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Learning Technologies Group PLC
LSE:LTG

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Learning Technologies Group PLC
LSE:LTG
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Earnings Call Transcript

Earnings Call Transcript
2022-Q4

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C
Claire Walsh
Head, Legal and Company Secretary

Good morning, everyone. Welcome to the Learning Technologies Group Final Results for 2022. My name is Claire Walsh. I am together with Jemima Gurney from FTI Consulting will be supporting today’s session.

Before we get started, I would like to go over a few items, so that you know how to participate in today’s call. Our Chief Executive, Jonathan Satchell, and our Chief Financial Officer, Kath Kearney-Croft will present the results and will then answer questions. [Operator Instructions]

Now, let me please hand you over to our Chief Executive, Jonathan Satchell.

J
Jonathan Satchell
Chief Executive Officer

Claire, thank you and good morning everybody. Welcome to this results presentation. It’s good to be here. Firstly, just looking at the highlights of last year, we are delighted that we delivered on what we said we would which of course is the commercial transformation of GP Strategies, which was the big factor of 2022.

Before we get into the details about that, I would like to take a moment just to pause and acknowledge the immense achievements of both GP staff and their leadership team and of course, my colleagues in the LTG, who supported them in achieving that. It really was a phenomenal task and achievement that we are highly respectful and appreciable. I am not going to go into a lot of detail about the financial highlights, because Kath is going to now take us through those in more detail.

K
Kath Kearney-Croft
Chief Financial Officer

Good morning, everybody. Very pleased with the achievement of the business in 2022 on all important measures and the upward trend continuing. Reported revenue is up 131% at £596.9 million, the performance benefiting from a combination of 3% underlying organic growth, full year contribution of 2021 acquisitions, including the transformational acquisition of GP Strategies and FX tailwinds due to the strength of the U.S dollar in 2022.

Taking into consideration GP for a full year, pro forma organic constant currency growth was 5%. Adjusted EBIT is up 84% to £100.9 million, also driven by a combination of the full year contribution of 2021 acquisitions, organic growth and FX tailwinds. Adjusted EBIT margin at 16.9% was lower than prior year as expected due to the change in the portfolio mix following the transformation acquisition of GP Strategies and its inclusion for the full year. And I will cover the other metrics in more detail in the following pages.

In the chart on the left hand side, we can see the increase in revenue in all reporting segments. Whilst the full year of GP Strategies is outstanding, we are pleased to see continued growth in software and platforms revenue. Now looking at the middle chart, it is clear that we continue to be predominantly exposed to the U.S market. And despite the UK absolute revenue more than doubling, on a proportional basis, this has decreased to 11% of group revenue. And the rest of the world is now 21%, with operations across 35 countries, giving us the ability to deliver to truly global companies who want localized delivery. Looking at the chart on the right hand side, we see the split of our transactional and SaaS and long-term contract revenue. With the inclusion of GP Strategies for the full year, we continue to see high levels of SaaS and long-term contracts with 71% for 2022, giving us confidence on the visibility and security of future revenues.

Now moving to look at the reporting segments and starting with GP Strategies. The 2021 figures shown here in light orange are pro forma figures for the full year and GP Strategies’ initial contribution for 2021 since acquisition on October 14 shown in dark orange. In 2022, revenue increased on a constant currency organic basis by 6% for the full year and 5% for period of ownership. Organic revenue growth for the year was driven by increases in multiyear managed learning service customers in the EMEA and Americas regions alongside large project organic growth and effective people and enterprise technology services businesses. We are very pleased with the continued margin improvement during 2022 through the commercial transformation program with full year margins at 12.2% and Q4 exit margins in the mid-teens as expected. And Jonathan will talk more about the commercial transformation program shortly.

As we move to software and platforms, we saw a step up in revenue to £149.7 million through a combination of 5% organic growth, the full year benefit of 2021 acquisitions, and FX tailwinds due to the strength of the U.S dollar in 2022. Good growth in Rustici, Breezy and Watershed for the year was partially offset by an expected 10% reduction in PeopleFluent due to the higher churn from customers with less complex needs. Excluding PeopleFluent, organic growth for the remaining businesses in this segment was 12%.

Continuing to focus on this group of businesses excluding PeopleFluent, H2 2022 compared to H2 2021 saw very strong performance of 16% organic growth. And H2 saw more moderated growth at 8% as the macro environment and strong H2 2022 reduced Breezy’s growth rate compared to H1 and the higher impact on churn and reflective technology clients was felt. Adjusted EBIT increased 11% in the year to £40.3 million and adjusted margin declined 100 basis points reflecting the blend of the portfolio businesses and their varying margins and growth rates.

