PageGroup plc (PAGE) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's PageGroup Q3 Trading Update Call. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Kelvin Stagg, CFO, to begin the call. Please go ahead when you're ready.

Thank you, Seb, and good morning, everyone, and welcome to the PageGroup 2024 Third 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, which will also be available on our website following the call. The group delivered gross profit of GBP 201.4 million in the quarter, a decline of 13.5% in constant currencies. We continue to see challenging market conditions in the majority of the group's markets with a further softening in Europe, and we exited in September down 16% on 2023. Our fee earner headcount reduced by 98 or 1.8% during the quarter. We continue to review fee earner headcount, reallocating resources in line with our strategy into the areas of the business where we see the most significant long-term structural opportunities. Overall, our intention remains to hold fee earners broadly at existing levels to ensure you're well placed to take advantage of opportunities when market conditions improve. Overall, the group ended the quarter with 5,500 fee earners and a total headcount of 7,442. Due to the tough macroeconomic conditions and our decision to hold on to fee earner headcount, gross profit per fee earner, our measure of productivity, was down 4% compared to Q3 2023. Our balance sheet remains strong with net cash at the end of September of around GBP 93 million. This compares to GBP 57 million at the end of Q2 and is before the recent interim dividend payment paid on the 11th of October, totaling GBP 16.8 million. 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 by 8.6% against Q3 2023 with permanent down 15.3%. Reflecting this, our ratio of permanent to temporary gross profit was 71:29. In Michael Page, permanent recruitment represented 80% of gross profit, while in Page Personnel, it was less at 44%. Michael Page was the stronger performing brand, down 10.5% compared to a decline of 21.3% in Page Personnel. A portion of the decline in permanent recruitment in Page Personnel was due to the transition of teams in certain markets to more profitable roles within Michael Page. We reduced our fee earner headcount by 98 or 1.8% during Q3 with reductions mainly in Europe. We continue to review fee earner headcount at a country level to ensure it remains appropriate to market conditions. Our intention is to hold fee earner headcount broadly at existing levels. Our non-operations headcount decreased by 36 in Q3. In total, our headcount is now 698 or 8.6% lower than in Q3 2023. Due to the tough macroeconomic conditions and our decision to hold on to fee earner headcount, gross profit per fee earner decreased 4% compared to Q3 2023. The number of interviews and jobs per fee earner was relatively stable in Q3 after adjusting for the seasonally quieter summer months. Reflecting continued shortages of candidates, fee rates remained at high levels and slightly above the prior year. Salary levels also remained strong. Salary offers, however, 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 unwillingness to move at -- sorry, unwillingness to risk the move for the size of incentive on offer. Conversion of interviews to accepted offers remains the most significant area of challenge as ongoing market uncertainty continues to impact candidate and client confidence negatively. I will now present a regional review. Group gross profit declined 13.5% in constant currencies against Q3 2023. And we saw tough market conditions in the majority of the group's markets with no sign of improvement. Foreign exchange had a negative impact on our results, decreasing our reported gross profit growth rate by 3.2 percentage points or GBP 8 million. In our largest region, Europe, Middle East and Africa, which represented 53% of the group, we declined 15.1% with market conditions worsening during the quarter. Michael Page was the stronger performing brand, down 12% compared to a decline of 21% in Page Personnel. Within EMEA, temporary recruitment represented 36% of total gross profit, a higher proportion than the rest of the group. Temporary recruitment down 12%, was more resilient than permanent, down 16%. Our temp was more resilient than perm, temp placements were not as high as anticipated in September after the quieter summer months. Germany, the group's largest market in Q3, which represented 13% of the group, declined by 19%. We saw declines across all brands, albeit our technology-focused interim business was the most resilient. France, which represented 13% of the group, declined 16%. We saw a more resilient performance in temporary recruitment, which is indicative of the current uncertainty in the market. Tough market conditions continued throughout the rest of Europe. We declined in all major markets. In the Middle East and Africa, gross profit was down 3%. In line with the tougher trading conditions, we reduced our fee earner head count by 49 in Q3, mainly in Germany and France. Excluding Argentina, due to the hyperinflation, the Americas, which represented 18% of the group, declined by 10.3% against Q3 2023. North America was down 13%, with the U.S. declining 11%. The conditions we saw in Q2 continued into Q3, with low levels of candidate and client confidence impacting conversion of interviews to accepted offers. In Latin America, excluding Argentina, gross profit was down 7%. Mexico, our largest country in the region, was down 15% due to its high degree of reliance on the U.S. However, Brazil was up 7% with strong growth, particularly in temporary recruitment. The remaining countries declined 8% collectively. Across the region, fee earner headcount increased by 14% as we held on to our platform in the U.S. In Asia Pacific, which represented 16% of the group, Q3 gross profit declined 16.8% with ongoing tough market conditions across most of the region. Southeast Asia declined by 9% against Q3 2023 with Singapore down 10%. In Greater China, which represented 4% of the group, we saw no signs of improvement and declined 25%. Mainland China was down 24% and Hong Kong was down 23%. Japan and India declined 5% and 3%, respectively, albeit both had tough comparisons. Australia declined 31%, with ongoing challenging conditions in all states. Our fee earner headcount decreased by 29% in the quarter. In the U.K., which represented 13% of the group, gross profit declined 13.5%, with tough conditions in both Michael Page and Page Personnel. We continue to see clients deferring hiring decisions and Canada is cautious about accepting offers. Reflective of market conditions, temporary recruitment was more resilient than perm. Fee earner head count reduced by 34 in Q3 to 698. I will now provide a summary of our results. We continue to see challenging market conditions across all regions in Q3, with no signs of improvement and softer activity and trading in a number of European countries, including France and Germany. Conversion of interviews to accepted offers remains the most significant challenge due to subdued levels of client and candidate confidence. Permanent recruitment continue to be impacted more than temporary as clients sought more flexible options. Our intention remains to hold fee earner headcount 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, a strong balance sheet and our cost base is under continuous review. We expect 2024 full year operating profit to be broadly in line with current market consensus of GBP 58 million. Nick and I will now be happy to take any questions you may have.

