Trading Update

Jan 15, 2019

Earnings release

Hello, and welcome to Hayes Q2 Quarterly Update. My name is Amelia, and I will be the coordinator for today's conference. For the duration of the call, you'll be in listen only. However, and you will be connected to an operator. I have now hand over to your host, David Phillips, to begin today's conference. Thanks Amelia, and good morning, everyone. Welcome to Hays' quarterly update conference call for the 3 months ended 31 December 2018. Our second quarter of our financial year. I'm David Phillips, Head of Investor Relations, and I'm here with Paul Venables, Group Finance Director. Before we start, please be aware that this call is being recorded and that the recording may be accessed using the number and code provided in the release. You should be aware that the discussions may contain forward looking statements that are based on current expectations or beliefs as well as assumptions on our future events. That our risk factors, which could cause actual results to differ from those expressed in or implied by such statements, Hayes 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 will now hand over to Paul. Thank you, David. Good morning, everybody, and thanks for joining us. I will summarize the highlights of today's update cover the key themes and discuss our regional performances before taking any questions. As usual, all net figure percentage that I give for the quarter will be on a like for like basis versus prior year. Highlights of the results. I'm pleased to report we've delivered another good quarter performance with group net fees at 9% against an increasingly tough year on year comparative. Carancy translation continued to have a negative impact and reduced headline net fees by 1% in the quarter. I'd highlight the following key features in the results. 1st, our performance is again broad based with 17 of our 33 countries that have been double digit growth including 8 all time costly records. 2nd growth is 9% in both our 10th and perm businesses. Third Australia delivered strong growth in net fees of 10% versus increasing retail comparative has extended its run of consecutive growth quarters to 'eighteen. 4, Germany delivered strong growth of 15% or 12% underlying adjusted for working days. Our temp and contracting business grew 13% and we saw continued excellent growth in perm up 26%. However, UK and Ireland delivered another solid performance with growth of 3%, This was driven by 12% growth in our public sector business in part due to easy comparatives, private sector net fees were flat. Next performance in the rest of the world is strong, up 10%. Within this, Asian Americas were the standouts, delivering growth of 18% and 15% respectively. And Europe ex Germany grew 6% with Southern And Eastern European Countries performing those in Northern Europe. 7 consecutive consultant headcount rose 2% in the quarter, in line with expectations and 7% year on year. We continue to make selective investments in markets where we see strong growth opportunities such as Germany, the USA and Asia. In line with our long term plan as we open the net 3 new offices in the quarter. I know that our cash performance has been good at paying GBP 113,000,000 in dividends in November, we ended 2018 with GBP 30,000,000 net cash similar to 2017. And I'll comment on the performance by each division in a little more detail. ANZ. Our ANZ division, which represents 17% of group net fees delivered another good quarter with net fees of 8% despite tough comparatives. This was our 18th consecutive quarter of growth. Our tank business is up 11% with perm continuing to be subdued at 1%. Public sector net fees grew 11% with private sector up 7%. We saw another strong performance in Australia with net fees up 10% versus broad based across most states, In both New South Wales and Victoria, together 56% of our Australian business, net fees grew 10%. Queensland, our 3rd largest state delivered growth of 12% and South Australia 9%. ATT grew by 11% although Western Australia fell by 2%. At specialism level, net fee growth in IT was again excellent at 30% and office support grew by 13%. The construction property, our largest business in Australia, declined by 4% and accounting finance by 5%. In New Zealand, which represents about 5% of ANZ, our growth remains below expectations and net fees are by 21%. As outlined last quarter, we've taken actions to improve our performance. A solid headcount in lands had increased 2% in the quarter and by 11% year on year. Germany. Our largest business, Germany, which represented 27 percent of group net fees, grew by 15% or 12% underlying for working days. Given now scale in Germany and an underlying growth comparative of 23 percent in Q2 last year. This was a strong performance. Our Turpin Contracting or Flex business, which together represented 84% German net fees grew by 13%. Contracting was up 5% while 10% delivered excellent growth of 32%. Which represented 16% of German net fees continued its run of excellent growth of 26%, the 12th consecutive quarter we've delivered growth in excess of 20%. And our strongest, our largest specialists of IT Engineering, which represented over 2 thirds of net fees, both grew by 11%. County and Finance was again excellent at 28% as was construction property of 21%. The sales and marketing grew by 17%. The total headcount increased by 3% in the quarter and was up 3% year on year. As previously flagged, we expect