Pagegroup Plc

Good morning, everyone, and welcome to the Page Group 2023 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 £263.5 million in the quarter, a decline of 6.5% in constant currencies against Q2 2022, a record comparator. For the first half, we delivered gross profit of £526.5 million, down 4.5% on our record H1 last year. In line with the continued challenging trading conditions, our Fiona headcount reduced through natural attrition by 255 or 3.8% in the quarter, with reductions in all regions. Overall, the group ended the quarter with 6,385 fee earners and a total headcount of 8,572. Gross profit per fee earner, our measure of productivity, declined 4% on Q2 2022, driven by the reduction in gross profit, partially offset by the decrease in headcount. We have a strong balance sheet with net cash at the end of June of around £96 million. This compares to £105 million at the end of Q1, having purchased £11 million worth of shares for the Employee Benefit Trust in April, as well as having paid out the 2022 final dividend of £34 million in June. I will now give a brief financial review. Q2 growth was stronger in temporary, up 11.1% against Q2 2022. while permanent recruitment was down 11.4, indicative of the current uncertainty in the market, with many clients seeking more flexible options. Reflecting this, our ratio of permanent to temporary gross profit was 74.26, consistent with the last quarter, but down from the 78.22 in Q2 2022. In Michael Page, permanent recruitment represented 83% of gross profit, while in Page personnel it was less, at 52%. As is often the case in uncertain times, trading was stronger at lower salary levels, where the financial commitment from clients is less. Accordingly, Page Personnel was a stronger performing brand, down 2%, compared to a decline of 8% in Michael Page. Growth was notably stronger in temporary recruitment in both Michael Page, up 7%, and Page Personnel, up 15%, with permanent recruitment declining in both brands against 2022. In Q2, we decreased our Fiona headcount through natural attrition by 255, or 3.8%, with reductions in all regions. This follows the reduction in Fiona headcount of 304, or 4.4%, in Q1. Our operational support headcount rose by 29 as we continue to transition some of our candidate acquisition teams to delivery centres. The reduction for the past three quarters means our total headcount is now 96, or 1.1% lower than this time last year. Due to the reduction in gross profit as a result of the continued weakness in both candidate and client confidence in the quarter, productivity decreased 4% in constant currencies compared to Q2 2022. This is a particularly tough comparator with Q2 2022 productivity at a record level for the group. We continue to focus on productivity and have seen sequential growth in the past two quarters. When comparing to Q1 2023, productivity was up 6% as we reduced our fee earner headcount in line with trading conditions. During the quarter, activity levels remained strong and reflecting continued shortages of candidates, fee rates remained at high levels and above the prior year. Salary levels also remained strong with wage inflation in most markets. However, the slowdown in time to hire that we saw in Q1 continued in Q2. driven by increased client caution. Accordingly, conversion into placements continue to be slower than the previous year, due to both clients being less willing to raise offers and candidates being subject to buyback from their current employer or less confident in switching roles. We are also seeing the benefits from our investment in innovation and technology, where Customer Connect is supporting productivity and enhancing the customer experience, and Page Insights is providing real-time data to inform business decisions. I will now present a regional review. The group delivered good results in the quarter, despite the record comparator in Q2 2022. The strongest performance was in EMEA, where the standout result was Germany. Latin America also achieved strong results and a new record quarter in Q2. However, tough market conditions continued in Asia, the UK and the US. Overall group gross profit declined 6.5% in constant currencies against Q2 2022. Foreign exchange had a slight favorable impact on the quarter's growth rate compared to the prior year, increasing the reported gross profit growth rate by 0.3 percentage points, or £1 million. In our largest region, Europe, Middle East, and Africa, which represented 54% of the group, we grew 1.4% on Q2 2022. EMEA was our strongest performing region in Q2, despite Q2 2022 being a particularly tough comparator across the region. Michael Page, which is focused on higher income permanent recruitment, was down 