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UK - Michael Page's international growth fails to impress nervous stock market

15 August 2011

Group revenue was up by +27.6% from 393.5 million Pounds in H1 2010 to 502.1 million Pounds in H1 2011 at Michael Page International Plc (MPI:LSE), the specialist recruitment consultancy. At constant currency exchange rates, revenue was up by +25.8%.

Interim results for the first six months ended 30 June 2011 reveal that gross profit increased by +31.3% from 209.6 million Pounds in H1 2010 to 275.1 million Pounds in H1 2011. At constant currency exchange rates, gross profit increased by +29.5%.

In the first half, the mix of the group's revenue and gross profit between permanent placements and temporary placements has increased to 45:55 (2010: 43:57) and 80:20 (2010: 78:22), respectively. The group explains that as economic conditions improve, permanent placements grow faster than temporary placements. This trend is compounded by the group's faster growing regions in Latin America and Asia being predominantly permanent rather than temporary recruitment in the specialist sectors.

The gross margin on temporary placements in the first half of 2011 was 20.2%, a decrease from the same period last year (2010: 20.7%). Pricing has been relatively stable throughout the first half of 2011, with a stronger pricing environment in rapidly growing markets being offset by competitive pressures in the weaker UK market.
In the first half of 2011, the group has added +623 (+13.9%) new staff,  taken additional space in Beijing and Hong Kong, opened three new offices in Houston, Pudong and Porto, as well as additional offices in São Paulo and Rome. The group has also launched businesses in Qatar, Malaysia and India.

Operating profit for the first half of 2011 increased +40% to 45.4 million Pounds (2010: 32.5 million Pounds), however, this was -12% below analysts’ consensus estimates. Administrative expenses grew by +30% with increased investment in non-staff costs as well as significant headcount expansion. The group's conversion rate of gross profit to operating profit is now 16.5% (2010: 15.5%).

On 30 April 2010, a formal agreement was signed between MPI and Her Majesty's Revenues and Customs (HMRC) for a refund of 17.1 million Pounds of overpaid VAT plus 11.3 million Pounds of statutory interest, both net of fees. In respect of the amended claims for a refund of overpaid VAT, Michael Page continues to correspond and discuss its claim with HMRC, but the eventual outcome remains uncertain.

In the UK, representing 24% of the group's gross profit in the first half, revenue increased by +14.2% to 163 million Pounds (2010: 142.8 million Pounds), gross profit increased by +7.9% to 66 million Pounds (2010: 61.2 million Pounds) and operating profit was up +8.1% to 10.4 million Pounds (2010: 9.6 million Pounds).

In the UK, market conditions have been tough, but stable throughout the first half of 2011, with growth in the private sector being offset by a more restrained public sector. Operating profit increased in line with gross profit, up by +8.1%, with the conversion rate almost stable at 15.8% (2010: 15.7%). Headcount in the UK has remained largely flat over the first half of 2011 and stands at 1,343 at the end of June 2011 (1,324 at 31 December 2010), with the increase in gross profit being the result of improved productivity.

Europe, Middle East and Africa (EMEA) is the group's largest region, contributing 44% of group gross profit in the first half. Revenue in the region increased by +29.9% to 209.5 million Pounds (2010: 161.3 million Pounds) and gross profit increased by +31.7% to 120.3 million Pounds (2010: 91.3 million Pounds), due to increased activity, primarily in permanent placements. In constant currency, revenue increased by +28.2% on the first half of 2010 and gross profit increased by +29.9%. The +31.7% increase in gross profit generated a +76.1% increase in operating profit for the first half of 2011 to 17 million Pounds (2010: 9.6 million Pounds), a conversion rate of 14.1% (2010: 10.5%).

In the majority of countries across the region, market conditions have improved. In the Middle East, the group experienced some impact from the recent troubles, but all businesses in the region showed growth.

While there remains some surplus capacity in the more established markets of France, the Netherlands, Italy and Spain, in the more recently established countries, the group has increased its level of investment in new headcount, offices and launched in Qatar. Headcount across the region increased by +295 (+16%) in the first half of 2011 to 2,126.