[Operator Instructions] Our first question comes from Rory McKenzie at UBS.

It's Rory here. Just two questions on fee rates and wage inflation. Firstly, can you say what the year-over-year gross profit benefit was of rising fee rates and wages, please? And I guess that's been fading year-over-year across the past 12 months? And then secondly, you talk, of course, about the relatively weak salary offer rates which are clearly impacting the conversion that you're seeing. There are some kind of split views in the press about whether candidates need to be accepting of lower rates or clients need to up what they're offering. Can you say what you're hearing from the clients and the candidates once that conversion doesn't happen? Is the client then looking for a higher paid job offer? Or are they just not going ahead with the move they're looking for? Just trying to work out what could change next to break down this kind of deadlock.

Thanks, Rory. Well, maybe I'll look at the second question, and then I'll pass to Kelvin to comment on the first. So yes, as we go through the process, so as you know, about 70% of our business is perm, we're talking about white collar professionals that are committed to a move. So this isn't just window shopping. They go through a process, maybe first interview virtual and two interviews often face to face. And typically, what's happening is that the offer comes to them, and it might be an increase of, say, 5% or 7%. And particularly at this time of year they're then looking forward and thinking, "Well, I'm going to get some kind of an increase in January and also maybe some more of a bonus in January. Is there anything more that the client can do just to kind of tip me over the line at this stage?" And I just think a lot of organizations were burned through the period of '21 and '22 where they had some real kind of instability within their teams because of people on very, very different packages, people have been hired through that period coming in on 15%, 20% more than their peer group, which then cost the organization a lot of money to balance things out. And I think line managers now are just a lot more sensitive to that equity within the team, and they don't want to disturb that. In terms of then what happens is that typically the -- well, multiple things could happen, the candidate either just turns it down or the candidate goes back to their employer and their employer matches the offer in order to keep them in effect bringing forward their January pay rise. And then from a client perspective, the clients typically say, "Can you start again? Can you have a look to see if there's other candidates that could be of interest to me?" I think it's probably also worth pointing out that this just isn't a one-way contract. I mean I think some of the friction that we see is with candidates, and that's what you've called out. But there is friction on the other side with clients, which is that we get multiple occasions where we have two candidates at final stage, which is normally revenue that in a typical market we would forecast. If you have two of two at final stage, typically one of them will get offered the job and accept, and that will turn into revenue for us. What we're seeing more often than we would like in these situations at the moment is a client will often see two candidates at final stage, call us up and say, "I like this about him, and I like this about her. Can you go away and find me a candidate that has both of those things." And again, we start the process all over. So it's not just candidates losing their nerve. Clients want a perfect candidate if they're going to make an offer and then we've got to try work with them to try to get a salary offer that's going to get it over the line. So that's really where it becomes more difficult. And that's probably why you see the good consultants, experienced consultants that have been with us for a period of time, certainly the kind of consultants we have in brands like Page Executive are still doing a good job and making good money. It's actually just harder for less experienced consultants to manage those situations because they're very difficult to try and weave your way through and negotiate on both sides. Fee rates, I'll pass that one over maybe to Kelvin.

Yes, fee rates are actually holding broadly flat at the moment. So we're not really seeing huge pressure on fee rates coming down, but they're probably towards the top of what we expect in most markets. I think any movement in our group fee rate at the moment is more about mix difference between different markets because some do have materially higher fee rates such as Germany, such as the U.S., parts of Asia than you typically see in places like the U.K. or Australia. So I think fee rates have topped out. They are up ever so slightly year-on-year. In terms of average salaries, the average salary we're placing on is also broadly similar now to what we've been placing on for the last 12 months or so. The offers that candidates are getting, as Nick pointed out, are up maybe 5% to 7%, but that's not in itself pushing our average salary albeit each people that haven't moved for a while that are therefore getting that small increase on their salary. Our productivity overall was down 4%, and that really just reflects Europe moving closer in terms of the acceptance rate to the rest of the group. And therefore, having more placements and offers rejected within Europe. So yes, within the mix, it hasn't really moved outside of Europe.

