PageGroup plc (PAGE) Earnings Call Transcript

Hello, and welcome to PageGroup's Q4 2022 Trading Update. My name is Lauren, and I'll be coordinating your call today. There will be opportunity for questions at the end of the presentation. [Operator Instructions] I will now hand you over to your host, Kelvin Stagg, Chief Financial Officer, to begin. Kelvin, please go ahead.

Thank you, and good morning, everyone, and welcome to the PageGroup 2022 Fourth Quarter and Full Year Trading Update. I'm Kelvin Stagg, Chief Financial Officer. And on the call with me is Nick Kirk, PageGroup's new Chief Executive Officer. Although I will not read it through, I'd just like to make reference to the legal formalities that are covered in the cautionary statement in the appendix to this presentation and which will also be available on our website following the call. The group delivered gross profit of GBP 266.4 million in the quarter and approaching GBP 1.1 billion for the full year, a record year for the group. Against Q4 2021, we grew 3.5% in constant currencies. Foreign exchange has had a favorable impact on the quarter's growth rate compared to the prior year, increasing our reported gross profit growth rate by 4.4 percentage points or GBP 10.8 million to 7.9%. Reflecting the tougher trading conditions in Q4, we managed down our fee earner headcount by 128 through natural attrition. As such, our ratio of fee earners to non-operational staff decreased slightly to 77:23. Overall, the group had 6,943 fee earners and a total headcount of 9,020. We have a strong balance sheet with net cash at the end of December of around GBP 131 million. This was down from GBP 186 million at the end of Q3, having paid out GBP 100.5 million in dividends on the 14th of October. Given the slowdown in trading towards the end of Q4, we now expect 2022 full year operating profit to be around GBP 195 million. I will now give a brief financial review. Overall, growth was stronger in temporary than permanent recruitment, which is indicative of the current uncertainty in the market with clients seeking more flexible options. Temporary recruitment grew 18% against Q4 2021 with permanent down 0.8%. Reflecting this, our ratio of permanent to temporary gross profit was 74:26, down from 76:24 last quarter. In Michael Page, permanent recruitment represented 83% of gross profit, while in Page Personnel, it was less at 53%. As is often the case in uncertain times, trading was stronger at lower salary levels, where the financial commitment from clients is less. Accordingly, Page Personnel was the stronger performing brand, up 10% compared to growth of 1.1% in Michael Page. Growth was stronger in temporary recruitment in both Michael Page and Page Personnel. In Q4, we decreased our fee earner headcount by 128 through natural attrition with reductions in all regions, except EMEA. As a result of softening in both candidate and client confidence towards the end of the quarter, productivity decreased 12% in constant currencies compared to Q4 2021, reflecting continued shortages of candidates, fee rates remained high. Salary levels remained strong, but the increased time to hire that we mentioned in Q3 continued and increased towards the end of the quarter. Accordingly, whilst activity, such as numbers of jobs and interviews remained high, conversion into placements slowed due to both clients being less urgent to commit and candidates less likely to switch roles. Our operational (sic) [ non-operational ] support headcount rose by 37 as we continue to build out our capabilities in Page Outsourcing. As such, our ratio of fee earners and non-operational staff decreased slightly to 77:23. This fee earner headcount and gross profit chart shows the unprecedented scale of the decline in group gross profit in 2020 due to COVID and the comparison to the global financial crisis in 2008. It shows how we chose strategically to maintain and invest in our platform, which has driven the sharp recovery seen throughout 2021 and the first half of 2022. With quarterly gross profit reducing in Q3 and Q4, as the earner headcount has now fallen accordingly. I will now present a brief regional review. 