PageGroup plc (PAGE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the PageGroup Second Quarter and H1 2024 Trading Update. [Operator Instructions] I would now like to hand the conference call over to your host, Kelvin Stagg, Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us at short notice. Welcome to the PageGroup 2024 Second Quarter Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and on the call with me is Nick Kirk, 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 224.3 million in the quarter, a decline of 12% in constant currencies. For the first half, we delivered gross profit of GBP 444.2 million, a decline of 12.4% in constant currencies. We saw a softening in activity levels towards the middle of the quarter and exited in June slower, down 18% from the prior year. We reduced our fee earner head count by 153 or 2.7% during Q2, mainly in Europe. However, going forward, we still intend to hold fee earner head count at around existing levels. Overall, the group ended the quarter with 5,598 fee earners and a total head count of 7,576. Despite the reduction in gross profit, productivity measured as gross profit per fee earner increased 1% on Q2 2023. Our balance sheet remains strong with net cash at the end of June of around GBP 56 million. This compares to GBP 67 million at the end of Q1, having purchased GBP 9 million worth of shares for the Employee Benefit Trust in April as well as having paid out the 2023 final dividend of GBP 35 million in June. I will now give a brief financial review. Reflecting the uncertain macroeconomic conditions, temporary recruitment continued to outperform permanent, as clients sought more flexible options. Temporary recruitment decreased 9.8% against Q2 2023, with permanent down 12.8%. Reflecting this, our ratio of permanent to temporary gross profit was 74:26, broadly in line with Q1. In Michael Page, permanent recruitment represented 82% of gross profit, while in Page Personnel, it was less at 49%. Michael Page was the stronger performing brand, down 10% compared to a decline of 17% in Page Personnel. A part of the drop in permanent recruitment in Page Personnel was due to transitioning teams to more profitable roles within Michael Page as a result of our new strategy. We reduced our fee earner head count by 153 or 2.7% during Q2, mainly in Europe. However, we still intend to hold fee earner head count at around existing levels. Our nonoperations head count decreased by 49% in Q2 due to the finalization of the closure of our U.K. shared service center during the quarter. In total, our head count is now 996 or 11.6% lower than in Q2 2023. We saw a reduction in the number of new jobs acquired in May. This reduced the number of interviews in June and consequently placements in gross profit, resulting in a lower exit rate for the quarter. We anticipate the further reduction in new jobs acquired in June, which will impact activity and trading in Q3. Gross profit per fee earner increased 1% compared to Q2 2023 despite the softening in activity levels through the quarter. Reflecting continued shortages of candidates, fee rates remained at high levels and slightly above the prior year. Salary levels also remained strong. However, salary offers have reduced compared to 2022 and early 2023. These lower offers, combined with lower candidate confidence, has led to continued high levels of offers being rejected by candidates, either through employer buybacks or unwilling to move for the size of incentive on offer. I will now present a regional review. Group gross profit declined 12% in constant currencies against Q2 2023, and we saw tough market conditions in the majority of the group's markets with little signs of improvement. We saw a slower end to the quarter with the softening in activity levels, which led to our exit rate in June being down 18% in constant currencies on the prior year. Foreign exchange had a negative impact on our results, decreasing our reported gross profit growth rate by 3 percentage points or GBP 7.9 million. In our largest region, Europe, Middle East and Africa, which represented 56% of the group, we declined 10.2% on Q2 2023 with tough market conditions across Europe. France, the group's largest market, which represented 14% of the group, declined 14% against a strong comparator with similar performances in both Michael Page and Page Personnel. Political uncertainty in June led to a number of jobs and interviews being put on hold. We saw a more resilient performance in temporary recruitment, which is indicative of the current uncertainty in the market. Germany, which represented 13% of the group, declined by 9% in Q2 with declines across all brands, albeit with our technology-focused interim business the most resilient. We saw tough market conditions throughout the rest of Europe with declines in all major markets. In the Middle East and Africa, gross profit grew 7%, a new record quarter, with stronger levels of candidate confidence. In line with the tougher trading conditions in Q2, we reduced our fee earner head count by 120, mainly in Germany, France and the Netherlands. The Americas, which represented 18% of the group, declined by 6.6%. North America was down 19% with the U.S. declining 19%. The trends we saw in Q1 continued into Q2 with uncertainty around market conditions affecting both candidates and client confidence, particularly in accounting and financial services. In Latin America, excluding Argentina, due to the hyperinflation, gross profit was down 4%. Mexico, our largest country in the region, was down 10%, broadly in line with Q1 due to its high degree of reliance on the U.S. Brazil was up 9%, with a particularly strong performance in temporary recruitment. The remaining countries declined 8% collectively. Across the region, fee earner head count decreased by 31. In Asia Pacific, which represented 14% of the group, Q2 gross profit declined 19.8% on 2023. In Asia, which represented 12% of the group, we declined by 14%, due mainly to tough conditions in Greater China. In Greater China, which represented 4% of the group, we saw no signs of improvement and declined 29%. Mainland China was down 25% and Hong Kong was down 38% in the quarter, with particularly tough conditions within financial services. Southeast Asia declined by 12% against Q2 2023, due mainly to Singapore, which was down for 16%. India continued to deliver standout results, delivering a record Q2 and up 7% on Q2 2023, whereas Japan declined 6%. Australia declined 38% with ongoing challenging conditions in all states. Fee earner head count decreased by 9 in the quarter. In the U.K., which represented 12% of the group, gross profit declined 17.4% with tough conditions in both Michael Page and Page Personnel. We continue to see clients deferring hiring decisions and candidates cautious about accepting offers. Permanent recruitment was more resilient than temporary recruitment, partly due to a softer comparator to permanent. Following head count decreases over the past 18 months, in Q2, we held our fee earner head count broadly flat. I will now provide a summary of our results. We continue to see challenging market conditions in most of our markets in Q2, and we experienced a softening in activity levels through the quarter, particularly in terms of new jobs and interviews. Permanent recruitment continued to be more impacted than temporary as clients sought more flexible options and permanent candidates remained reluctant to move jobs. While we saw a slower end of the quarter, having taken action to reduce head count throughout last year, our intention remains to hold fee earner head count broadly at existing levels to ensure we are well placed to take advantage of opportunities when sentiment and confidence improve. We have a highly diversified and adaptable business model, an experienced management team, a strong balance sheet, and our cost base is under continuous review. Given the weaker-than-expected trading in June, recent increased geopolitical and macroeconomic uncertainty, and consequently a more cautious view for H2, the Board now expects full year 2024 operating profit to be in the region of GBP 60 million. Nick and I will now be happy to take any questions you may have.

