Staffline Group PLC (OSU.F) Earnings Call Transcript

Good morning, and welcome to the Staffline Group plc Investor Presentation. [Operator Instructions] Questions are encouraged. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Albert Ellis. Good morning, sir.

Good morning, and good morning to all of you who've so kindly devoted some of your time. You're with Albert Ellis here, the CEO; and Daniel Quint, my CFO, many of you will know us well by now. So we'll go straight into it. This morning, it's just really a pretty close trading update to update the market on last set of numbers. Really, really important to take that -- to take the opportunity to keep the market informed and hopefully appreciate the data. It won't be -- we won't have a very long presentation this morning. Just to remind you that it's at scale, the Staffline and PeoplePlus scale that gives its advantage in the market. As you can see, we're the market leader in blue collar recruitments. We have offices and sites and presence almost anywhere in the U.K. and Ireland. We've got an increasing presence now in the Republic of Ireland in line with our strategy, we announced 2 years ago. So opened a new office last year, growing the business in double digits. So that's a little bit of exposure to the Eurozone and to that hard currency, very welcome and also low tax rates. But in the Island of Ireland as a whole, if you take the North and the Republic, our market share is growing quite tremendously. So very pleased about that. Looking at Scotland, actually, Scotland had a very good time in the last period, even despite COVID because they're largest clients in the drinks industry, whiskey distillers and others, which have obviously not had the impact from COVID that other companies have had. And then for the rest of the South of England and the North, you can see -- we're tracking the spine of the country, warehouse distribution, logistics, those sorts of sites. So that's our group in a nutshell. And now on to the highlights of the statement. Last year's numbers, we really feel proud of what we've achieved. It's actually a game of 2 halves. The first half was tough and challenging because of the end of the pandemic, the Omicron disruption that we had, we suffered from statutory sick pay, people staff not coming into work and customers locking down again and closing sites. So that was the first half. We were a little bit behind the previous year. And in the second half, we made up all of that territory. And we'll talk about it in the slides to come. So just -- you could see the numbers there. We've grown the business, gross profit up, operating profit up in double digits. We, like others, have had a good permanent fee year, up 66%. We said a couple of years ago that the permanent fees, we'd like to see them in double digits as a proportion of Recruitment GB, recruitment gross profit, and we're heading for that now. And then finally, Daniel's going to talk to you about the cash, really, really good to go into a challenging year with a strong balance sheet and with a strong cash position. So Daniel will talk about that. And for the rest, some good news on the trading front all in the statement. Just one I'll pick up there, and that is the PeoplePlus awarded contract towards the end of the year with the Ministry of Justice. It's a 7-year contract with youth funding institutes and that's GBP 15 million total contract. So nice little end to the year.

Good morning, everyone. Very nice to be here today and to present the FY '22 trading update. To cover the core financials, you'll see that revenue was up by 0.4%. There have been 2 real trends driving that. There's been some softening from the customers who benefited from COVID especially around some of the supermarkets there, and but specifically online supermarkets and the online environment as has been well trailed. But that has been very much offset by new wins and BMW being one of them, which we spoke about in the year and Albert will speak a bit more about later on. Gross profit up by 2.3%. I would emphasize actually, it's not by more in the recruitment businesses across Great Britain and Ireland with PeoplePlus moving a bit backwards in the very high late market that we have where some of our skills trading not needed as much as one would have liked and that's a natural consequence of that. But the recruitment business is really coming to the fall with strong gross profit increase. Albert spoken about those term fees, that commitment we gave a couple of years ago to increasing Staffline's presence in the permanent recruitment market, a real success over the last 2 years both in our traditional customers, who we service in the temporary worker sector, but also in other sectors, such as defense, for example, obviously, in a relatively strong environment with what's been going on in Europe in last year in that sector. And over 2 years, you can see the perm fees has actually gone up 177%, a new angle on Staffline there, but clearly, we are predominantly a blue collar temporary worker recruiter, but able to benefit off that platform. One thing that's been really pleasing in 2022 is that we've really kept a tight control of costs that enabled the profit to drop through. You'll see that the 12.6% growth in underlying operating profit from '21 to '22 and the conversion from gross profit to operating profit, up from 12.4% to 13.9%. This has also been supported with the first year of profit recognition in the Restart contracts that we have and that should continue into next year. So all in all, very pleased with '22. And very importantly, just coming on to the next slide, is the balance sheet. And in times like we're currently experiencing, more challenging times, potentially recessionary times, very important to come -- to exist with and certainly come into 2023 with a strong balance sheet. So just to point out a couple of points here. So you're seeing net cash, although down GBP 1.9 million, that comes after, and you see on the top right a really important point. That comes after the repayment of approximately GBP 12 million of COVID government support and there are 2 elements that support. The last installment of repaying the deferred VAT, the COVID deferred VAT GBP 5.8 million and then GBP 6.2 million of some advanced payments we received as the Ministry of Justice for supporting its supply chain in 2020 and 2021 repaid in 2022. So that's that GBP 1.9 million in net cash movement is notwithstanding paying back GBP 12 million. So a really strong underlying trading cash flow performance. So really pleased with our net cash at the end of the year, really good position to be entering 2023 on. And then further to that, that balance sheet strengthened as I suppose, further evidence of that is the facilities headroom we have of circa GBP 75 million. Again, a vast improvement on where we were 2 or 3 years ago and really actually gives us potential firepower to take advantage of any opportunities that arise in what is going to be a challenging 2023 whether we can pick up contracts, et cetera, and we're ready as a business, really focused on watching that space. Leverage at approximately 0.6x EBITDA, a good position to be in as well. And then finally, just to mention, as a reminder, the group purchased an interest rate cap in Q4 2021 hedging 2/3 of our exposure to interest rate of SONIA specifically at 1%. And so we really feel that puts the group in a good position all the way through towards the end of 2024, towards the end of that 3-year interest rate cap product but especially this year, leaving us in a summary there with strength of facilities, covenant strength and then interest rate protection in the current environment. So hopefully, that's a good platform from which to look into 2023 and deal with the challenges that will arise, but no doubt the opportunities as well.

