Earnings Call: H1 2021

Aug 9, 2021

Hello, everyone, and welcome to the Page Group 2021 Interim Results. My name is Rekha, and I'll be the event specialist running today's call. And I would now like to hand over to our host, Kelvin Stack, to begin. Sir, Kelvin, please go ahead when you're ready. Good morning, everyone, and welcome to PageGroup's 2021 interim results presentation. I'm Kelvin Stagg, Chief Financial Officer, and on the call with me is Steve Ingham, Chief Executive Officer. I'll now present the headline numbers and a financial review before handing over to Steve for an update on our dividend policy and approach to sustainability before concluding with a summary. Although I will not read it through, I would like to bring your attention to the cautionary statement included at the end of this presentation. Given the magnitude of the impact of COVID-nineteen in 2020, we are comparing our results in constant currencies throughout this presentation to both 2019 and 2020. Although the group continued to be impacted by the pandemic, the increase in activity levels we saw towards the end of 2020 Continued into 2021, with trading conditions improving further as we progress through the first half. Consequently, the group delivered gross profit of GBP 404,200,000 up 38.3% on 2020 and down just 3.7% in constant currencies compared to H1 2019, a record year. Our operating profit for the first half was GBP 64,300,000 down from GBP 75,600,000 in H1 twenty nineteen, representing a decline of 12.5% in constant currencies, but up well over 100% on 2020. Movements in foreign exchange reduced the group's gross profit and operating profit by around £12,000,000 £2,000,000 respectively. Our conversion rate was 15.9%, representing a strong recovery on 2020. Earnings per share was 12.2p We closed the first half in a strong financial position with net cash of CHF 163,800,000. The significant improvement in trading in the first half gives us increased confidence in the outlook. And given our continued strong liquidity position, We are today reinstating our dividend policy by announcing an interim dividend of 4.7p per share. This increase of 9.3% Represents 2 years' worth of 4.5 percent growth over the interim dividend of 4.3p per share in 2019. In line with our policy to return surplus cash to shareholders, the Board has also announced a special dividend of 26.71p per share. This represents an additional return of GBP 85,000,000. Both the interim and special dividends Will be paid on the 13th October to shareholders on the register on the 3rd September. I will now take you through the financial review. This fee owner headcount and gross profit chart illustrates both our gross profit at reported rates and our Fiera headcount. In line with our strategy of investing in and protecting our platform, we chose to invest in the business, adding around 400 experienced Fiera's During the first half to now around 800 in the past 12 months. This additional headcount was primarily into our large high potential markets As well as our strategic areas investments, being technology, healthcare and life sciences, our technical disciplines and contracting. These investments meant that our net fee owner headcount increased by 298 in the first half to 5,443. Overall, the group's operating profit was GBP 64,300,000 up from breakeven in 2020 And a decline in constant currency of 12.5 percent compared to H1 2019. Our conversion rate was 15.9% As a result of the slower start to the year, but with a strong recovery from March. Gross profit per FIONA increased by 10.7% compared to 2019, And we saw an improvement in all regions. This increase was due to gross profit being down only 3.7%, whilst Fiona headcount was down around 8%. Looking at each of our regions and starting with the largest, EMEA, our conversion rate was 17.6%. Although profitability improved significantly on 2020 due to the improvement in trading conditions, we remained 3.8 percentage points below our record year in 2019, Primarily due to slower recovery in Page Personnel France, 2 thirds of our largest country in the region. Asia Pacific delivered gross profit growth of 3.5 percent over our record 2019 year, and our conversion rate improved by 8 percentage points 18.8%. Asia Pacific has been our strongest performing region, which combined with the reduction in headcount This has driven a significant improvement in profitability compared to 2019. In the Americas, gross profit grew 1.6% And our conversion rate increased 1.8 percentage points over 2019 to 14.3%. The widespread improvement in trading conditions in H1 delivered a conversion rate of 14.3% versus 12.5% in 2019. The UK, where gross profit remained down 17% against 2019, returned to profit, Delivering operating profit of GBP 4,300,000 at a conversion rate of 7.5%. This was after the furlough repayments of GBP 3,400,000 to HMRC. And excluding this one off item, ad conversion rate was 13.3%. We have lower costs for travel and entertainment and our headcount is down around 8% compared to pre pandemic levels. However, the majority of those That left the group where our most junior staff on lower salaries being replaced by more senior experienced learners. We also repaid GBP 3,400,000 of furlough in 2021. Therefore, in total, administrative expenses in the first half decreased by just under 2% compared to 2019. The group's organic growth model and profit based team bonus ensures costs remain tightly controlled. As you would expect in the people business, employment costs are by far the largest element of our cost base, representing 79% of total costs. This percentage has remained broadly the same for a number of years. Our employee costs include wages, bonuses, share based long term