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Edited Transcript of STAF.L earnings conference call or presentation 17-Sep-19 8:30am GMT

Half Year 2019 Staffline Group PLC Earnings Presentation

London Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Staffline Group PLC earnings conference call or presentation Tuesday, September 17, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Mark Pullen

Staffline Group plc - CEO & Executive Director

* Michael Robert Watts

Staffline Group plc - CFO & Director

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Presentation

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Christopher Mark Pullen, Staffline Group plc - CEO & Executive Director [1]

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Good morning, everybody. We'll kick off. So we are recording this session for our -- putting on our webcast. So with that in mind, I propose that we run through the presentation and then take questions at the end if we can, please.

Okay. So welcome to our interim results for the first half. Now the first thing to say is that it's been a particularly difficult first half in our Recruitment business. And we've had significant impacts from the delay to the publication of the full year '18 results, which has been well publicized, and we've spoken about in the past. In particular, we won very little new business in the first half, which we attribute to the delay in our results. Normally, we win a significant amount of new business and grow as a result of that. And we missed that in the first half.

The trading environment has become very challenging and remains challenging, and we expect that the second half trading will be challenging as we see the impact of reducing customer sentiment, confidence and uncertainty, which we see as a result of the demand coming through from our end customers, which is significantly down on our previous years.

However, we have a very strong platform for recovery to future growth. So the fundamentals of the Recruitment business remain absolutely sound, and all of the work that we've been doing in the past 18 months to create a strong platform for growth is beginning to deliver some really encouraging proof points. So it's a question of getting through this tough trading environment and then recovering to future growth.

Meanwhile, in our PeoplePlus business, the transformation from the former Work Programme to what is now today's -- today the U.K.'s leading adult skills and training business has completed as planned. We're expecting a profitable half 2 under the new operating model, and we still see really good prospects for next year.

So in terms of revenue, the group revenue was GBP 533 million (sic) [GBP 535 million], which is up on the previous year largely due to the impact of some of the acquisitions that we made last year. So up 11%, albeit we have to remember that some of that revenue growth is as a consequence of the increase in the National Minimum Wage which flows through, but organic growth was down by 10% in Recruitment.

In PeoplePlus, the revenue was down versus the previous year totally as a consequence of the transformation away from the former Work Programme operating model to the new operating model that we have now going forward.

Then in terms of group operating profit, a slight loss in PeoplePlus of GBP 900,000 and GBP 4.6 million of operating profit in the Recruitment business. And we will see that unusually for this year, the financial performance of the group will be H2 weighted to a greater extent than is normally the case. And there's a couple of reasons behind that. Firstly, our PeoplePlus business tends to be totally flat-phased across the year. But of course, this year, a transformation year, we've got the onboarding of new contracts in the first half coming to maturity in the second half and therefore, PeoplePlus unusually will be H2 weighted. And then the Recruitment business, more H2 weighted than normal because of the difficulties of the first half and increased weighting in the second half.

So the group operating margin again is down on the previous year. So that's reflecting the first half loss of PeoplePlus as it goes through its transformation and also the more difficult first half that we've experienced in Recruitment.

Net debt at the half year point was GBP 89 million, and that was before the equity raise of GBP 37 million.

Notwithstanding the difficult first half and the challenging outlook for the second half, the -- it's true to say that in both operating divisions of the business, we have market-leading platforms, and we are very well positioned for return to future growth.

In our Recruitment business, we exist to help make our customers more successful by providing the flexible work forces that our Recruitment customers need. And increasingly, that is important as our end customers face into an increasingly competitive situation.

So we're the clear market leader by size and scale. We're uniquely differentiated now through the work engagement strategy that we've deployed over the last year, and we're winning the race to find workers for our customers. So even in this extremely tight labor market, where we have the lowest unemployment for 30 years, we are winning the race to find workers. And for the first time, we're getting into a situation where we have workers on the bench available for our customers and in particular, where our competitors can't find the workers.

In PeoplePlus, we are now today the U.K.'s market-leading adult skills and training business. The transformation to the new operating model is complete. And looking forward, we'll have a portfolio business of multiple service contracts with diverse revenue streams. So therefore, looking forward to a PeoplePlus business with a far better quality of earnings than the former PeoplePlus operating model under the Work Programme. And it's a very values-based organization, which aims to make a direct difference to the lives of 1 million people by 2022, and we're well on with that ambition, having crossed the 300,000 threshold earlier in the year.

So that's the overview. We'll come back to the operating divisions in a moment, but I'll hand over to Mike for the financial performance.

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Michael Robert Watts, Staffline Group plc - CFO & Director [2]

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Thank you, Chris. Morning, everyone.

