-  HY results affected by challenging trading conditions
-  Lower demand in permanent recruitment but rising demand for contracting
-  Strategic focus and growth markets

Clarius Group Limited (ASX: CND) is a specialist provider of contracting, staffing and recruitment services to corporate and government organisations across the Asia Pacific region.
                                                                                                            
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Clarius Group (ASX: CND) reported NPAT of $1.3 million for the first half ended 31 December 2011, down 45 percent from the previous corresponding period (pcp).  EBIT was $2.3 million, down 40 percent on revenue of $135.6 million, down 3 percent.  The falls reflected challenging trading conditions, with lower hiring demand in your Permanent Recruitment business.  What has been the trend in trading conditions in the current March quarter, and what visibility do you have regarding revenue and EBIT over the remainder of FY2012?

CEO Kym Quick
Trading conditions in the period since January have been slightly stronger than the last quarter of calendar 2012 and we anticipate this will continue until the end of the current quarter.  There is a little more positive sentiment in the marketplace and this helps our business as many of our challenges over the last 12 months were sentiment driven.  The strengthening US economy, the settling of the European debt crisis and other global issues are expected to positively impact the decision making of our clients.

We’ve seen times over the last two to three years where trading conditions started improving and then deteriorated due to an event or shifting sentiment.  The start of this quarter gives us confidence that EBIT will be stronger than the last half but it’s difficult to provide a definitive forecast.   

The last quarter of calendar 2012 was challenging.  Seasonal factors had an impact as hiring decisions not made by mid November, particularly in the permanent hiring market, are usually pushed out until January.  We saw a particularly aggressive slowdown pre-Christmas and part of the strong start this year has been due to hiring decisions being delayed until this calendar year.

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Gross margin was $24.3 million in the first half, down 11.5 percent.  Given growth in the Contracting business, which accounts for about 70 percent of total gross profit, this implies a reduction of at least 30 percent in the gross margin contribution of the Permanent Recruitment business.  To what extent are costs fixed in the Permanent Recruitment business and what scope is there to reduce costs in the business?

CEO Kym Quick
Gross margin in the Permanent Recruitment business has been the area most impacted by market conditions.  Over the last few years we’ve cut costs significantly but don’t want to cut business resources so close to the bone that we’re unable to capitalise on a market rebound.  While we have capacity for additional cost reduction, it’s not to a degree that will make a major positive impact on the business.  On the reverse side, having extra resources is a massive positive when the market rebounds.

To improve the cost structure of our Permanent Recruitment business many of our consultants work across both permanent and temporary contract requirements.  This gives us greater head count productivity than if they focused on only one business line. 

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Can you comment on the drivers of the growth in your Contracting business in the first half?  To what extent are they sustainable going forward?

CEO Kym Quick
Over the last six to 12 months there has been consistent demand for contracting and temporary services.  Demand has largely been driven by more positive sentiment but companies acting more conservatively and not wanting to make permanent full-time hiring decisions.  Organisations requiring head count may take on a contractor with the view that if trading conditions deteriorate they can move on unsustainable resources.  This trend is very  likely to continue going forward as many companies consider flexible work forces very important to their growth plans.

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Given ongoing volatility in financial markets and soft labour market conditions, what is the current pricing environment for your services?  What differentiates Clarius from other contract and recruitment services providers in the market?

CEO Kym Quick
We’re currently seeing a fairly aggressive approach by a number of larger clients who typically have a stronger bargaining position and are able to negotiate very favourable margins and pricing conditions for themselves. This is an issue for the entire industry and not unique to Clarius. As market demand softens the pressure on margins increases. We are not immune from this and neither is the rest of the recruitment industry.

The tension between supply and demand impacts our pricing structure and we expect the supply of skilled workers in numerous sectors to decrease over the next several years.  As demand for these skills bounces back, it will reduce the pressure on margins.

Our pricing is differentiated from some other service providers by our distinct service models which allow for a cost differential as well as a pricing differential.  We separate parts of the organisation servicing high volume, lower margin opportunities from those that require more resources allocated to them.  These different operating models allow us to achieve more productivity and effectiveness than we have previously.  This approach has also provided us with an opportunity, particularly in IT sector recruitment, to increase gross margins as we differentiate the level of service provided.

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What is your strategy to secure new account wins and increase market share?  Given your relatively high exposure to IT, finance and accounting, how are you positioned to respond to the labour market demand and supply imbalances identified in your Clarius Skills Index?