1% for the quarter. Page Personnel, which is focused on lower level recruitment with a higher proportion of temporary, grew four. France, the group's largest market, was flat against a very strong comparator, with Michael Page down three, whilst Page Personnel grew three. Growth was stronger in temporary recruitment, up 8%, whereas permanent was down four. Germany, now the group's second largest market, which represented 13% of the group, delivered another strong quarter, up 6%. The standout performances were achieved by Page personnel, up 17%, and our Michael Page interim business, which focused primarily on technology, up 19%. Elsewhere in Europe, we delivered robust results against a tough comparator. The Middle East and Africa delivered a record quarter, driven by strong performances in both the UAE and South Africa. Across EMEA, having reduced fee earners by 37 in Q1, we reduced our headcount by a further 79, or 2.5%, in Q2. The Americas, which represented 18% of the group, declined by 8.8%. North America was down 16, with the US also declining 16, in line with Q1. The conditions we saw in Q1 continued into Q2, with uncertainty driven by tech firm layoffs, banking failures, and interest rate rises affecting both candidate and client confidence. In Latin America, gross profit grew 3%, and we delivered a record quarter despite the macroeconomic uncertainty. Mexico, our largest country in the region, was down 7% compared to a decline of 4% in Q1, while Brazil was down 9%, an improvement on the minus 13 in Q1. The remaining countries grew 23%. Argentina, Colombia, and Panama all achieved record quarters. Across the Americas, Fiona headcount decreased by 84, or 7.2%, mainly in the US, Mexico, and Brazil. In Asia Pacific, which represented 16% of the group, Q2 gross profit declined 17.2% on 2022. Permanent recruitment across the region declined 19, while temporary declined 5, reflecting the continued market uncertainty. In Asia, 12% of the group, we declined 21, due mainly to tough conditions in Greater China. In Greater China, 5% of the group, we declined 32, with mainland China down 37. Whilst COVID restrictions have been lifted, trading remains challenging, with the recovery being slower than anticipated. Hong Kong declined 19% in the quarter. Southeast Asia, our other large high-potential market in the region, declined by 22% against Q2 2022, with Singapore down 29, due mainly to the slowdown in Greater China, as well as a particularly tough comparator. India, which represented 15% of Asia, continued to deliver strong results, up 5% for the quarter. Elsewhere, Japan declined 10% and Australia declined 4%. Across the region, our Fiona headcount decreased by 57, or 4.1% in the quarter, broadly similar to the decrease in Q1 2023. In the UK, which represented 12% of the group, gross profit declined 17%, following a decline of 9.4% in Q1 2023. Michael Page was down 19%, whilst Page personnel declined 12%. During the quarter, we saw more clients deferring hiring decisions and increased caution from candidates. Reflecting the uncertain market conditions, clients sought more flexible options, and as such, temporary recruitment was more resilient, up 6%, whereas permanent recruitment declined 24%. In line with the more challenging trading conditions, in Q2, our FIONA headcount reduced by 35%, or 3.9%. I will now provide a summary of our results. Group gross profit declined 4.5% in constant currencies against a particularly tough Q2 comparator, being the group's record quarter. EMEA and Latin America performed strongly. However, tough market conditions affected the performances in Asia, the UK, and the US. We continued to reduce our FIONA headcount by 255, or 3.8%, in Q2, with reductions in all regions. Productivity measured as gross profit per FIONA declined 4%, however, was up 6% sequentially and remains a key area of focus. Looking forward, there remains a high level of global macroeconomic and political uncertainty in the majority of our markets. However, we continue to see candidate shortages and good levels of vacancies, as well as continued high fee rates. We have a highly diversified and adaptable business model, a strong balance sheet, and a cost base under continuous review, which can be adjusted rapidly to match market conditions. At this stage of the year, the board expects 2023 operating profit to be in line with company compiled consensus of £137.6 million. Nick and I will now be happy to take any questions you have.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your own question, and please ensure that you are unmuted locally. Our first question today comes from the line of Anvesh Agrawal from Morgan Stanley. Anvesh, please go ahead. Your line is now open.

