Adcorp reinstates full-year dividend

FIFI PETERS: Adcorp, a company that is in the employment business, released its annual results today. It has resumed paying full-year dividends [and] moved from a net-debt position to a cash position. However, the company reported a slight dip in revenue this time around.

We’ve the CEO of Adcorp, Dr John Wentzel, on the Market Update for more on the numbers. John, thanks so much for your time. The fact that you started paying dividends again – what does this say about your view of the economy and the prospects of your business in it?

Dr JOHN WENTZEL: Good afternoon, Fifi. I think there are a couple of things there. Our focus in 2022 was to stabilise the organisation, and from that perspective we improved the quality of our earnings, cleared our debt, and we are on top of working capital. That now gives us the opportunity to deploy cash both to reward shareholders and to commit to future growth and investing in the organisation.

So I think the payment of dividends is more a reflection that our objective in 2022 [of] stabilising the organisation has been achieved. If we look forward, we are optimistic. However, there are some concerns that we’ve got in the South African economy. We are concerned about the ongoing low growth, we’re concerned about rising inflation, and also about the infrastructure challenges. In Australia we are a bit more optimistic as the border closures have ended there. So there we do expect to see the ability to meet demand more easily met than in the past.

So I think we are optimistic in what we have indicated in our results presentation to shareholders – that would be the capital allocation framework. We are certainly going to attempt to pay dividends more regularly than we have in the past.

FIFI PETERS: Let’s start off in South Africa then, just with the outlook that you’ve shared there in terms of the concerns about the economy, the low growth, the load shedding and others. What does this mean for employment prospects then?

Dr JOHN WENTZEL: We are worried. We mentioned this previously. We are worried that we are seeing a muted recovery. We’ve very high unemployment rates in our country, and therefore the absorption of unemployed people is a lot slower than I think any of us would like.

So we are concerned that we are seeing elements of a jobless recovery, and we see significant risks to growth in the economy, mostly around rising inflation and the infrastructure challenges that you mentioned. So for us I think that is a concern.

We saw early signs at the end of Q4 of an increasing demand for the white-collar contingent and white-collar perm[anent] placement. That gives us some hope, but hopefully we don’t get the downside risk materialising that we fear.

FIFI PETERS: That’s a pretty stark warning there – that of a jobless recovery in the signs that you are seeing on the ground. Can I ask in which sectors perhaps it’s more pronounced?

Dr JOHN WENTZEL: There is a mix, and it’s not only a South African issue, it’s a global issue. So we have a severe skills shortages in some of the high-tech sectors.

In IT in particular there’s a global skills shortage, and we see that South African skills are sought after globally.

So in IT we see a shortage of skills. In healthcare we see a shortage of skills.

So it is a bit of a mix where we have a significant demand. It’s not unique to South Africa. It’s global demand as well. But [in] the bulk of where we have unemployed people in South Africa, the demand is unfortunately not there to absorb them into the labour force as efficiently as we would like.

FIFI PETERS: You are saying this lack of demand is because of the economy and the pain points that are going on there?

Dr JOHN WENTZEL: Yeah. I think that’s a significant contributor. At the end of the day jobs get created when businesses grow. So, as businesses grow, necessarily their workforce grows. And when you’ve got 1% growth in South Africa with rising inflation, rising interest rates, businesses either don’t grow or they delay investing to see what happens – and necessarily then the job does not realise.

FIFI PETERS: Just in terms of the skills gap, recently we had an update to our critical skills list, and I’m interested in what you make of that, and perhaps what skills should have been added onto that just to plug in some of the gaps you are seeing presently in IT and in healthcare here.

Dr JOHN WENTZEL: I think on the listing of skills we would concur that’s by and large correct. What you find is that even in the broad IT sector there are some very specific skills, and they would relate to particular applications or particular functionality where there is a global demand for IT skills. I think with the last two years with Covid, the hybrid work-from-anywhere has actually increased the number of companies that can now access South African IT skills.

So it’s less about what skills we need to focus on, but really how we retain skills that we’ve got and ensure that those skills don’t necessarily go and work for international companies. We don’t see any problems in terms of the listing of skills, but I do think there is a requirement that we, as a country, continue to invest in the science, the maths, the engineering side, because that’s where we are seeing a lack of skills.

