Empresaria Group (LSE:EMR) — Interim Results Webinar

0:01 Good afternoon, and welcome to the EMPRESARIA GROUP PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. You can submit it at any time via the q and a tab situated in the right hand corner of your screen. Just click q and a, scroll to the bottom, type your question, and press send. Company may not be in a position to answer every question received during the meeting itself. However, we'll review all questions submitted today and proper responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Tim Anderson, CFO, and Ronny Driggs, CFO. CEO, I beg your pardon. Thanks, Ronny. Thank you. Thank you very much, Paul. Welcome, and thank you for attending our 2022 interim results presentation today. We will go through our general overview and update on our strategic priorities, financial review, operating review, which is new this a little bit different this time versus last time because we are now reporting by region as opposed to by sector, and then finally closing with the outlook. And,

1:03 of course, there's appendices for reference. So first turning to the overview. We've had solid NFI growth of 15% on previous year. Our adjusted profit increased 5%, which is reflective of investments in the business. Our adjusted net debt reduced down 3,200,000 from the end of twenty twenty one. Key themes for h one show very strong growth in offshore services, ongoing benefits from our diversification both in by sector and geography, as well as our operational investments that are starting to deliver benefits. We are on track to deliver market expectations and are well positioned to realize our ambition of 20,000,000 in adjusted operating profit in the medium term.

1:52 Now we'll turn to some of the operating highlights for the period. You will notice in our results that we've moved to, again, as I mentioned, a regional reporting structure. Offshore services has performed extremely well. We are optimistic on its continued growth as we look to expand our capacity with investment in infrastructure to accommodate further growth. Our APAC professional and IT showed strong NFI growth with professional up 17% and IT up 28%. Professional in The UK increased 17% in NFI, and logistics is showing solid improvement over last year where they were having challenges attracting talent. These results were offset by the expected drop in health care, particularly in The US market due to COVID related projects as well as client demand in Germany due to supply chain issues.

2:45 We are continuing to invest in growing our sales and recruitment teams where we see opportunity for growth and have made investment in dedicated teams in our, Asia Pacific region to deliver on our expanded service offering and RPO where we have seen some positive results. Currently, we have deployed our new front office technology to over 60% of our businesses. We are now working on pre implementation with the remainder of the businesses that are slightly more complex due to language and or operating models. On our strategy update, there's a lot of detail on the slide, so I'll highlight just few areas of progress on our strategic objectives. The first one on building scale.

3:30 In Asia Pac, which has seen positive results in in h one, we have added a regional sales director to drive and close more regional opportunities with our clients and enhance our cross selling capabilities across the region. We are already realizing benefit from that, and we'll talk about, additional benefits going forward. Offshore services has been successful in establishing our operation in The Philippines, and we are now up to 89 headcount in that location. Our group headcount grew by 5% excluding our tremendous growth in offshore services headcount. And, And, additionally, we continue to supplement our internal hiring through greater utilization of our offshore team. On increasing our diversity of profits, in h one, we have seen some early successes in our expansion into our our RPO service offering with our newly appointed sales director being instrumental in our success.

4:25 As mentioned previously, our heightened focus on cross selling will help us in diversifying our profits by introducing new service lines or locations into our existing client base. On productivity and efficiency, during h one, we went live on our new technology in three additional businesses, bringing us to over 60% of the group on our new technology with multiple additional projects launched as part of our second phase. As an example, things like onboarding, reporting, and candidate reach and engagement tools. On target our targeted investment in growth, we have continued to invest in revenue generating headcount, and we'll continue to invest where we see opportunity in addition to, continuing to maximize our leverage, our offshore team to supplement our recruitment teams.

5:17 As well as noted previously, we are continuing to invest in our offshore services space or infrastructure, and that is, underway currently. Now I will turn it to Tim for our financial review. Thank you, Rona. So as Rona mentioned, we've seen solid growth in net fee income in the first half of this year with net fee income increasing 15%. And alongside that, we're seeing growth of 5% in adjusted operating profit. Our revenue is flat year on year, and this really reflects the the mix. So we've seen permanent NFI increase by 23%, but temp NFI has fallen by 5%, and that's in part due to the expected reduction in health care alongside some challenges in in Germany and our UK IT business, which we'll talk through in a a bit more in a few moments. As a result, revenue flat year on year.

