Michael Page announces group gross profit of nearly 8%
Financial summary (6 months to 30 June 2014)
Profit before tax
Basic earnings per share
Diluted earnings per share
Interim dividend per share
*Constant Exchange Rates
Commenting, Steve Ingham, chief executive Officer, said, "PageGroup delivered an increase of 7.9% in year-on-year gross profit growth in constant currencies for the first half, with improvement in all four regions. We saw solid performances across our regions, including strong growth in the major economies of Greater China, the UK and the US. While adverse FX continues to impact our results at reported rates, the underlying business environment is gradually improving in a number of our key markets.
"The Group's conversion rate rose from 12.3% to 13.5% year-on-year. This reflected the full run-rate of cost savings from the work done in 2013 to achieve consistency and efficiency, as well as a steady improvement, in this early stage of the recovery cycle, resulting in growth predominantly in temporary and lower-level permanent recruitment.
"Looking ahead, we expect market conditions to remain challenging in Brazil and France, and for Australia to stabilise. The more positive environment in many of our other countries is expected to continue, with our leading KPIs positive as we start the second half. For the full year, if the current trend of improving growth rates is maintained and foreign exchange rates remain constant, we expect to perform in line with market expectations*."
* Operating Profit: £82.1m (2013: £68.2m)
INTERIM MANAGEMENT REPORT
To the members of Michael Page International plc
PageGroup's strategy is to expand and diversify the Group both by geography and professional disciplines, and to become the leading specialist recruitment consultancy in each of our chosen markets. This strategy has been pursued through organic growth of existing and new teams, and diversification by region and discipline. Investment in the business has been focused on developing the long-term sustainability of the business and is supported by significant balance sheet strength and cashflow generation. We invest significantly in our people, as the recruitment, retention and development of the best talent available is central to our ability to grow the business and to manage our resources through economic cycles.
Our strategy is to grow organically, achieved by drawing upon the skills and experiences of proven PageGroup management, ensuring we have the best and most experienced, home-grown talent in each key role. Our team-based structure and profit share business model is highly scalable. The small size of our specialist teams means we can increase headcount rapidly to achieve growth when market conditions are good. Conversely, when market conditions tighten, these entrepreneurial, profit sharing teams reduce in size through natural attrition. Consequently, our cost base contracts during the lean times. Our strategy for organic growth has served the business well over the thirty eight years since its inception and we believe it will continue to do so. We have grown from a small, single discipline management recruitment company operating in one country to a large multidiscipline, multinational business, operating in 35 countries represented by three key brands.
Diversification by region and discipline
Our strategy is to expand and diversify the Group by industry sectors, professional disciplines, geography and level of focus, be it Page Executive, Michael Page or Page Personnel, with the objective of being the leading specialist recruitment consultancy in each of our chosen markets. As recruitment is a cyclical business, impacted significantly by the strength of economies, diversification is an important element of our strategy in order to reduce our dependency on individual businesses or markets and to increase the resilience of the Group. This strategy is pursued entirely through the organic growth of existing and new teams, offices, disciplines and countries, maintaining a consistent team and meritocratic culture as we grow.
Build for the long-term
When we invest in a new business, be it a new country, a new office or a new discipline, we do so for the long-term. Downturns in the general economy of a country or in specific industries will inevitably have a knock-on effect on the recruitment market. However, it has been our practice in the past, and remains our intention, to maintain our presence in our chosen markets through these downturns, while closely controlling our cost base. In this way, we are able to retain our highly capable management teams in whom we have invested and, normally, we find that we gain market share during downturns which positions our business for market-leading rates of growth when the economy improves. Pursuing this approach means that we carry spare capacity during downturns that has a negative effect on profitability in the short-term. A strong balance sheet is, therefore, essential to support the business through these times.
Recruit the best people, develop their talent and promote from within
We recognise that it is our people who are at the heart of everything we do, particularly as an organically grown business. Investing in them is, therefore, a vital element of our strategy. Our strategy is to find the highest calibre staff from a wide range of backgrounds and then do our very best to retain them through a team-based structure, a profit share business model and continuous career development, often internationally. Our strong track record of internal career moves and promotion from within means that people who join us know that they could be our future senior managers and main Board directors.
