Robert Walters plc

Hello and welcome to the Robert Waters Q3 Trading Update Call. My name is Saskia and I will be your coordinator for today's event. Please note, this call is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star 1 on your telephone keypad. I will now hand you over to your host, David Bauer, to begin today's conference. Please go ahead, sir.

Thank you, Saskia. Good morning, everyone, and welcome to the Robert Walters third quarter 2024 trading update. I'm David Bower, Chief Financial Officer, and joining me this morning is Toby Halston, our Chief Executive. I hope you've seen the statement we published earlier this morning. Before we move to Q&A, I'll make a few remarks around performance at the group level before Toby touches on trading across our regional segments and then our full-year outwork. Unless otherwise stated, all net fee income percentage movements are in constant currency terms. As you have seen, group net fee income of around £80 million was down by 12% year-on-year in the third quarter, mirroring the year-on-year performance seen in the second quarter. In that sense, the trading backdrop remains largely consistent with what we were seeing with client and candidate confidence levels yet to show signs of material improvement. One contrast to our second quarter, where you might recall we saw a particularly soft exit rate in June, was a more consistent pacing for this third quarter just gone, as implied by the September exit rate, which saw Group B income down by 13% year on year, and therefore broadly consistent with the quarter as a whole. Looking at our service lines, specialist recruitment fee income of around £66 million was down by 12% year-on-year, within which both PERM and TEMP, and to remind that TEMP comprises our contracted interim offering, they were both down by 12%. In recruitment outsourcing, net fee income of around £14 million was down by 14%. Turning now to group headcount and productivity, At the end of the third quarter, group headcount stood at 3,466. That was a 4% reduction on the second quarter closing figure. Within this, there was a 7% reduction in the non-fear of the population, as our front office support ratio continued to trend back towards pre-pandemic levels, consistent with the second building block of our programme to drive higher medium-term through cycle margins, as detailed at our capital markets event last month. There was then a 3% reduction in the sea urn population. We continue to be slightly selective in replacing sea urn as a natural attrition, and our strategic imperative is to ensure that our average sea urn tenure remains strong, leaving us well positioned for when market conditions improve. With sea urns now down 20% versus the end of the first quarter in 2023, we broadly feel where we have reached is appropriate for the current market conditions. And indeed, looking at the volume productivity of our terms of the earners during the third quarter, it was down just 3% year on year. And when combined with mixed wage inflation benefits, this meant that we saw growth in overall fee earner productivity in terms of net fee income per fee earner year on year. Following our capital markets event last month, I would remind you that we will commence looking at fee earners and non-fee earners, as well as volume and overall productivity as part of our standard quarterly disclosures from our fourth quarter trading update in January. So finally for me, turning to look at the balance sheet, this continues to remain strong, with closing net cash of £50 million at the quarter end, consistent with one of the cornerstones of our capital allocation policy. We'll now hand over to Toby, who will take you through trading in our regional segments and the bullier outlook. Thanks, David. Good morning, everybody. Let's first turn to look at our specialist recruitment business. All net free income percentage movements continue to be in constant currency terms and at a segmental level, just relating it to specialist recruitment. Looking first at our Asia-Pacific business, Net fee income was down 10% year on year. As you know, Japan is a key market for us, and it was pleasing to see another quarter of growth there with fees up 3%, albeit that was more than offset by softer conditions in South Korea. Southeast Asia grew by 2%, and that comes on the back of a bit of momentum that's built there in job flow, which has improved over the last six to nine months, albeit from a top position seen as 2023 closed. In Australia and New Zealand, which was down 23%, conditions remain very challenging, and in particular with public sector tent hiring in New Zealand. As a reminder, we did see headwinds increase there around the time of the newly elected government shifting away from the use of tent labour towards the