether these statements are affected as a result of new information, future events, or otherwise, I will now hand you over to Paul. Thank you, David. Good morning, everybody, and thanks for joining us. I'll summarize the key themes of today's update, discuss regional performances before taking any questions. And as usual, all net fee growth percentage that I did for the quarter will be on a like for like basis versus prior year. Key points. Growth in the quarter declined to minus 4% with December particularly tough down 6% impacted by certain specific external events, which I will discuss later. Compressed down by 3% and perm 6%. Fancy translation had a negative impact and reduced like for like net fees by 3% in the quarter. We highlight the following key features in the results. Firstly, underlying trading in October November was minus 3% versus the working days adjusted minus 1% in Q1. This decline was driven primarily by 2 factors. 1st, the deterioration in German trading, which as you can see declined by 9% in the quarter, from minus 2% underlying in Q1, with broad signs of reduced business confidence and increased level of client cost control more on this later. 2nd, growth in our Asia business was heavily impacted by the continuing disturbances in Hong Kong. Outside of Germany and Asia, the rest of our business was remaining subdued with broadly sequentially stable in line with our expectations. However, as December progressed, group trading was materially impacted by specific external events in 3 countries which represents circa 45 percent of our group fees, namely the French general strike, the tragic bush fires in Australia and the UK election. These reduced our group growth rates to minus 4% for the quarter and a group fee exit rates for December of minus 6%. 3. These trends and events combined with our continued investment in strategic long term growth markets for its recent adverse FX movements, then we anticipate half 1 FY 'twenty operating profit will be around GBP 100,000,000. All group consultant headcount climbed by 1% in the quarter and 2% year on year. I, during the quarter, we reviewed our overhead cost base in detail As a result, overhead costs reduced by GBP 5,000,000 in the second half. Additionally, given the step down in Germany over the quarter, we are reviewing its cost base. We continue to make selective investments in markets where we see strong growth opportunities such as IT Specialists and globally and the USA. And 7, our cash performance has been good as paying a £122,000,000 in dividends in November, 10,000,000 more than November 2018, we ended 2019 with GBP 15,000,000 net cash. I'll now comment on the performances in each detail in each region in more detail. InZ, net fees in our ANZ division, which represented 17% of group, declined by 7% versus a tough growth comparative. The firm market slowed materially in December with bush fires, particularly impacting sentiments in the private sector, especially in New South Wales. That remained stable, and our temp business decreased overall by 2% whilst perm was down 15%. Public sector fees fell by 2% with private sector down 9%. And our Australian business saw net fees down 7% In New South Wales and Victoria, together 56% of our Australian business, that fees fell by 7 11% respectively. Greenland, our 3rd largest state decreased by 6% whilst Western Australia fell by 5% and ACT by 4%. Both fascism level, office support fell by 19%, Construction Property, our largest business in Australia declined by 14% and financing finance also by 14%. So the net fee growth in HR was strong, up 12% and sales and marketing 4%. Zealand which represented about 5% of ANZ delivered its 2nd consecutive quarter of growth of a solid 4%. Headcount in AIMs decreased by 1% in the quarter and by 6% year on year. Germany. Germany, our largest business at 26 percent of group net fees decreased by 9%. I continue to see tough macroeconomic conditions and increasingly broad signs of reduced business confidence. This is most evident in the manufacturing and automotive sectors but with clear signs of spreading to the finance and services sectors. Our Temp And Contracting business, which represented 83% of Germany's net fees, was down 10 percent. This was driven by a 4% reduction in worker volumes and a 6% reduction in average terms of contracted hours per assignment. With increased cost control through the quarter and the direct impact on our fees. This is typically evident prevalent in our largest clients in Engineering, Automotive And Financial Services sectors, and continued to slow and was down 3%. We continue to see growth in our German Public Sector business now 11% of net fees, which was up 6% in the quarter as the private sector was down 11%. The largest specialism of IT 41 percent of German net fees was down 6%. Engineering, our 2nd largest down 12% driven by the weakness in Manufacturing And Automotive Sectors. Accounting Finance was down 9, and construction property was down 17%. However, we saw growth in smaller nationalism such as sales and marketing up 16% and legal up 7%. Consort headcount decreased by 2% in the quarter and by 4% versus prior year. Pickering Island, UK and