Thank you, Daniel. And I must say, and this is -- this is not a scripted comment, but every CEO needs a CFO, who takes out an interest rate cap. A year before, we have a change in Prime Minister, a change in Chancellor, we have an interest rate spike in the markets as a result. So I'm absolutely delighted with Daniel's foresight there and what a pleasure, protects us from interest rate rises over the next 2 years, which is a source of great comfort. Anyway, so having said that, what we said in -- at the interim, which is probably the last time you saw us was that there were 4 points, 4 stepping stones to achieving our FY '22 targets. We're very target orientated, and we have a culture of high performance in Staffline now. And actually, the management team was super motivated to hit the target. I know there were some skeptics out in the city that said, look, numbers look a bit weak at first half, we understand that, in the first half, you've had Omicron, you've had costs and unexpected pandemic-related setbacks, but this is a tall order in the second half, but we knew that we had the fire power and stepping stones to get there. So we've just set out how we achieve this. And the obvious one was the winning of the contract with BMW Group, that's MINI in Oxford and Rolls-Royce in Goodwood. And we on-boarded those workers in the second half, quite a significant amount of costs extended to implement that contracts, a big contract, largest contract awarded in our sector, to be honest, in recent years. So we didn't want anything to go wrong. We -- the client is at foremost in our minds in terms of making sure everything goes smoothly. And then Daniel just set out for reminding anybody that hasn't read that state -- particular statement what it looks like. And then we had Restart, which was a contract that we flagged in '21 -- 2021, that we had secured. We were the largest subcontractor in that particular phase, funding framework, with 3 separate contracts. Of course, the government at the time felt that there was a risk of rising unemployment. I mean some of the forecast for job losses as a result of the pandemic were apocalyptic to say the least and Restart was their welfare to work successor. The largest amount of funding, I believe, for employment, certainly in recent times. So we secured a healthy slug of that funding. But the ramping up and mobilization period lasted 12 months, we successfully did that. And then we promised, as you can see, that we would recognize some profit in that contract if everything went well in the second half. And of course, you can see that that's coming for us. And then it's so important and very difficult to predict, Staffline traditionally has a year of 2 halves as I said at the beginning of the year where it's rather subdued after the previous year's Christmas period. People have got mortgages and higher mortgages and credit cards and everybody spent their savings a little bit to have a Christmas. And so the first quarter is always a bit subdued in retail and in the supermarket chains. As you know, if you follow them. And then the year begins to move forward and we have -- in February, we have Valentine's Day, we have Mother's Day, we have these celebrations during the first half, which actually lift trading. We have a summer peak, a mini peak and then, of course, we have the peak towards the autumn and into the winter. So we knew that the World Cup would hopefully fuel a little bit of the Christmas peak, and we were delighted to see indeed that you all went out and bought ready meals and maybe a few beers and a couple of bottles of wine and watched the World Cup. So that really helps us. And of course, it doesn't matter if there's a peak. It really doesn't affect you if you can't deliver. And one of the things that has struck me since I've been at Staffline is how strong the delivery is and how committed our teams are. I've been in the office just before Christmas, in the Midlands, one of our busiest offices and the teams are up 5:00, 6:00 in the morning for full shift. So it's just quite admirable and amazing to watch them. So it's that commitment to the delivery that has ensured that we were able to capitalize on the peak. And then finally, we've seen organic growth, as Daniel has mentioned that logistics and distribution, those sorts of businesses that prospered, the sort of the Amazons of this world, et cetera, that have really prospered during COVID, those businesses that actually uniquely could service us why we were already locked down globally. They've actually come off those peaks a little bit. So therefore, demand is slightly lower. But we've seen other organic growth, in particular, and I'll talk about that in the next slide, to give you a little bit of color. So the 2 names I've chosen are 2 of the most fantastic customers in the supermarket and food