a much smoother profile of headcount additions, throughout FY 2019 compared to last year, we saw our consultant headcount growth heavily skewed to half 1. Ukraine Island. In Ukraine Island, which represents 23% of the group, we delivered a solid performance, particularly given economic uncertainty. Net fees at 3%. This match our Q1 growth rate. Our Temp And Poor Businesses grew by 4% and 3%, respectively, Growth was led by a public sector, which represents 28% of UK and Ireland and rose 12%. Within the public sector, 10% grew 9% in term 18 percent, and growth in the private sector was flat with 10 confirmed delivering similar rates. Although underlying public sector activities improved slightly, Some of our growth is down to ease the comparatives as markets were artificially low this time last year due to IR35 rule changes. All regions traded broadly in line with the overall business with exceptional Southwest and Wales in Northwest at 14 9%, respectively, and Scotland and the Southeast down 15% and 8%, respectively. Our largest UK region of London delivered 3% growth. Our Irish business delivered another good performance with net fees up 6%. And across our 5 largest specialisms, net fees in IT grew strongly at 13% counting finance 3% office support 2% whilst construction fell by 1%. Education continues to face tough market conditions and declined 10%. And so headcount was flat in the quarter year on year as we continue to focus on driving consultant productivity. Rest of the World. Our largest division of Rest of the World made up by 28 Countries and representing 33 percent of group net fees delivered strong growth of 10% and 8 country delivered all time records. Europex Germany was up 6% despite increasingly tough comparatives, Our largest rest of world markets in France grew 3%, while Spain delivered a strong quarter up 19% and Poland up 16%. Was a Belgium and a tough quarter and declined 14%. Asia delivered strong growth overall of 18% China, which includes our Hong Kong business, is our 3rd largest rest of the world country, grew by an excellent 33% within this Hong Kong delivered a superb 41%. Elsewhere in Asia, Japan was tougher and fell 6%. The Singapore returned to growth up 25%. In the Americas, we also saw strong growth with net fees at 15%. The USA, our 2nd largest rest of the world country by fees, grew 10% while Canada delivered an excellent 28%. Brazil declined 2% while Mexico fell 20%. Overall, consultant headcount in the division was up 2% in the quarter and 13% year on year. Cash flow and balance sheet. Cash generation in the quarter was good. We ended the period with net cash of 1,000,000 in line with prior year. This was after paying 1,000,000 in current special dividends in November 2018. We also extended the maturity of our 210,000,000 unsecured revolving credit facility in November, its attractive rates of 0.7% to 1.5% over LIBOR. This is in place until November 2023, with potential options to extend by further 2 years. Current trading and guidance. I'd highlight 6 points. Our group net fee rate was broadly in line, exit rate was broadly in line with the quarter as a whole. Secondly, considering the increased economic uncertainty, activity levels at the start of the new year and the return to work period will be an important driver of the group's second half performance. We'll provide a detailed update to our interims in February. 3rd, looking ahead, we continue to overlap tough year on year growth comparators across our international business. We're also mindful of the likely Australian general election in April, throughout May and the impacts that may have in that market. Foreign exchange rate movements remain a material sensitivity to group's reported results If we re translate FY18 profits at current sterling spot rates, we estimate a negative GBP 1,000,000 operating profit currency headwind for FY19. This represents a negative swing of 1,000,000 since we reported our prelims. Fires and technical guidance, Easter falls entirely in Q4 FY 2019, whilst last year, there was even a split between our Q3 and Q4, except this will have a 1% benefit to our net fees in Q3 with a corresponding 1% negative impact in Q4. Finally, overall, while we're alert to macroeconomic conditions, our outlook is good across most international markets. We will continue to invest structural growth markets like Germany, USA and Asia, and we anticipate sequential growth in group headcount to be broadly similar to the 2% delivered in Q2. In conclusion, this has been another quarter of broad based growth led by international businesses, but with a creditable performance from the UK. Our focus remains on driving profitable net cash, cash generative growth and leveraging our global platform, the largest and most balanced platform in our industry. I'll now hand you. We have the first one from the line of Rory McKenzie from UBS. Please go ahead. Morning, all. It's Rory here on behalf of Bilal Aziz. And 2 first, please, on on the European regions. So firstly, within Germany, the 10 business accelerated quite strongly, I think. So can you give any more detail behind that? And then secondly, you mentioned slowing in Northern Europe. Any verticals in particular you'd call out within that? Yes. If I take Jeremy first, I think first of all, we were very pleased with the German results. It's pleasing on several aspects. 