Turning now to look at Contents and Services, excluding GP Strategies. Revenue increased due to a combination of the benefit of PDT for full year, good growth in Preloaded and Affirmity and FX tailwinds. This was partially offset by organic revenue decline driven by lower services revenue from software businesses due to large implementation projects in 2021, not repeated in 2022 and clients taking longer to precede projects into delivery phase, particularly pronounced in LEO in H2. Adjusted EBIT grew 10% to £11.7 million, with margins increasing to 24.4% as the portfolio mix benefited from the growth in the higher margin, Preloaded and Affirmity businesses.

Now moving to look at cash for the year. Adjusted operating cash flow increased to £38.9 million, an increase of 88% reflecting the increase in adjusted EBIT partially offset by working capital investments and other operating cash items broadly offsetting each other. Cash conversion for the second half was better than H1 as expected, finishing at 82% for the full year compared to 60% for H1 and reverting to its normal 80% range. Net interest paid reflects a combination of the higher debt levels following the acquisition of GP Strategies and higher interest rates. And the interest reflects the cash interest paid for the first half of the year as the loan interest was fixed for 6 months in July and payable in January.

Increased tax payments reflected large size of the group. Integration and transaction costs primarily relate to the GP Strategies acquisition and remain in line with expectations as the business continues to prepare for the integration of LEO and PDT announced at the beginning of 2023 and work on its go-to-market strategy. We continue to expect total GP integration costs to be in the region of $30 million. Earn-out payments relate to Breezy, PDT, eCreators, eThink and Watershed for the FY ‘21 performance and the proceeds from net asset sale relate to the disposal of GP’s NAS JV, which was completed in April. Free cash flow for the year more than doubled to £50.3 million.

Looking at the balance sheet and net debt, the graph at the top of this slide reflects the movement in net debt from the end of December 2021 to December 2022. Free cash flow is as described on the prior slide and share capital reflects cash income from the issue of employee share options. £9.1 million dividends paid in the year reflect the final 2021 dividend and the 2022 interim dividend. And as previously noted, we rolled the interest period in July for 6 months and the £4.5 million reflects the 2022 portion of this, which is included in net debt calculation and was paid in January 2023.

Our loan facility is all U.S dollar based and the FX impact of €23 million on the debt balance more than offsets the FX benefit received on the cash balances. We finished the year at £119.8 million debt compared to £141.4 million at the beginning of the year. And this translated to a significant deleveraging through the year from 1.8x on a covenant basis at the end of 2021 to 1.1x at the end of 2022. This is broadly in line with our targeted 1x year end net debt leverage at the beginning of 2022 prior to significant strengthening of the U.S dollar.

Moving on to briefly talk about our debt facility. Our banking syndicate included Silicon Valley Bank with this SVB UK holding the loan. Following the device of SVB in mid-March, HSBC UK Limited purchased SVB UK and our debt facility has remained intact with SVB UK continuing as the facility agent and security agent of the debt facility. During 2022, we repaid Term Facility B of $40 million and £9.6 million of Term Facility A for the first of the ongoing quarterly payments of $9.6 million.

As we now look at earnings and dividend growth, as expected, there was a material improvement of 62% and adjusted diluted EPS following the significant improvement in adjusted EBIT. Incremental interest related to the new debt structure, a higher adjusted effective tax rate and a higher share count moderated the diluted EPS growth in comparison to adjusted EBIT. Reflecting the significant uplift in diluted EPS in 2022 following the transformational acquisition of GP Strategies, the Board has proposed a 1.15p final dividend taking the full year dividend to 1.6p. The final dividend will be repaid – will be paid by July 14 to shareholders on the register on June 23. Return on capital employed has improved as expected as we saw the operating improvements in GP Strategies and other improved profitability dropping through to the bottom line.

And finally, a few points into the guidance. For 2023 adjusted EBIT, we expect an H2 rating due to the continued margin progression in the second half of 2023. And despite challenging macro environment, we expect to deliver high single-digit adjusted EBIT in 2023 supported by strong pipeline, particularly in GP Strategies. With respect to finance charges, our debt is currently on a floating basis and with interest rate increases we estimate our finance charge will be circa 7% for 2023. We continue to expect our adjusted effective tax rate for 2023 to remain in line with 2022 and be in the region of 27%. We have included an estimate of our dollar FX adjusted EBIT sensitivity for guidance, which is increased due to the growth of our U.S. business. And finally, for non-core businesses, we have added some additional detail for modeling purposes.

