Trading Update

Oct 15, 2019

Earnings release

Hello, and welcome to Hayes's Q1 analyst call. My name is Molly, and I'll be your coordinator for today's event. The duration of the calls, your lines will be on a listen only. However, you will have the opportunity at the end of the call to ask questions. This will be done by pressing star 1 I'll now hand you over to your host, David Phillips Center Conference. Thank you. Good morning, everyone, and welcome to Hayes quarterly call for the 3 months ended 30 September, 2019, first quarter of our 2020 financial year. I'm David Phillips, Head of Investor Relations, and I'm here with Paul Venables, Finance Director. Before we begin, please be aware that this call is being recorded. With the recording accessible using the number on the code provided in the release. Please be aware that our discussion 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 different results to differ materially from those expressed in or implied by such statements. This disclaims any intention or obligation to revise or update any forward looking statements that have been made during this call, regardless of whether these statements are affected as a result of new information, future events or otherwise. I'll now hand you over to the call. Thank you, David. Good morning, everybody, and thanks for joining us. I'll summarize the highlights of today's update, cover key themes, and discuss regional performances before we take any questions. As usual, all net fee growth percentages I give will be on a like for like basis versus prior year, unless stated otherwise. First highlights the results. We delivered a solid quarterly performance with group net fees flat on a headline basis, in line with market expectations. This is despite tough macroeconomic conditions ongoing signs of reduced business and candidate confidence and a 9% year on year growth comparative. Adjusted for working days, net fees decreased by 1%. Quality translation had a positive impact and increased headline net fees by 1% in the quarter. I'd highlight the following key features in the results. First, One of our 33 countries delivered double digit growth, including 8 all time call key records. Overall, both were flat in both our temp and our perm businesses. Australian net fees declined by 2% of 3% working days adjusted. The overall market is broadly sequentially stable at near record levels, although conditions in construction of property remain tough. Germany delivered flat net fees or down 2% working days adjusted, and we saw broad signs of reduced business confidence and and increased client cost control, particularly in the manufacturing and automotive sectors. Or in the UK and Ireland, fees declined by 4% or down 5% working days adjusted, which comprised a good 6% growth in our set for business and tough conditions in the private sector where net fees fell by 7%. The high performance in the rest of the world was solid at 4%, Asia and Americas both performed well up 7% and EMEA, Germany was up 2%. Consult headcount was up 1% in the quarter year on year, and we opened 1 new office in BRAman, Germany, in line with our long term plans. 7 cash performance was good, and we ended the quarter with net cash of £90,000,000, 10,000,000 higher than Q1 FY19. I'll now comment on the performance by each division and a little more detail. Brain Z division, 18% of group net fees declined by 2% or around 3% on a on a WDA basis. Temperage represents 68% of AMP fees declined by 1% and perm down 3%. Important to note, the overall market is broadly sequentially stable at close to record levels. Australia decreased by 3% and in New South Wales and Victoria together 57% of Australian business Net fees decreased by 6 5% respectively. Queensland declined by 2% of our South Australia and APT up 5% and 1% respectively. On the Australian Specialist level, net figures in IT were strong, up 11% and HR grew by 6 percent. Construction Property, our largest business in Australia, remains challenging and declined by 20 16%. It is now 21% below peak. Accounting Finance was also difficult to reduce by 13%. And finally, I'm pleased to say that following management changes made in New Zealand last year, we now returned to growth in that country up a strong 19%. On headcount and headcount in A and Z increased 1% in the quarter, it was down 2% year on year. Our largest business, Germany, 27 percent of group net fees was flat and down 2% on a WDA basis versus the prior year. Noted earlier, there are broad signs of reduced business confidence and increased cost control. We also have faced a tough 13% growth comparative from prior year. Our Tempur contracting business, which represents a 3% of Germany's net fees, was flat and contracting down 2% and temp delivering solid growth of 5%. Continued to slow and decreased by 2%. After strong growth in recent quarters, our chairman public sector business preserves a mention, and it now represents 11% of net fees. And it grew by 31% in the quarter of private sector was down 3%. Our largest specialist in IT, 41% of the German net fees grew by a solid 4%, but engineering, our 2nd largest specialist, maturity 7% saw fees decline by 5% due to continuing tough conditions in manufacturing and automotive sectors. Sales and marketing grew an excellent 21% of our construction property was tougher down 16%. Our consultant headcount was flat in the quarter and up 1% year on year. In Ukraine Island, 23% of group net fees, conditions were tough and net fees were down by 4% or 5% working days adjusted. 