Yeah, hi, good morning. I got three questions, really. First, just in terms of your guidance of 137.6 million, what sort of scenario you are baking in for the second half? I mean, are you assuming a sort of sequentially stable or slightly down trading or something materially worse? Any steer toward that would be useful. Second, just in terms of the profit split this time around between first half and second half, I mean, given the trading continues to weak, anything to think about there? And finally, just on the capital allocation, I mean, obviously you have set the framework for special, but just for the core, should we expect the dividend to move in line with the earnings or you sort of

Yeah, let me talk to that. So in terms of that expectation to hit our consensus 137.6, we're not really trying to make any sort of crystal ball gazing forecast into the macro for the second half. So I think broadly we're expecting things to stay roughly as they are in most of our markets. I think there is a bit of an expectation that things would improve in China, albeit off a relatively low profit base. We are profitable in China at the moment, but just. And so there is an expectation, but we've probably pushed that back now into Q4 in terms of what we're thinking. And so there's not a huge amount baked into that number for this year in terms of profit out of China. Yeah, I mean, the profit split first half, second half, we obviously aren't there yet in being able to give you a profit number, and I'm somewhat nervous about doing that with the interims coming up. But it will be bigger in the second half than the first half. It was obviously the other way around last year. Last year we were 1.15 in the first half and we were 80 in the second half. the magnitude of the difference. Well, I don't expect the magnitude of the difference to be as big as that this year, and I do expect it to be bigger in the second half, but I'm not going to pin a number. And then finally, capital allocation, thank you. We always look at that at the time of the intrims. That's not a long way away yet, but we haven't actually looked at that and that will be a job for next week once this is out of the way. So we will be certainly making a capital return depending on the share price, depending on our shareholders, and depending on the decision of the board later on this month will determine by which method we return it. As you know, we've made special dividends fairly continuously now over an extended period of time. But I guess that will be a decision that we make and we'll announce it at the interim in early August.

Okay, thank you.

Thank you. Thank you. The next question today comes from the line of Andy Grobler from BNP Paribas. Please go ahead Andy, your line is now open.

Hi, good morning. Through from me as well, if I may. Firstly, just on the cost base. And from a kind of monthly basis, where is where has that been running through Q1 and Q2 versus versus last year, given wage inflation and some other inflation in your in the business? Secondly, can you just talk through where placements per head are versus pre pandemic levels? I guess 21 and particularly 22 were kind of exceptional from that. or at least exceptional in recent years. So just to think about where you are versus kind of more normalized markets. And then lastly, you talked about some elevated buybacks in Q1. As I understand it, they were very elevated versus the previous year. Can you kind of talk through some of the kind of quantify some of the numbers for those buybacks in the second quarter as well? Thank you very much.

Okay, Andy. Well, I'll take the second and third question, then we'll come back to Kelvin on the first. So maybe start on the third question around buyback. Yes, we certainly went through a period where we were seeing a significant increase. I think we quoted in the Q1 statement that we were seeing in the UK and France, one in three offers being turned down when typically it'd be one in five. And that really hasn't gone away. I mean, if we just take the UK as an example, you're definitely seeing a market where there's low confidence. But we've got candidates that, due to the cost of living crisis, are looking to earn more. So they're wanting to move, but then they're also concerned about moving, that sense of being last in, first out. Video interviewing plays into this as well, though, because their ability to come to market, to shop, to look at options is increased by the fact that the barriers to going to an interview are reduced through going via a video. So, yeah, I mean, we're seeing roundabout in the UK, three out of four candidates get counter-offered. So what you're seeing there is a reflection of candidate scarcity. It's not a case that candidates are going in and resigning and their employees want to see them go. As I say, three in four of them get bought back. What you're also seeing because of that is because there's cost pressures in the client that's offered the job, they're not offering at the same level as they did before. So therefore the buyback from the existing employer is easier and therefore more often successful than it would have been. But then alongside that, just to confuse the picture a bit more, one in three candidates in the UK are getting multiple offers. So good candidates are still in high demand. So you've got this picture where you've got high vacancies, candidate scarcity, a level of wage inflation that exists but not to the same degree as it did 12 months ago, and this almost friction, if you want to call it that, between candidates coming to market and expecting an increase that they may have seen colleagues getting 12 months ago that now they're not going to get, and clients wanting to hold the line to control their cost base. So, you know, we're suffering at that bottom end of the pipe still. So that's definitely a live issue and that hasn't gone away. I don't actually have the number of placements per head pre-pandemic. I have all the way back to the, just after the pandemic. So I'm kind of slightly estimating, but I would assume that, as probably you would, that we saw placements per head go up to record levels through 21-22. It's fallen away a bit in 23 because, you know, you would have worked that out because our average perm salaries are a little bit higher than they were a year ago. Our average perm fees are higher than they were a year ago. So where in the mix are we seeing something fall away? Well, it's volume. Where it's fallen to, as a guess, Andy, I would think it would be broadly in line with where we were pre-pandemic, but I would need to dig around to get those exact stats.

Thank you. So just if I can clarify on that, in the UK, saying three out of four candidates are getting counter offers.

Right.

And about one in three of those are getting actively bid back.

