Empresaria Group (LSE:EMR) — Interim results for the six months ended 30 June 2020

0:02 Good afternoon, ladies and gentlemen, and welcome to the EMPRESARIA GROUP PLC Interim Results Presentation for the six months ended 06/30/2020. Throughout the presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the Q and A tab situated on the right hand corner of your screen. The company may not be in a position to answer every question it received during the meeting itself. However, the company will review all questions submitted today and publish responses where appropriate to do so. These will be available via your investor meet company dashboard. I'd also like to remind you this

0:34 presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Ronen Driggs, CEO and Tim Hansen, CFO of the EMPRESARIA GROUP PLC. Good afternoon. Thank you, Paul, and welcome, and thank you for joining us today to review our 2020 interim results for period ending June 30.

0:58 I'd like to start. We're we're going to do a brief overview of the financial review. We also have a sector analysis prepared along with an outlook, and there is an appendices section section that you can refer to after the presentation. So to give you an overview, and for those of you who are new to EMPRESARIA, we are a global staffing specialist group founded in 1996, operating from 20 countries across six diversified sectors. We have historically grown through acquisition and have turned our focus to organic growth in the short to medium term. We are in the midst of driving change across the group through alignment of businesses around core sectors to better leverage synergies and cross selling potential, enhance operating models to scale the business more effectively, and driving a performance based culture.

1:50 The slide here gives you a breakdown of the sectors we operate in, our segment breakdown by permanent, temporary, and offshore recruitment services, along with the breakdown by regions. As you can see, our professional sector is the largest in the group at 31%, followed by IT at 25%. 74% of our NFI is from outside The UK with APAC being our largest at 37%. Our temporary segment represents, 57% of our overall net fee income. This is an area that we are looking to grow in the future. And one of the key differentiators in the group is our offshore recruitment services business in India, which primarily serves the recruitment industry in The UK and The US markets and is a key strength amongst our competitors.

2:39 Highlights for the period is is we we had a strong start to the year with year on year profit growth in q one in each month of q one, clearly demonstrating the operational initiatives we started in the last half of 2019 that started to bear fruit. We were able to achieve profitability in q two despite the significant impact of COVID nineteen due to the swift action action taken to protect the business. And we were careful to protect investment key investment areas that are are critical to our long term growth ambition to ensure we are well positioned to take advantage as and when the markets recover. The safety of our employees, candidates, and clients has been and continues to be our top priority.

3:25 Despite the adverse impact of COVID on the global economy and staffing being at the forefront of this impact, there have been positives in our business, and I'd like to highlight those. We were able to move the majority of our teams to work from home while maintaining service levels and responsiveness to our clients and our candidates and ensuring the safety of our employees. A great example of this is in our offshore recruitment business in India, where we were able to move hundreds of employees to remote working in an extremely short period of time. This is something we could have never imagined in this business and clearly demonstrates our ability to continue to perform services for our clients even in in adverse economic conditions. Our overall move to a more performance based culture proved beneficial with improved focus on bottom line results, and we saw clear benefits from our stronger together initiatives with a coordinated and cohesive response across the group and greater support and guidance from the central team. We saw our businesses collaborating with one another, sharing best practices, and overall lessons learned as countries continued to move in and out of lockdown.

4:36 In many cases, we accelerated operational changes in our business. And lastly, we saw clear benefit from our diversity across sectors and markets. And this should continue to provide protection to the group as we navigate the next stages of the pandemic.

4:56 As highlighted earlier, the operational initiatives we put in place the last half of two thousand nineteen started to show benefit in the first quarter with year on year profit growth in each of the month of the quarter. In the second quarter, despite a 39% year over year decline in net fee income, we were able to maintain profitability due to the swift and decisive actions taken on cost, which resulted in a 30% decrease versus 2019. Our diversification in both sectors and geography continues to prove beneficial during these difficult times. Overall, our net debt has significantly reduced to $8,900,000 from $19,100,000 in December 2019. This is partly due to the strong cash management we put in place as soon as the impact of the pandemic became clear, but predominantly due to the inflow of working capital that we saw as activity levels reduced.

5:51 Our increased head levels of 18,100,000 from 11,500,000 in December 2019 reflects the positive movement of our net debt along with the increase of our facilities, which we agreed with our bankers. We remain cautious on how the pandemic will develop and on the speed of recovery, but we are confident that with a more efficient and unified organization, we are well placed to take advantage as and when demand returns. As discussed earlier, we protected our key investments for the future, and that includes our investment in leading front office technology to enable our businesses to provide speed to market with our candidates and our clients, gain efficiencies, and capitalize on cross selling opportunities across the group.