[Operator Instructions] Our first question comes from the line of Remi Grenu of Morgan Stanley.

Three questions on my side. So first on the exit rates of the minus 18%. Just interested in hearing if this has been driven by any geographies in particular, or if the weakness has continued to be relatively broad. So that's the first question. The second one, it's about France, and given the political uncertainty, I'm interested also to understand how this has impacted the trade in June, if you can quantify that a little bit. And related to the previous question, was this country a large contributor to the slowdown experienced and the weaker exit rate? So that would be the second question. And then the third one has to do with your strategic decision to hold on to your head count from now on. Can you maybe elaborate a little bit whether it relates to any tangible signs or discussions with your clients? Or you just believe that doing more in terms of cost savings from now on will start hurting the business more permanently?

Okay. No problem. I'll take those 3 questions. So in terms of the exit rates of 18%, was it driven by specific geographies? I think it was the activity was more marked in terms of decline in some of our big European countries, places like France, Germany to an extent the U.K., but it was broadly across the board. We saw slowing in a number of markets. So it wasn't just a European thing. We saw slowing in the numbers in the U.S., we saw them in Japan, so it was more global. But if you wanted probably 1 or 2 more extreme examples, then certainly, France and, to some extent, Germany saw more of a slowing in June than others. And as our 2 largest markets, clearly, that has a pretty significant impact on us in terms of the performance in June, but also our confidence going into July and then the summer months. Specifically on to France, I mean I've just touched on France, but we had the first round of elections, as you'll know better than me, and really coming back after that weekend, we had a number of clients contact us and candidates either wanting to pull out of processes to wait to see what happened or clients putting interviews on pause and recruitment on pause until they saw what happened with the second round of elections. We've now had those. I'm not going to move into political territory, but I don't think what we've seen is any kind of certainty falling out of the back of that. And again, that's another element from our perspective where you've already got a market in France, very similar to many of the markets around the world where we have consistently said there's low levels of confidence, there's low levels of sentiment, there's people turning down job offers at final stages, et cetera, et cetera. So what we're doing with the political situation is, in effect, just layering more uncertainty on top of uncertainty, and with it being our biggest market, that clearly creates a level of caution for us looking forward. We don't have an answer, maybe we'll know more after the summer coming back in early September. But right now, clearly, there's a play through from the political situation into the business situation. And then your final question on headcount. Look, from my perspective, this is really where the leadership of a business has to make a call, and it also helps that many of us on the exact Board here have been in the organization a long time like I have, which is nearly 30 years. I think probably, to answer your question, we need to almost look back and actually just walk through what we've done to bring us to this decision. Our peak head count in the recent cycle was Q3 2022. Since that peak in Q3 2022, we brought total head count down by 17%. We brought fee earner head count down by 21%. In all of our trading updates through last year, we were talking about removing underperformers and people that were struggling in the market. So in effect, we've removed the bottom 20% of our fee earners. If you want to, you could call that the cyclical element. The ones that you'd add in as you were growing, the ones that you can more easily remove as the business starts to underperform. And we've taken that action steadily in a measured way quarter-by-quarter over the course of the last 6 quarters. But there is a point at which you then start to look at your business and feel that the head count is at the right level, it's at the critical level. How do you know that? Well, to some degree, you're looking at productivity. We're still trading at record productivity levels, but you're also looking at what the consultants are doing. Do they have jobs to work on? And the answer at the moment is, yes, they do. There is jobs out there. Has there been a softening? There has. Has it become more difficult to generate jobs? Yes. But do they still have work? Are they still arranging interviews? Are they still creating an opportunity to make a fee? And all of those things are still true. So with that in mind and considering the fact that we have regularly stated in these trading updates, difficulty in predicting which fees are going to land because of the conversion from offer to accepted offers, the way to try and minimize that risk is to have a larger pipeline, therefore, more jobs that we're working on, more interviews that are going out, because it's harder to predict which jobs are going to turn into revenue. So from our perspective, it's a judgment call. I think the final thing that's really important from our side, it probably leads into the final part of your question in terms of recovery, is that consultants take on average somewhere around about 9, maybe 12 months to become productive. So the decisions we make on head count now in terms of recruiting and investing will be around consultants who are going to be productive in end of March next year, end of June next year. And from our perspective, we believe that there will be signs of recovery at that stage, and we want to be able to accelerate quickly when that opportunity presents itself. Those are the reasons for the decision.