And with that, I would like to hand back to Jonathan to take you through the strategic review.

J
Jonathan Satchell
Chief Executive Officer

Yes, thank you very much. Ladies and gentlemen, I think as you can see, these are a very good set of results for 2022. And of course GP Strategies is a big part of that. So let me dive in a little more to a bit more detail around the progress that GP made and some of the achievements that it made as well.

Firstly, pro forma growth, which obviously is a best measure of each year-over-year performance, was 6%. I think it’s often felt that, when LTG acquires businesses that it believes it has a transformational capability around often that’s because they have been growth impaired PeopleFluent software business being a prime example of that. Well, I am pleased to say absolutely not the case for GP that business exceeded our expectations. Yes, of course, the margin improvements came through as expected. But also it produced more growth than we were planning for, we were estimating that we might see somewhere between 2% to 4% growth and we saw 6%. And that growth obviously – the lower rate has continued into this year as well. So, I think that’s very encouraging indeed.

We did a bit of brand rationalization in the business, and most importantly, our enterprise technology implementation business that was until now under the GP Strategies brand became effective People as differentiated. And we have spoken many times about the depth and strength of the long-term relationships that GP enjoys with its customers, many of them in its top 50 customers and the tenure of that is around about 16 years. Well, it’s relationship with General Motors actually goes back four decades astonishingly. And clearly, the relationship is at an all-time strength with this for the sixth consecutive year, they have won GM Supplier of the Year and that is not just an easy thing to win because you have been around a while. The way that they actually do it is very scientific measurement system with a lot of feedback points within the organization. And so we are very proud to be continuing to receive such an accolade.

I talked about organic growth that of course partly was driven in 2022 by sales achievements that GP made in 2021 or the beginning of ‘22. I am pleased to see that those achievements continued through the year, with around about $200 million of net new contracts in the year, that’s the multiyear value of those contracts, not just single year value. But even so, those new wins are flowing through to our organic revenue growth that’s continuing to this year. And as I said before, the one thing that GP is very good at is not just winning net new business, but also expanding the spend of its existing clients.

We have talked a lot about margin and actually, I am quite looking forward to the point whereby GP’s margins are no longer a big topic of investor conversation, because they actually are done and dusted. We are still on that journey. Just give you a little bit more color, you have all heard about this. So, it really is merely complimentary, but we did take the margin up to the 12% that we suggested we would across the entire year Q1 was low as we were disrupting.

Okay. It’s back. Okay, apologies for that. We are having some problems with audio for a moment. And so we have trailed the margin story quite a few times Q1 was challenging. In that, we put a number of changes into the business which reduced margins for a while from the exit run-rate that we enjoyed at the end of 2021. But from Q2 2022 onwards, we saw a steady and linear growth in margins through to the exit run-rate of about 14% as predicted at the end of last year.

Interestingly, I think we have said a number of times, our margin improvement journey this year, of course, are the lower trajectory, we are expecting a couple of percent has taken a slightly different route if you like, because the good practice that we embedded in the business last year has continued, but we have made some structural changes this year and that GP has become the entire content and services capability of the group. So we have merged LEO and PDT. Preloaded is the only services business that’s still to go across the GP sometime later this year. But GP and GP content division is now merged with LEO and PDT.

As expected when you do that sort of thing, how LEO starts, who have always lived very high margins are working on different systems, because they are all embedded within GP systems now. We are bound to see a little bit of lack of productivity or lower productivity whilst this is happening. And therefore, we have seen margins abate very slightly. And we are working through that in Q1 and we fully expect Q2 onwards to be back on that improving margin journey. Such that GPs margins will start to move towards LEO’s former margins. So, it’s absolutely as planned and that’s what we are expecting to occur.

The other thing of course that we did was launch GP Strategies as LTG’s market facing brand for the entirety of its solutions. This was something that had a lot of careful consideration in the search and the feedback that we are getting about has been very strong and very positive. One of the things that we find customers say to us a lot is that they are large international customers are fed up with dealing with a large roster of multiple suppliers, not only having to procure from them, but also manage them to provide their individual services and software and also work in conjunction with each other. We of course remove that obligation and difficulty and we are also enabling procurement to contract with us on a single source contract, which is proving very popular indeed.