6:15 The reduction in adjusted diluted EPS reflects again mix, and this is the impact of the non controlling interest in our offshore services region, which has had a very strong first half. As Ron mentioned, we've moved to a regional reporting approach. And as a result, any overheads that are directly related to those regions have been reallocated there, and those were adjusted out of the central costs that we now report.

6:42 Our adjusted net debt has fallen significantly during the first half, reducing by 3,200,000 from where we were at the end of last year. This reflects both the profits during the period, but also that change in mix. So because we've had that that small reduction in our temp side of the business, that has reduced the working capital requirements, which is higher from temporary contract than it is from permanent. Headroom remains strong at 14,800,000 has improved from December, And our net finance costs remained fairly low but have increased from the prior year reflecting the increase in interest rates along with the prior year credits that was included in 2021 numbers.

7:26 Moving on to the operating review. So we've highlighted the the global diversified sort of diversified nature of the group on this slide, showing both the NFI split by region service and by sector. Offshore services has had a very strong first half and is now 18% of the group. Our temperature perm ratio has reduced to 57 to 43, reflecting the strong growth in perm and that, you know, change in mix from prior year when we were at 64 to 36. We continue to target increasing our temp to perm ratio to 70 to 30, and we are focused on growing our temp business. But, of course, at the moment in the market, the the significant demand has come from from the permanent side.

8:16 In the sector waiting, you can see that that reflects both strong growth in offshore, but also in professional alongside the expected decrease in health care. Looking at The UK and Europe operations, net fee income has increased by 3% while just operating profit has reduced by 20%. This reflects strong performance in UK, particularly in professionals. So UK net fee income is up by 12%. That is despite a drop in our UK IT business, which has fallen slightly year on year, although we are taking steps to resolve any issues there. Our logistic operation in Germany returned to growth after a challenging 2021, but we have seen some supply chain issues in our German temporary business.

9:07 These are partly mainly related around the the automotive sector, and and part of that is is due to supplies which were previously coming from Ukraine, and those businesses have had to source alternative supplies. So we do expect that to be a short term impact, but that has impacted our business in the period along with increased sickness rates from from COVID impacting margins. Our health care business in Finland has reduced as expected with the wind down of COVID nineteen demand. There have also been some significant changes ongoing to the public sector health care in Finland, which are impacting demand at least in the short term from from the public sector.

9:50 In APAC, we've seen very strong growth in net fee income, which was up 20%. Adjusted operating profit is flat year on year. In part, that reflects some challenges we've had in specific operations such as in Australia, but also a full year contribution of regional overheads in those numbers. We have seen strong NFI growth across most countries and and four of our locations, Indonesia, Philippines, Thailand, and Japan, have delivered record NFI in the first half of this year. We've also seen good success in diversifying our service offering, and our recruitment processing outsourcing offering has has had some good early success. Aviation does remain a challenge, and although, of course, we've seen some strong recovery in in aviation from a, if you like, a consumer perspective in in The US and UK, you know, the majority of our operations and our clients are in APAC, which has been much more subdued, particularly with China remaining fairly closed.

10:50 And at the moment, our clients are still able to, you know, recall pilots themselves rather than needing to go externally to recruitment companies to to source new pilots. So we're we're still seeing a subdued market there. However, we are starting to see some signs of recovery, and we would expect that to continue into next year. And you see in the in the sector split chart there that we've had an increase in IT as a proportion of the region, and that really is reflecting the focus we've had on growing IT in APAC.

11:25 In The Americas, we've seen an expected drop in net fee income and adjusted profit during the first half. This is primarily driven by US healthcare where we had a very, very strong 2021 with record results driven by the COVID nineteen related demand. With that dropping off this year, we've seen a fall in net fee income and profits. That twenty twenty to one demand was for high volumes of similar roles, which we were therefore able to fulfill very efficiently. There is still strong demand in US health care in in 2022, but it is now for a a much more various type of roles, and and those therefore take more time and effort to fill, and that has impacted on our ability to convert net fee income to profit.

12:11 US IT did fall slightly with an extremely competitive marketplace means that counter offers have become the norm, and there's a a much greater proportion of of, you know, NFI dropping out of the offer stage. Results fell slightly in that town. In 2020, on one, we had a large election project in Chile, which obviously wasn't repeated this year. And Peru has had a slower recovery from COVID nineteen, which is impacting results there. Our offshore services region has had an extremely successful first half to the year and really carrying forward the momentum they had last year into this year. So net fee income up 91% and adjusted operating profit up 94%.