production chains, you could imagine. Sainsbury's, Argos, you know they release some good trading updates in the last 2 weeks. We've been asked to help them. They've given us more market share, and we're hugely appreciative of their confidence in us to deliver. And we're helping them with their supply chain. They -- as all companies are now concerned about supply chains, this is one of the great benefits of being listed. Of course, we're transparent. So our numbers whether they're good or not so good, always available to the markets and private companies believe that they have an advantage because they don't have their transparency whereas my view is, our customers like the transparency. They love to know that we have a strong balance sheet. We will pay the thousands, the tens of thousands of temps that are on their sites on time, and they can rely on us. And I think that's the Sainsbury story is the confidence in Staffline stand shoulder to shoulder with them in their supply chain delivery and help them. Now we've done this through a managed service arrangement. Something that we're very, very keen on this year. We believe that more companies will consolidate their supply chain, particularly in labor as some of our weaker competitors will struggle with higher interest rate, private companies that have got debt and they've got funding. But those -- the cost of that funding is rising, particularly if you're not listed, there's a difference there. And then on to Samworth Brothers, which is a great friend of ours, and we love Samworth Brothers, they produce pork pies and that sort of related food to go. More -- I would call it more value meals and food to go. And of course, they're large customers of the supermarkets, of course, and they're a huge business that actually does a lot of good as well as produce bakery products. But actually, we're one of their largest labor suppliers, and they've actually seen a move to value in the supermarket chain. So we've picked up some organic growth from there. And then just Daniel mentioned Restart, it's old news now, so I don't want to go through how it works. But essentially, we've recognized very cautiously our first profit despite having started that contract 18 months ago. Vinci, to just quickly touch on that, it was a contract extension and a new element to that contract that we reported last year. It has to do with the London to South Hampton fuel pipe. And of course, it's construction, it's in the construction sector. And these projects, these infrastructure projects -- and of course, you won't -- you'll be forgiven for me from it if I could just mention that energy is becoming much more important. And so projects like this and more down the pipeline, which we're engaged on all to do with energy security and getting fuel into the economy, I think, has been very good for us and it's good for the country. So we had an outstanding year with Vinci Construction and then as I said, we've implemented BMW in the second half. Now finally, always looking forward, of course, investors want to know what we think of the future. Let me just step back by saying Daniel and I have got 30 years of -- have more than that, I think, 40 years of recruitment experience between us, we've certainly been through a number of recessions. My grown-up children have -- this is their first recession, so I'm helping them navigate it. But we've been -- I've been through the '93, the 2001, the 2009 and then the pandemic. And I can tell you that there's only one thing that matters in a recession and that is your financial strength and it's binary. If you're strong financially, you've got headroom, you've got the confidence of lenders that are helping you finance your working capital and your customers trust you and this transparency, recessions are opportunities for recruitment businesses. And so it's about keeping that infrastructure in place, keeping your fee earners in place, delivering and navigating your way through. And ultimately, the objective of every recession for every recruitment business I've been in, is to gain more market share. It's the time where you could gain market share and not at the expense so much of price because you have a weaker competitive landscape. So macros this year pick whatever number and whatever view and whatever opinion, from the various commentators out there, whether it's Ernst&Young, the EY forecast, which is the recession -- they're on the more pessimistic side. The IMF have got a bit more positive. There's a range. But let's be honest, it's not going to be as good as last year. And in particular, if you look at the sector, you'd have seen that both Page and Walters have had profit warnings for last year and Hays had an in line just a week ago. So the sector is now either in line or warning on the outlook. So I think the first point to note is we're a