I think you are more than well aware of the different services that we provide though the presentation gives you a sense of all of those different capabilities both services and technology. If I move on to look a little bit more about one of the rationale for doing the GP Strategies deal and what it added to LTG, this is of course the opportunity to cross-sell and expand our offerings within the existing customers that we have got. You are well aware of those top 15 clients, 93% of them already take something more than just a single service or software from us. There is really long tenure with them. And 7 of them already, half of them already using an LTG technology, so we are we are making some progress, we actually were fortunate enough that we carried into when we acquired GP, we had some commonality of clients. So, some of those seven were already pre-existing. We are seeing no decline at all in the market demand characteristics. So people are quitting work where they do not feel that they are being appropriately developed. And this is a concern for C-suites that we continue to see very much at the top of their mind, particularly as even though we may be in tighter economic circumstances, there is a genuine desire by employers not to lose their existing talented staff because they know that the up skilling challenge, the hiring and up skilling challenge is really hard. And also the workforce is shrinking. So they are very aware of the challenges that would face them, if they reduce the size of their workforce, or they don’t do enough to retain them properly.

So those characteristics, which are very positive for us, are being maintained. And from a cross sell perspective, just want to talk to you about a couple of different cross selling stories that now exist, we are making good progress with cross selling. You will see for instance, that we have seen a 29% increase in the number of GP clients that now have an LTG product or service over the last year. We are in 168 of the global 500 companies, which is a very significant proportion for any customer, any supplier and 86% of the LTG top 100 clients have more than one product or services that there is a great opportunity for us to cross sell there.

Just looking at a few of the stories that we have not told you before. You have heard about AICPA, you have heard about very large energy companies that take multiple products and services from us. But also, we are doing the same thing with a large global bank. Combination of our content and services team and also, our analytics tools are making a big difference there. We have taken a diversity inclusion, [indiscernible] inclusion training into a long standing defense client of GP, a global investment bank now uses both reflective and we will see uses GP services to support their global employee on boarding experience in a multimillion dollar contract. And a couple of different global automotive manufacturers are using a combination of technology and services from us. So we really are making significant strides into cross selling, and we expect substantial progress on that matter this year.

If you look at the bottom right hand corner of this slide, one of the things that I am taking about and this supports something that [indiscernible] that our GP leadership colleagues said from their experience of prior economic downturns in the Managed Learning Services element of their business, not something that LTG has experienced before. Trrainingindustry.com, which is the probably the most authoritative research house for the economics of our industry, American based organization has for some time said market size is around about $350 to $400 billion. The biggest part of that market by a country mile is about $300 million of internal spend and then about $100 billion of external spend. What they are seeing is a shift where 1% to 2% of the internal spend is being shifted to external. So we are very heartened by the potential growth in the external market being caused by that changing in buying characteristic. This is a slide that you will be familiar with, you have seen it a number of times, we have just ordered it slightly differently for you. We find great comfort in the diversification of our customer base. This is the entire business so includes GP Strategies. You will see that automation whilst the largest type of customer that we have, were also very strong and other segments like manufacturing and aerospace, finance, insurance, FMCG, media and marketing and government. And then only so that retail off into the other segments. So we really are nicely diversified and we are seeing some significant growth in government spending, particularly in the defense sector in the U.S.

You are aware of continuing desire and strategy to build the business in organically. It’s fair to say that there are a number of opportunities that we are looking at the moment. We are mindful of our constraints around how we finance those with our internally generated cash and debt availability; I am very pleased with the speed at which we pay down our debt last year. So we do have firepower. And we are considering a number of opportunities almost all exclusively in the software space. We are not rushing, I don’t think we need to rush, I do see signs of some distress, particularly amongst those businesses that are not yet get cash positive. The follow-on financing market is pretty difficult for those organizations and we may well be able to take advantage of situations there. But we are actively on the trail for further acquisitions along the lines of the target to sectors that we have described to you before.

We make a number of big player – the fact that we are I think reliably able to improve the operating model of the businesses that we acquire. I am not a laser pointer around GP Strategies; I reiterate all the fantastic job. The entire team has done in achieving that. And sometimes it feels a bit like it perhaps isn’t as recognized and appreciated by the market when you see some share price reactions and so on when you deliver such strong results, but there we go, a more than doubling of profits achieved by a business that is gone from circa 5% to circa 15% margin every year is I think, pretty phenomenal achievement, and well done those people.