12:56 Headcount has continued to increase during the period and is now up to more than 2,700. We have three locations in this business, two in India and one in The Philippines. And The Philippines operation, which we are seeing very strong demand for from The US in particular, is now up to 89 headcounts.

13:13 We've seen very good demand from our UK clients, and the number of our billable seats has increased by a third in the first half of the year. We have seen some slowdown in The US. This is primarily driven by that same reduction in the health care demand, and that has offset the growth we've seen from other clients. This is expected to be a short term impact. Our pipeline remains strong, so we continue to expect, you know, this good growth potential in this business. We are gonna be increasing in investing sorry, in increasing our headcount capacity in the second half of this year, adding office space and the associated infrastructure. And I would just highlight on on the full slides on our website, there is a a further slide on offshore services in the appendix, which for those who are less familiar with this operation, provides a bit more detail on exactly what it does and its track record.

14:05 And I'd like to hand back to Rona for the outlook. Thank you, Tim. So we're continuing to invest in the business, growing sales and recruitment teams in areas where we see high demand and opportunities, along with our expansion in in our offshore services business to increase our capacity to meet the demand that we're seeing and continuing to see or, going into the future. And then also the technology rollout and implementation of the next phase of our IT road map will continue into, you know, this year and early next year into the rest of this year and early next year. In regards to, you know, while there's macroeconomic uncertainties, we have not yet seen any in adverse impact barring some local impact in our German temporary business.

14:58 Our client demand remains strong, and talent shortages are expected to continue despite forecast for an economic downturn. The staffing market is a $600,000,000,000 market, and there is always market share to take. So I think, again, even if demand starts to slow, there is market share out there, and, we are going to go get it. So, I think the, when you look at our, I think you've all, read the news that our chairman has retired. We have a process underway right now to strengthen the board with the appointment of two new nonexecutive directors following, his retirement. We've had a solid start to 2022 and are optimistic for the year ahead and certainly, very confident that we will deliver full year results in line with the market expectations.

15:49 And I would say lastly, but most importantly, we feel well positioned to realize our ambition of delivering 20,000,000 in adjusted operating profit in the medium term. That's fantastic, Ron and Tim. Thank you very much indeed for the presentation. Ladies

16:06 and gentlemen, do please continue to submit your questions using the q and a tab situated on the right hand corner of your screen. But just while the team take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Ronald, Tim, as you can see, we've had a number of questions submitted, throughout today's presentation. If I may just ask you just to click on that q and a tab and where appropriate to do so, just read out the question and give your response, please. Yes. Sorry, Rona. Go ahead. You go. Okay. Yes. So we've had one question highlighting that there's been some industry commentary highlighting a slight slowdown in time to hire, which I think is referring to the the page group update from a couple days ago. Can you update us what you are seeing over the summer period?

16:54 So I I'll take that one, Tim. And I would say that we're not as yet seeing any slowdown in time to hire. Now, of course, The UK, it's a big holiday time in the summer. So there may be we haven't yet seen any any significant or any any real slowdown in demand at all or time to hire. What we are seeing again is con continued, you know, competition for counter offers and and certainly the the the talent shortage is continuing. So I I I'm not seeing what they're seeing, but, again, our businesses are are very different. We're not experiencing any notable slowdown in time to hire at this point.

17:43 So another question. So given the macro backdrop, we might expect there to be a slowdown in the pace of perm hiring. Now it's also obviously demonstrate we're continuing to

17:54 see growth in perm. Are you noticing any change in confidence levels, and where are the strongest areas of that growth? So in the, perm hiring, I think the perm demand for for us, what we what we've been seeing in particular, the start of this year and kinda going into, you know, the June time frame, so to speak, the the permanent hiring has been strong because clients are really wanting to secure this talent on a permanent basis as opposed to a contract basis given given the extreme talent shortage that is out there. And and you also have a very, as you all know, a candidate driven market right now where candidates are able to to to, get the benefits of being kind of a contract where they can work flexible hours or work from home or work have that flexibility that a contract role provides in a permanent role today. So I think that is also a part of that notable change in permanent hiring.

19:00 Changes in confidence levels, a little bit maybe in The US in terms of IT, but, again, demand remains strong. So and I would say the strongest areas of growth for us is certainly our offshore services business, our IT, and our health care, and our professional, I think, all have, strong areas of opportunity. And, again, given the size of the market, we have opportunity to take share even if there starts to if we start to see a slowdown in demand. And then we've had a a couple of questions around offshore. So trying to roll roll them into one. So one sort of, yeah, how do we expect this to span expand going forward, and could we give a bit more detail on the operation?