incentives And training and relocation costs. The tax charge for the half year was GBP 25,100,000, Up from $800,000 in 2020. This represented an effective tax rate of 39.4%, Significant decrease from CHF 107,600,000 in 2020. In 2020, changes in deferred tax asset recognition On losses and other timing differences due to uncertainty about the availability of future taxable income negatively impacted the rate. The CVAE tax in France, which is linked to revenue rather than profit, also had a disproportionate impact in 2020. We expect the full year effective tax rate to return to around 30%. The most significant item in our balance sheet was trade and other receivables, which increased by €35,300,000 versus 2020, due primarily to the increase in the permanent debt of receivable. Rights of use assets have decreased by $27,000,000 compared to H1 2020, Due mainly to depreciation on the property lease portfolio and lease liabilities have also reduced by EUR 30,000,000 Overall, net assets have increased from GBP 336,000,000 in H1 2020 to GBP 346.2 This chart lays out the movements in and uses of our cash during the first half. Our working capital requirements increased by GBP 36,300,000 driven by an increase in permanent debtors, Although debtors days remain in line with the year end. Tax and net interest payments were CHF 21,800,000 Net capital expenditure was CHF 10,700,000 due primarily to our investments in Customer Connect and new operating system. Payments made in relation to lease liabilities reduced cash by GBP 18,700,000 Due to the higher share price in the first half, Employees exercised 2,300,000 share options. This generated £6,900,000 of cash, up from GBP 0 point 1,000,000 in the first half of twenty twenty. The group also purchased GBP 2,200,000 shares at a cost of GBP 10,400,000 into the employee benefit trust to satisfy future obligations under our group share plans. Overall, the impact of these cash flows decreased slightly the group's Net cash position since year end by GBP 2,200,000 to GBP 163,800,000 at the end of June, But we remain GBP 82,000,000 up on our cash position in June 2019. I will now hand you over to Steve for an update on our dividend policy, Thank you, Kelvin. Page Group operates a highly cash generative business model with very high levels of cash conversion. We have a clear capital allocation strategy with 3 defined uses of cash. The first and primary use It's to satisfy the operational and investment requirements of the group, such as experienced hires and continuing to roll out technology and innovation, As well as hedging liabilities under the group's employee share plans. The second use of cash It's the payment of the ordinary dividends, where it is the group's policy to maintain these through a downturn, which we've done in all years since 2,001 Apart from 2020 and to increase them when conditions are more favorable. Thirdly and finally, any remaining cash surplus is distributed to shareholders by way of a supplementary return either by share buyback or special dividend. In 2020, in line with many of our peers, we announced the temporary suspension of our dividend policy. This was against the background of unprecedented global economic disruption and significant uncertainty caused by the outbreak of COVID-nineteen. We suspended the policy to preserve liquidity and cash flow. Through 2020, all our stakeholders were by the pandemic. Our people endured salary cuts or worked reduced hours in Q2 as well as all our staff not receiving annual bonuses. We also received government support. All of these sacrifices helped us to protect and invest in the platform, allowing us to recover faster this year. At the end of Q2 2020, we returned our staff to full pay And the full hours and in line with improved trading in 2021, we fully intend to repay annual bonuses. We've also repaid HMRC the GBP 3,400,000 of UK furlough income. The significant improvement in trading in the first half gives us increased confidence in the outlook and given our continued strong liquidity position, We're today announcing the reinstatement of our dividend policy. We're announcing an interim dividend of 4.7p Per share or a total of £15,000,000 In normal conditions, our policy has been to grow the dividend over the course of cycle in line with our long term growth rate, which historically has been between 4% 5%. Given shareholders did not benefit from this increase last We've applied 2 years' worth of 4.5% growth to the interim dividend. After paying this interim dividend, The group's Board has concluded that we're still holding surplus capital. As such, we're also announcing today a special dividend of 26.71p per share, totaling £85,000,000 Together with the interim dividend, this amounts to a total cash return to shareholders of £100,000,000 The special dividend will be paid at the same time as the interim dividend on the 13th October to shareholders on the register as of the 3rd September. Earlier this year, Page joined the United Nations Global Compact, The largest corporate sustainability initiative in the world. To reinforce our commitment to sustainability, we recently renegotiated financing with BBVA, Linking our revolving credit facility to environmental and social sustainability KPIs. Meeting What we're not meeting these KPIs triggers a price differential. Neither party will benefit with any proceeds from the sustainable KPIs Being donated to charity, we're delighted that BBVA share our commitment to sustainability. In 2020, we fully offset our carbon emissions and we are targeting carbon net zero for the group within 5 years. Finally, today, I'm excited to launch our inaugural sustainability report, a copy of which can be downloaded from our website. The