And we fully expect to continue that. So without any further acquisitions this year. We still expect substantial growth in our adjusted EBIT. Yes, of course, we will be facing higher interest charges this year than last year. That is a fact of the world and the macro environment. But in terms of the operating performance of the business, we still see modest to reasonable revenue growth. And I think very substantial and significant EBIT growth. So we are very comfortable and confident about that.

We continue to make progress on our ESG priorities and have high regard for what the importance of that. Across the bottom, you will see our key here ESG initiatives, of course, we are in the business where we can genuinely make a difference for our clients in the way that they deliver on their ESG initiatives. The delivery of learning and development people, of course, is a key priority. We focus on taking care of our own people. And indeed our flexible working policy in everything has been very well received and works well and has a number of beneficial effects and knock on effects on our carbon footprint, etcetera. We are putting in more measures for the way that we look at our environmental sustainability. We of course are very conscious of our [indiscernible], security standards, and that will always remain so. And then finally, we are very respectful of the government’s [indiscernible] of running a business like this.

So in summary, we look back on a very positive year achievement in 2022. I think the cash conversion something that, I have mentioned, but it matters a lot in terms of continuing with our buy and build strategy, particularly in this environment where we wouldn’t use equity to finance acquisitions unless it was a compelling reason to do so. We are very satisfied with the margin improvements in GP. And that will more modestly continue this year as predicted. We are a much bigger scale business that gives us opportunities to win work that frankly is not possible elsewhere. We are looking at the moment a significant pipeline of large opportunities, some are on stage and these are multi 10s of millions of dollars contracts, one of which is a very large North American Telco, that may well require something in the region of $10 million of customer learning content to create to be created in a matter of 6 to 9 months. Well, I can tell you very simply, we haven’t won that yet. But there are very few other companies that could actually win something like that. Because they simply will not have the scale of the resources that they would need to allocate to that work. We are excited by the opportunity ahead of us. We see relative resilience in our customers in the market. But of course we are very mindful of the macroeconomic backdrop. We have been given a cautiously optimistic statement for this year. And I have anticipation we will either deliver on it or be ahead of it.

And with that, let us take some questions. Thank you very much.

J
Jemima Gurney
Investor Relations

Good morning. My name is Jemima Gurney from FTI Consulting. [Operator Instructions] Our first question is from Jessica Pok. Jessica, you are now live, please ask your question.

Jessica, I don’t’ thing we have been able to connect you at this point But we can read out your – read out your question as it is written here. The first question from Jessica is do you have any stats as to what the corporate learning market is forecasted to grow this year? As a second part of the question, Jessica’s, also if you could provide more color on the contracts in the pipeline for GP Strategies? And how much of these are included in guidance? F1 is this upside risk to guidance.

J
Jonathan Satchell
Chief Executive Officer

Okay. Yes. Morning, Jessica. the couple of things, I believe the growth rate for the external segments of our market is somewhere between 2% to 3% forecast this year and next. That is sort of magnitude. The contracts that are in the pipeline, ranging in size and variety, there are three – that come to mind that are of great interest to us. One is within the high volume existing customer, one of our largest customers. Two, again, this characteristic of consolidation that happens during more difficult challenging economic times, there is a possibility that they are saying talking to us about the possibility of consolidating some of their supply chains through us because they want to leverage the management capabilities that we have got and look for some economic savings because of that. And that could be as much as 25% uplift in the current value of that contract, which is very meaningful indeed. So that is an existing customer, the other two would be brand new logo wins, both of which are very meaningful in their [indiscernible] in fact, one I alluded to earlier, which was this North American Telco. So those are the sorts of contracts that we talked about, of course, are many other much smaller contracts. That is one of the potentials in the pipeline. And across our software businesses as well, I think you mentioned that people from business has launched properly now launch to the market, it’s new recruitment software, which replaces the old solution, which was a cause of much churn, this new solution is based on our Breezy software. And but it’s an enterprise version. So it’s, it has much more functionality. And it is receiving [indiscernible] at the moment and selling very fast indeed. So we have got a good pipeline for that as well alongside other things. So we are comfortable that pipeline in terms of the very large contracts, they are not factored into guidance, because it’s these are – as some people in the market would call them their whoppers or whatever it is. And I think it would be foolish to factor those in between we may well not, not win them.

J
Jemima Gurney
Investor Relations

Thank you. As a third part, Jessica has also asked if you have any thoughts on Reflektive for the year?