In terms of half year results, group revenue is up 11%, but organic revenue is down just over 12%. If we look at Recruitment first, Recruitment revenue grew by just over GBP 64 million, just under 15%; and that was driven by the benefit of the 6 acquisitions we made in 2018.

Organic revenue is down just over 10%, and that's been driven by the previously headlined reasons for that around uncertainty leading to customers taking our temporary workers permanent, the impact of the accountants' delay on winning new business and headwinds in specific markets such as automotive. And that's led to a downward pressure on gross profit margin, and indeed, that has flowed through to the operating margin where we've seen that falling from 2.1% to 0.9%.

In PeoplePlus, the decline reflects the closure of the Work Programme, which ended earlier this year and that subsequent transformation of PeoplePlus to deliver multiple contracts with multiple end dates during the back end of last year and this year. Whilst we've seen sales revenue fall, we've continued the good progress in taking out costs. And indeed, we've taken a further GBP 3 million out H1-on-H1 to try and maintain a stronger bottom line as possible.

Overall, the group operating margin of 3.4% falling to 0.7% reflects the first half trading lower margins in Recruitment and the losses in PeoplePlus and indeed, the increasing concentration of the Recruitment business as part of the group.

In terms of dividend, just to reiterate, there is no dividend declared at this point. In terms of exceptionals, PeoplePlus transformation is complete, and all those costs were taken last year. Outside of that, we have seen some additional trading exceptionals. We've seen GBP 1 million for professional fees, which were associated with the extended audit process that we incurred in the first half of this year. And then we've seen GBP 2 million of reorganization costs in our Recruitment division.

The Recruitment division has changed fundamentally from a divisional structure to a regional structure to drive a more efficient operating model. This allows us to pool candidates and look for candidates in regions, and this has been supported by our digital candidate resourcing strategy. So that has led to us being able to drive efficiencies across people and property as we've gone to a geographic structure.

Net debt has moved from GBP 63 million at the end of December to just over GBP 89 million, so a GBP 26.2 million movement over the first half of this year. That has been driven by exceptional cash costs associated with our extended audit process, the reorganization of PeoplePlus, the cash going out this year, with the P&L impact being felt last year and some payments of the minimum wage in the first half of this year.

We've then seen a significant reduction in our VAT liability as sales volumes have dropped full year to half year, and this is a structural position that we see each year.

And then 2018 acquisitions, we have just over GBP 5 million, GBP 5.3 million of deferred consideration from those acquisitions that we've paid out this year. Those are the key drivers of that net debt position.

Chris?

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Christopher Mark Pullen, Staffline Group plc - CEO & Executive Director [3]

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So moving on to the Recruitment division. So it's been a difficult first half, and the Recruitment division particularly suffered in terms of confidence from the delay in the publication of the full year rating results. And as I said, this led to a lack of new business, and that's had an impact on the organic performance of the business.

As we come into the second half, we're increasingly seeing the challenges industry-wide that are being presented by a drop in demand from our end customers as our end customers see a reduction in consumer sentiment across not only retail but also food. And we have -- do have an exposure increasingly to the retail sector, the growth in our support of online retail but also, we are seeing some drop-off in demand from the food sector.

So underlying operating profit in the Recruitment business, GBP 4.6 million, and that is reflected in the decrease in the operating profit margin. So a number of factors behind the decrease in the operating profit margin.

So firstly, there's been a mix shift away from more profitable work in sectors like automotive. And as we highlighted in May, our business in automotive driven significantly by some factory shutdowns in Jaguar Land Rover and the retooling of plants to electric vehicles ready for the end of next year's production runs has meant that we've lost some of the higher-margin work, and that has reduced some margin in terms of mix.

We've seen some margin compression in the first half as a result of increased competition. And in the first half, it's true to say that we were vulnerable to our competitors during the time that we did not have our results published for the previous year.

And then there's an operational gearing impact that we are seeing as demand has reduced, and this has brought us a little bit down towards our fixed cost base.

Now looking into the second half, the second half remains challenging, albeit we are absolutely expecting the buildup to the Christmas peak to start rebuilding demand in volumes, which then takes us away from that fixed cost base and, of course, improves the margin into the second half.

Again, having said all of that, the competitor differentiation that we've been working on over the last couple of years is coming through with some really good and strong proof points. And we, therefore, could not be better placed to respond in a tight labor market.

So it is a tough trading environment. And I've highlighted already that the delay to our results in the first half had an impact on that. But certainly, what I would say is that the company has lost time in its development, but it's certainly not permanently damaged because, of course, we will come through the challenging trading environment and put the first half behind us. And we fully expect to capitalize on the platform that we've got for growth into the future.