CEO Kym Quick
In the last few years, our differentiated delivery model has strengthened our capacity and competitive position.  By developing different remuneration structures for staff who work in the high volume lines of business, we’ve been able to source new business opportunities and price more aggressively.  Over the last six to 12 months we’ve seen significant wins and growth in new accounts.

We’ve also ramped up our sales capabilities in the non-PSA (preferred supplier agreement) or ‘retail’ parts of the business.  Our management and consulting teams are also stronger in their sales activity than they have been in the past.  We’ve had a significant culture shift, particularly in our approach to new accounts, which has led to many wins.

Our branding strategy focuses around being a house of specialist brands.  For example, our IT brand Candle, which is by far our largest, has a strong presence in the sector.  We want each of our brands to be number one in their space: for Candle to be associated with IT careers, Lloyd Morgan with finance and accounting careers and SouthTech with engineering careers.  We prefer to be entrenched in and have a strong brand presence in certain sectors as opposed to trying to cross over all categories with a single brand.

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You’ve indicated that as at 31 December 2011, your business segments with the least headroom when comparing the recoverable amount to their carrying value are Lloyd Morgan and Alliance Recruitment.  How reliant are these businesses on macro conditions and what is the likelihood of an impairment charge at year end?

CEO Kym Quick
These businesses are more subject to the macro environment, largely because their reliance on permanent recruitment is higher than our other business lines.  Unlike these businesses, Candle is heavily dependent on contracting revenue which tends to be less susceptible to overall market conditions.

We wrote down some of the goodwill in these businesses in the past, which potentially reduces the likelihood of having to take further impairments.  By year end, hopefully conditions will enable us to increase the amount of headroom within each of those brands.

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Cash outflow from operations was $4.1 million in the first half, versus inflow of $1.1 million in the pcp. What is the outlook for cash flow?  Can the business generate positive cash flow in current trading conditions?

CEO Kym Quick
Our cash flow is strong.  However the first half was impacted by the payment of a significant outstanding balance by one major client that fell just after balance date.  That accounted for more than 50 percent of the year on year difference in cash flow.  The other major factor was the increase in our direct contracting business, given we’re paying our contractors a minimum of 30 days prior to receiving payment from our clients.  Growth in the business puts temporary pressure on working capital, which is the downside of an otherwise positive situation.

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As at 31 December 2011, Clarius had net debt of $2.0 million, versus net cash of $4.0 million six months earlier.  Gearing was 4.0 percent (debt/equity).  Over the past two years Clarius has maintained low levels of debt.  What is your preferred funding model for the business?  What is your balance sheet capacity and appetite for acquisitive growth?

CEO Kym Quick
After a capital raising a couple of years ago, we’ve deliberately kept a very low level of debt.  That’s helped us through a turbulent time and provided us with relatively low funding costs versus our competitors. 

We’ve also wanted to maintain the strength of our balance sheet to respond to acquisition opportunities when they become available.  However, our approach to acquisitions is far more stringent than it was historically, and we look for very strong contracting businesses, which are very difficult to find. 

Another reason we want to maintain our balance sheet strength is to help manage our cash flow.  Given the size of our contracts, it’s important we manage our cash flow very tightly: client payment timing can have a strong implication on our cash position, as was the case in the first half.

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Clarius will pay a fully franked interim dividend of 1 cent per share, down from 2 cents last year.  What is the outlook for dividends in FY2012?  If current conditions continue, would you suspend dividend payments, as you did during the GFC?

CEO Kym Quick
We’re aware that a lot of our shareholders are as interested in dividend payments as share price movement.  So an important part of our commitment to our shareholders is to ensure that where circumstances allow, we’ll pay dividends in line with our historical payout ratio.  Any suspension of a dividend payment would only be under fairly extraordinary market conditions. 

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You were appointed CEO in September 2011.  After four months in the role, what are your immediate priorities for the business and what is your longer term vision for Clarius?

CEO Kym Quick
Our immediate priority is to navigate current challenging market conditions.  We’re focused on our core business and continuing to increase productivity, grow market share and strengthen our branding strategy.

The traditional recruitment industry is subject to economic cycles.  Longer term, it’s important for us to look at ways we can diversify without moving outside our area of expertise yet allow us to de-risk our exposure to inevitable economic changes.  We’re currently working on broadening our service offerings to our existing clients and to new client groups, with the aim of lessening the impact on earnings of the sort of downturns we’ve seen in the past.

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Thank you Kym.
 

For more information about Clarius Group Limited, visit www.clarius.com.au or call Kym Quick on +61 2 9250 8100.

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