J
Jonathan satchel

Reflect on Reflektive. So yes, Reflektive, continues to the – we worked on to the integration into our Bridge software. So we are consolidating and integrating our software platforms quite considerably at the moment. And eventually Reflektive will just exist within Bridge, but that will take some time. So that is our focus. Reflektive did very well it was a Silicon Valley startup. It did very well a few years ago in garnering customers from its sort of fellow early stage technology company sector. So it seems some enhanced churn in those customers because simply obviously tightening their belts and they can’t afford things. In it is more established enterprise customers, such as a very large investment Global Investment Bank, we have a very stable customer base. So Reflektive is probably going to track sideways this year. We would not expect it to advance but it is a relatively small business and the entire sort of mix of the portfolio. What we are very happy about is it brings a very enhanced performance management and feedback mechanism to bridge without having to build it out from scratch.

J
Jemima Gurney
Investor Relations

Thank you. Our next question is from Gareth Davies. Gareth, you are now live. Please ask your question.

G
Gareth Davies
Private Investor

Good morning guys. Can you hear me?

J
Jemima Gurney
Investor Relations

Yes, I believe we can hear you now.

G
Gareth Davies
Private Investor

You can hear. Okay. Perfect. I want to first, look, Jessica just asked it, but be slightly cheeky and ask a different question. Just on software and platforms, you have kind of touched on a couple of the elements in your answer that Jessica a minute ago. But can you, one, we are thinking about the shape of growth this year, and how much visibility you have got there? What are the sort of moving parts? And clearly that’s quite a positive message on PeopleFluent? And how do you see that impact, that’s underlying performance from PeopleFluent. And then two specific, one is forecasts, just in terms of working capital, there was a bit of seasonality in 2022, in terms of sort of bigger outflows, H1 and then came back in H2. Can you just talk about that in ‘23? Do we need to be mindful of that in terms of the shape of debt, H1 versus H2, in combination with an improving margin? And then the final one came through from a client and was just in terms of contingent liability, I mean you typically don’t structure deals with big contingency in them. Is there any outstanding from memory, that is not anything significant, but can you just confirm that? Thank you.

J
Jonathan Satchell
Chief Executive Officer

Okay. Gareth, good morning. So, dealing with this sort of breakdown of what we expect to be software company growth this year. Rustici, and Watershed, who of course are stalwarts of our growth will continue to feature. I think it’s fair to say Rustici, now we believe grows as a reasonably absolute level of around about $2 million to $3 million of revenue growth a year of absolute revenue. So, of course percentage is coming down because Rustici is now a mid-$20 million revenue business. But it is just metronomic in the way it delivers that growth, which is fantastic. Watershed continues to grow nicely. Our other very fast growing business is unpredictable at the moment and that’s Breezy. So, just to remind you, we bought Breezy around about $3 million revenue in 2019. It peaked at $16 million of annualized revenue in the middle of last year, and actually ended up in the sort of mid-$15 million, because in the second part of the year, it saw quite a lot of churn, or rather than churn, it’s actually just pausing of customers. And bear in mind, these are mostly small and medium sized American businesses, not completely, but majority are, who are using it to hire handfuls of people. This is not a mega big recruitment tool. It is a tactical applicant tracking system, and very well regarded in that market. So, we have got plenty of customers at the moment that have not switched off their data, they don’t want to lose all their records, nice thing, but they have paused their credit card payments, and they are not using the service because they are not hiring people for obvious reasons. It is very hard to predict when that will just return and we expect it to be quite hockey stick when it does. What’s curious is that we are seeing that pausing churn for what a best world temperature. But we are also offsetting quite a lot of that with new wins. So, the messages that come through ask, the performance of our Breezy business are genuinely mixed. And at the moment it is sort of moderately tracking sideways in that sort of $15 million range. We expect it to break out of that upwards at some point. And clearly, depending on how far into the year we go before it does that will have an effect on software and platforms growth or not in this case may be. So, that’s a difficult one to predict. And I genuinely wouldn’t call it, I don’t think the business is in control of that. I think that’s very much a market thing. People know it’s interesting, we are delighted that we have got a product that’s a new product that is being so well received. Of course, we still have churn, and therefore I don’t think that this is significant enough. If the original recruitment revenue product revenue was only modest is about 10% of the overall PeopleFluent software revenue. So, this is not going to move the dial on the overall revenue, and therefore we don’t think it will affect our prediction of around about that 10% decline rate at the moment. But this is great to see a new underpin that we bring out and that we are bringing out, that team is capable of bringing out a product that hits a very good market fit and is well received. So, we see that as an absolute positive, but I don’t think we are yet factoring it into the sort of volume that will cause us to adjust our expectations over the time in the revenue. Kath?