1, after a week of September, we saw very strong perm growth across the quarter. So I think that's removed one uncertainty. And secondly, within the attracting intent business. Actually, our volume growth improved across the quarter. So very happy with the German results. Clearly, temp gets a disproportionate benefit. Of the increasing working days, Rory, because not only do we get a pickup in more margin, we also, of course, don't, you know, it's when we have reduced days, we have to pay for the 10ths. So we get a double whammy. So combination, I think the more important statistic is overall, Tempur contracting is at 13% and we're really happy with that. And then on Northern Europe, I think Generally, we've seen more of a weakness in the industrial and manufacturing heartlands across Northern Europe. And that was a point that we discussed on the last quarter and it continued into this. And then within places like France, where we still think on the background of having more than doubled the business over the last 4 years and outperformed our competitors, you know, growth of 3% is less than we had before, but a pretty credible result. We've seen a specific weaknesses within the life sciences and the reduction in temp numbers, but, overall, still growing and, still a pretty good performance. Okay, thanks. And then just on Australia, you still describe favorable conditions today. I was just wondering if you're worried yet about any of the lead indicators or just kind of worried ahead of the potential election impact, kind of your thoughts on that market there? Well, I think one of the key parts there, Rory, is that our construction property business, which is 28% of ANZ was down by 4% and that's the 2nd quarter where we've been down. So The best way of looking at that backdrop is after a very strong acceleration in activity over the last 3 to 4 years, We've seen a weakening in the residential space. The good part is that we're seeing an increase in activity in commercial infrastructure, but there's no doubt there's a little bit less activity than we had 6 or 12 months ago. And we're mindful, you know, we read the industry statistics, such as you do. So There's a bit greater in certain in construction property outside of that. I think it's all about, about the run up to the election. So strong performance in Australia growth of 10%. We've been growing two times, the growth of our basket of competitors now for the last 3 to 4 years are very strong comparative and up against good solid performance, but there's no doubt it's slowing slightly. The next question comes from the line of Anvesh Agraal from Morgan Stanley. Please go ahead. Got a couple of questions. So just following on Germany, obviously, the mix of growth shifted from contacting them. Can you just say in the business similar? And can you manage it with your existing headcount, I. E, the headcount that you have put in the business manage can manage both acting and term businesses. And second, again, on the headcount perspective, obviously, there are a few headwinds to the growth and from a macroeconomic perspective, but at the same time, you would look to continue to invest into the structural growth markets. So how do you balance that from a productivity perspective? Or how should we think about the conversion margins this year? Thank you. On the 2 parts, I might have missed part of your question on the headcounts in Tempur Contracting. But I think the better way of looking at it is we increased headcount by 3% in the quarter. So that's the increase in productive capacity we have put in And that gives us enough capacity to be growing this business at about 10%. And we would expect to continue that sort of trend if we go into Q3 and Q4. I think on a headcount growth, we've always been very explicit about which of the key countries that drive the profitability of the group and where we have supported conditions in those markets. And Germany is one of those in the U. S. Is one of those and parts of Asia, one of those. Then we've always been on the front footing putting investment in. France is another good example. France is a key country for us. It's we've driven significant profitability growth over the last few years. But clearly, growth is slower at the moment, and therefore, we are more mindful to be very modest in any headcount growth and focus on cost controls. So We're always trying to do the right thing for the long term of the business, but we've also been a business that's believed in driving profitability as we go along. And then the overall question about drop throughs, all I can really give at this stage is where we are for the first half. And the context for this is the 3 or 4 factors. First of all, of course, As we've outlined over the last year, we've opened, we've expanded a number of properties over the last year. And when we do that in our major markets, we look to give productive capacity even between 10% to 20% in any expansion. So we've had an increase in property cost. We've got a number of system projects on the go at the moment, both front and back office. And when you add that together with, of course, within the rest of the world where, you know, we have had slightly weaker growth in Europe and their we've got headcount growth ahead of fee growth, we would expect drop through in the 1st 6 months to be something like 20% Coming to the 2nd 6 months, that's really all driven by the return to work. You know, we're in a very good position. We've got very tight cost control, very happy with the headcount we've got for