Also in areas like healthcare, where there’s an ongoing shortage of nurses.

FIFI PETERS: All right. So shifting over to Australia, where you are lot more optimistic about the group prospects there compared to South Africa, talk to us about the hiring that’s going on there. Where are [skills] being demanded? What are you looking forward to over on that end?

Dr JOHN WENTZEL: In Australia it’s the opposite of South African …. It has record low unemployment and there the demand is primarily across the board. With the extended lockdowns that Australia had for two years, we see a shortage of supply on the white-collar side – again, technical skills – but also there on the blue-collar side. But there with the opening of borders we now believe we will be able to more readily access particularly blue-collar demand, and therefore the supply side pressures should ease a little bit on the white-collar side. We do expect that the supply-side pressures will continue throughout the year, even though we have rising inflation in Australia as well. Its economic growth is projected to be north of 2% at a GDP level, which is significantly higher than South Africa’s.

So that’s our outlook on Australia.

We think our business there will benefit from the growth on [both] the white-collar and the blue-collar sides as their economy returns to normal growth.

FIFI PETERS: We’re hearing a lot about this concept of the ‘great resignation’. Workers are rethinking their positions and resigning to go and do what they want to do, pursue things that they hadn’t pursued previously before the pandemic. Can you talk to us about how the great resignation is playing out in your business here in South Africa, as well as in Australia?

Dr JOHN WENTZEL: The ‘great resignation’ I know is a term that’s been coined. The response is that South Africa and Australia are slightly different. I think with the high unemployment rate in South Africa people are more reluctant to leave jobs because they may not readily be able to find another job. However, in certain sectors and certain niche areas we have seen higher incidents of people resigning.

In Australia it’s quite different. Because you have supply [of jobs] exceeding demand, we’ve seen a much higher staff turnover rate in clients in Australia because people often have a choice of jobs, and therefore there’s been a much greater impact. In Australia, where we’ve seen contracted churn, we’ve seen perm[anent job] churn and we expect that will continue, until the second half of this financial year.

FIFI PETERS: So you say supply of jobs there is exceeding demand for jobs?

Dr JOHN WENTZEL: Yes.

Australia has that unique situation where the demand [for people/workers] exceeds the supply in some sectors.

FIFI PETERS: John, a lot of stuff has happened since your year-end in February. Russia went to war with the Ukraine. China had a new lockdown – although reports are that it’s easing as from today. We had inflation going through the roof and you have made reference to inflation in the business. I’m just interested [in] the events that have happened since your year-end closed in February. What has happened to your business so far?

Dr JOHN WENTZEL: I think the biggest concern that everyone has right now is rising inflation. And we are starting to see rising inflation, as you point out, [with] Russia’s invasion of the Ukraine, and we expect that that will put margin pressure on our business.

But with the South African economy in the state that it is, it’s really hard for us and many businesses to pass along inflation increases to our clients, because our clients themselves are struggling. At the same time inflation is putting workers everywhere under pressure, and that means workers may be more willing to change jobs to earn a greater income.

So we are starting to see input-cost pressures on our side, and that I think will flow through to margin pressure as we battle to pass those increases along to our clients.

FIFI PETERS: And options to contain some of those costs internally via changes, perhaps changes to how you do things – are they still there [or has] part of the turnaround that you implemented in the year under review kind of maxed out those options?

Dr JOHN WENTZEL: I don’t know whether they ever completely maxed out, but we’re certainly not going to get a 40% decrease in our operating costs. We think we have reset our operating costs as low as they can reasonably be. We are stuck with some costs I wish we could get out of, but we are trapped on that perspective.

FIFI PETERS: Like what?

Dr JOHN WENTZEL: Well, we have the head office, for argument’s sake, which is a big item on our balance sheet. If it were different, would we deploy ourselves into that particular head office now? I don’t think so.

So where our options are, I think, going small, is to try and drive operating leverage. That means moving more of our costs to a variable-cost input model than a fixed-cost input model, and hopefully then as demand changes our cost will actually reflect that.

But we are certainly not going to see significant cost savings. I think our cost base is pretty much optimised from where we are right now.

FIFI PETERS: John, thanks so much for your time and looking at the numbers there. That was Dr John Wentzel. He is the CEO of Adcorp.