2022 was a record year for the group with gross profit growing 20% year-on-year. In Q4, we delivered gross profit growth of 3.5% against Q4 2021. However, as the quarter progressed, conditions became increasingly challenging, and we saw a reduction in both candidate and client confidence, leading to further delays in decision-making as well as candidates becoming more reluctant to accept offers. Greater China continued to be affected by COVID restrictions at the start of the quarter, before many restrictions were lifted, which resulted in high infection rates amongst our people, our candidates and our clients. Foreign exchange had a favorable impact on the quarter's growth rate compared to the prior year, increasing the reported gross profit growth rate by 4.4 percentage points or GBP 10.8 million. Whilst activity levels, such as the number of jobs and interviews remained high, conversion into placements slowed due to both clients being less urgent to commit and candidates less likely to switch roles. In our largest region, Europe, Middle East and Africa, which represented 53% of the group, we grew 11.8% on Q4 2021. Michael Page, which is focused on higher income, permanent recruitment was up 13% for the quarter. Page Personnel, which is focused on lower level recruitment with a higher proportion of temporary, grew 10%. France, the group's largest market, delivered a record quarter and grew 7%, with stronger growth in Page Personnel, which have been slower to recover from the pandemic. However, France exited the quarter slower in December with increased caution amongst both clients and candidates. Germany, representing 12% of the group, delivered another record quarter, up 14% against a tough comparator with strong growth in all 3 brands. Our Michael Page Interim business, which is focused primarily on technology, was the best performing, up 35%. We now have over 700 fee earners in Germany, which positions us well for ongoing growth in this large high potential market. Elsewhere in EMEA, we delivered robust results, but generally saw candidate and client confidence decreasing towards the end of the quarter. Having added 197 fee earners in Q3, we added at a slower rate in Q4, up 21% for the region overall. The Americas, representing 18% of the group, delivered growth of 6.6%. U.S. was up 2%, down from 14% in Q3. Construction, our largest discipline in the U.S., saw a slowing in residential builds alongside reduced funding for commercial projects. In Latin America, gross profit grew 13% despite political and macroeconomic uncertainty across the region, particularly in Brazil. Mexico, our largest country in the region, was up 1% compared to 17% in Q3, impacted by increased delays in decision-making. Brazil was up 2%, and the remaining countries grew 33% collectively, with record quarters delivered by both Argentina and Colombia. In line with the more challenging conditions, overall fee earner headcount decreased by 59, mainly in the U.S. and Brazil. In Asia Pacific, representing 16% of the group, Q4 gross profit declined 15.8% on 2021. Permanent recruitment across the region declined by 19%, while temporary recruitment grew 5%, reflecting the uncertain market conditions. In Asia, 12% of the group, we declined 20%, driven by the impact of COVID on Greater China. In Greater China, 4% of the group, we declined 41%. Mainland China was down to 52%. This was driven initially by COVID lockdowns, followed by the relaxation of restrictions and subsequent high infection rates, which further impacted activity levels. Hong Kong was also impacted and declined 26% in the quarter. Southeast Asia, our other large high potential market in the region, declined by 2% against Q4 2021, driven by declines in both Singapore and Indonesia, down 9% and 23%, respectively. India, 13% of Asia, grew 10% against another tough comparator. We now have around 230 fee earners in this highly profitable market. Elsewhere, Japan declined 5%, whilst Australia was flat. Our fee earner headcount decreased by 64 in the quarter, mostly in Greater China. In the U.K., which represented 13% of the group, gross profit declined 1.9%. Page Personnel, which operates at lower salary levels and have been slower to recover from the pandemic, was up 31%, whereas Michael Page declined 12%. Growth slowed from 9.5% in Q3 as we saw more clients deferring hiring decisions and increased caution with candidates. Reflecting the more challenging trading conditions, our fee earner headcount reduced by 26 in Q4. I will now hand you over to Nick for a brief summary before we move on to the Q&A.

