IGNITE LIMITED — Interim / Quarterly Report 2014

Feb 18, 2014

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Managing Director on 1H Results and Outlook

Open Briefing interview with Managing Director Kym Quick

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Clarius Group Limited Level 3, Suite 302 70 Pitt Street Sydney NSW 2000

In this Open Briefing, MD Kym Quick discusses:

• Half Year Result and Revenue

• Cost Savings and Efficiencies Gained

• China, New Zealand and IT Improvement

• Market Outlook

Record of interview:

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Clarius Group (ASX: CND) today reported a net loss after tax of $1.48 million for the half year ended 31 December 2013, compared to the previous corresponding period’s underlying net loss after tax of $0.1 million. This figure is within the guidance statement of 4 December, of $1.3 to $1.5 million net loss after tax against a continuing landscape that has proved difficult for employment growth. Can you comment on these results given the prevailing environment and compare the make-up of this result with the previous period’s figure?

MD Kym Quick

In this half we have really seen the impact of a continuing local decline in permanent recruitment conditions which we have experienced over several years now and had deteriorated further over the past few months. We saw a lot of conservativism and a lot of scepticism around the market and obviously an election in the middle of that period which contributed to the uncertainty that a lot of businesses were feeling. Adding to that over the last 12 months, and in particular the IT sector, we have actually seen a decline in contractor numbers on the back of a lack of confidence in the market by our clients. So compared to the previous half figure there has been a negative flow on effect.

On the flip side of that, our businesses in Asia showed much stronger trading conditions and China was able to contribute a more significant permanent hiring revenue number. We saw the China business transition to profitability in the last half and that will continue into this half. The contribution of the higher margin permanent revenue from China has meant that the impact of the revenue reduction on Gross Margin for the group has been less volatile.

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Revenue for the half decreased almost 26% to $91.3 million from $123 million in the previous period. What was the main contributor to this decrease and what is your outlook for the coming half? Is there an attributable structural change that has impacted this revenue or is it reflective of the depressed hiring environment?

MD Kym Quick

The decrease was largely a result of declining contracting revenues. However the decline we saw in the Australian business was, from a permanent revenue point of view, offset by an increase in the permanent revenue from our offshore businesses. So the majority of that

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decline has been in the contracting space and as I previously mentioned, the majority of that contracting decline has come from the IT sector which is obviously a significant part of our revenue streams. I think that’s reflective of a combination of things, yes, definitely some structural change was attributable to that, some areas of our contracting revenue has shifted from sourced contractors to other methods of engagement. So the majority of that revenue decline is reflective of the depressed hiring environment, however I think we have started to see very early signs in this second half of some recovery in contractor demand.

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Cost savings through restructure have been considerable and have been supportive to the overall result and savings of approximately $4.0 million in annual costs. Is there any room for further cost efficiencies or have you reached your cost savings target? How does this set the company for revenue growth and profit margins in the future?

MD Kym Quick

We have done some significant work around costs and obviously a lot of that change has been in labour costs. A considerable amount of that $4.0 million has been in salary savings across the last 12 to 18 months. I think it’s fair to say there’s always room for more efficiencies and we are certainly reviewing our cost base on an ongoing basis. Our focus is now heavily on productivity assessment of the business and in making sure that our sales force is performing at the level required. While we will continue to monitor our internal back office operational costs, it’s fair to say the majority of the work has been done. There will be some further savings and some further streamlining through the technology that we are implementing in our back office. I think it’s important to understand the nature of the business we are in - it’s a sales business and sales require a sales force. I feel that there is very little more within that sales force that we would be looking to do other than achieving those efficiency and productivity improvements.

The salary costs that have come back into the business are as a direct result of our growth in China, where we are now starting to see productivity improvement. Importantly, Clarius is now leveraged for growth and from my view of the business and where we sit today, we are very lean and we are well placed to capitalise on market improvements and other opportunities as they present themselves.

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This half result sees a substantial increase in the profit from the company’s China operations with revenue reported at $4.1 million, an increase of more than 100% on the previous period of $1.7 million. Is this revenue growth trending smoothly and what is helping to drive this growth? Is the company’s China strategy on target and capable of making a significant impact to the bottom line in the near future?

MD Kym Quick

Yes, the growth is trending very smoothly, we have seasonal patches as we do in every marketplace but over the last 12 months we have significantly increased our headcount there and the month on month growth has been very steady. Our China operation delivered its best results to date in January off the back of record results in December, so it is certainly trending in the right direction consistently. February has a seasonal downturn with the Chinese New Year celebrations but we expect March to be very much back on track and their contribution to the second half of FY14 being significant. The China business’ operations success is a result of productivity improvements we have been working on over the last 12 months. So yes, the strategy is on target and the business is definitely capable of making a significant impact to the bottom line and I would expect that to happen in this half and beyond.

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New Zealand has also been a positive contributor with revenue of $3.5 million, up from $2.7 million in the prior corresponding period. What is the outlook in the New Zealand market and what is your view on the company’s potential for operating improvement in that country?

MD Kym Quick

New Zealand has been a really good story for us this year, after several years of disappointment. Our presence there is predominantly in the IT space and the IT market in New Zealand appears to be showing very good signs of improvement and growth so I am confident that the trends we are seeing in New Zealand will continue and again, further productivity improvement will show benefits in the second half. The first half we saw several changes in the team which is now stabilised and I think both our fiscal year and calendar year will see some good improvements in that country. Over the course of the long term I believe there are definitely some good opportunities for us to grow in that environment, even outside of our traditional IT business there.