7 declined by 8% was 10% flat. Both in the public sector, which represented 28% of Eastern Ireland was a good 6% and within this 10th through by 8% and per 1%. The conditions in the private sector were tougher, and ongoing uncertainties continued to affect business confidence and we also saw a reduction in candidate confidence and thus net fees decreased by 7%. All regions traded broadly in line with the overall business, except for the Southwest and Wales, up 4% and the Midlands and North, down 10% and 7% respectively. Our largest UK region of London fell by 2%. In Ireland, net fees declined by 13%. The specialism level, IT grew a solid 5% warranty in finance and office support profile 4% as construction property was down 7%. Education continues to face tough permanent market conditions and declined by 11%. Overall, consultant headcount increased by 2% in the quarter and year on year, reflecting our graduate intake and investment in our IT specialism. Rest of the World, comprising 28 Countries, and representing 32% of group net fees grew by 4%. Against a tough 14% growth comparative. Within this eight countries delivered all time records. EMEA X Germany grew by 2% and remained broadly sequentially be stable. Within this, our largest rest of the world country of France was up 3%, 6% 7% and Italy increased by a strong 11%. However, the Netherlands and Belgium were tougher decreasing by 12 7% respectively, and in Spain, we saw a decrease in the quarter down 6%. Americans delivered good 7% growth. Our U. S. Business, the 2nd largest rest of our country, produced a record quarter and grew by 12% with growth in both Construction And IT. Mexico increased by an excellent 36%, however, Canada was tougher and declined by 5%. Both in Asia was also good at 7% China, our 3rd largest rest of the world country, delivered another record quarter of 7% Japan grew by 3% and Malaysia produced an excellent result of the world, consultant headcount was up 2% in the quarter and up 1% year on year. Cash flow and balance sheet, we delivered a good underlying cash performance in the quarter, a net cash position at 30th September of 1,000,000, £10,000,000 higher than at the end of Q1 of FY19. Phone trading and guidance. I highlight 5 points plus the group's net fee exit rate was broadly in line with the working days adjusted rate of growth in the quarter. 2nd, we expect group headcounts to remain broadly flat in Q2 FY 'twenty. For comparative purposes, if we re translate our FY 'nineteen profits at the average exchange rate seen, during FY 'twenty' reporting operating profit of 248,800,000 will be 248,000,000, which is £6,000,000 reduction versus the position on prelim results in August. Call looking ahead, we remain mindful of economic and political uncertainties. We're focused on managing the challenging conditions of cyclical sectors CMP And Engineering, whilst investing in key structured growth markets like IT, being fenced investments into our to specialists in over recent years are delivering strong results with 11% growth in FY19 and 6% in the last quarter on a global basis. In Q1 thus, we added a further 70 consultants into our IT specialists in Australia, France, Spain and the UK, the initial tranche of a ring fenced investment program. 5, as we sit here today with a user caveat that we've only got 3 to 5 weeks visibility and little forward secured revenue stream, I'd expect our group like for like growth rate in Q2 to be down 2%, slightly below Q1's working days adjusted growth rates. On conclusion, we've delivered a solid performance in tougher macroeconomic conditions. We'll continue to balance investing for the long term as managing the more challenging markets we currently face. Cash performance was a gain, heard, and we ended the quarter with 10,000,000 more cash at the same point last year. Demonstrating again the highly cash generative nature of our business model. Our financial strength and global network, which is the largest and most talented in the industry, means we have an excellent platform to manage more challenging markets while still investing to deliver our long term strategic goals. I'll now hand you back to the administrator. Keypad and ensure that your telephone line is unmuted locally. You'll then be advised to answer your question. This question comes from the line of Rory McKenzie calling from UBS. Please go ahead. Good morning all. It's Rory here with a few questions on behalf of Bilal. Firstly, just on that last comment you gave where you said that you expect the group to be at -2 percent. In Q2. Is it bigger areas of deterioration still in Germany? Can you talk about how business confidence It may be still falling there. And also what should we be aware of in Germany and Q2 in terms of comps and working days, please? Yeah. Thank you, Maureen. Good to hear from you again. Look, I think we we were very clear when we talked to the prelims that we've seen a step down in activity levels in Germany in the UK. And, of course, that was clearly reflected in the results today. And whilst our exit rate in September overall is in line with the kind of the underlying growth in Q1. We have to remember 2 things, I think. 