Our current strategic priorities comprise the following:
• Increase the scale and diversification of PageGroup by growing organically existing and new teams, offices, disciplines and countries
• Scale the business with a team and meritocratic culture whilst delivering a consistent and high quality client and candidate experience
• Invest through cycles in our high priority high potential markets - Greater China, Germany, Latin America, South East Asia and the USA
• Manage our fee earner headcount in all other markets to reflect market conditions
• Focus on operational support consistency and efficiency including the roll-out of our new technology operating platform, 'Page Recruitment System' and
• Focus on succession planning and international career paths to encourage retention and development of key staff.
% of Group
The Group's revenue for the six months ended 30 June 2014 increased by 1.8% to £512.2m (2013: £503.2m) and gross profit increased by 0.7% to £263.7m (2013: £261.9m). At constant exchange rates, the Group's revenue increased by 8.3% and gross profit by 7.9%. The Group's revenue mix between permanent and temporary placements was 41:59 (2013: 42:58) and for gross profit was 77:23 (2013: 77:23).
Revenue from temporary placements comprises the salaries of those placed, together with the margin charged. This margin on temporary placements fell slightly to 19.9% (2013: 20.2%) in the first half of 2014. Overall, pricing has remained relatively stable across all regions, although a stronger pricing environment has been experienced in markets and disciplines where there have been increasing instances of candidate shortages.
Headcount increased by 207 in the first half, with the ratio of new fee earners to support staff being 86:14, reflecting the continued strong focus on operational efficiency. In total, administrative expenses in the first half decreased by 0.8% to £228.0m (2013: £229.8m), driven by a further £6.6m of the full run-rate cost savings from the consistency and efficiency exercise in 2013. At constant exchange rates the Group's operating profit from trading activities increased by 21%, although this reduced to £35.7m (2013: £32.1m) or 11% at reported rates.
The Group's conversion rate of gross profit to operating profit from trading activities improved by over one percentage point to 13.5% (2013: 12.3%), reflecting a combination of full run-rate cost savings, steadily improving market conditions in many markets and improving consultant productivity, although in part offset by more challenging conditions in some of the Group's larger markets.
OPERATING PROFIT AND CONVERSION RATES
The Group's organic growth model and profit-based team bonus ensures cost control remains tight. Approximately 75% of first half costs were employee related, including wages, bonuses, share-based long-term incentives, and training and relocation costs. These costs totalled £171m (2013: £175m), and included the annual inflationary salary increase which averaged 3% across the Group, and £4.2m of share-based payment charges (2013: £5.0m). The Group had an average of 5,289 employees across the half, with a front office:back office ratio of 75:25.
Other costs comprised principally information technology and property costs, which together totalled £57m in the first half (2013: £55m). The Group is currently undertaking a significant technology upgrade including the development and roll-out of its new Page Recruiting System "PRS". This is focused on delivering productivity gains for our recruitment consultants such as automatic CV parsing and enhanced job-board management, together with a significantly improved capability to attract candidates through an upgraded multi-device website platform. This roll-out accelerated in the first half and is being expanded across the Group, with an expectation of approaching one third of the consultant network on PRS by the end of 2014.
In total, administrative expenses in the first half decreased by 0.8% to £228.0m. Within this, cost increases from inflationary wage increases and new headcount investment were more than offset by incremental cost saving benefits of £6m, together with a foreign exchange benefit of around £16m. The Group has now seen the vast majority of the year-on-year benefit of the £20m of annualised savings from the 2013 actions, with less than £2m of incremental savings due in H2. At constant currency, administrative expenses increased by £13.7m, or 6.0%.
The Group views its conversion rate, which represents the ratio of operating profit to gross profit, as a key metric for the business. This conversion rate is affected by the macro-economic conditions, the level of investment, particularly in fee earners and the degree of spare capacity within the business. The Group's conversion rate for the period of 13.5% (2013: 12.3%) was a solid improvement on H1 2013.