back end of last year. In Greater China, with fees down overall by 12%, The positive performance in mainland China, but more than offset by softer conditions in Hong Kong. Then we look at Europe. Specialist recruitment net fee income was down 13%. As expected in France, our largest European market, activity was more muted in the quarter due to the Olympic Games. However, the September exit rate in France was slightly better in quarter three as a whole. Belgium, down 14%, continued to annualize tough comparatives, and you may recall that the first half of 23 was a record for our business there. Of our larger European markets, we did see slightly more resilience in the Netherlands, which was down 10% overall, but did deliver modest growth in Pern. Really, it's the first time since fourth quarter of 2022. Germany, down 4%, was also pretty resilient, with a notable performance by the interim business there. Now turning to the UK. Net fee income was down 26%, so a fair bit softer than the pacing we saw during the second quarter. And as noted in the statement, we did see clients generally choose to pause activity as they awaited clarity on the now published employment rights legislation of the new government. Combined with the budget taking place later this month, this has generally given incentives for clients to adopt a wait-and-see approach, with fees down in quarter three by 19% and 29% respectively in London and the regions. In the rest of the world, we saw the most resilient segmental performance year-on-year of our specialist recruitment businesses, with fees down 4%. We saw another good performance in the Middle East with fees up 12%, although this was more than offset by softer conditions in LATAM. And now turning to our recruitment outsourcing business. As you heard from David a moment ago, fees overall were down 14%. Looking around the region, where the fee income split in the quarter was just over half coming from the UK, a quarter coming from Asia Pacific, and just under a quarter from rest of the world. UK recruitment outsourcing was down 13%, with Asia Pacific down 23%, and rest of the world up 2%. Reflective of still greater caution among clients, non-perm volume hiring was slightly more resilient than perm. Before turning to the full year outlook, let me just give a few brief comments on how activity levels trended during the quarter. And by this, we're really thinking about job flow, interviews, and placement, all on a per-fee and a basis. At the group level, job flow trended broadly, as we'd expect, with a reduction in August versus July, given the Northern Hemisphere holiday season. There was then a bit of a further reduction into September, but job flow held up better than we saw in September last year. And interviews and placement followed a broadly similar shape. Commenting more selectively around the regions, in Asia Pacific, we have seen signs of stabilization in ANZ job flow, albeit at levels much reduced compared to last year and the peak. And I noted in my earlier remarks that momentum in Southeast Asia job flow continued to be positive. Meanwhile, in Europe, unsurprisingly, given traditional summer vacations, job flow and interviews came off in the latter part of the quarter. consistent with last year and as we would expect. We'll be keenly focused on trends through October and November to see if the build-up seen last year is replicated. And finally, just before we move to Q&A, some comments around how we're thinking about the full-year outlook. As we referenced in the statement, hiring markets do remain challenging, with the period of decline seen since the peak now running to about two years. And in that sense, longer, I think, than most of the industry expected. As we sit here today, our previously stated assumption that market improvement in client and candidate confidence levels will be gradual and likely to not commence until 2025, that remains unchanged. With the exception of last year and the COVID impact of 2020, we have historically seen a seasonal profile whereby second half fees have been slightly bigger than the first half. However, as we called out in this morning's statement, given market conditions and the very near-term outlook, we think it is unlikely that fees in the second half will exceed the £166 million we saw in the first half. That being said, we have seen progress on lowering our cost base this year, and actions there continue. and we will continue to aim for possible full-year outcomes. That concludes our prepared remarks, and with that, we'll open up for Q&A.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question on today's call, please take it by pressing star 1 on your telephone keypad. That is star 1 for your questions today. And up first, we have Tom Callan from Investec. Please go ahead.

