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Edited Transcript of HAS.L earnings conference call or presentation 21-Feb-19 8:30am GMT

Half Year 2019 Hays PLC Earnings Presentation

London Feb 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Hays PLC earnings conference call or presentation Thursday, February 21, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alistair Richard Cox

Hays plc - CEO & Executive Director

* Paul Venables

Hays plc - Group Finance Director & Executive Director

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Conference Call Participants

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* Anvesh Agrawal

Morgan Stanley, Research Division - Research Associate

* Hans Pluijgers

Kepler Cheuvreux, Research Division - Head of Research of Benelux

* Paul Daniel Alasdair Checketts

Barclays Bank PLC, Research Division - Director

* Rahim Nizar Karim

Liberum Capital Limited, Research Division - Research Analyst

* Steven John Woolf

Numis Securities Limited, Research Division - Analyst

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Presentation

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Alistair Richard Cox, Hays plc - CEO & Executive Director [1]

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Okay, good morning, everybody. I think we're just about all here. We've killed the jazzy lounge music. So welcome to our half-year results. And as per our usual format, I'll take you through the operating review and then I'll hand over to Paul who will walk through the detailed financials and current trading. Then I'll come back and give you an update on our strategy.

So if we turn to the results, as you can see from the top right-hand corner, net fees increased 9% to GBP 568 million. Operating profit up to GBP 124.1 million, an EPS of 5.86p, also up 9%. And we've increased the interim dividend by 5% to 1.11p.

Now as you know, our strategy has been consistent for many years now. The 3 things that are most important to us are maximizing our financial performance, investing in and building our future business and that means, obviously, further expansion and diversification; and then thirdly, being world-class in terms of efficiency, both in terms of cash generation as well as profit creation. And when we look at our first half, again, I think we've delivered on all 3 of those aspects. So our profits grew 9%. And the benefits of our international diversification and investments, I think, are very clear in these results. Over 80% of our operating profits came from outside the U.K. and 20 of our 33 countries delivered record net fees in the first 6 months.

We continue to invest in additional capacity around the world. International headcount was up 10% and we augmented this by opening 5 new offices and we had significant office expansions right across Europe, Asia and in the Americas. And to support all of that front office investment, we've continued to scale up our back offices as well to handle significantly higher volumes as well as greater efficiency. And we've also continued to invest in front office productivity enhancing technology in general.

The conversion rate has remained strong. It did slip 40 basis points mainly due to a softer market in some parts of Europe. I'll come back to that in a little while. But our largest markets of Australia, Germany and the U.K. together, they are 2/3 of our net fees. Each saw solid conversion rate performance despite the investment that we made in infrastructure around the world.

And then on the U.K., while the U.K. has remained a relatively stable market for us, albeit uncertain, our strong cost control there allowed us to deliver 6% profit growth.

And then finally, in terms of cash, we paid out GBP 113 million in core and special dividends just back in November. And yet we still ended up the half with net cash of GBP 32.5 million. So obviously, I'm pleased with that set of results.

So let me give you a little bit of color on each of the divisions, and I'll start, as usual, in Australia & New Zealand.

I've used the word consistency in the past to sum up the Australian business. And here we are again, we've had another 2 quarters of strong growth. And that takes us now to 18 consecutive growth quarters. Fees and profits in Australia were both up 10% despite increasingly tough comparators. And this was led by New South Wales, up 9%, and Queensland and Victoria, both up 11%.

At the specialism level, we delivered excellent growth in IT, up 27%; banking was up 20%; and Office Support, up 12%. Admittedly after a long period of growth, we have been expecting a slowdown in Construction & Property and we did see fees there decline by 9%.

When we include New Zealand, the ANZ Temp numbers were very strong, up 10% and Perms grew 2%. And again, we hit record levels of temp workers, over 21,000 temps and contractors on assignment any point in time.

Looking more generally at the local economy in Australia, there does continues to be a tougher market in construction. However, in most of our sectors and most of our markets there, particularly in the world of technology, we continue to see very supportive conditions. And as a result, we invested in the business. And our Australia headcount was up 13% year-on-year with a skew towards areas, such as technology and digital, which again is a key focus, a key sector for us around the world in general.

Looking forward, there's obviously the Australian general election likely to be in May. We have to consider that. And that may well bring the usual short-term pause in activity in the public sector.