report highlights the importance of sustainability to our employees, many of whom give significant amounts of time to changing people's lives. We're proud to showcase their hard work for which I'm thankful. I will now finish with a brief Summary of the first half. Throughout the pandemic, we've continued to focus on the protection and well-being of our employees, Having reacted in Q2 2020 as we were forced into home working globally, we rapidly returned to our investment The tough and challenging year in 2020 has strengthened our culture, diversity and the value in the business, Which are now reaffirmed at the forefront of our operations as confirmed by our recent employee engagement survey. I'm immensely proud of the spirit, resilience and commitment of all of our people. This, I believe, is reflected in our results. Gross profit for the first half was only down 3.7% on 2019, Our record year, we've delivered operating profit of GBP 64,300,000 in April 2021 at a conversion rate of 15.9% And we ended the half with a record quarter in Q2. We remain confident in our strategy of maintaining investing in our platform. We continue to invest carefully in headcount, demonstrated by approximately 400 experienced hires we added in 2020 And a further 400 in H1 2021, as well as rolling out new technology and innovation. Our headcount is currently down around 8% on the pre pandemic level at the end of 2019. As a result of the more favorable trading conditions in H1 as well as this reduction in our Fionna headcount, our gross profit per Fionna It's up 10.7% on H1 twenty nineteen. Given the improvement in trading conditions in H1 As well as our strong liquidity position, the Board has decided to reinstate our dividend policy. As such, we are announcing today a cash return to shareholders of £100,000,000 Looking at it continues to be a high degree of global macroeconomic uncertainty as COVID-nineteen remains a significant issue And restrictions continue in a number of the group's markets. Additionally, at this stage of the recovery, it's not clear whether the improved performance is still the result of pent up Supply and demand or a sustainable trend. However, as stated on the 7th July 2021, the strength of our performance in H1 notably in June And absent any unexpected events, we expect full year operating profit to be within the range of GBP 125,000,000 to GBP 135,000,000 With a clear leader in many of our markets, with a highly experienced senior management team, which we believe positions us well to take advantage of opportunities to grow And improve our business. We have maintained our focus on driving progress towards our long term strategic goals. That concludes the formal presentation for this morning. Kelvin and I are happy now to answer any questions you may have. Thank you. We have the first question from the phone lines from Anvesh Agrawal from Morgan Stanley. Sir, please go ahead. Your line is open. Hi, good morning. I just got, I mean, 2, 3 questions, simply around the cost base really. 1st, can you tell us what's the sort of cost inflation or the wage inflation you're seeing within your own cost base? Is the sort of tightness in the labor market impacting that as well? And then if you look at the Slide 5 where you show the fee earners and the net fees, just like the gap that we have between the peak Fee and the fee earners, is it fair to assume that going forward sequentially, the headcount growth will sort of outpace the fee growth Or you can still eke out some more productivity. And then finally, longer term, what's the split you're targeting between the fee earners and the support staff? And is it possible to tell that what's the rough differences in the salary of the support staff and the fee earner is really? Okay. Well, look, let Kelvin answer the first and last question, and I'll answer the second one on the headcount. Yes. I mean, in terms of inflation on our own staff, we gave everybody an inflation repay increase back in January. So In the UK, for example, that was 1.5%. In most of Europe, it was just below 1%. It would have been higher in Latin America And in parts of Asia. But we did that back in Jan, which was really before we saw the markets heat up. That's not the inflation we're seeing in people who are changing jobs and the people that we're placing, which in many cases is much higher. As we go through the year, we always monitor to ensure that our people are on Sensible and competitive packages and a larger part, particularly in our operational front office area, Of their pay is represented by variable pay in terms of profit related bonuses. So we would expect them to Obviously, we see sizable increases certainly against last year in terms of the profit related element, but the base salaries were Held at about 1.5%, if you use that as an average, it's not far off of the group as well. I'll jump on to the last one. The last one About Fiona to support staff ratios. I mean, we're still targeting 80 2.18 as a measure. We're currently 77.23. We went as high as 79.21 at one point. And then it fell back to 77.23 Fee earners unwound last year. I don't see anything structurally that says we can't get to 82. As we add in fee earners, Largely, we were able to absorb that with the greater degree of automation that we've got now. And we're just starting to deploy Robotics and various other things into the activities that we have in our support staff. I think The cost of our support staff is quite different depending on where you are in the world. And so we have 4 shared service centers nowadays. We have one based in the UK, we have one in Barcelona, we have one in Singapore and we have one in Buenos Aires. And Singapore and the one in flower, fairly comparative