Thanks. Morning, gents. Hope you're both well. Three questions from me, please. Firstly, can you just touch on in terms of what you're seeing in terms of margins and fee rates on the sort of temp side of the business? Secondly, you know, good performance in the Middle East, I think second quarter on the bounce of really strong growth. What drove that specifically? Any sort of read across to what was flagged at the CMB in terms of the sort of really helpful dynamics in that Southeast Asian market. Is there sort of any sort of similarity there? And then thirdly, could you please touch on job offer sort of rejection rates that you're seeing currently, how that's evolved, if at all, post the Q2, and how does that dynamic vary from region to region? Thanks.

Hi, Tom. So I'll answer the Middle East and Southeast Asia question, the job offer rejection rates, and I'll pass over to David for margin and fee rates. Middle East, really, I mean, it's good tenure. We've been in that market for well over a decade now. It is a good market with strong activity levels. As you know, obviously, there is a good, strong influx of foreign labor. And obviously, it's clearly an attractive market for employees there. Oil and gas remains fairly significant, and as you know, there's a commitment, certainly in the Middle East, to build a very competitive tech ecosystem and we're well set up to deliver there. And we're seeing, obviously, some bigger boosts in sectors like tourism and banking, Islamic banking as well. Similar to SEA, yes, in the sense of strong productivity growth, I mean, Southeast Asia, Four out of our six countries that we operate there have grown year on year in quarter three. And probably Malaysia is a particular call out. And again, a product really of good tenure and good management. Job offer rejection rates, it hasn't really changed. I mean, the general trend, as you know, 21 and 22, we've received sort of three to four candidates being interviewed before they were being offered the role. That has extended out to more like eight to 10 candidates now. So it unfortunately continues to be a confidence issue. Rejection, largely down to counter offers, which we've seen probably more now than we've ever seen before. We know it's a 50 glasses solution, but that's the reality of the current confidence challenge that we're in at the moment. Thank you, David. And on the... margins and 10p rates but those are holding up really really well and indeed probably you know the the temp margins are up ever so slightly year on year yeah I think overall really reflecting on that point of COVID addressments on you know the number of candidates that clients are wanting to see etc I think generally that's meaning that we're doing a lot of work to get them great candidates, and when we land them a candidate, they're happy to reward. So the FD rate's holding up really well at the moment. Thanks.

Thank you. And our next question now comes from Steve Wolf from Deutsche Bank. Please go ahead.

Morning, Elton. It's just a couple from me. I'm left with um just comments on germany based on the interim business in terms of what end markets are given that's a good performance given where um you know the economy and the macro signals seem to be out of the minute um secondly on japan another great performance again you know what roles what industries are you perhaps feeding into and then thirdly with your comments about um buybacks from from companies what sort of um wage inflation are being offered out there that companies are being confident to buy back with, if that makes sense. Yeah, so Japan, I'll just run straight away. I mean, it's such a specialized business in Japan. I think I've used the example before, just ourselves, the marketing division has 17 different teams. So, you know, we've got a lot of tenure there. You've got good fee rates there, as you know. We have got excellent retention there as well in terms of our people and very much it's a market leading force for us. So that's held us in good stead and really particularly with AI, what we're seeing is we're seeing more and more data coming at our clients. So the speed of application of candidates is far, far greater now than it's ever been. Now the consequence of that of course is that our clients are just inundated with more and more information. and that they need someone to help them with that information, and they also need to understand the truth. So the importance of relationships, and I talk about relationships being a currency of the future, is so critical, so the clients know that they're getting the truth in terms of what they're actually being sent. Japan, so we're not particularly heavy in the automotive sector, which obviously has been under quite a lot of pressure in Japan. It is a, still for us, a relatively fledgling dividend, so it is growing. and interim is a big growth area for us, particularly in that sort of Northern European, continental European businesses. And that's held us in good stead, and that continues to grow in Germany. And then in terms of buyback and wage inflation, I mean, it largely depends on what sector, or sorry, what discipline rather. So I can give you some examples right now. Tax, employment lawyers, Real estate lawyers, particularly with what we're seeing at the moment in terms of employment rights, you've got obviously the minimum wage increase, you've got almost certainly national insurance increases coming to the budget. So all of that points to higher wage inflation and some of those types of roles. Okay. Cheers. And then just one follow-up. I mean, this is slightly holistic. you know, confidence is what everybody is, you know, obviously it's been the theme for, you know, the last six, 12 months. What is it in your view that gets this, you know, broken, that gets people moving? So, you know, so the job churn can recommence, you know, is it just better headlines on the TV, newspapers, podcasts, confidence you know new year um you know post bonuses maybe in any pay rises what do you think is going to be the catalyst that you know starts hopefully improving the world response yeah um i think it's all of those i mean media definitely um i think we've got obviously elections uh us we'll we'll see obviously we'll get some certainty whatever way that goes uh i think obviously things like um and i think actually really important interest rates as well. With that, of course, you start to see greater investment and borrowing from some of the larger corporations that stimulates more job creation and increased productivity. So I think there's a whole range of different factors, to be honest with you. So once we start seeing some of those signs improving, then I think we'll start to see that confidence pick up and create more movement in the job market. And it really comes down to candidates fundamentally candidates actually think they'd be moving jobs.