The EMEA region saw a significant increase in its conversion rate due to the full run-rate impact of the cost savings made in 2013, while the UK also recorded a positive increase in its conversion rate through improving economic conditions and increased consultant productivity. Conversely, both Asia Pacific and the Americas saw their conversion rates decline, due to macro-economic challenges in the major markets of Australia and Brazil, together with increased headcount investment in Asia and North America and the development of new markets such as India and Peru.
The Group was affected in the period by the impact of movements in foreign exchange rates, as sterling strengthened against almost all of the currencies relevant to the Group's operations. In the first half, this reduced the Group's revenue, gross profit and operating profit when expressed in sterling by £33m, £19m and £3m, respectively.
Depreciation and amortisation for the half year totalled £9.2m (2013: £8.1m). This included amortisation relating to the Page Recruiting System of £4.2m (2013: £1.3m), an increase of £2.9m on 2013, principally due to the amortisation commencing in May 2013, 4 months into the prior period.
A net interest charge of £0.1m reflects the continuing low interest rate environment, with £0.3m of interest income on cash balances held through the period offset by financial charges related to the Group's Invoice Discounting Facility and overdrafts used to support local operations.
The charge for taxation is based on the expected effective annual tax rate of 34.0% (2013: 33.0%) on profit before taxation.
Basic and diluted earnings per share for the six months ended 30 June 2014 were 7.6p and 7.5p respectively (2013: 7.0p).
The Group started the year with net cash of £85.4m. In the first half £22.7m was generated from operations after funding an increase in working capital of £25.9m, primarily due to an increase in trade receivables. Tax paid was £13.1m and net capital expenditure was £6.4m, with net interest received of £0.1m. During the first half, £25.4m was spent on the purchase of shares into the employee benefit trust to hedge exposures under share-based awards, £2.7m was received from the exercise of share options and dividends of £22.2m were paid to shareholders. After adverse currency movements of £0.7m, the Group had net cash of £42.9m at 30 June 2014.
DIVIDENDS AND SHARE REPURCHASES
It is the Board's intention to pay dividends at a level that it believes is sustainable throughout economic cycles and to continue to use share repurchases to return surplus cash to shareholders. The Board remains confident of the Group's longer term prospects and has therefore decided to increase the interim dividend to 3.42p (2013: 3.25p) per share. The interim dividend will be paid on 3 October 2014 to shareholders on the register on 5 September 2014.
5.5m shares were purchased into the employee benefit trust during the first half at a cost of £25.4m.
EUROPE, MIDDLE EAST AND AFRICA (EMEA)
Gross Profit (£m)
(41% of Group in H1 2014)
H1 2014 vs. H1 2013
EMEA is the Group's largest region, contributing 41% of Group gross profit in the first half. Revenue in the region increased by 2.6% to £210.6m (2013: £205.3m) and gross profit increased slightly by 0.3% to £107.5m (2013: £107.1m). In constant currency, revenue increased by 7.1% on the first half of 2013 and gross profit increased by 5.2%.
The EMEA region experienced mixed market conditions throughout the first half. Our large businesses in France and Germany, together representing 49% of the region by gross profit, grew by 5% and 7% respectively in the first half. Each saw strong growth in their Page Personnel businesses being offset by continued difficult trading conditions in Michael Page, which focuses on higher salary and predominantly permanent placements. Overall, 16 countries, representing 88% of the region, grew in constant currency compared to the first half of 2013. Of these, significant growth was seen in Southern Europe, Turkey, Middle East and Poland.
The 41.3% increase in operating profit for the first half of 2014 to £14.7m (2013: £10.4m), and improvement in the conversion rate to 13.7% (2013: 9.7%) was due principally to the full run-rate of the cost savings achieved in the prior period through the reduction in operational support staff and related costs. Headcount across the region increased by 150 (8%) in the first half of 2014 to 2,036 at the end of June 2014 (1,886 at 31 December 2013), with the majority being fee earners.
Gross Profit (m)
(26% of Group in H1 2014)
H1 2014 vs. H1 2013
In the UK, representing 26% of the Group's gross profit in the first half, revenue at £155.6m (2013: £146.1m), and gross profit at £67.6m (2013: £61.4m) reflected continued progression of the business as the UK recovery maintained its steady momentum.