K
Kath Kearney-Croft
Chief Financial Officer

Yes. So, Gareth, on working capital and cash conversion, we do still expect to see some cyclicality in H1 versus H2. The timing of which will depend on how Q2 pans out in terms of that growth during Q2. But we are expecting to see a lower H1 cash conversion than the full year possibly not as low as we saw last year. But again that will depend on the shape of the business during Q2. With respect to contingent liability, we do still have an awesome place for PDT and eCreators. They are linked to revenue growth. And so they will only pay out on performance of that business. But they will be in place for the next couple of years.

G
Gareth Davies
Private Investor

And they are relatively modest...

K
Kath Kearney-Croft
Chief Financial Officer

Yes. I mean there is a cap. I can’t come up with the total amount, but it’s – it will be in single million dollars combined. But again will be based on performance.

G
Gareth Davies
Private Investor

Always be very happy to pay them.

J
Jemima Gurney
Investor Relations

Our next question is from Yanni [indiscernible]. Yanni, it does not appear that you have a microphone connected. As such, I will be reading out the question, which is in two parts. Firstly, as we move into Phase 2 of GP Strategies integration, what are the risks and opportunities you see? And on to the second part, secondly, ex-M&A, it appears your balance sheet firepower will be quite significant come year, and what should we think about as the order of priority for use of this balance sheet capacity? Is acquisitions or shareholder returns too simplistic? Are there any internal investment opportunities you see?

J
Jonathan Satchell
Chief Executive Officer

Kath, do you want to do that?

K
Kath Kearney-Croft
Chief Financial Officer

Second one?

J
Jonathan Satchell
Chief Executive Officer

Yes.

K
Kath Kearney-Croft
Chief Financial Officer

So, we are expecting on an organic basis to deleverage during this year. I am not expecting Jonathan to keep the checkbook in the draw. And therefore I do expect that we will have made some by the end of the year. And so where we end up on the balance sheet will depend on what that looks like. Our focus is still on M&A, making sure that we can add to the business, we still see opportunities in our space, with the focus still on the software and platforms. Clearly, there is always jostling internally for an investment for products. And we have to balance that in terms of where we get the best value for our money and for shareholders money.

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Jonathan Satchell
Chief Executive Officer

With regard to the GP margin question, I don’t know whether you entered it before, I gave a bit more color around GP margins. But just to reconfirm that, the changes that we made last year were broadly around a focus on improved procurement, and the fiscal discipline in the organization, and then also a real focus, an absolute laser focus on utilization. And the use of subcontractors appropriately and nothing inappropriately, that would really knockdown to one of the big changes came in. And we were – there were also some low-hanging fruits in terms of the cost of not being a public company, for instance, which obviously might repeat. This year, we have always advertised that the improvement would be less significant. We have done the big leap, so it’s a couple of percentage points. And in a way, you could argue, these are now the marginal gains that are harder to get. There is one area which I alluded to earlier, which is the big area of concentration, which was the – is the final if you like gross margin improvement, which is that the GP content development team, which is very substantial in this largest content actually in the world, use different processes and a different approach to things. And we believe that we can help them be more efficient in the way that they do certain things. LEO has always been proven to be a very good business of achieving high productivity and very reliable high gross margins out of its work. And so now they are merged together, the methodologies and the approaches that GP – that LEO takes have been incorporated within GP. But when you do that and train those in, you see a little bit of a sort of productivity hit, if you would like sort of the irony is that as you are striving for more productivity, you actually go backwards for a temporary kind of period. The other thing is we have actually taken the LEO team slightly backwards, because they are also now working within GP’s systems, not within LTG’s. And that’s obviously very different for them. And it takes a while to get used to those things. And indeed some of the systems that project managers use to be very quick to approach margin changes. This is often we are doing fixed price contracts with variable labor inputs. And so you need to be very agile about the way you see if you are burning too hot on a certain type of labor on a particular project. You need to be able to adjust for that. The systems are capable of telling us that in GP, but they are different. They do it in a different way than we had in LTG. So, people are getting used to that and perhaps haven’t seen all the signals immediately. So, we have seen a modest gross margin decline in the first couple of months of what we now call GPLX, which is the LEO and GP content division combined. Fully to be expected, and we are already seeing that abate over the last couple of months. And we will see it improve throughout the year. So, that’s a big factor, because don’t ignore the fact that GPLX is a $90 million revenue division, so it’s meaningful. And so that’s a big part of the story of the margin journey. There are a few other things actually that are coming towards us, which are long-term contracts that GP was entered into, that will roll-off this year that we will either change the terms or not re-enter. These are more modest savings, but they are all contributing to the margin improvement. And indeed, it’s fair to say real estate slimmed down is a big factor as well. The average tenure of our lease is round about 5 years. So, every year, we are seeing about 20% of our office facilities come up for renewal, and we are giving very careful consideration as to whether we renew them the same size, less size or not renew them at all. So, if you add all of these things up, they are relatively minor other than the GPLX aspect, but they all contribute to full confidence. So, the continued expansion of GP’s margin is obviously a much lower increase than the last year. That’s enough detail to give you comfort.