I, which represented 23 percent of the group. Net fees decreased by 4%. Our 10 confirmed business fell 1% and 7% respectively, to the private sector perm heavily impacted by the continued economic and political uncertainty, which further increased in the run up to the UK election. Handalate confidence continued to weaken the cost of the quarter and client confidence fell materially in December. Both in the public sector 31 percent of UK fees was good at 8% and in the public sector, temp grew by 7% and perm by 12%. Meanwhile, the private sector declined 8% with 10% 5% and turned down 11%. All regions traded broadly in line with the overall business, except Northern Ireland, which is up 4% and the northwest down 12%. Our largest UK region of London declined by 1% while our Irish business decreased by 7 term. I thought our 5 largest specialisms, net fees in IT grew strongly at 11%, but accounts in finance fell 4% office 43% and construction property 8%. Finally, education and science of stabilization, we sees down 3%. The top headcount decreased by 1% in the quarter, but increased by 1% year on year, driven by investments in our IT specialists. Rest of the World. Our largest division of the Rest of the World consisting of 28 Countries and representing 34 percent of group net fees delivered net fee growth of 1%, but in which five countries delivered growth of more than 10%. Eurepex Germany decreased by 1% with a significant step down in growth in December, particularly in our largest rest of our country of France, which is impacted by the general strike and declined by 3% overall in the quarter. Netherlands was tough and 12% and Spain fell by 2%. The growth in Italy and Belgium was good, up 9% and 6% respectively. In the Americas, net fees increased by 6% in the U. S, Our 2nd largest rest of the world country by fees delivered a strong quarter up 13% and Brazil was up 1%. Canada, however, was tougher with fees down 5%. Asia was flat overall, driven by strong 12% growth in Japan, together with an excellent growth of 25% in Malaysia. China, our 3rd largest rest of our country declined by 9% with our Hong Kong business becoming increasingly difficult with net fees from 10%. But overall consultant head transfer division was up 1% in the quarter, which decreased by 1% year on year. Cash flow and balance sheet cash generation in the quarter was good and we ended the period with net cash of £15,000,000. This is after paying almost 1,000,000 in court and special dividends in November 2019. Current guidance and trading. In addition to the comments I made at the start, I would highlight 3, 3 further points. First, the rebound from the specific events in France, Australia and the UK, plus the overall new year return to work period will have been an important driver of the group's second half performance. Could provide a detailed update of our interims in February. Question, we expect group headcount will be down modestly in Q3. Third exchange rate movements, we remain as material sensitivity to the group's reported results. If we re translate FY19 profits at current sterling spot rates, We estimate a negative £3,000,000 operating profit currency move since our Q1 trading update in October. And this equates to a £9,000,000 currency reduction since we reported our prelaunch. Here's some closing messages. Overall, we expect near term market conditions to remain difficult, and we see continued opportunities for growth in key markets like IT. That's our people balance such investment opportunities with managing our cost base while protecting the infrastructure market leadership. In conclusion, this has been a tough quarter with a combination of worsening conditions in Germany and specific external events in 3 of the major businesses. This combined with adverse moves in currency has negatively impacted the group's first half financial performance by more than we expected when we talked to the end of Q1. However, the combination of our strong global platform are highly experienced management teams across the world and our financial strength gives us confidence for the future. Thank you. So as a reminder, if you would like to ask a question or make a contribution on today's call, And the first question comes from the line of Bilal Azis from UBS. Please go ahead. Good morning, everyone. Just a few questions on from my side. Firstly, I have these thoughts, the volumes decline, and hours were, per assignment also declined. Can you help perhaps comment on what impact you've seen if any on your fee rates within the provision currently. Separately, Paul, you've indicated that you're now assessing cost base in Germany now. As well. Can you perhaps highlight some of the plans as a largely headcount you're looking at within that region or the other staff you can do as well? Thank you very much. A lot. The the the reduction in the quarter, I think I tried to set that very clearly early on. And within my standpoint, The fact that hours reduced by 6% is the key part, and that really shows that our clients have moved from. Modest cost control and adjustments around the edges to a much more concerted reduction in cost base. And that's what really drove the reduction in