6:37 We are pleased to say that despite the adverse conditions of the pandemic, we went we were able to go live with Bullhorn in three of our brands in early July. We are accelerating changes to our operating model in key brands with a more candidate and client centric model to increase effectiveness, reduce business risk, and provide greater ability to scale our business in the temporary segment. We are taking advantage of this time to restructure and rightsize our businesses, which we believe will protect our bottom line and position our businesses for growth. We remain focused on scaling our key growth sectors in our existing geographies. We have included our strategic objectives for your reference in the appendices of this presentation. Tying all of this together, we will continue to build on our performance driven culture, which aligns not only individual businesses to performance, but overall group results as well.

7:36 Now I'll turn it over to Tim for a financial review. Thank you, Rona. So just looking at the half overall. So net fee income was down 22%, and so that reflects the sort of tale of two halves we saw with the two quarters with the first quarter down 5% and the second down 39% on prior year. But thanks to the swift and decisive action we took on costs, the impact on our adjusted operating profit was limited to a drop of GBP 1,300,000, so 30%, reflecting the fact we managed to maintain profit in the second quarter as well as delivering year on year profit growth in quarter one. We've had limited impact from currency, although currencies have been volatile.

8:21 It hasn't had a significant impact on the group. Turning to net debt. Our adjusted net debt has reduced significantly from December down to GBP 8,900,000 from GBP 19,100,000. The primary driver of this is the working capital inflows, reflecting the reduction in trading activity. Our receivables were £11,900,000 lower than the start of December. In addition to that, as a group, we took advantage of any government schemes enabling us to defer certain payments. So for example, the scheme to defer UK VAT. This enables us to defer £3,500,000 of payments, which will start to be repaid during the second half but move forward into the first quarter of twenty twenty one as well.

9:11 We did take early action in engaging with our banks. We agreed an increase in The UK overdraft of GBP 2,500,000 and the relaxation of our principal covenants for the next few quarters. Now you can see at the half year that actually we've got very strong headroom, and we've got very strong headroom on both facility headroom and covenant headroom. However, we took that precautionary action at the time when there was more uncertainty, and that has given us to ensure that we have the financial flexibility and financial headroom to get through this current period. Of course, net debt levels are expected to rise as and when trading starts to return. And the primary driver has been the working capital inflow. And as trading levels start to increase, we would expect to see working capital outflow.

9:57 However, with the headroom in our covenants and with our headroom in our facilities, we are well placed to cope with those cash flow movements.

10:08 During the last quarter, we did increase our investment in console partners. We now own almost 100% of that business. Consideration was £1,600,000 with a further potential £100,000 payable in 2022 based on 2021 performance. The terms were substantially reduced from the original acquisition in 2016 and from the acquisition of additional shares that we did in 2019. That reflected both the founders' desire to sell the remaining shares now that they're no longer directly involved in the business and they're all parties' appreciation of the situation at the time. We weren't, with COVID going on, going to be buying the shares at the full price, we've agreed the price was very the parties.

10:53 Consol has performed very well since joining the group and has been relatively resilient in the face of COVID nineteen and is a strong investment for the future, we believe. And this is, of course, a sector that we are focused on growing, and this investment is part of that. Although the cash outflow in the first half was around GBP 900,000, we did draw final GBP 1,000,000 of our RCF accordion to finance that. That accordion couldn't be used for working capital. Could only be used for acquisition purposes. So this increased investment has not adversely impacted our headroom at this time. We do expect the acquisition to be earnings accretive in 2020.

11:35 Just moving on to analysis of our sectors. So starting with Professional. This sector did see a large impact from COVID-nineteen. It includes our aviation business, and aviation has been significantly disrupted, as we all know, and isn't expected to recover quickly. We have taken action to rightsize the cost base of that business and restructure it so that it is well positioned to benefit from recovery as and when it comes. And we are confident this market remains one with good medium and long term potential for

12:10 us. The other key impact on this sector is a reduction in demand for permanent placements. Permanent placements are normally first hit when there is a downturn or a drop in demand, and the professional sector accounts for a large portion of our permanent revenue for the group.

12:28 The chart to the top right, it looks like the proportion of perm temp is the same year on year, which it is, but that reflects the fact that our aviation business was predominantly temporary. If you took the aviation out, you would see a drop in the permanent revenues.