in terms of costs. Barcelona is slightly cheaper and Buenos Aires is very much cheaper Due to the depreciation of currency down there, but as I say, we look to optimize things both within those centers and across those centers And look for automation where we can really going forward. Steve? Yes. I mean, in terms of headcount, we would still expect our GP line to move faster The NAR headcount line. That's traditionally how we've always grown to sustain depending on what we're seeing by the end of the year And whether this is a sustainable sort of improvement, in other words, if Q3 is better than Q2 and Q4 better than Q3, then clearly our confidence will grow to hire people in preparation For next year, but GP should grow faster than our headcounts. I would add a couple of things to what Kelvin said. Yes, I mean, firstly, on the bonus level, that Generally, tends to be where we get significant inflationary increases with our consultants. And to give you a flavor, our best performing consultants Can add to their salary more than 100%, in some cases, much more. And so Clearly, that's going to be very different to what they were receiving last year. So invariably, they feel the benefits of the improvement in the marketplace. We are seeing with candidates that demand is definitely outstripping supply, which is a situation that we like. That means that clients struggle to fulfill their own needs and therefore will outsource recruitment. But what we are also seeing is candidates getting multiple offers, and also what we call buyback, Which is where clients try and persuade candidates to stay. All of those tend to lead to a little bit of a bidding war, which means, Of course, the gap between the salary that somebody is on and the salary they end up on when they either decide to stay put or move jobs Tends to be quite significant and we're benefiting from that. And of course, when supply demand, sorry, outstrips supply, We also benefit because a large proportion of our business is spot priced with clients. We benefit by being able to harden our fee rates. And we're starting to see a little bit of that as well. Finally, I would say on the Sort of inflationary costs, the bit we alluded to and Kelvin talked about it, we clearly have had a reduction of headcounts, But they were in our least experienced fee earners. And we've been in effect replacing them by a fewer number, But higher paid experienced individuals. The beauty of that is two things. When you hire somebody who's never worked in recruitment before, We will get a reasonably high staff turnover because they find that once they transition their career from being an engineer or a Lawyer or whatever into recruitment, they don't like it. And so they decide that they don't want to stay in the industry. If you're hiring experienced hires, They've already been through that test, if you like. And invariably, therefore, they want to stay in the industry. They've made that decision, and that's why they're moving to another Recruitment business, hopefully, a better one and a bigger one. And so that tends to help. The second is that the lead time, Particularly in temp, but also in perm can be very long for an inexperienced hire, whereas the lead time For an experienced hire up to full productivity and hopefully beyond, and we're already experiencing that with the 400 we hired last year is much shorter, of course. So there are added benefits to both, but it just gives you a real granularity on what we're doing. Okay. That's very clear. Thank you. Thank you. We now have a question from Rajesh Kumar from HSBC. Sir, Rajesh, please go ahead. Hi, good morning. Just thinking about this cycle slightly longer term, not just this quarter. Do you think the margins we saw in the loss cycle are a reasonable reflection What type of margins we could get through given how the geographic expansion process That's progressed over the last decade. And how you're thinking about the overhead cost base, Especially with a bit more working from home and real estate cost shifting, double running growth of IT platform, Gong. Any thoughts on that would be very helpful. Sure. I mean, Kelvin can try and put numbers to it, but I To say predicting the future is always very difficult. Firstly, there is no doubt about it. The expansion so far that we're seeing and it's Highlighted in our results this morning in terms of good strong growth in North America, in Asia Pacific, Particularly Asia and Germany, of course, then invariably the fee rates are higher in those geographies. And we can take advantage of that, whereas perhaps at the moment, we're recovering From a deeper slowdown in the UK caused by Brexit, and we have slightly lower fee rates here in comparison. So Yes, the mix will have an impact for sure. This supply and demand I think it will definitely help. Of course, it always depends on the degree that you grow. So if this cycle turns out to be Sustainable and we would grow rapidly and that supply and demand continues, then I would expect Margins to improve. Finally, in terms of our cost base, I totally agree with you. I mean, working from home, it's certainly something that we are Saying to all of our staff, we trust them to be able to make a decision on how they can best perform. And if that means working from home rather than in the office, That's great. Now we're experiencing different things in different parts of the world with different cultures and as to How that will actually play out. But without doubt, we will require less space in our offices, Including less interview rooms as we use video technology more and more. That said, that will take a while to play out because, of course, we have lease agreements with landlords. And when those