In the Americas, representing 14% of the group's gross profit in the first half, revenue increased by +47.1% to 52.7 million Pounds (2010: 35.8 million Pounds) and gross profit increased by +55.4% to 40.3 million Pounds (2010: 25.9 million Pounds). In constant currency, revenue increased by +47.5% and gross profit by +54.7%. With the investment in additional headcount and new offices, operating profit increased by +54% to 5.8 million Pounds (2010: 3.8 million Pounds), with a conversion rate of 14.4% (2010: 14.5%).

In North America, gross profit grew by +28% in constant currency and while there is some evidence of a steady improvement, particularly in Canada, market conditions remain tough.

In Latin America, where gross profits grew in the first half of 2011 by +70% in constant currency, market conditions are strong and the group has continued to invest heavily in the region. In the last twelve months, the groups has added +241 staff, an increase of +80.9%. The number of offices in the region has doubled to 16 with the launch of a business in Chile.

Brazil, which was established in 2000, is now the group's third largest country business and is growing fast. The newer businesses in Mexico, Argentina and Chile are also performing strongly. The group now has 778 staff in the region, an increase of +126 (+19%) since the start of the year.

In Asia Pacific, representing 18% of the group's gross profit in the first half, revenue increased by +43.4% to 76.7 million Pounds (2010: 53.5 million Pounds) and gross profit increased by +55.8% to 48.6 million Pounds (2010: 31.2 million Pounds). In constant currency, revenue increased by +35% and gross profit by +49.2%. Operating profit rose by +28.8% to 12.2 million Pounds (2010: 9.5 million Pounds), with the large investments in additional headcount and new country start-ups in Malaysia and India, partially offset by operational gearing and increased productivity, resulting in a net decrease in the conversion rate to 25.2% (2010: 30.5%).

Australia, the largest business in the region, grew gross profits by+ 23% in constant currency. Market conditions have remained stable throughout the first half of 2011, particularly in Western Australia, which is benefiting from the demand for natural resources.

In Asia, where the business is almost entirely permanent placements, gross profit grew by +80% in constant currency. In Japan, where growth of +30% in constant currency was impacted by the effects of the Tsunami in March, the group finished the half year with a record ever month for gross profit.

At the end of June, the group had 874 staff in the region, an increase of +183 (+26%) since the start of the year and assuming market conditions remain strong, further headcount will be added during the second half of 2011.

Steve Ingham, Chief Executive of Michael Page, commented "we delivered a strong performance in the first half of 2011 with gross profit up +31% to 275.1 million Pounds. Operating profit before non-recurring items grew by +40% to 45.4 million Pounds as we continue to make significant investments for the longer-term growth and prosperity of the group."

"In the first six months, our banking business grew strongly. However, following the recently announced hiring freezes in the last few weeks, gross profit growth in this sector, which accounts for approximately 10% of group gross profit, has slowed. With the exception of banking, trading in July has been broadly consistent with recent trends. While the recent turbulence in the financial markets has added an additional element of uncertainty, we expect market conditions in the UK to remain challenging, but anticipate that our UK business will maintain modest growth and continue to gain market share."

"In Europe, we expect to continue our progress and our outlook for Asia and Latin America remains strong."

"Over the last 10 years we have diversified significantly and altered radically the composition of the group, entirely through organic investment and development, with over three quarters of the group's gross profits now being generated from outside the UK."

"Our Latin America and Asia businesses combined now represent over 20% of the group's gross profit, with 31 offices across 9 countries and 1,000 staff."

"We have entered and achieved a market-leading presence in relatively underdeveloped recruitment markets with numerous opportunities for further growth. In these markets, we now have approaching 50% of our fee earners and grew gross profit at over 50% in the first half of 2011. We remain mindful of the macro-economic risks and uncertainties, however, we are continuing to invest significantly in developing our faster growing markets, as well as exploring opportunities for new openings."

Investors failed to respond to the growth in both revenue and profitability and seem more absorbed by the Company’s cost increases, weaker gearing and more cautious outlook. Accordingly, in early trading Michael Page's shares were down by -14.39% to 342.80 Pence, some way off of the 52-week high of 567 Pence recorded on 27 April 2011.


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