But the political and economic uncertainty is certainly hitting customer sentiment, and we're seeing customers increasingly take some defensive actions and reducing their exposure to temporary labor for the time being. And this is around perceptions from the risk of a hard Brexit. But again, we expect this to be relatively time limited. But overall, our customer demand is down on the prior year.

But I would reiterate that we cannot be better placed to benefit from a tight labor market as we go into the second half of the year and the Christmas peak. We, for the first of time, have got workers on the bench. So all of the benefits of our resourcing platform and attracting candidates very efficiently to our candidate pools, deploying them on a regional basis in a more efficient way, means that we have got capability to take on significantly more work in a way that Staffline has never been able to before. So we are extremely well set up to support our customers through the upcoming Christmas peak, notwithstanding those challenges mentioned.

And here, I just want to reiterate the size and scale of what is the U.K.'s market-leading blue-collar industrial temporary worker agency. We're across around 450 locations. We deploy about 60,000 workers at peak, making us one of the U.K.'s biggest blue-collar workforces. So we've got real substance, a real network and network strength in order for us to fulfill the service that our customers require. And we still see the consolidation trend amongst our customers continuing. For example, Sainsbury's has recently reduced the number of suppliers from around 80 to less than 10. We're a beneficiary of this reduction in number of suppliers, and we expect to see that trend continuing into the future as customers increasingly want a more professional service, and they recognize the differentiated service offering and the benefits from that, that companies like Staffline can uniquely offer.

So the proof points of our strategy and differentiation strategy are definitively coming through. So we set out in the last year to dramatically improve candidates' ability to find work with us through online. We completely reengineered our online platform and optimized it for natural search, and we use extensive use of social media marketing.

The consequence of that is now really coming through, meaning that we've nearly doubled the number of visitors to our Staffline website in the first half. We're cutting out the use of intermediaries, which cost money and make the process less efficient. And we're getting direct hits, meaning that the number of candidates coming to our candidate pool is dramatically increased. It also means that we're able to onboard candidates in a much quicker and efficient way through the artificial intelligence that we're using to get people through the process as quickly as possible.

And then through our worker engagement platform methodology, we have successfully reduced our year-on-year attrition by 30 -- 23 percentage points (sic) [23%], which is an incredible improvement in the large blue-collar workforce.

So overall, it means that we're winning the race to find workers. When we find workers and we get them into our onboarding process, we get them through to work more quickly than our competitors. And then having done that, we hold on to our workers for longer, meaning that we need to hire less workers in at the front end. And then in overall terms, it means that the cost of hire is reduced, the cost of onboarding and training to our customers is reduced and we can pass some of those benefits on to our customers.

And this results in opportunities to improve commercial terms. And this is not something that is possible to do overnight, but it's dependent on the ability for us to translate this differentiation through to a better service to our customers. But we've had some excellent early successes, and we've got some really good examples of customers being willing to pay between 20% and 30% more in terms of the fee at the renewal point.

So we've got a well-developed pipeline of similar opportunities in renewals that we're working through and we're, therefore, confident having seen all of these proof points, that we will be able to improve and gain better commercial terms as a consequence of our unique differentiation as we move forward.

And, of course, these improvements don't land overnight, but is a process that leads us to have confidence in the recovery of the business as we get through this difficult trading period.

Now moving on to PeoplePlus. So for PeoplePlus, this has been a year of transformation. We've moved from the former operating model under the Work Programme, and the Work Programme being a large, government -- monolithic government contract, which came to an end in March this year. And we've transitioned the business to being the U.K.'s market-leading adult skills and training business.

So this is a year of transition, and the first half has gone as expected. We have onboarded a significant amount of new business. We've won over GBP 150 million-worth of new contracts in the first half. We've made a slight loss of GBP 900,000, and we expect to be profitable in the second half as the new contracts come to -- come into margin maturity. And then into next year, that will further develop, and we see good prospects into 2020. At the same time, we stayed on the cost control and reduced costs by GBP 3 million in the first half.

So as I said, a year of transition, and this slide describes how that transition has materialized. So on the left-hand side of the page is the -- a description of the former operating model of PeoplePlus. So under the former PeoplePlus, we had -- it was largely the Work Programme contract with central government. So the business was very orientated around central government funding, very little exposure to the private sector. And our bid engine was in need of some transformation and with a bid win rate of around 1 in 3. So we needed to improve on that.

The Work Programme came to an end in March this year. We incurred some exceptional costs in the previous year in relation to the closedown. And, of course, the closedown of the Work Programme was, in the end, earlier than we had expected. And now we move into the new operating model.