fees. Moving on to fee rates, we've seen little and no impact so far on fee rates. Of course, that will always come in in any weeks, a period of time. You know, the backdrop to Germany is we've seen GDP growth, which almost 2 a half percent, 2 years ago, fall to very modest level, at the moment. So I think we'd expect see our clients focus on cost, but at the moment, it is much more around rather than what we do for them. It's around the hours per assignment and the level of assignments. And then moving on to the cost base, look, this is just normal housekeeping at this stage. We've already done quite a bit of housekeeping around the overhead cost base. Over the last year. But clearly, we were 2% -2 percent working days adjusted a quarter ago. We'd expect it to be in the minus 4 or minus 5 across this quarter, and we're sitting here at minus 9. So all we're doing is just a kind of review of the cost base and, I think radical, we've got fantastic long term opportunities in Germany. The structural opportunities are undiminished, but it's clear that we're going to have a more difficult period of time for the next 3. Thank you. The next question comes from the line of Paul Checketts from Barclays. Please go ahead. Alright. Cool. I've got 3, please. That's that's just continuing the theme of Germany. The the reduction hours worked. Do you think potentially the next step? Is it is it how it unfolded originally, the the clients reduced to the number of hours of of people over there? They have in, and then they subsequently reduce the number of people if they want to, address their cost bits a bit more. And if you looked at this, Is it just really a phenomenon in the manufacturing and automotive sectors, or have you seen it elsewhere? The second is, can you give us a reminder if the year on year changes to the cost base and look what the ring fenced the amount and depreciation, etcetera, but can you just give us an update? And then know, lastly, if I if I step back, some of I appreciate it. It must be quite difficult to deal with on the end of the period or so week, but it feels like some of the factors are are temporary and the strikes in France, bush fires, hopefully, UK election now rearview mirror. Is there a sense in the business that, actually that temporary and things will start to improve? Yeah. Quite quite wide ranging questions, sir. Also if if I don't answer them all, please come back to me. Look, I think in in in Germany, we've had both parts of it. So the volume reductions have been primarily in the manufacturing space. But what is clear is we've gone across this quarter and fairly early in this quarter, is that this has now moved into the more broader German economy. Thinking back to several factors, really. There's been a lot of discussion in both the German press about, you know, technical recessions section. I covered that on the call last time. So Germany was always the one I was nervous about coming into this quarter. I think what we've seen is a complete overtime band been put in place pretty much across most of the clients we deal with some much more focused HR cost control. And then what we've also seen, both, in the manufacturing space, but also within the financial service space because it's easier within the contractor part of it to reduce hours further if you want to, and we've seen a situation where newer assignments have been have a clear expectation and delivery of more 4, 4 a half days a week working rather than full. Secondly, overtime ban and thirdly, reduced hours. So I think this is a real notch of the cost control. And it's difficult at this stage to see where this might go quite measured. No real drama, if you like, within the business. Good discussions we're having with our clients. And it is all in the higher end companies that we deal with. It's the large companies we deal with. What's been interesting is if I look at the understand that we've opened into over the last period of time. We've seen continued growth in that space. And therefore, you know, if anything for me, it it leads to in the strategy accelerating the additional offices and the rollouts, because I think the long term opportunities, are and diminished. Secondly, on the year on year changes in the cost base, clearly, this is kind of early. No. I felt the need to talk to a half year profit because overall, I've got 3 facts. I've got, you know, a 3% underlying for the quarter, which went to 4% because of what happened in December and the 3 specific events. And as a result, we're at GBP 100,000,000. I think when you look at it, the biggest part of it is is fee reduction because these overall are down by percent. So, you know, that's certainly gonna be £11,000,000 reduction in fees at the straight off bottom line because, really, we're in is the productivity is is reversing, you know, when when decision making gets a bit slower, things like our reduction, that doesn't lead you to anything to your headcount at all. So if I was the assignment reduced, you still need the same amounts of consultants to deal with those clients the fees has fallen through the bottom line. We talked about some ring fenced investments. I talked on the last conference