The next question comes from the line of Afonso Osorio of Barclays.

I have 2 questions, quick ones for me, please. The first one, you mentioned the exit rate in June, minus 18%. That's actually in line with your March exit rate. So I'm not sure -- I mean, this is not that bad in the scheme of things. I was just wondering if it actually implies a much better April and May trading. Obviously, you have the holidays timing there impacting that. But just wondering if you can give us a bit more information on how the quarter went, and expectations for Q3 as well, or if we should expect some sort of a stabilization into Q3, small recovery into Q4, and then a full point recovery in 2025, if that's your base case. Secondly, on the conversion rates in your conversation with your clients at the moment. Just wondering if you have any comments on the pricing sort of things with your conversations with your clients, if it has moved significantly today versus in Q2 versus Q1. And then on the other side, with the candidates, I mean, I remember talking to Kelvin a few months ago. We discussed the pay uplifts candidates were having at that point comparing that to both COVID, where candidates were having like 20% plus pay uplift to move jobs. I think Kelvin previously told us that it was like in the mid-single digit around Q1. Is that still the case? And it's quite interesting, your comments in terms of candidates staying in their current job even though they get an offer, because their current employers match essentially the offer. What's the split? I mean, I'm not sure if you have those numbers in front of you, but what is the split of the cases where actually candidates get an offer, but end up staying in their current employment because of the employer matching that offer versus the offer being too low, which goes back to the mid-single-digit range I was talking about in terms of pay uplift? So those are the 2 questions, please.

Sure. Let me take the first one. So you're correct. Our exit rate in March was around 18%, albeit that it was slightly days adjusted due to how Easter and some of the bank holidays fell. So it was probably normalized more 14%. April and May, again, you're right, high single digit in both months and fairly similar in both months. So it had sort of fallen back a bit, or improved a bit in those 2 months, which is why, to a certain extent, June was more of a surprise to us when it went back to minus 18%. And that really, probably pointing back at the slide that we showed with activity, looks to have been driven by the decline that we saw in job acquisition in May, which went from sort of minus 12% versus the second half of last year to minus 19% in May, which then fed through into minus 20% in terms of numbers of interviews and activity that clearly then didn't get offers over the line in time to actually deliver into June. I think our expectation is that with the jobs acquired being down 23% in June, that the impact that, that will have on activity will be fairly similar to what we saw in June or possibly slightly worse in July, leading into the summer in August, which obviously is a fairly highly impacted month, particularly with 56% of the group being in Europe and a sizable proportion of the group in the Americas, where Christmas is obviously also a fairly sizable impact, just August even. As we, therefore, go through into the second half of the year, September and October are the big months, and it's too early now to make a guess on what sort of a recovery we see there. But where I think previously we had expected to see some sort of recovery coming through towards the end of Q2, we obviously didn't see that. We had assumed that, that would then carry on into Q3, beginning of Q4, and we're now assuming that, that is less likely. So we're forecasting really that things will remain relatively stable in the second half of the year, but that we won't see a recovery until the first half of next year. Until we get there, we won't know whether we're right.