No, sorry. So in the UK, you'll see around about three out of four of every offer that we get when they go to resign will be counter offered. But then also what we're seeing, which highlights the still the high demand for good candidates, is candidates, one in three candidates are getting multiple offers. So when they go to market, they might get two offers or three offers. So I guess what I'm trying to highlight to you is that on the one hand, we've got candidate scarcity, which is meaning that good candidates are still in high demand. We put them to market, they might get one, two, three offers, and one in three candidates, as I say, get more than one offer when they come to market. But then when they make the choice and go back to resign, three in four candidates get bought back or at least counter-offers. So not all those counter-offers will be successful, but on 75% of occasions, employers are looking to hang on to people that they've got. So that's kind of the balance. You've got a very busy workforce, high volumes of jobs, high volumes of interviews, lots of activity, but there's friction at the bottom end. And what I was trying to explain there is I believe the friction's created because employers Markets work well in recruitment, probably a little bit like financial markets, when there's clarity. And if there's clarity as to who's in the driving seat, then the markets tend to work a bit better. So if we know it's a candidate-driven market, the clients know that, the candidates know that, we know that, the markets work well. At the moment, you're seeing some friction because the candidates are reading headlines that say candidate scarcity, so they believe they're in the driving seat and therefore expecting significant increases on their basic salary to move. and you've got clients with vacancies wanting to fill them, but under cost pressure, and therefore not offering the increases that they did 12 months ago. That's what's creating the issue that we're seeing.

Okay, thank you.

And Kelvin, I'll answer your question around cost base.

Sure, so year on year, so not necessarily how we rolled over the year end, but year on year, on average our cost base is up about six million a month. If you break it down, about 4 million of that is wage inflation. About a million of it is cost inflation elsewhere. So think software licenses, property, things like that. And the last one is the additional headcount that we were running through part of the beginning of this year. So obviously that headcount has come out and therefore that's an average. But if you compare that to the first half of last year, on average, it's up about

six million a month and kelvin just on that we're looking at consensus numbers they have costs up 12 million for for the year so how do you kind of square that if monthly costs are up six million uh i think our costs will be coming well our costs have been coming down and that's certainly true

But I would say that there's something wrong probably in consensus then around where it is. I'm happy with the OP on consensus. The GP one is harder to get to. But I'm assuming by that you're taking the GP consensus less the cost to get to the OP. Yeah. Yeah. Okay. Great. Thank you.

Thank you. The next question today comes from the line of Keane Marden from Jefferies. Please go ahead. Your line is now open.

Thanks, morning all. Just coming back to China, excuse me, first of all, Kelvin, not looking for a precise estimate here, but broadly, if China is currently running sort of slightly above break-even in the first half, what sort of profit does it need to deliver in H2 to be consistent with that four-year consensus EBIT number? So does it need to be up? sort of 5 million or 10 million sequentially. Secondly, there are some areas where you are sort of holding the line with regard to capacity to maintain infrastructure so you can benefit from medium-term structural growth. Are there any other areas that you'd like to call out? So China's the obvious one, but any other territories where we're sort of reaching the point where you would maintain headcount and take a hit to profitability to maintain medium-term growth? potential. And then thirdly, Kelvin, are we starting to see DSO increase anywhere in the US at the moment? Thanks.

So the China one, actually there's very little in terms of OP baked into that forecast. So we're at about 230 in terms of headcount at the moment. We're trying to hold at that level. Just over a third of those people have got over six years of experience in recruitment and it's taken a long time to build that people infrastructure and therefore we are running just above break even. I would envisage if things improve and the GP line picks up a bit, we'd rebuild some of that junior headcount underneath them and try and lower the average cost of the consultant there and therefore there's very little in terms of OP drop down that we've got in the plan. The shape of the recovery in China, which clearly doesn't look like it's V-shaped, but the speed of it will depend on whether or not we actually do get some operating profit out of there, but we're not really anticipating much. I'll take the last one and then hand you back to Nick for the second question. No, in the US, we're not actually. I often think that that may point towards the fact that in the US, we're 95% perm, and in many cases, if you're in trouble financially, you've probably got better things to do than interview perm people. It's more of a challenge around contracting, and we do very little outside of banking in New York. So at the moment, no idea, so it's fine. And that will be true all around the rest of the world, not seeing a decline anyway.