big recruitment company, and we can't be immune to the sector-wide weaknesses. And it's particularly in permanent recruitment. There's a cycle, customers have now hired many, many perms. And now that the demand falls and the first thing they do is they start thinning out the workforce. As you've seen with all of the big tech companies, they're all laying off IT software developers, who would have thought. And that's the first element. And of course, everything is a cycle. And so within 6 to 12 months, these companies would have laid off too many people or that they thinned the workforce and suddenly demand will start picking up. And actually, the economy will improve, and they'll need people. And in particular, in the blue collar sector, it will be supermarkets that will need to hire temps. They will turn to us to put in and the retail, aviation and automotive sectors as well. So whilst we're not immune, we really believe we've got a key strength of resilience. We all need to eat, people are traveling, cars need to be replaced, vehicles need to be replaced and these are just the basics of life and they don't stop during the recession. Demand might fall, and of course, people might change their choices. But overall, the economy continues to move forward. So that's recruitment. Now onto PeoplePlus. Well, it's a yin and yang because PeoplePlus is great strength, is that they are a trusted partner for the DWP, Department for Work and Pensions, Education Department and the Ministry of Justice, well known to the commissioners. And they -- and their job is to support unemployed -- those people unfortunately enough to be unemployed at this time and PeoplePlus is there for them. Now because the jobs market has actually surprised everybody on the strength of vacancies and we just hit record low unemployment in the last few months now. There's a lot in those numbers. There's a lot of inactivity and there are people that have left the workforce, retired earlier, during the pandemic. And of course, we've got the long-term sickness problem in the economy from the pandemic as a result of the pandemic. But actually, of those people choosing to work, wanting to work and in the workforce, we're at a record low unemployment. And that, of course, is not helpful for PeoplePlus because PeoplePlus generate its revenue from helping volumes of unemployed individual. So because of the Restart and the training programs having less volume than we expected, and we don't think that unemployment is going to get materially worse in the next 6 months, we've held our expectations back on PeoplePlus. We simply as a Board, being very, very cautious, mature, responsible, et cetera, we're not going to make a highly optimistic and possibly unrealistic forecast and statements about the future. We'll rather look at the near term, be mature, we take a cautious approach and address the near-term factors as we see them. So that's the macroeconomic backdrop. And of course, the global backdrop in terms of automotive supply chains, travel, this will be effective, I think less so than what we've seen with PeoplePlus. So PeoplePlus is where our outlook is most cautious. But we have a healthy pipeline of opportunity. We can't talk about it right now because, obviously, pens needs to be taken and signatures append its contracts, and we need certainty, but we've got a good healthy pipeline of new opportunities. And I think we'll be in a much, much better position as well as we secure those opportunities with our balance sheet and with our results last -- from FY '22. Of course, it goes without saying that not only -- Daniel and I are not the only members of the management team, but we've got a fantastic management team out there. All of the hidden, unsung heroes that are delivering on the front line, our management, our MDs, our FDs, they're all working to make sure that we collect our cash, that we actually invoice our debtors that we actually make good decisions and that we do what it says on the churn that we do, and we are successful. So a credit to the management team, but also to the staff. Look, the group remains well placed. There's no doubt about it. We've got a strong balance sheet. We're conserving cash. That was the right decision. I mean I remember facing the investors a year ago and talking about dividends and other things, we said we need to conserve our cash and build our balance sheet. That's what our key larger investors also wanted us to do, and we've done that, and they've been proven right in that. So conserving our cash, using it to capitalize on considerable market opportunities, and we'll update you as and when those opportunities appear. And of course, ultimately, the gain is to further entrench our market position and grow our market-leading share of that market. So with that, Daniel, if you've got any other comments?