call to £5,000,000 and we've certainly had a good £3,000,000 in here. There is, £3,000,000 of property depreciation if we remember. We get some numbers out, when we did the results. So it's 3 sorry. Actually, it's £5,000,000 of the property and depreciation. Then on the flip side of that, you get a 1,000,000 pickup in IFRS 16, £2,000,000 for the overhead reductions we did in Europe. And then finally, I think it was George asked on the last conference call about underlying inflation in the business, and I talked to about 1 a half percent cost inflation that would be about kind of £5,000,000. If you add all those together and a bit of exchange, it takes you to nearly where we are today. And then finally, when we think about the the factors, first of all, the the Australia events are, really quite troubling for that business. That's kind of irrelevant, but we'll have all seen the fires, the deaths. Our focus at the moment is on the thousands employees that we have there. The 20,000 10ths and contractors that we have in that business and and so far, Sure. There's been no injuries to our own people, but we continue to be focused on that and supporting them. And on Australia, I really don't have a view at this stage, Paul that's a hard one to call. I think on the other 2, I think on the UK, really what happened in hindsight, there's any engagement and activity stopped fully in perm from about 4th or 5th December. And, Our clients didn't want to engage, and interview numbers were heavily reduced. Our candidates were very slow in coming back and going for second interviews, etcetera. And therefore, we go into every period with, an amount of secured. As you guys know, we only book permanent people start in the month or 1st day after the month. We went in with a, you know, a level of support, and that normally goes up by predictable amounts cost a month. That simply did not happen. In many respects, it was, as I said, like the shutters being called up on perm from, clients. I think the fact that we've got, we've had uncertainty in the UK for a long period of time now with Brexit and everything else. We don't have the added political uncertainty, and I think we're positive for all of on this call for all the businesses, but I have certainty. We have a a government with a large majority with a clear plan. And I think what that will do is it will help candidate confidence the most in the short term because if you remember on the previous call, I talked to Whitney in candidate confidence I think we'll see an improvement in candidate confidence. I think for clients, they now have certainty, then the final tariff agreement is going to be. And then the service sector, they don't know. How that will work. However, they know that there is a government with a clear plan. And therefore, I think what we've probably had in December is a bit in the UK, And the really interesting thing is I actually think our UK business had a really good performance across this quarter other than the last 3 or 4 weeks. We were trading at -2-3. I think that was really good. And therefore, I think that we'll, you know, January paid up weakness in December's moved a bit to January because, of course, you've reduced activity level. So you don't catch that back immediately. I think the fees, you just have a one off loss of fees, but I think certainly by the time we get into February, we'll return through a more normal level. And then finally, in France, I think the the reason let me give you some an example in France. We expected to be +3 percent in this quarter. France in December, for which the business's 70 80 percent firm was minus 13%. So that turned a plus 3 to a minus 3. And, again, I think it was much greater in December because it was easy for activity to slow down as you had a business period coming. And with a massive transport disruption, it was easy that things just kind of stopped, got up going and stopped. I think you don't get hit for the same thing twice and whilst the general strike is still continuing and therefore, we don't know when it will end, but I don't see anywhere near the same impact when we come even into January because I think we're looking certainly into January, Christmas is gone. There'll be a normal return to work. You know what? Generally start, it's gonna go on for another 10 days, 30 days, 50 days because they're gonna get on with that live. So what we were trying to do in these results say, look, across France, across the UK and across Australia, I'm taking a hit of not 4 or £5,000,000. And, hence, why We've done the announcement as we've done it. I think France that they I think you just lose the fees. It goes across. I think the UK in the end is a is a good part. And then Australia, it's far too early to tell. So what we've tried to do today is set up the first half profitability clearly on the cost parts of it, you ask me about call roll in for the second half. Clearly, we've got the currency move, which reduces the second half. And January, it's going to be a little bit more difficult than it would otherwise have been. But otherwise, you know, we've got a great business, and we're gonna continue doing all the good things that we're