And then finally, a word on New Zealand. New Zealand is 5% of our total ANZ fees and it has been a very tough business for the last couple of years. Fees there declined 25% and it overall did impact our ANZ results, as you can see on this slide. However, we have made changes in New Zealand. The early signs of those changes are very encouraging and I personally fully expect that business to return to growth again in the near future.

Let me turn now to Germany, as you know, our largest business, where we've delivered another strong performance against increasingly tough comparators. Net fees and operating profit both grew by 14%. And when we adjust for the 2 additional working days in the half versus the prior year, profits grew by 10%.

Growth in the Flex business, which is 84% of German fees, remember, was 12%. And within this, Contracting grew 7% and Temps an excellent 22% up. The Perm business had another tremendous half. It was up by 27%.

IT remains our largest specialism in Germany. That grew 9%. And the next biggest, Engineering, was up 10%. However, the newer specialisms were again the standout performance. So Accountancy & Finance, up 29%; Sales & Marketing, up 20%; and Legal, up by a phenomenal 75%. And these newer specialisms are now 1/3 of the entire German business. And I think they represent some fantastic long-term opportunities for us.

We opened 1 new office in Germany in the period and we materially expanded space in 3 others. Headcount was up 7% in the half, 3% year-on-year as we embedded in the very significant numbers of new people that we brought on this time last year. If you remember this time last year, we had increased heads in Germany by 30% year-on-year. I do, however, expect a more linear pattern of headcount growth and additions in our second half, including some modest sequential growth in headcount in Q3.

As we set out at the 2017 Investor Day, as the market leader in Germany, and we are far, far ahead of the competition there, we see a once-in-a-lifetime opportunity to build a truly massive business, and that will serve us very well for many years to come. So again, I'm pleased with the results in the half in Germany. It's a lot of exciting stuff going on under the bonnet in that market, and I'll come back to that in a little while.

Moving then to the U.K. & Ireland, and given the backdrop here, I think the team have delivered a tremendous result. Net fees up 3%, profits up 6%. We all know about life in the U.K., but the good news is that candidate confidence remains high. Employment as we saw yesterday from the ONS is at record levels. And there remain significant skill shortages in this market.

The private sector which is 73% of net fees was stable and it grew 1%. Commissions in the public sector have improved slightly and fees there grew by 9%, in part helped by slightly easier comps due to IR35 from this time last year. The Perm market was flat whereas our larger Temp business delivered a good 6% growth.

Looking regionally, the South West & Wales was again the standout, growth of 14%; Northern Ireland, I think, deserves a mention, up 6%; but further North in Scotland, Scotland was tougher, and fees in Scotland fell by 9%.

Now our largest region here in London was up 3%. And then a shout-out to Ireland, continued to deliver strong net fee growth, up 10%.

Looking by sector, we had an excellent performance in IT, that was up 14%. And our other larger businesses in Construction & Property and A&F also grew. However, as been -- as has been the case in the recent past, the Education business has remained tough. So overall, we maintained a flat headcount in the U.K. We focused on driving consultant productivity, that was up 5% in the half. And we'll continue this way until we're much clearer on future trends.

And then finally coming to the Rest of the World, as you know, this comprises 28 different countries. We group them into 3 sub-regions. The overall fee growth of 11% was strong. However, a slowing of growth in parts of Europe across the half meant that our conversion rate fell by 70 basis points.

We have 17 countries in EMEA excluding Germany, 11 of which had a record half. Spain, Italy and Poland were standouts, growing by 18%, 15% and 9%, respectively. Belgium was tougher. It declined at 6%. And growth in France and the Netherlands slowed through the half to 5% and 3%, respectively. As a result, our profits in EMEA excluding Germany declined 7% year-on-year. And as you'd expect, we've taken out costs to best protect our profits.

Across the world in Asia, we enjoyed another strong performance with fees up 19% and profits up 13%. Profit growth was slightly below fee growth in Asia due to significant investment in property and IT of around GBP 1 million, including major office expansions in Shenzhen, Beijing and Tokyo.

China is now our largest Asian country. It grew by a superb 31%. IT there was up by 2/3. Legal was almost tripled in the half. And we're building a business of real scale in China now, with over 17 million in fees in the first half and around 250 fee earners.

The net fee CAGR over the last 5 years in China has been 24% with headcount up only 11% CAGR. So we're clearly getting strong productivity gains. And I'm personally convinced that China will become a much more important part of our group in the longer run.