1st of all, September a year ago was a week quarter. That was a culture in which we, have a quite sharp decline. And then secondly, all the four indicators we see show that we don't expect to see any improvements, in fact, a slight deterioration again in the UK and Germany. In Germany's case, I think now the what started off year ago as the start of a quite sharp slowdown in in the automotive and manufacturing sector. I think that's now for obvious reasons. It contributes more broadly. Now you only have to follow the the business press in Germany to see that there's a lot of discussion about, you know, will there be a technical recession how long might it be, how deep might it be, and all of us will have seen the PMI indices in Germany, which is whether it's in the sector, whereas at 44, whether it's in the service sector is well below that in Europe. So from everything we're seeing, our clients have moved more to cost control, It's interesting within these numbers that you'll have seen that the group growth, quite significantly exceeded some chapters And again, contractors is a longer term commitment from our clients. Temp is a shorter term commitment. Whilst, as you guys know, on average, our temp assignment last 12 months, they're on a rolling 4 week basis, so it gives clients more reception. The positive both in those markets and everywhere in the world is that we're seeing no distress at all in any sector or any country. But what is clear is in Germany, we're seeing, you know, more cautious, decision making from clients and moving on to the UK I think it's fairly obvious that there's an enhanced level of uncertainty at the moment. And the new news in this quarter was that we saw a reduction in candidate confidence which means, of course, that you have a number of jobs where you get to the end of the process and offer his main as the candidate then port himself out of the process. So this is fairly normal in a weaker market. But, again, I'm trying to give some comfort in many respects by saying, you know, with the experience I've got, we expect Q2 to be worse than Q1. So therefore, we've said it but we don't expect it to be significantly worse. There's no working days, impact. And of course, a year ago, we were still growing pretty well. Rory, overall group level, we were 8%. And in Germany, was, you know, still double digits. So, again, against, against, still against in hindsight, some strong comparatives. Yeah. Sure. Just just against, that that we just talked about. It was noticeable that EMEA X Germany, actually saw some trends stabilize or improve. So why do you think there's there's a difference there? What do you what's different with the clients? You're interacting with Dixie in France, for example, but that does is done a bit, sir. Yeah. I think I think that point is is very well made because, France is our largest, country within the rest of the world region. I think the mix of specialisms is different. We don't have a large automotive business in France. We have a greater proportion of our French business towards the professional services of Cancer And Finance. So we also do have a a decent sized business in in markets such as life sciences. And whilst there's no doubt that the broader trade issue has impacted all exporters globally. I think pharmaceuticals has been less impacted. And then finally, Rory, a year ago, the real problem that we've had in in Q1 was very much in France and in Belgium and the Netherlands where we see it sort of quite a sharp slowdown in the perm in that part. So of all of our regions, Europe, ex Germany is the one that feels the most stable at the moment, and that's great. So we'll take that. And we were trying to bring that separately, the difference between, let's say, France and Germany. I think in Germany, there's a greater exposure, a, through manufacturing and B, much more of the economy as export driven. Great, that's helpful. Thank you. The next question comes from the line of Paul Chacketts calling from a car, please. Please go ahead. I'm looking forward to it. I have three questions. The first, I would say the results are that's slightly better than than expected it in Q4, certainly better than I had it and and possibly what you've guided to. Can you just run us through the areas that were, I think, better than feared? That's number 1. And then in encompasses, but probably often gets you through Australia, and you're seeing your growth rate quite divergy trends where you can give us an update on on how you see that panning out. And then the last one is, can you remind us how your having a spike for the balance between costs and fees in a more difficult environment? Yes, Paul, thanks those questions. If you don't answer them fully, please please do come back. I think Remember, though, when we came out, with the Williams, and, certainly, for any questions that we were asking, we went around the Roche, etcetera, etcetera, we said we expected to be minus 1%. And and and in that, I was talking about kind of working days. So for us, It's it's broadly in line. Where is it? If anywhere, where is it a bit better? I'd actually say it's slightly worse in Germany, maybe one percentage point, but it is definitely better