Thank you, Kelvin. 2021 was a record year for the group with gross profit growing 20% year-on-year. In Q4, we delivered gross profit growth of 3.5% against Q4 2021. As the quarter progressed, conditions became increasingly challenging, and we saw a reduction in both candidate and client confidence. Due to these tougher trading conditions, gross profit per fee earner, our measure of productivity, declined 12%. Given the slowdown in trading towards the end of Q4, we now expect 2022 full year operating profit to be around GBP 195 million. Looking forward, there remains a high level of global macroeconomic and political uncertainty in the majority of our markets. However, against this backdrop, we continue to see candidate shortages and good levels of vacancies. Given our highly diversified and adaptable business model with a cost base that can be adjusted rapidly and a strong balance sheet, we believe we are well positioned to weather the uncertainty and continue to make strong shareholder returns. Kelvin and I will now be happy to take any questions you may have.

[Operator Instructions] Our first question comes from Anvesh Agrawal from Morgan Stanley.

I got 3 questions. The first, despite the weakness, the temp growth looks quite solid. Wondering if you can explain some of the drivers behind it. Is there anything specific to the cycle, which is driving that strong temp growth? Second, I mean can you just explain the reason behind the loss of productivity in Q4, while there is a slowdown, but the overall fee number or fee growth number in Q4 was kind of still in line with subset where the market was expecting, but it seems that drop-through rate was weaker? And then finally, in FY '23, how should we think about the drop-through rate of the cost base? I mean, are you now at a stage where you're looking to actively cut the cost? Or you still manage through natural accretion?

Well, if I go with maybe temp growth to begin with, I guess, temp growth is something that we typically see when there is uncertainty in the market, clients tend to opt to take a candidate on a temporary or contract basis versus taking them on perm, where they may be more uncertain about the future. So I guess our read on that would be that perhaps it indicates some lack of confidence within our client base that's instead of hiring perm, they would be more interested in taking a candidate on a temporary basis.

Yes. In terms of fee growth, I think our growth rate clearly slowed as we went through the second half of last year. I think the conversion rate was really driven by a productivity drop. I guess the answer is possibly that the expectation for GP was somewhat lower than it would have been. Had we had a stronger performance going through it? Our cost base, if anything drops slightly as we went into Q4 with a reduction in fee earners, there were a small number of underlying cost increases in some other areas of SG&A really in terms of sort of IT costs and the like. But it was more driven by a lower productivity that led to a lower conversion than really anything in terms of fee earner headcount. So possibly the consensus for GP growth was lower than it might have been otherwise. The last one on cost base is really, I guess, a question around fee earner headcount going forward. I think you probably heard us say at the time that we did our Q3 results that we maybe were a little bit surprised by the number of fee earners that have gotten in Q3. I think that was off the back of obviously having a very strong first half. A number of those have got into European countries, whereby the actual start date is quite long. And therefore, we saw people that have been hired during May and June, who didn't join until sort of well into Q3. I think the messaging internally, however, was very strong. And therefore, we saw the additions drop and therefore, natural attrition which is still currently running for us at a relatively low rate, but would be in the very high 20s, low 30s, depending on the market, allow us to just drop our fee earner headcount. I think depending on the market as we go forward, and clearly, our team-based profit share allows us to be very -- cues as to where we're dropping headcount according to the activity that our people are seeing on the ground. I would expect that headcount possibly to drift a little bit as we go into next year, but it will really adjust to what the market conditions are as we go through that period. So our cost base at the moment is currently running somewhere around GBP 75 million a month, and that is unlikely to move materially apart from fee earner headcount, as I say, which we'll keep an eye on as we go forward. Hopefully, that helps you a little bit with your modeling.

Yes, that's really useful. And just on the profit share, that roughly equates what, 10% of the fees as a sort of a ballpark?

It's not far off. I mean, it doesn't really work that way. It's more probably in terms of about 25% of pre-bonus profit. But if you wanted to use 10% of fees as a proxy, you wouldn't be far off.

Our next question comes from Kean Marden from Jefferies.