the business, But like every other year at this point, the return to work is important. We will have an internal clear view on that by the end of January, and of course, we'll give you detail color on that when we do the interims at the end of Feb. Yes. But assuming, let's say, normal return to work, is it fair to assume the drop to in second half, that's just somewhere around 30% or so? I said 20% for the 1st 6 months. Yes, we'd expect to see slight if we get a normal return to work, With growth levels at this or slightly higher, we'd expect to see a slightly improved drop through in the second half of the year. But as we've always discussed, that in part is dependent on where the mix of growth comes from. So for example, we are very happy with our UK performance. In the 1st 6 months, you know, 3% growth with the backdrop we've got. And of course, with that, we can drive good profit growth. So it's a combination of where the mix of growth will come from in the second half and where the absolute growth level will be, we'll be in a much better position to give you some guidance when we get to the end of February. But for the purpose of today, we've had about 20% drop through in the 1st 6 months. The next question comes from the line of Sanjane Sri Lanka from Routers. Please go ahead. I had a question specifically in regards with U. K. Market in Ireland and regard with Brexit and how that is affecting hiring as such, has it slowed, has it frozen, or companies, you know, much locked into Ohio. I want you to know on this perspective. Well, I think we're happy with the performance of our UK business. And at the moment, the business remains in very stable conditions. We delivered 3% growth in Q1. We delivered 4% delivered 3% growth again in Q2, and we're very happy with that performance. But clearly, we are at, lower levels of absolute fees than we were a couple of years ago. So There is good enough stability in the moment for us to drive fee growth and profit growth, but, clearly, we all look to see what will happen in the next 3 to 6 months. Alright. And, a follow-up 1, I I specifically seeing jobs moving out of London to, other EU countries, especially with the finance roles or anything of that sort? Anything? If anything, it's very minor. So again, this is a question we've covered. Mainly on the press side, which is where you're from, over the last few years, anything we've seen is really around the edges. The next question comes from the line of Steve Wolf from Numis Securities. Please go ahead. Hi guys. Just trying to sort of put the jigsaw together in a sort of comparing contrast, you know, way. You know, there's 3 markets, which I'm sort of getting a little bit stuck on at the moment, and there's Japan, China, and Mexico, and the performances across that with peers. I was wondering, could you provide any color on trading conditions there that you might be seeing, versus others and maybe even market positioning, that you think where you are different, you know, to others, if that's possible? I think Mexico is easy to do. We've got a relatively small business and when you've got a relatively small business, any change, any small changes can have quite an impact on that phase. It's not significant in our overall group position. Sure. Japan, you know, after again, a few good years' worth of growth, this was just a poor quarter. And, you know, we'll take all the actions to try to drive fee growth there's nothing fundamentally wrong with the Japanese economy. And I think the China performance was absolutely superb, you know, it is our 3rd largest country within the rest of the world. And the really, really pleasing part of it, we had strong growth across Mainline China, which of course has an industrial base as well as finance and legal, etcetera, but we also had very strong growth in Hong Kong, which is more around Financial Services. So really pleased very much in line with the strategy we've set out supported by headcount investment and it's becoming a meaningful part of our group. So I think, the most important of those, certainly from profit perspective, are Japan and China, and the upsides in China more than offset any weakness in Japan. And within China, it's still, you know, multinationals in and out from, you know, it's more sort of multinationals in rather than the Chinese multinationals. Is it is it worse or Chinese international out, if that makes sense? Well, we continue to we're increasingly diversifying our business as we go across a period of time. So, you know, for example, Alibaba is a really good customer of ours. So we started off like most companies going into China with predominantly Western Companies and bilingual Chinese nationals, But as you build a business over a long period of time, and we've been in China now for almost 10 years, we are now increasingly going to Chinese elements off that business. So, and that's an important part of our growth going forward. There are no further questions. I will hand you back to Paul Venable for any concluding remarks. If that's all the questions today, we'd like to thank you all again for joining the call. I look forward to speaking to you at our next, at our half one FY 2019 results on 21st February. And should anyone have any follow-up questions, David Charles and I, we're available to take calls for the rest of the day. Thank you very much. Thank you for joining today's call. You may now disconnect your lines. House please stay connected.