in the rest of the world. And whilst in August, we talked to, come come being broadly sequentially stable. In in in Europe, ex Germany. Of course, September is a large month for us. Is 40% of the court. It's heavily perm dominated. And I think it is fair to say that we were very pleased with what has happened in that in that region. And when we look internally, we look at kind of the budgets that we set and everything else, you know, that was the best performing region and that they've kind of and it's not just that they've hit the numbers we expected them to, but there's no real surprises we've done across the quarter. In in a, Europe. And then, b, without Adapt, the US, both acceleration, is better than we could have expected. You know, we had some, kind of, restructuring within the business about 4 or 5 months ago in some of the sectors. We've got some real momentum now. We've had momentum throughout construction property based on our own analysis. We're now number 1 in the US market. We're gonna continue to invest in that sector. That's one of the ring fenced investment areas. But secondly, IT has returned to growth, and, Perhaps it's perhaps, Paul, it's just that we're taking the PRC board to the US next week and the US colleagues want an easy time. But either way, That shall take the board around the world all the time because, we've had, you know, a record quarter by some way, strong growth, real momentum, and very happy with that business. Coming on to Australia. I think, it's an interesting market at the moment. And for any of you that read the stuff comes out to, for example, NAB or ANZ Banks. What you've got is you've got the government and the federal reserve, trying to do everything stimulate the economy. You've had 3 cuts in interest rates, for a full employment economy, interest rates at half percent is another kind of indictment on where we are as a world. You've also had tax cuts. So you've got stimulus being done on on scale. At the same time, you've got business confidence remaining pre subdued and consumer confidence whilst it has held up and there's no doubt the interest rate cuts have stabilized house prices, things like cars are still down about car sales are down 10%. So I think Australia for me is still mixed. We're very happy with our business, sir. I think the best way to describe that is Now 18 months ago, consumption property was 28% of our business states, 20%. And we've managed that within not much of a reduction in our fees. And we're only 2, 3% above peak all time level. So we're doing well. We've got good growth in IT. We've got good growth in HR. We've got good growth in policies. Policy, which is sequentially stable, but, you know, there's still some uncertainty in that market. So I'm not saying we're out of the woods what I'm saying is at the moment, we're broadly stable. And then I think your last point, is the critical issue for all typical businesses. And I guess the way that we approach this and certainly the way that my mind is on is in part related to the answer I go to Rory a few minutes ago. There is no market anywhere in the world where we're seeing distress at the moment. What we are seeing is clients make very logical decisions after 4 to 5 years worth strong growth and strong investment and being a lot more cautious at the moment. Within that, of course, there are certain sectors automotive and backing which are for obvious reasons harder hits. Now for what we're trying to do is balance between where we've got some on down some construction pop absolutely reducing headcounts and making sure we're in line with that market. But equally where we've got some long term structural opportunities and within that IT, Across the World Life Sciences, US, we're gonna continue to invest. And the balance is a hard one to have because we've often talked about consultant productivity in good times, of course, both the tools and our management in the economy helps drive it. At the moment, even more in places like the UK where suddenly we've now got candidate confidence. And, of course, we have a reduction in candidate confidence, and we've said before, the productivity is up or down 1% that has an 8,000,000 impact on our And at the moment, we're in that down phase. Our aim currently is to be very cautious on headcounts we talked to you about the installed newspaper, which means it'll probably decline a bit because that's just the nature of equipment businesses. Keep an eye on every market as possible. But make sure in the long term structure opportunities, we continue to invest for the long term on a controlled basis. So That means all through some of these investments we'll make less money this year, but I think it positions us much better for a rebound when we see stabilization in the market. Thanks very much. The next question comes from the line of Amdocs Akual with Morgan Stanley. Please go ahead. Hi, good morning. Just one question, really. I know we are very early in the year, but just kind of give some thoughts on how should we think about the operational leverage in the business, especially given the mix of the growth in which is higher interest of the world, which is again a lower conversion margin business. And, any kind of metrics around what sort of impact on productivity on every percent or 2 of the fee construction assuming we kind of remain in this minus 1, minus 2% for the year. Thank you. I guess a real simply re re ready retina. As in the end, none of us knows, you know, the next 9 months ago, I've only done this job for more than 13 years, and You have to start off and be humble and say you've got 3 to 5 weeks visibility and not a lot of forward secured revenue streams. So that's the way we'll continue. But One percent of fees is about £11,500,000. On that, we say commission, which gets you down to, you know, strictly below £10,000,000. And below that, it depends on what you do on headcount. At the moment, we're expecting that head counts, which I think was 1% up year on year in these results. Is above the underlying c level of minus 1%. 