Perfect. That's great. Thanks very much, Tony.

Thank you. And as a brief reminder, that is star one for your questions today. And up next, we have a question from Sanjay Vidyarthi from Tanyar Liberum. Please go ahead.

David, just one for me, please. In terms of the year ahead, would 3% underlying cost of inflation be a fair assumption? I know obviously there'll be a lot of initiatives underway to mitigate that, but are we looking at maybe 9, 10 million of cost growth just in terms of the inflationary side of things? Would that be a fair start point?

Yes, not unreasonable. As we talked about at Capital Markets Day, 70-80% of our cost base is people related and we've got good people, we've retained some really great people where we'll want to ensure we reward them appropriately for their work. Clearly we are working on productivity improvements, we're working on other aspects of the building blocks and procurement. So we are working very hard to mitigate cost increases by being more productive, more efficient, more selective. But yeah, ultimately, on average and underlying, inflation would not be a bad assumption to start with.

Okay, that's great. Thank you very much.

Thank you. And as a final reminder, that is Star 1 for your questions. We will pause for a brief moment. We just received a follow-up question from Steve Wolf of Deutsche Bank. Please go ahead.

Sorry, that's good to come back. Something Paige Group mentioned yesterday about...

clients becoming increasingly picky over hires and making sure they want to get the right one.

So they would go through that process that you have flagged three to four candidates up to eight to ten, but still get to the final one to two and then not be happy enough and saying, please go and start the process again. Is that something of a trend you've seen or is it generally it is just that part of four to five candidates has gone up to eight to ten do you think, regarding their comments? Is it a similar trend? Yeah, I think it is. I think it comes down to what hiring clients want to believe. Do we believe that these are the best candidates that are available? We know that unemployment is low from a client perspective. We know that there is a reticence to move. So I think it's that needling doubt in the back of clients' minds thinking, am I seeing the very best people here? At a point where they're also under quite a lot of costs pressure to make sure they get the hire right. Because of course, you get the hire wrong, then there's a cost impact of that. So again, for me, that plays very much into tenure. And I think we mentioned CMV, our tenure starts now over 80% of our field is more than 12 months experience. If I go back to September 22, it's more like 60%. So the importance of tenure, specialist recruiters, and I'm an advocate for flexibility, but having people together in the office and building those face-to-face relationships. And I've said before, relationships are the currency of the future. The ability to influence and to really make that incisive comment with the client around, no, these are the best people. We now need to make a decision is critical.

That's great. Thanks very much.

Thanks. I think also, Steve, one other thing as well is speed. And we all know that in business, the speed of decision is critical. So, you know, and unfortunately, because, again, clients are second-guessing. Is it the best person? Really, I'm under pressure to make certain this hire really works. So, again, the importance of trying to get speed into the process is very important. Great. That's great. Thanks, Toby.

Thank you. And as there are currently no further questions in the queue, I'd like to hand the call back over to you, Toby, for any additional or closing remarks.

Nothing more from me or David, just to say thank you very much to everybody who joined the call this morning.

Thank you. And that concludes today's call, ladies and gentlemen. You may now leave.