The next question is from Remi Grenu from Morgan Stanley.

This is Remi here. I've got two. The first one is if you can elaborate a little bit more and tell us how you're reading that slightly weaker exit rate in September. I know that the phasing through the quarter might be a little bit different given the summer and the phasing impact. So yes, you read on that minus 16% would be great and any flavor you can add there? And then the second one is on France and Germany, more specifically, based on that exit rate in September and discussion with your clients, interested what is your base case scenario at this point for these two countries? And whether -- what you think is most likely is that we are seeing low volume of activity at -- stable levels of activity at very low levels or if you believe that given this exit rate and discussion with clients, that there could be further pressure there as we go through the rest of the year?

Thanks, Remi. Okay. Well, I'll talk a bit about France and Germany and then let Kelvin comment on the exit rate. So let's do them one by one. So France, first of all, we saw a pretty resilient performance from our business in H1 but we've seen temp activity soften in Q3, particularly in September where the temp rates just -- or temp placements weren't as high as we'd anticipated, which will in turn impact Q4, obviously, because if they're not in play, then we're not going to be charging margin on them through the quarter. No significant change in perm in France. So it's been tough most of the year, and it's still similar. Job acquisition has probably been a little bit more difficult, but there again, interviews being probably a little bit better. So jobs down a bit, interviews up a bit. We have a large business there that covers public sector and not-for-profit, and that continues to be impacted by the political backdrop. As you know, there's been several elections. There's no government to speak of. So that's been tricky, and I think that will continue to be the case. So that's going to be impacted through the rest of the year. That said, again, trying to pull out some positives. We've seen some good successes with some of our enterprise clients. We've won some good contracts in France through Q3. So yes, I mean, overall, I think we're calling out France because it is uncertain, and it is one of our big two markets, and we wanted to make sure that we highlighted the uncertainty and the weakening going into the second half of -- well, the final quarter of the year. As regards Germany, I think we probably experienced kind of a slight deterioration there in sentiment during the quarter, during Q3. Our clients remain cautious around cost, budget pressures are impacting new contract volumes and clients, frankly, are preferring to extend existing contractors rather than taking on new contractors. From a perm perspective, I think jobs have become a bit more difficult to acquire. They're still out there. But I think as I've called out in one of our earlier trading statements was that in Germany, we're seeing clients often trying to fill the role themselves first in order to manage their costs and then coming to us afterwards when they struggle to identify the talent through their own sources. Perm candidates themselves are very nervous around changing roles. You know about probably the laws in Germany. So you are exposed in that probationary period at the beginning. So therefore, we're seeing high levels of candidates pulling out during the interview process, all being bought back, which is what Kelvin was speaking about a moment ago. There's no significant variation that we've seen by discipline or sector but also, as with France, the current political backdrop isn't helping. There is a bit of a negative sentiment there and a bit of a lack of confidence as a result. So yes, we called those two out because they are our two biggest markets. It has deteriorated in Q3. I think there will be an impact going into Q4. So yes, it's tough, and we're kind of waiting to see some kind of -- some alignment there with the political backdrop because I think that will help confidence and boost sentiment around business.

Yes. On the exit rate, I think what's probably important to note is unlike our competitors who are largely remunerate their consultants on a monthly commission, we actually remunerate based on a quarterly profit share. And in normal market conditions, that would mean that we tend to get quite a big run on revenue at the end of the quarter. And so in normal years, you'd expect March and June to be our two biggest months of the year, and you'd expect September to be fairly sizable as well. What we've seen this year, and to simplify it a bit, was Q1 was broadly minus 10%, minus 10%, minus 18%. Q2 was almost identical. And in Q3, it was pretty similar, but we exited at 16%, which is probably because the comps were getting a bit easier last year. And therefore, what we've seen is that we're not managing to get that run at the end of the quarter because actually the candidates acceptances are sort of calming down that quarterly push. And so really all it does, as we've gone through the year, is flatten out the quarters, such that the absolute revenue numbers are much more closely aligned month-to-month than they are quarter-to-quarter. And I say that largely because I'm not sure I would therefore read a huge amount into the exit rate in September in the same way that the exit rates in March and June didn't really tell us about what was coming the month after that. I think we're just seeing softer comps, and we're seeing that quarterly cycle disappear while we're in this very unusual trading conditions. I would firmly expect it to come back once trading conditions restore themselves. But -- so I think the 16%, whilst it was absolutely the exit rate, probably doesn't tell you a huge amount about what's coming in Q4.

Our next question comes from Karl Green at RBC.

Two questions from me. Just the first one in terms of the candidates unwillingness to move. I mean thinking about the U.K. and possibly other jurisdictions as well, do you get any sense at all that fiscal drag is feeding into people's thought process as well in terms of taking a pay rise, but actually the marginal tax rate is in some instances punitive? Is that you're picking up on that anywhere, the U.K. in particular? And then the second question, completely unrelated. Just on the balance sheet, you obviously ended the quarter actively accrual for the interim dividend at kind of close to GBP 80 million. So you're on track to another good cash performance here. Just any updated thoughts about the potential deployment of that cash as you go through towards the prelims, please?