Yes, I just would support everything that Albert said, obviously, challenging year ahead. Again, off the back of a really good '22 -- FY '22, challenging year ahead, cautious forecast, but opportunities are there, and we're ready for when they present themselves and we're able to realize them. So with that, we'll finish the presentation, and we're ready to take some questions.

Perfect Albert and Daniel. Thank you very much indeed for your presentation. Ladies and gentlemen, please continue to submit your questions using the Q&A tab situated on the top right corner of your screen. While the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor dashboard. Albert, Daniel, as you can see, we have received a number of questions throughout today's presentation, and thank you to all investors for submitting their questions. Albert, can I ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

So I think I'll take the first question, which is how much debt is left to be paid? Why is such a big firm share price going so low. So in terms of the first Part A of that question, really 2 questions. And there's no debt in terms of COVID debt, which that question might be referring to, to be repaid, that's all completed. If it's a more general question, if you look at our year-end position, we ended up with net cash. So I think that really leaves the business in a really good place. Why such a big firm share price going so low. I think as you would have seen, driven by the recruitment sector, our share price is not dissimilar to the share prices of 3, 4, 5 other in our category along with -- as we've gone through the end of '22 into early '23 and the macroeconomics, obviously, you've spoken and people have taken their direction from that reality. That's the reading I have into the reason why the share price has gone lower. Just the next question because I will take obviously the finance-related ones, and I think this one is finance one. What is the repayment of GBP 6.2 million of COVID-related advanced payments to the Ministry of Justice. It sounds like MOJ paid upfront for services that weren't delivered, required. So these didn't convert to sales. So as I mentioned, just to echo what I said earlier, in the depths of COVID, we're talking throughout 2020 and then in 2021, the Ministry of Justice wanted to make sure that their supply chain was robust. There are no risks to delivery of service, absolutely key, as was the case in other parts of the economy. And that was the reason why those advanced payments, as I call them, were made, absolutely appropriate, all paid back on time, but it was to be -- to summarize very important to ensure that the strength of the supply chain to society, to whom those services are supplied, whether it's prisons, et cetera, were robust and strong and wouldn't fall over. And we weren't in a position, that was a general approach to the supply chain and might be some other smaller suppliers, it might have been at risk of challenges in terms of financial challenges with cash flows, but that was the general strategic reason for that.

And they did convert into sales.

Yes.

Growth forecast for FY '23 turnover increasing marginally and EPS growing 22%, is your cautious approach to FY 2023 in line with these forecasts or management expectation is different. Daniel?

Yes. Well, I think what we'll say about FY '23 is that the results for '23, as we see them at the moment, right in January at the beginning of the year, we see them being slightly behind FY '22. And I think as we've said, we're approaching things in a cautious manner. And so our expectations are that we will be slightly behind '22. But we will obviously -- as Albert said, we will update our next -- opportunity for update is on Tuesday, 21st of March, as you would have seen announced this morning, which will be the full publication of our FY '22 results and then at other points during the year. So we'll update those points.

Change in revenue mix from permanent to temporary recruitment suggests to us that margins will come under pressure. Is this correct Daniel?

Yes. I think that's an interesting point. As we stated in our presentation that we've increased perm fees, 65% over the last year and over a 2-year period, 177%. I think -- so the general comment about perm recruitment softening would lead one to believe that is possible. Number 2, I would mention -- I would say that it depends where our mix lies in temporary recruitment. So for example, we've spoken about as the image on the front of our presentation suggests that we have made inroads into the aviation sector, which has slightly higher margins than you would expect, for example, in the supermarket sector. So that would be able to support our margins. And the final thing I would say just back on the permanent recruitment point, is that the sectors that we -- in addition to supplementing our temporary customers, which are quite first around the food supply chain and food retail, we do have quite an extensive presence in our technical engineering permanent sectors. For example, defense, and I think I mentioned that and obviously sadly with the world. But for business reasons, those would be supported on the margins. So I think we'll just have to wait to see how the mix of margins turns out with the offsetting of some of the softening in permanent recruitment with where our actual plan of improvement ends up in the defense sector and oil and gas where we can support those sectors. So all to play for, but we'll be watching that closely.

I'll just add to that. I don't think we're going to see any sort of alarming margin degradation if that's also part of the sort of thinking behind that question. I think there will be what they'll be. But certainly, on conversion ratios, we've seen through the good work of the transformation and everybody that has been involved in changing this company around. Our conversion ratios have gone up right across the board. I will just bring out Ireland in that. That team has done a fantastic job, they've got sets of beating conversion ratios in the mid-20s really, so someone it comes from the recruitment business, that's really a fantastic margin. So we've got some great margins, conversion ratios mainly, which shows efficiencies. Daniel will be talking about clients, which is absolutely right. And we just don't see any reason that there would be any alarm about the macro on margins. You've asked -- I know the company has been focused on organic growth, but do you see a return to making acquisitions. As I said, we are actually conserving cash. We are keeping -- we see organic growth as a sort of -- it's always the best growth, right? It is the most valuable for shareholders. Staffline have made some acquisitions in the past, some have been good, some have been not so good. We can get more out of what we've got is in our view. But we will not be closed. Our minds will not be closed to the possibility of picking things up that are either distressed sellers in our market or where there's value to be had but we're not going to bet the farm whilst Daniel and I are the executive team here, there'll be no borrowings to buy acquisitions. You can take that to the bank. We will all be out of trading cash flow if there are any bolt-ons. And actually, our organic growth opportunity is our real opportunity.