The UK market continued to enjoy steady growth and showed signs of greater confidence both in London and the regions, with increasing instances of candidate shortages in certain disciplines. Excluding Financial Services, Finance & Accounting (17%) and technical disciplines such as Property & Construction (28%) performed strongly. Page Personnel was up 17% for the first half, reflecting stronger activity in temporary and permanent recruitment at the professional clerical level.
Headcount grew modestly, up 3% during the first half of 2014 to 1,361 at the end of June 2014 (1,319 at 31 December 2013), as the business was able to achieve consultant productivity gains, while adding headcount selectively to the more strongly performing disciplines. This enabled operating profit to increase 13.1% to £10.8m (2013: £9.6m) and the conversion rate increased to 16.0% (2013: 15.6%).
Gross Profit (£m)
(19% of Group in H1 2014)
H1 2014 vs. H1 2013
In Asia Pacific, representing 19% of the Group's gross profit in the first half, revenue decreased by 2.8% to £93.1m (2013: £95.7m) and gross profit decreased by 5.5% to £51.3m (2013: £54.3m), with the region being impacted significantly by FX translation. In constant currency, revenue increased by 13.1% and gross profit increased by 7.8%.
Asia, comprising 13% of the Group and 67% of the Asia Pacific region, enjoyed strengthened trading conditions and benefitted from the increasing experience and maturity of our local consultants. This helped Greater China achieve growth of 22%, with improving momentum through the half year, including record months from all offices in June. In Australia, gross profit was down 6.9% in constant currency as we continued to be impacted by the downturn in the mining and commodities sector. However, the Australian market stabilised progressively as the rate of decline slowed through the first half, in part due to softer comparators from the prior year.
Operating profit fell by 11.7% to £8.5m (2013: £9.6m), resulting in a decrease in the conversion rate to 16.5% (2013: 17.7%). Headcount across the region was broadly flat through the first half at 1,114 at the end of June 2014 (1,111 at 31 December 2013). The decline in the conversion rate was principally due to challenging trading conditions in Australia.
Gross Profit (£m)
(14% of Group in H1 2014)
H1 2014 vs. H1 2013
In the Americas, representing 14% of the Group's gross profit, revenue decreased by 6.0% to £52.9m (2013: £56.2m) and gross profit decreased by 4.5% to £37.3m (2013: £39.1m), as the region suffered from significant adverse foreign exchange movements that reduced revenue and gross profit by £8.5m and £6.3m, respectively. In constant currency, revenue increased by 9.1% and gross profit increased by 11.8%.
In North America, our businesses performed well, with gross profit in the USA up 23% in constant currency. This reflected continued strong market conditions and high levels of activity. Our Canadian business also performed strongly and opened a new office in Calgary in July.
In Latin America, gross profit was up 6% year-on-year in constant currency. Brazil experienced mixed market conditions, starting the year positively, before being impacted by the World Cup in June which disrupted business activity and delayed decision making. Excluding Brazil, the other countries in the region (40% of LatAm) performed very strongly, up over 21% with record performances from Mexico, Argentina and Colombia. A new business was launched in Lima, making Peru our sixth country in the Latin American region.
Headcount increased modestly by 1% in the first half of 2014 to 826 at the end of June 2014 (814 at 31 December 2013). Operating profit decreased to £1.6m (2013: £2.5m), with a conversion rate of 4.4% (2013: 6.4%). The decline in the conversion rate was due principally to the challenging trading conditions in Brazil and headcount investment in North America.
CURRENT TRADING AND OUTLOOK
While adverse FX continues to impact our results at reported rates, the underlying business environment is gradually improving in a number of our key markets in this early stage of the recovery cycle. This gives us the confidence to continue to invest, both in infrastructure and, selectively, additional fee earners and we will continue this investment in people and infrastructure as we continue to see improving market conditions.
Looking ahead, we expect market conditions to remain challenging in Brazil and France, and for Australia to stabilise. The more positive environment in many of our other countries is expected to continue, with our leading KPIs positive as we start the second half. For the full year, if the current trend of improving growth rates is maintained and foreign exchange rates remain constant, we expect to perform in line with market expectations*.
* Operating Profit: £82.1m (2013: £68.2m)