19:48 And do we expect to see more competition and margin pressure in this business over time? So, with offshore services, the it it, we absolutely have confidence that it is going to expand and grow. The demand is high. As as as you will you know, you've certainly read that inflation and wage inflation in particular has been, you know, a huge a huge burden on staffing companies. And this sector primarily or this, service primarily supports the staffing sector. So their their clients are staffing competitors currently. And when you look at the the demand has really been two in two two reasons for the demand. One is, you know, off the back of COVID, clients are are realizing that they can have recruiters anywhere, and they don't need to be physically in an operation. So I think that has increased demand.

20:48 The the difficulty in hiring experienced talent and experienced recruiters also is lending itself to leverage offshore services much more, widely in the recruitment space. And then I would say, lastly, when when we're talking about margins and pressures regarding margins, I think there could be, but I think, you know, because it is also you know, there's there's pressure for wage inflation for us on the in in India as well and and high it's a highly competitive market. But we don't, we don't see that having any significant impact, and we don't expect that to have any significant impact on our margins going forward. We run a very efficient business, and it's getting more and more efficient as we as we grow it in numbers and size. So, and the bench is strong with talent in in both India and The Philippines.

21:46 And then we've got a question around our net debt. So having reduced the net debt substantially, are you looking to get to net cash, or would you look at m and a or further investment organically? So I mean, I'll I'll answer that one if that's okay. Yep. Yeah. We're aware that, you know, a lot of our peers and and listed peers tends to tends to typically be in a a net cash position in this industry, so we know there's a there's a negative negative investor sentiment around debt generally. I wouldn't necessarily say we're looking to get to net cash or at least not in the short term. What we are trying to do is make sure we balance the, you know, the opportunities to invest in the business, particularly organic growth against the desire to reduce those debt levels. And what we don't want to be doing is, you know, focusing on reducing debt at the cost of the long term growth of the business. So, you know, that's why we've been investing in the business, you know, investing in technology, etcetera, because we believe that's the the best way to to grow the business longer term. And, of course, in time, that will also reduce, you know, our net debt position.

22:47 We would do continue to look to m and a, and we always keep an eye on on m and a options. You know, clearly, if something suitable was identified, then we would need to look at funding options whether that could be, you know, shares or debt rather depends on the on the situation at the time. But, certainly, it's something we we continue to look at, but we're not sort of, you know, folks we're we're mainly focused on growing this organically rather than through m and a. And then there's other questions. One question around the '23 operating target. How do you define medium term? I mean, medium term, well, first, I have to say we will provide more detail on the, you know, how we we plan to deliver that 20,000,000 operating profit in future in in future presentations.

23:33 Medium term, typically, I I think we'd say is five years. I think that's fairly fairly typical in terms of definition of medium term. That's what we're we're really looking at in this case. And I think that is all the questions. Thank you very much. I think you have actually covered those off. There's a few around that target. So thank you. That's great. If there's any further questions that do come through, of course, the company will be able to review those, and we'll publish responses where appropriate to do so on the investor meet company platform. Well, perhaps before redirecting investors to provide you with their feedback, which I know is particularly important, may I just ask you for a few closing comments, please? Sure. First of all, I I want to, again, thank everyone for taking the time to join us, and and we've we've got some really good questions as well. So thank you for that.

24:20 I am absolutely confident in where the group is headed. We have made significant changes to our operating structure to become more efficient over the last couple of years. The level of collaboration, the culture we're we're building here will be a differentiator for us. Turning to our business lines, when I look at, what the opportunity is, particularly for offshore services, IT, and professional, which we're we're already doing really well in, and we have a good footprint on. But I feel very confident that, that we will, not only meet our market expectations, but meet that medium term goal of of 20,000,000 in operating profit. So with that, I'm going to, again, close off by saying thank you and turn it back to Paul.

25:07 Right. Thank you. And, Tim, thank you indeed for updating investors today. Could I please ask investors not to close the session? It should be automatically redirected to provide your feedback, nor the team can better understand your views and expectations. This will only take a moment to complete, and that is greatly valued by the company. On On behalf of the management team of EMPRESARIA GROUP PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Good afternoon.