12:47 However, the strong action taken on costs in this sector means that we continue to deliver a profit despite the significant fall in net fee income. Moving on to our IT sector. This sector has been more resilient than most in the face of COVID-nineteen. Net fee incomes and revenues are in line with last year, with only a small drop in the operating profit. The U. S. In particular has performed strongly with sustained demand through the first half, reflecting the niche roles and sectors we operate in. And a lot of that U. S. Revenues is permanent focus for us at the moment, and that has been strong in the first half. The UK has had a more challenging first half, been more impacted by COVID as well, and we have taken more actions on cost in that business to protect the bottom line.

13:36 Our business in Japan has also performed in line with expectations in the first half.

13:45 Healthcare sector has been impacted by COVID. Patients generally in the last quarter have been unwilling to engage with healthcare services unless they really need to and that has reduced demand for temporary staff, which is predominantly what we supply in this sector. Permanent revenues have also been impacted in similar ways to where professional pay have reduced year on year. Revenue was up in the first half, but that reflected some high temp volumes in The U. S. At the beginning of the year but on lower margin work. So net fee income is down, reflecting the net impact of COVID-nineteen in the quarter.

14:27 Now property construction and engineering sector, the year on year fall is predominantly driven by our UK engineering business, which we closed a substantial part of late in twenty nineteen. This sector is wholly in The UK, and a large portion of it is focused on supplying sales staff to the new home sales industry. This has been hit significantly by COVID-nineteen with sites closed for the majority of the second quarter, severely impacting revenues. However, this sector does have a low cost base and as demand returns, we expect this sector to return to profitability fairly quickly. In our commercial sector, we see a mix of performances varying by specific industries and locations.

15:17 In Germany, our logistics business had a very strong first half. It had a very positive impact on demand from COVID-nineteen due to the increased demand from supermarkets. There was the initial period of hoarding, which was seen across a number of countries, particularly the case in Germany. But actually, that demand has continued to be sustained as people are buying more from supermarkets rather than going out. Elsewhere in Germany, we have the automotive sector as a major client for us, and that has continued to suffer in Germany. I mean, initially, there, we saw factory closures, which were due to COVID-nineteen, but they're really due to supply issues for China rather than local COVID-nineteen issues.

16:03 And what we have now, though, is the ongoing impact from low consumer demand, meaning factories are not opening back to full capacity, reduced requirements of temporary workers. In Latam, the impact of COVID-nineteen was felt later in the quarter. And at the moment, it still doesn't look like it has fully peaked in the region. Chile did receive some protection as it does have supermarkets from a large part of its client base. That has given it a good to get through the current period. In Japan, we supply sales staff to high end retail, sort of fashion retail, and we were impacted by the Tokyo lockdown, which meant that workers weren't able to work. However, now that that has end, we would expect that business to return to profitability, but of course that is dependent on any risk of second lockdowns in the region.

16:58 Our offshore recruitment services business has been a very strong performer for us over the last couple of years and grew strongly through 2019 and the first quarter of twenty twenty. So although this business was significantly impacted in Q2, it still shows year on year growth in both net fee income and operating profits. Although this business was hit hard by COVID-nineteen with its clients looking to pass on the impact on their businesses and the their clients are all, you know, working in the recruitment sector. They're all recruiting businesses. Despite that impact, we do see significant upside potential for this sector going forward as those clients look to efficiently increase efficiency and minimize their cost basis and look to operate in a more efficient way, in a more invested market as they move forward. So we see great opportunity for the sector to grow and to get back to its previous levels, relatively quickly compared to others.

18:00 I'll pass you back over to Rona for the outlook. Thank you, Tim. While we are cautious on the speed of recovery, there are some signs of economic activity increasing where COVID cases are falling and restrictions are lifting. But it is too early to assess the quality and the pace of any improvement or its impact on the staffing sector. However, our diversity by sector and geography will continue to prove beneficial, as different markets and geographies will recover at different paces. Our diversity also helps reduce the risk and impact of localized issues on the wider group. In summary, I am proud of how the business has performed in what has been a very challenging time. We took swift action to protect the business and achieved profit before tax in both the first and second quarters despite the significant impact of COVID.