focused on. Thanks very much. The next question comes from the line of Matthew Lloyd from HSBC. Please go ahead. Good morning. Just one question, really. I suppose it's similar vein for everybody else. Is it's very early in the year to know what's going on. And the tone seems from you to be more bearish than perhaps from some of the other businesses, and there's some of it being mix and and various other things. Is there anything specific, that we should be aware of? Have you lost a big MSP RPO that will affect the first half of this year or or something like that that that we should perhaps think through. I mean, 1st of all, MSP RPO is about 15% of our group. And secondly, that business grew across the first 6 months of the year. So there's there's nothing in that place. I think they're they're sitting there on 16th January. And so I'm I'm kind of confident on UK because I think the election result helps. I tried to say that, but Australia, it's far too early to have any view on that. And, I think I think we're still in a in an uncertain world. We come back to the discussions we've had on previous calls. You know, I I trade deal between the US and China that sticks, which then leads to a reduction, in further tariffs And that's how there were no other kind of political or or military type events. All of those are important in putting an underpinning under confidence. But I think the positive there's a lot of uncertainty in these results already. And, I'm not seeing that uncertainty increasing at the moment. Equally, I don't think anything's happened in the world over the next 1 month 3 months outside of the UK, which is going to lead to any sort of real pickup. I think we're gonna be in for a cautious next 6 to 12 months. And for us, the nice thing is you only get hit by a week first and therefore, the minute gets into the underlying data on sentiment. You know, you stabilize. And actually, Matthew, if I could put this in another way around, I had expected to be covering an IMS today, where I talked to minus 1 going to minus 3, where I talked to the weakness being Germany related, and why I made a statement which is so 70% of our business is sequentially stable. And I've tried to get that over in the way I've done this presentation, but I do think that's important. So we've had 3 events in those 3 countries, country, and Australia. But otherwise, up until that point, I think we were seeing the natural parts of some stabilization and some of our growth some of our clients returning focus on growth. So I remain confident that clearly we've got some uncertainties to deal within the near term. Thank you very much. You can press star 1 now. The next question comes from the line of Schroeder Alvar from Morgan Stanley. Please go ahead. Hi. This is Anvesh Agarwal from Long Stanley. Just a quick one, really. I know it's kind of too early to come and then interrupt you answer that question. But, how should we kind of think about the profitability in 2nd half, really, assuming that some of these one of events means that fee growth remains in line with what what you're guiding to in terms of exit rate? Yeah. Look, I've only been doing this job for almost 14 years, and I don't talk to, for your numbers because I think in a business where you've 3 to 5 weeks visibility and minimum and secured forward revenue stream. You're, you know, you're kind of using a crystal ball. What we can say is if we strip out of those events, underlying fee declined 3%. In this quarter. And that's kind of the fact that we talked about. We haven't got distress, in any somebody's tapping on their keyboard if you could just cancel a second. We don't have, we don't have distress in any of the major markets, but clearly there's an uncertainty in Germany. So Underlying minus 3, the real question in the second half of the year is is is what now happens to Germany? Do we stabilize at this level and therefore get in to get into some easier comps. Do receive a further squeeze on cost control from our clients? And 16 days into this quarter. I don't have a view on that. You know, by the time we do the the interims, myself, ring Germany, mean, I'm in Australia in the last week in January, start of Feb. We're both in Germany, in the 2nd week, in the end of 1st week in in February. So we'll have a much better view that we can give you. And therefore, what we've tried to do, what I've tried to do it in the way today is to say underlying fee decline was is 3%. And that's the thing we know. What I can't tell you is where it will go from now. We have no further questions coming through, so I'll now hand the call back to you as helpful for any concluding remarks. If that's all the questions for today, we'd like to thank you very much for joining the call. I look forward to speaking to you at our next half 1 FY 2020 results on 20th February 2020. And should anybody have any follow-up questions, David, Charles, and I will be available to take calls for the rest of the day. Thank you very much for joining, and thank you for your questions. Bye. Thank you for joining today's conference. You may now disconnect your lines. Please please be connected and await further instruction. Thank you.