leases come up or we get a break, then we will look to work to Offices that more fit the future, if you like, of the way that we work. The other thing I would say is that partly through our desire to be more sustainable, But also, the practicality of it as well, we will travel less. So there will be other costs that also Come down in the business and of course they will also help our margins. Kelvin? Sure. I mean, it's relatively challenging to try and compartmentalize those costs. But We pre pandemic, so sort of 2019, spent about GBP 1,000,000 a month on travel. We spent about GBP 1,000,000 a month on Candidate and Client entertaining. I don't expect either of them to go back to that level. But whether it ends up with sort of 50% of that or slightly less, I don't know. But there will be a savings certainly within those 2 categories. Within our property portfolio, I would expect that Going forward, we would need less interview rooms. And depending on which region you're in, the interview rooms would have been between 30% 40% of the floor plan. Having said so, we'll probably reduce that to maybe 10% to 15%, again, depending on the region. I think The actual fit out costs are likely to go up slightly per square foot. In terms of historically, we've largely had Big banks of desks. And actually going forward, we're likely to have some more collaborative spaces and more spaces for people to come in Really spend more time with each other rather than individually at desks, which is what they're more likely to do on the days that they're working from home, assuming that's their work pattern. So I don't think you'll see a straight sort of 20% reduction in our property costs, but you could see, dollars 5,000,000 to $10,000,000 Our property costs Roughly GBP 50,000,000 a year in terms of the things that directly related to leases and that side of things. So I mean, I do think there's some opportunities around all of those. As Steve said, in terms of the places that we've been targeting, Those places tend to have higher fee rates. And there's nothing in our model that says that we can't get back into At the very least, the sort of the mid-20s in terms of conversion rate. I think the last 10 years was a relatively benign environment Large amounts of wage inflation over the last 10 years. We're seeing that now. We've got Pretty much 0 unemployment rates in white collar across the world, and that's reflected in the growth that we're seeing. So Do I think that we can move up? We had said a couple of years ago pre pandemic that we were targeting through the changes we've made in the back office To move our conversion rate into the low 20s and that we needed really scale and some decent market conditions to move up into the mid-20s. I still think that's very much achievable. Understood. Thank you. That is reasonably comprehensive, I think. If we look at consensus estimates, clearly none of that is in the medium term thinking of the various models out there. Is it because you have not Given a strategic update for a medium term. And if so, then any plans on doing such an update next year? Yes. I think it's been clearly very difficult to give you much forward visibility in the last sort of 18 months. I think we haven't really changed our position from 3 weeks ago when we said that the outlook Remains uncertain. And to the extent this was pent up supply and demand coming through, we still don't fully know whether that's the case or whether this will continue to be robust. I don't think we'll manage to do an update this year, but I think we would like to do a capital markets update next year. We actually had some slides that we prepared for this meeting that looked at some of the broader strategic areas of the group, Looking at where we're focusing on high potential disciplines, very much around sustainability, around experienced Hi, that we will go into a Q3. We thought there were probably going to be a few more people listening at that point. But they are really just going to be in terms of teeing you up to some of the Next year and within that we can refresh the vision that we presented probably 3 years ago. Thank you very much. Okay. Thank you. We now have another question from Hans from Kepler Cheuvreux. Hans, please go ahead. Yes. Yes, the previous One only question from my side remains, and that's on the payables. The cash flow was Reported by some lower payables and also look at the balance sheet, payables go up a little bit. Is there something any strange in there? Or let's say, is there any timing issue there also in light of, let's say, your cash position at the end of Q2 after deduction of your dividend payout, which in principle is then below the €50,000,000 could you give some feeling that the €23,000,000 Positive impact on the cash flow from payables. Could you give maybe some flavor on that? The short answer is there's nothing odd in there. I'm frantically trying to think why there would be anything in there or anything that Unless there was something slightly unusual in terms of the timing that it fell with 10 payrolls possibly, There might have been something in that, but that wouldn't normally be towards the end of the month. So no, I think whatever you're seeing in there is just Something relatively normal. There's nothing else in there. Yes, I suspect it's Probably timing differences on temp and temp accruals, but there's nothing else. Okay. Thanks. Thank you. We have no further questions We have had no questions registered at this time. So we'll hand it back to Steve. Okay. As there are no more questions, thank you for listening The call, our next scheduled update to the market is on Wednesday, 13 October, one of the holder conference call to deliver our Q3 2021.