So today, in the middle column, we have a business where we have won over GBP 150 million-worth of new contracts in the first quarter, which is an outstanding success in terms of new business development. We've got a bid win rate of 1 in 2, which is industry leading. And we have put live 35 new contracts from the month of April onwards.

We've got a number of market-leading positions in the adult skills and training environment. We're the market leader in skills support for the unemployed with 47% market share. We're the market leader now in Prison Education where we doubled our footprint to 25% in excellent and reliable service contracts. And we've grown our private sector client base to over 150 clients, particularly in our Apprenticeship Levy business. And at the same time, we're deploying some market-leading artificial intelligence solutions to make the whole of our delivery more efficient going forward.

So as we look forward into next year, we see a business with a diverse contract base, far less reliant on central government funding. So probably 1/3 central government, 1/3 local and devolved government and 1/3 from the private sector. Already at this point in the year, we have 60% or in excess of 60% of next year's revenues contracted and locked in, and that's excluding our apprenticeship business.

The apprenticeship business is now in a market-leading position in the U.K. It's had a well-publicized slow start but is continuing to develop well with some good new wins. And again, we're deploying some technology to our apprenticeship delivery to make it more cost efficient as we go forward.

And that bid win rate of 1 in 2 is extremely strong and further supported by the pipeline that we've got visibility of going forward. So for the rest of the year, there is still work in the pipeline that we will be bidding for and some of which will potentially drop this year, but we're expecting most of it to impact next year.

But more significantly, the pipeline for next year is large at over GBP 600 million, and that relates to average contract length of around 3 years. And if you apply a bid win rate of 1 in 2 to that, then there is significant potential to further develop the business next year.

One of the most significant elements of next year's pipeline you can see there is in justice, and this relates to the government's recent announcement that they will be outsourcing the skills and training provision associated with the probation service, whilst at the same time, they're insourcing the probation service itself.

So both of those elements work very well for us. And of course, adult skills training in relation to the probation service and to ex-offenders is right in our sweet spot. So we see a lot of potential for us there.

And then on to our apprenticeship business. So we've got a market-leading position in the apprenticeship business in a sector which is highly fragmented and with numerous smaller competitors that are in reasonably weak positions. Whilst the Apprenticeship Levy itself has had a well-publicized slow development, we believe that it is an attractive market and will be attractive for the future as it matures, and we continue to build and develop our market-leading position.

And on that page are a number of further extremely good wins that we've had in the first half. So in particular, the Heathrow Employment & Skills Academy, which gives us access to the whole of the Heathrow estate and all of the companies that operate at Heathrow. And then Standard Life is another example of a customer for whom we provide the entry-level apprenticeship in financial services and will add to the service provision that we provide for other organizations such as Lloyds Bank and Leeds Building Society.

So rounding up on the priorities and outlook, so the priorities for the remainder of 2019. For the Recruitment business, remain as optimizing the existing business. So making sure that we are extremely well placed to deliver the expected uplift for -- as we head towards the Q4 peak, maximizing cash conversion and getting back to the strong cash conversion that we enjoyed before some of the difficulties experienced over the first half and getting on to -- and further improving on that margin position and developing into the second half and taking advantage of the differentiation strategy.

In PeoplePlus, advancing our leadership position in the Apprenticeship Levy market, which is well established, making sure that we become more efficient from a cost-base perspective by taking advantage of digital learning capabilities again, and we're well advanced in that; continuing with that contract diversification and improvement strategy; and continuing to reduce our reliance on central government funding.

But from an overall group perspective, in both businesses, we're very focused on optimizing the individual business units' performances so that we do further enhance and get back to strong cash conversion with the ultimate aim of delevering further the balance sheet as quickly and as much as possible.

So the outlook and the recovery to normalized earnings, as I've mentioned in the Recruitment business, we are facing into a tough trading environment following a difficult first half, and the financial performance for the year is weighted towards the second half and the quarter 4 peak, in particular. But having said that, those strategic initiatives that we've put in place are delivering and have -- and we have got definitive proof points that through those strategies, we have a great platform to build out once we get through this, for the time being, tough trading period.

In PeoplePlus, a positive outlook for 2020 under the new operating model. The business was not affected by the delay to the full year results for last year. We have got over 60% of next year's revenues locked in and already contracted. And we're less dependent on the Apprenticeship Levy business next year, that being about 15% of next year's expected business.

So to finish off the guidance which we updated today for the business for the full year '19, EBIT of approximately GBP 20 million and our leverage ratio of around 2x, which keeps us comfortably within our banking covenants.

Great. Thanks very much, indeed.

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Michael Robert Watts, Staffline Group plc - CFO & Director [4]

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Thank you.