1% of that current rate is definitely and productivity due to the uncertainties we've discussed. 1% is a decision to ring fence investment. So there are certain mechanisms that we're going to divest slightly ahead of the curve because we focus on the long term. I think we also have a luxury in, in a very loyal shareholder base, you know, our top 10 55 percent. Myself and Alice have been here a long period of time, and therefore, we'll do the right things for the longer term. So number 1, I think productivity will be down this year unless we see a strong rebranding growth in the second half, and kind of 1% issue to 8,000,000. That kind of the the reverse that already written is how I got you to that 10,000,000 before, so it's in that sort of range. And then you're right as it's his life. We want over the longer term a large business in the US and a large business in Asia. And at the moment, those businesses combined are, you know, above 10% of our group, but they're not 30% of our group. Therefore, we will continue to invest in strength and depth of management across Asia. We'll continue to invest in the US. And we know by those sorts of investments, That investment is going to be a good, you know, 5,000,000 plus ring fence this year. And that of course will have an impact on profit. But I think those are the right things to do for the longer term part of the business. And I take a bit of comfort and it might be serious. So you know, feel free to shoot me down, but it's intriguing to me that the generalists have all stabilized at about minus 3, minus 4, and I've been stable now for a couple of quarters. So we look at every single activity every single month. We will move quickly if we see any further real decline versus where we are now. But we're the right thing to do, I think, is to kind of keep up and sort take out where we are today, slightly lower, And then finally, of course, we gave, you know, we gave quite a lot of guidance on property and depreciation, etcetera, of which, of course, a greater skewer that is for the first half, but a great question. And I I think we've got we're in a nice position to make some choices, but rest assured market gets tougher. We'll take more costs out at the moment. We're more likely to continue with some modest investment programs and, and not do anything drastic. K. That's, very clear. Thank you. Please stay on the line. We'll take the next question if you'd like to ask question comes from the line of George Gregory calling from Exane. Please go ahead. Good morning. Paul, just following up on that last comment of yours. In terms of in terms of the the the starting point, and and what you need to offset, is is the is is is the base level of cost inflation, her cost inflation is still around 2%, or is that Yeah. To what extent is that slightly lower lower in the in the current environment outside of your your investments into the US and what have you? Thanks. I think 2 things. 1, by its very nature, some of the property stuff that we put in that year end note has some inflation in there, and that's just kind of life. Where if you look overall, it it overall, it is less than 2% because there's parts of our cost base which are fixed There's others which don't go up in line with inflation because, of course, like commissions go up in line with salary inflation, if you looked at the overall cost base, you would have inflation of 1 to 1 a half percent. And then on top, we've got some specifics which I've covered earlier on. Positive is we're continuing to see a bit of wage inflation. So a nice part of it is there's still some wage inflation. Whilst we've seen no acceleration of that across this period, I don't think that's surprising. You know, with our average term fee, which is my best surrogate for that. Is continuing to increase, kind of modestly. So, you know, we're not we're not I think from that standpoint, we're in a pretty good position. But again, we will continue to watch everything. We have no further questions coming through on the phone line, so I'd like to hand the call back over to your host for any concluding remarks. Brilliant. Thank you. That's all the questions today. We'd like to thank you again for joining the call. I look forward to speaking to you at our next Q2 trading update on 16th January 2020. And should anybody have any follow-up questions, David Charles and I will be available to take your calls for the rest of the day. Thank you very much for joining us, and have a great day. Bye. Thank you for joining. Please hold. You may now disconnect your lines.