And then coming back to markets where we're holding the line, the only other one that I'd probably call out is the U.S., I think we probably, when we reflect on the pandemic, there wasn't an awful lot of support for employees in the US. They didn't have a furlough scheme as such in the US. So during the pandemic, we were forced to cut very hard. In the subsequent two years, we spent a long time building out the business, getting over 50 heads in numerous regional cities across the states. And that gives us a great platform to move forward. And so we want to, as much as we can, hold on to that. Now, we have obviously brought headcount back. I think this time last year it was around about 520, 540. I think now it's more around about 430, 440. So we've reduced it by about 20%. I wouldn't really want to bring it back any further now. Clearly, if the market deteriorated significantly, I'd have to revisit that statement. But in terms of where we're at, We see the U.S. as a high potential market and we want to be in a position to grow quickly when it recovers. And we don't want to spend the first year of recovery adding back in 100 experienced heads because we've built out that workforce now. So probably a little bit like China is we want to make sure that we're not cutting into muscle. We've released the fat and we'll hold there unless the market moves significantly southeast.

Great stuff. Thanks very much for the answers, guys. Cheers.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Carl Green from RBC. Please go ahead, Carl. Your line is now open.

Yeah, thanks very much. Just one remaining question from me. You've given us a lot of detail, obviously, on geographies and individual countries. Just any observations you can make through Q2 around specific end client verticals. I think, you know, you did call out, obviously, changes in tech and noticed this around U.S. banking, but I think that was more sort of general commentary. Any trends you're seeing in sort of key verticals that you'd want to pull out, please?

I mean, the general commentary, Carl, is consistent across All geographies in terms of candidate scarcity, we're seeing that everywhere. Even in the tougher markets, we're seeing candidate scarcity. We're also seeing good levels of vacancies, again, even in the tougher markets. I suppose, you know, the issue is more friction at the bottom end, which creates the poorer result in certain places and less friction in other places means we get a better result. As regards verticals, I'm not sure there's anything I particularly call out. I mean, certainly from chatting to the regional heads, we were speaking to our head in Germany the other day. He was saying that they were seeing more cost pressures around manufacturing than they were in services. We've called out technology and banking in the US. But it really is kind of across the board, to be honest with you. And there isn't anything I'd specifically call out over and above other areas. Okay, great, thanks. Sorry.

Thank you. The next question today comes from the line of Steve Wolfe from Numis Securities. Please go ahead, Steve. Your line is now open.

Morning. Just one left for me in terms of Germany. Could you give us a bit more colour on that and what you're seeing on the ground there? You mentioned the interim and the IT business within that being particularly strong. Just any thoughts there on the wage inflation, perhaps, and whether some of the demand has been more structural outsourcing at this time, rather than just volume-based in general?

Yeah, I can take that one, Steve. I mean, we're certainly seeing a level of wage inflation. I mean, if in this time last year, it might have been on average, say, about £60,000. It's more now around about £65,000 for a PERM offer. Again, you're seeing that play through a bit on fees. So Germany's already a high fee market, but it has increased over the last 12 months. There's high levels of candidate scarcity, but consistent with the global picture, Temp's definitely better than Perm. As referenced a moment ago, certainly from chatting to our head of Germany, he was saying that clients are under a lot of cost pressure and they're seeing that a lot more in manufacturing than they are in the service sector. And then finally, and again, it's a bit of a repetitive statement, I'm afraid, but candidates are a lot more susceptible to buy back because clients are under pressure to not offer or over-offer on salary, a phrase that we picked up certainly on our travels after the Q1 statement when we were in the U.S. was a phrase called internal equity, this sense of organizations wanting to make sure that an individual that had joined the business last year who maybe had come in on a 20% pay rise and therefore was earning more than his or her colleagues in the same team. Once they balance that out in January, they're keen to not do it again, otherwise everybody has to move up in January and it costs a lot of money. So we're seeing that in many, many of our markets and it makes complete sense. So what then happens is that rather than giving that really compelling offer, they give something that actually is in line with what the team are earning And then when that individual goes back to their boss, often they're going back to their boss not because they're hugely unhappy. They just wanted a pay rise. And if their current boss can match it or get close, they'll probably stay where they are. And that would be the case in all of our markets, not just Germany. But hopefully that's given you a little bit more color on Germany.

Perfect. That's great. Thanks. Thanks, Steve.

Thank you. As a final reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time, so I'd like to pass the call back over to Kelvin Stack for any closing remarks.

Thanks, Bailey. As there are no further questions, thank you all for joining us this morning. Further to our recent capital markets event, where we showcased our technology and focus on people and society, we will hold another event in September to give you an update on our strategy. Further details to follow on that in due course. Our next update to the market is our 2023 interim results on the 7th of August. Thank you all for your time this morning.

Thank you.