Just on Germany. So I think your narrative feels a little more solid there. So it doesn't feel like you are flagging a sequential deterioration in the fourth quarter. I'm wondering whether that is just your scale, so you guys taking market share, or just whether the market is a little bit more robust in Germany? And secondly, are you seeing wage rate inflation falling in any particular areas that you'd like to call out. It's obviously a very topical debate in the markets at the moment. And then thirdly, I don't know whether you're going to assist with a sort of December exit rate, Kelvin, at the group level or maybe divisionally but some narrative around that would be helpful.

Okay. Well, I'll take the question on Germany. I mean, our German business is an excellent operation. We have -- we're seeing shortages of candidates and full effect in that marketplace. And our consultants are still very busy, albeit that they did also see some softening on the perm side. But as you saw in the numbers, the contract business continues to perform extremely well. As to why I think it's a combination of the two things that you mentioned, I think, one, I think we are still growing and taking market share. But also, I think as it stands, the German recruitment market is standing up better than some of the others.

Let me take the other two. So wage inflation and wage rates, I think I'll take them in two areas. So internally, and therefore, what we would probably say is wage inflation, is running somewhere broadly between 4% and 5%. So I think it's near 4% across Continental Europe. Across the U.K. and the U.S., it's probably near a 5%. And that broadly reflects what we'll be giving our people as annual salary increases, where that's applicable in January. So that's sort of what I would call wage inflation. I think in terms of what people are being offered to move jobs, which is always a bit more than that. It's currently running probably still maybe 10, 15 in the U.S., maybe probably nearer 10 in Europe and the U.K. I think it has come down from the frost that we were seeing in the first half of '22, where in all reality, those numbers, particularly in the U.S., could have been 20, 30 or even higher than that at points. In Europe, it was probably also somewhere at least 15, if not 20. So some of the froth has come off it, but you can still get a decent salary increase if you move jobs albeit that clearly in January, the delta between what you're going to get anyway and wage inflation and what you're going to get to move jobs has decreased, and that may well be some of the reason that we're seeing candidates more willing to defer their decision-making or go back and negotiate for buybacks with their own employers. So I think we'll just have to see how that continues during the year. The only other point I'd make on that is we did highlight in the statement that our fee rates remain at record high levels. And that would only reflect the fact that there are candidate shortages, and that's likely to support some increase in good candidates, getting good job offers to move jobs going forward. But that's obviously subject to how the macro evolves as the year progresses. The exit rate -- the exit rate actually is quite complicated to explain, and it's less about the rate that we saw in terms of 2022 over 2021. It's actually the comp, which, for us, when we were talking about it in 2021 was over 2019. And for those of us that have just about decent memories, we can remember that in December 2019, we had trade tariffs that we're kicking off. And therefore, we had quite a weak comparator in 2019, which means that the 2021 December comparator over 2019 was extremely strong. And therefore, when you look at the December exit rate over that '21 comparator, it looks particularly weak. What I would say is, actually, if you're trying to get a better sense for the quarter, then the quarterly growth rate which we saw, which was 3.5%, deteriorated relatively slowly through the fourth quarter. So we exited slower than we were in October. November was the midpoint and December was the low point. But it was mildly negative or flat as opposed to particularly negatively down if you look at it in the round. Does that help you, Kean?

Yes, it does. And divisionally, is that across all 4 divisions? Or was EMEA maybe a little bit much you keep that strong [indiscernible]?

EMEA was stronger. Yes, EMEA was stronger supported particularly by Germany. But actually, the majority of the businesses in Europe and Northern Europe, also Benelux was a bit stronger, slightly more robust. I think in all cases, they were slower in December, but they certainly weren't down in the sort of flat to negative. They were positive. The U.K., the U.S., Latin America were all probably in the middle of the pack. And obviously, in Asia Pac, we were negative through the quarter. And we didn't exit particularly outside of China, much more negatively than the rest of the quarter. Even within China, actually, it was fairly flat, albeit there was a bit more disruption right at the very end, but not noticeably.

If I may just put one last quick one on. So if China reopens post the COVID restrictions, how quickly would it take your business there to see the benefit of that?