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Jemima Gurney
Investor Relations

Our next question is from Thomas Singlehurst, which I will be reading out. The question is in three parts. First is, can you talk about the visibility on growth? What percentage of revenue effectively is already booked? Second, are there any big set piece opportunities in terms of new contract wins, or is the focus more on expand and land? On the third, which may have been addressed already is when you think about M&A, what areas are you focusing on in terms of capability and/or geography?

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Jonathan Satchell
Chief Executive Officer

So, as I migrated as the subsequent questions in a minute, holding all these questions in my head, I clearly don’t have a good enough brain for it. So, in terms of the first question was visibility on growth. Well, the revenue that we already have booked, we told is in the second 70% of all of our contracts are long-term. So, we come into the year feeling very comfortable about that. Naturally, we also have a long-standing backlog order book from the sales that we have made in the previous year of more transactional projects. When we formed the budget, which wasn’t quite at the New Year, it took us a month or so into this year before the budget was fully finalized. Of the £600 and some odd million worth of revenue, we were well towards £500 million that we felt very comfortable, that was visible and understood. And then the rest was the gap that we needed to sell to. So, we have a very high percentage of overall revenue visibility and feel very comfortable with that. It’s been one of the things that we have tried to convey to the market a number of times, although we are now a much lower proportion of SaaS revenue. GP business enjoys over two – about two-thirds of its revenue from long-term contracts, which are actually ironically not longer term, on average, 4 years to 5 years, then our SaaS business, which about 2.5 years. Of course, the differences in those contracts, there is more margin variability than there is in the SaaS contract. But we have already demonstrated our ability to regularize, and make those margins much more reliable. And we have no doubt that that will continue. So from our perspective, we get a lot of comfort on both sides of that. What was the next part of the question, please?

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Jemima Gurney
Investor Relations

Are there any big set piece opportunities in terms of new contract wins, or is the focus more on expand and land?

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Jonathan Satchell
Chief Executive Officer

I think perhaps you put this question in, before I spoke to the big pipeline opportunities. So, because I think I have answered already, we have certainly one major and a number of more medium sized opportunities with existing customers, which naturally we feel more comfortable about winning. We are not competing for them other than whether the customer size to do it or not. So, there is – there will always be in the GP business and elsewhere in LTG, a London expand mentality and we enjoy good success there. But I am heartened by the number of new logo opportunities that we have at the moment at a medium to advanced stage in the pipeline, some of which are very significant indeed. So, it’s a combination of both. And the final part of the question?

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Jemima Gurney
Investor Relations

M&A…

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Jonathan Satchell
Chief Executive Officer

Yes. Again, I think we might have covered this before the questions was – after the question was put in. But as I have said, we are in reasonably early to middle stage conversations. One of those conversations with software businesses that we like, we think they fill some very interesting gaps in our portfolio. Areas that we are particularly focused on are the entire sort of ability to deliver the skills agenda. Companies are very focused on assessing what skills they have, what skills gaps they have, what they need, and then finding a way of delivering against those. We have much of the ways of delivering the opportunity to close the skills gap. That’s what we do, we are learning business. But we haven’t at the moment got a technological capability, perhaps AI driven of actually understanding precisely what the current skills capability is, and therefore what the skills gap is. And that’s a moving feast and you need technology to help you do that, so that’s an area of focus for us.

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Jemima Gurney
Investor Relations

Thank you. That was the last question. We will now end the call. Thank you for joining us.

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Jonathan Satchell
Chief Executive Officer

Thank you.

K
Kath Kearney-Croft
Chief Financial Officer

Thank you.

All Transcripts

2022