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Clarius began rolling out a new payroll system in 2013, on a brand by brand basis. What benefits are you seeing from this rollout, is there an immediate measurable difference and when will this program be complete, with the whole company on the new payroll system?

MD Kym Quick

We are seeing some benefits early on and those benefits are largely around the greater efficiency in respect to the automation of our payroll. This enables significant head count savings but also provides a scalability benefit. As the market and the contracting business starts to ramp up we will have the capability to process a far higher volume payroll for no additional cost, in fact less cost, than we have historically been able to do. Combine this with the fact that our invoicing process is now far more accurate and far more timely, this essentially means we will see that positive impact flow through to our cash flow. So while it’s still early days, there are certainly lots of measurable and tangible positive differences that we are starting to see. At this point in time we expect the program to be completed in the latter part of the calendar year when we should see the whole organisation operating the new payroll system.

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How are you seeing the current domestic recruitment market environment? Do you see the recruitment market now beginning to react to the new government or is there still some trepidation in industry with regard to new hiring? Where do you see the major and ongoing focus of new recruitment in 2014?

MD Kym Quick

Most of the market has been showing signs of uncertainty, however having said that, we are observing an underpinning of positive sentiment coming through since mid January. In fact in late December we saw a surge in demand which is unusual and that flowed through to January. I anticipate that some of that will be a catch up from activity that was held off in the last half and has now been pushed from November/December into January. Overall, our clients are starting to talk more positively about their hiring expectations in this current year and we’re actually starting to see that translate into the pipeline.

I don’t think that the recruitment market is really reacting to the new government yet. I think there is still a bit of trepidation and I think it’s fair to say, post election, we actually saw no change whatsoever in clients behaviour in the first half. We expected there to be a slight spike in demand with new confidence in the new government but that certainly didn’t translate at all at any time in the last half. Contributing to this could be the fact that the election was finalised in the period close to what has traditionally been an early Christmas season over the last couple of years

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In terms of ongoing focus of new recruitment in 2014, I think we will start to see the IT sector start to improve significantly as a lot of organisations have shelved projects and put projects on hold for the last couple of years and they are now at a point that they are willing to move forward with some of these initiatives.

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Of the Clarius Group brand suite, what is the breakdown in contributions and what comment can you make for their outlook in the year ahead?

MD Kym Quick

As previously mentioned, the IT sector has a good outlook and the combined group of Clarius, Candle and Jav businesses combined, make up around 60% of total margin. Without breaking them down specifically, some of the areas where we are starting to see strong signs of growth are in our IT focused JAV business. We’ve really seen them surge ahead and they’ve started to deliver significantly higher numbers over the last three to six months than we have seen over the last two to three years which is a great outcome. That’s largely off the back of a shift in client demand with some clients now starting to look for delivery of outcome as opposed to delivery of head count and I think that’s largely driving a significant amount of that growth.

Across the board I think it’s the contracting and temporary hiring space where we are starting to see increased confidence, which is traditionally how we come out of a downturn in this industry. Generally confidence is first identified by an increase in contractor demand because companies are ramping up their work force but not committing to permanent hires and once that positive sentiment is voluntarily entrenched we then start to see demand for permanent hires. At that point of time as we see market confidence return we also start to see candidates more confident in changing jobs which obviously then creates growth for the recruitment industry.

So in terms of how we expect the next six to twelve months to look I anticipate further growth in contractor numbers with growth in permanent numbers to follow and that’s across all of the different brands within the suite. But I would anticipate it’s IT demand that is going to grow most significantly over the next six months.

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Are you satisfied that Clarius has achieved the structural strategic changes it embarked upon and that the company has now effectively completed this? What else has management learned by undertaking this process and which you have been able to capitalise on?

MD Kym Quick

We have managed a lot of change both structurally in the industry and structurally within the organisation and I still think there are further changes ahead. Obviously not as significant as we have seen in the past but I think as the organisation starts to adapt to changing trading conditions and changing engagement models out in the market place, we will see a more positive impact. So I am confident that over the next few months, that having reengineered the business we will be able to better respond to the market and achieve greater level of speed to market and improve the quality of our candidate database.

This will help us to get ahead of the game as the market does start to turn. Much of the hard work over the last couple of years has really been to ensure that we don’t just move with the economic tide as the recruitment industry has historically done. What we have tried to do is to ensure that we mitigate the risk of that by spreading our revenue across different regions, investing in the growth in non traditional types of revenue like our IT services and I think we will start to see the benefit of that over the next six to twelve months, firstly as the market turns and secondly, as our strategy really starts to deliver to the group off the back of the significant investment that has been made over the last couple of years.

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During the business re-engineering process it has been an intense learning period for all of us. I think that as an industry as well as an organisation, that we must be aware of the need to adapt to a rapidly changing environment where our customers are changing not only the way they do business but also the way they engage their workforce. We have to move with that change and listen to our customers’ needs and be able to respond effectively as opposed to offering the same traditional services in the same traditional way we as an industry have always done it.

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Thank you Kym.

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

For previous Open Briefings by Clarius Group, or to receive future Open Briefings by email, visit openbriefing.com

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