18:51 We are laser focused on what we can control and how our businesses respond to the months ahead. We will maintain a steadfast focus on our strategic priorities while ensuring we continue to manage our costs. Our continued focus and progress with our Stronger Together initiative, along with the actions taken in recent months, has positioned the group to be more efficient and unified going forward. And our operational investments and initiatives will continue to position the group for long term growth. While there remains much to be done, we are cautiously optimistic that as we move into the second half of two thousand twenty, And we are confident we are well placed to take advantage when the demand returns. Thank you so much for your time today and your continued support.

19:38 Right now, Tim, thank you very much for the presentation. And ladies and gentlemen, please continue to submit your questions using the Q and A tab situated in the right hand corner of your screen. But just while the company take a few moments to review those investor questions submitted already, I'd just like to remind you that a recording of this presentation along with a copy slides and the published Q and A can be accessed via your investor dashboard on the Investor Me Company platform. Lastly, before I hand back to Ron and Tim, I'd like to remind you that your feedback is important to the company. Immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order the company can better understand your views and expectations. Ron and Tim, I know I haven't given you a huge amount of time, but we we have had a number of questions in during the presentation. Perhaps I could hand back to you and you can just have a little run through those and respond where appropriate to do so.

20:27 If I if I could ask you just to read the question out, that would be fantastic. Thank you. Sure. So we've had a question in regards to our geographic split and what part is from The US. So I'll the take first part of that and turn it to Tim for the second part. But, again, in The US market, it is an an opportunity for us to expand in the future and and provide a much more a much greater presence in The US market. It is a very robust, the largest staffing market in the world. So that is on our on our road map. Currently, today, we have recently expanded this past year into Austin, Texas. We have predominantly two sectors operating in the, US market, which is both our our IT and our health care sector.

21:14 And in addition, what's what's not accounted for, which is showing in the offshore recruitment services revenue, is the large piece. We do support a large, portion of The US in our offshore recruitment services business. Tim, do you have an idea on the percentage split in The US? So around half of our Americas region is from US, so about 80% of, total NFI in the first one. Great. Another question came in is do you see remote working as a trend you look you will look to continue? And if so, how much fixed cost do you expect to remove if you reduce office space? So I I do believe that there will be opportunity for hybrid models.

21:59 Most of our brands will will likely do a a combination of both at home and in office work. At this point, we do expect to see some reduction in office space and already started on that journey pre COVID in, being able to share office spaces around the world, much much better than we have in the past. So we have started to see benefit from that. What we will be able to reduce in in the near term in terms of a a financial dollar, I don't think we have that answer today, but it will be something certainly that we should see unwind a bit as we look to incorporate a hybrid model going forward.

22:48 Next question is, what trends are you seeing in the market, and are there any areas you are not present in that you wanna be? The answer is yes. Opportunities in all of our markets. And and I think in the appendices, you will see that we put together a chart that kinda shows you where what sectors are in, which markets. And you can see that there is opportunity in particular to scale, more temporary business into the Asia Pac region along with, scaling temporary into The US markets. In addition, the opportunity to scale some of our high growth sectors in IT and digital and health care is certainly on our road map for the future.

23:38 Next question is, are you seeing acquisition opportunities in the current environment? We've certainly have seen some opportunities. We we we are still, you know, looking at things, keeping things in the pipeline for the future, and we'll be opportunistic if if something comes up that we feel like we can't pass up, but it's not something that's currently on our priority. Thanks, Rona. Tim, I think you've addressed pretty much all the questions you have from investors. Of course, the company will review all questions submitted by investors today and we'll publish those answered on the investor meet company platform. Rhonda, perhaps I could just hand back to you to to wrap up before I redirect the investors to feedback, please. Sure. I, again, would like to, you know, thank you for your support, your continued It it it is important to us that we continue to share, you know, transparently with you how we're seeing things in in the group and and in the market.

24:40 And, again, I wanna summarize that. I I do believe that we are positioned for growth when the demand returns, and we have taken, really, I think, big steps these these last several months to get ahead of of this pandemic as much as we can. So we are are very, very optimistic on the second half and what what we can do to take advantage when the market returns. So with that, again, thank you again for your time today and your continued support. Thank you. Thank you, Rona. Thank you, Tim. Thanks for updating investors today. Could I ask investors not to to close the sessions? You will now automatically be redirected for the opportunity to provide your feedback. If you've accessed the meeting via our website, the feedback will appear directly in front of you. If you've accessed from the link sent you in the email, you'll be asked to log in to submit your feedback.

25:39 On behalf of EMPRESARIA GROUP PLC and Investor Me company, we'd like to thank you for attending today's presentation. That concludes today's event. Many thanks indeed.