And I'll pick up your question around the clients and the candidates. I mean, the clients one specifically was in regard to pricing and the pricing remains robust, our fees remain at record levels, and there's been no reduction on those fee rates in Q2 versus Q1. In fact, in certain markets that continue to strengthen, I think there is a very logical reason as to why that's the case, is that the roles that the clients are coming out for are the ones that are essential. And they're typically the ones where the candidates are in very high demand. So they have to recruit them and the candidates that they're after are very hard to find. Therefore, from a consultant's perspective, they know how hard it's going to be to find those candidates. They know that they've probably got more than one client that's interested in them, and you're still finding many situations that for those kind of candidates, their skills are in high demand and they will receive multiple offers. And in that situation, the pricing, therefore, remains high just on a simple supply-demand model. So that would be my thought behind why the fees remain at record levels and salaries continue to nudge up, because the roles that are coming out to market are the ones that clients absolutely need to hire. As regards to comments around candidates and the salary increases, yes, what Kelvin told you is still about right. I mean, it's mid-single digit. It varies a little bit by market. But if you wanted to take an average, that would be about right. In terms of getting candidates over the line, I think probably 2 things to say in regard to that. I mean, if you look at the market, for instance, like Germany, you move in Germany, and for 6 months at the beginning of your new contract, you'll be on probation. During that period, your contract can be terminated relatively easily. Beyond that, then you have a lot of reassurances and guarantees on the labor law. So if you are thinking about making a move, you need to be very, very sure that nothing is going to happen to you during those first 6 months. And therefore, it comes down to a risk reward. So this 5%, 6%, 7% is going to make you feel comfortable enough to take that risk and potentially expose yourself when you're looking at maybe a situation in the EU, which is quite uncertain and how that may play through to your current employer. As regards to trying to give you some percentages, we gave some numbers previously. They haven't changed significantly. So in good markets, you would expect the average buyback or turndown rate on an offer to be around about 20%. We're currently seeing that more around about 30%, 33%. So 1/3 of everything that we get to final stage will either be bought back or the offer will be turned down. So a lot of work going into processes that ultimately don't end up in revenue. But that almost feeds back into my earlier answer, which is, therefore, how do you work your way around that uncertainty or have a fuller pipeline? How do you have a fuller pipeline? We'll have more consultants working in the market, working jobs, arranging interviews and giving you a chance to make the fee in the first place, knowing that there's increased uncertainty and, therefore, lower ratios at the bottom end of the pipeline.

That is very clear. If I can just have a quick follow-up, because this is a question I've been getting quite a lot recently. In terms of where you expect full recovery and where unemployment is today, because today is a very different cycle versus previous ones. With unemployment still super strong today, do we need to see unemployment going up and then down for recovery? Or do you expect to still see a recovery with unemployment remaining low? What are your thoughts on that front?

Yes. I mean the relationship between unemployment data and the type of work that we do is in a particularly kind of close relationship. I think it's fair to say. I mean we work within the white-collar professional leadership, management, and expert field in perm recruitment. There is nearly always 0 unemployment in the area that we work in. So the broader statistics about unemployment don't really feed into our market. The way that they do feed in and the biggest driver of the recovery when it comes or the current situation we find ourselves in is sentiment or confidence. So it's another negative headline or it's another positive headline, and they feed into how people are feeling in those leadership roles and whether they're then willing to take the risk of making a move, leaving some relative certainty within their current employer to potentially put themselves in a position where they could be lasting first out, which in a more senior role, where you've got responsibilities around a mortgage and a family and other things, you want to make sure you don't make a mistake. And therefore, at that level, our candidates tend to be well educated, they tend to read the press. They know what's going on with inflation rates, interest rates, they're looking at the political situation in a country on a global level and there is just a lot of uncertainty around, which doesn't help confidence. And confidence doesn't help the clients in terms of making a decision to hire and it doesn't help the candidates in terms of making a decision to move and we're caught in the middle of that.

Your next question comes from the line of Kean Marden of UBS.

Just first of all, is there anything sort of one-off or lumpy in nature, which has a disproportionate impact on your profitability when we start getting towards the sort of numbers that you're guiding to? Obviously, you've got some office relocations and closures that are taking place at the moment. I think some accruals floating around. So just whether that impacts this year and maybe helps profit recover in fiscal '25? And then second area is just on sort of balance sheet and free cash flow. So your net cash was a little bit lower than I was looking for, for the first half. Forgive me, is the GBP 9 million EBT just for the second quarter? Or did you spend any in the first quarter as well. You normally spend about GBP 15 million. So just wondering what thoughts are for the full year. I guess more broadly on free cash flow, is there anything different about the cash cycle this time around? What are you seeing with DSO? And then finally, on fee rates, which is sort of the interesting area, because I guess in previous downturns, we would have started seeing fee rates coming under pressure probably around about now. Is there any way where you are seeing fee rates starting to decline? Or do you feel actually we're just going through this down cycle actually with fee rates remaining elevated, which would be a little unusual, but interested in your thoughts on that, Nick.