And then finishing up in the Americas where net fees grew by a strong 18% despite tougher markets in Latin America. In the United States, fees were up 17% including Construction & Property, up 26%. And as you know, our strategy is to invest to build scale in the States, and we expanded our offices in New York and in Atlanta.

We also invested in our fledgling Accountancy & Finance business. We're combining experienced consultants transferred in from around the world with local talent to build out that team.

Further North in Canada, we had a fantastic half. Fees were up 27%. And within this, our Flex business grew 56%. And we've seen some excellent wins in our large corporate accounts business and our pipeline there looks strong. Despite all of these investments, we still grew our Americas operating profit by GBP 1 million in the half.

So overall, across the Rest of the World, given the strength of our markets, we invested aggressively in headcount, up 17% in the Americas and in Asia.

And as usual, I'll end this section with a traffic light assessment of our performance versus our long-term profit aspirations. Now as you know, we aspire to significantly grow our profits to between GBP 300 million and GBP 450 million by FY '22. And I think we remain in a good place 18 months in.

Top left, ANZ remains green. Fee growth in the first 18 months of the plan is annualizing at 11%. That's above the top end of our targeted range. And on a constant-currency basis, we saw ANZ profits grow by GBP 2 million. And Australia alone delivered 10% like-for-like profit growth.

In the top right, as I said at our full year results, if Germany delivered the combination of strong net fee growth and rising conversion margins, then we'd return it to a green light. I'm pleased with the fee performance. But until we do get profit leverage, which we expect to deliver in FY '20, we'll leave it on amber for now.

Bottom left, the U.K. and Ireland is already within our 5-year plan range and it's outperforming the market. However, I'm mindful of the wider uncertainty created by the Brexit negotiations. So it would seem unusual to move the U.K. to a green light before we see the eventual outcome from those discussions. However, I am delighted with the performance in the U.K. & Ireland, but the political situation means that we'll leave the U.K. on amber for now, too.

And then finally, bottom right, in the Rest of the World, I'm really happy with our performance in the Americas and Asia. Both will get a firm green light. However, we did see a slower end to 2018 in some parts of Western Europe, and our profit performance there was softer than I would've liked. That said, this part of the division is on track in terms of our 5-year plan. And our profit run rate is not far off the bottom of the range with 3.5 years still to go. Hence, we keep the Rest of the World on green.

And with that, I'll now hand over to Paul, who can take us through a deeper look into our financial performance as well as an overview on current trading.

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Paul Venables, Hays plc - Group Finance Director & Executive Director [2]

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Thank you, Alistair, and good morning, everyone.

Starting with the highlights of the financial review, firstly, to summarize what has been a good first half. As you can see on the slide, net fees increased by 9% on a like-for-like basis, and we delivered GBP 124.1 million of operating profit with good underlying profit performances across most of our international businesses and strong cost control in the U.K. As a result, EPS increased by 9%, and the board has increased the interim core dividend by 5% to 1.11p.

In market conditions that have been mixed but broadly supportive, these results are a testament to our ability to invest rapidly and capitalize on growth opportunities, such as Germany, North America and Asia, whilst at the same time focus on driving improved consultant productivity and good cost control in other markets, such as the U.K., in order to consistently maximize the group's profit performance. This balanced approach and consistent delivery over several years sets our performance apart from the competition.

Coming on to the more detailed income statement, on an actual basis, net fees increased by 8% and operating profit by 7%. On a like-for-like basis of organic growth at constant currency, net fees and operating profit both increased by 9%. And the difference between the headline and like-for-like growth rates is primarily a result of the depreciation of the average rate of exchange between the Australian dollar and sterling. Overall FX movements decreased net fees and operating profit by GBP 6.9 million and GBP 2.1 million, respectively. And I'll cover FX in more detail later.

Alistair has already covered the regional trading details, so I'll cover a few technical issues. Germany saw strong growth in net fees and profits, but adjusting for the 2 additional working days, underlying net fee growth was 13% and operating profit was 10%. The shortfall of profit growth to fee growth is due to our continued investment strategy as set out at the Investor Day, with GBP 1 million of incremental revenue investment in property, including a new office in Wiesbaden and material expansions in 3 others, and a further GBP 2 million in our ongoing development of our front and back-office systems, scaling them for significant future growth, which is partially offset by an improvement in consultant productivity.

In the U.K., profit growth exceeded net fee growth with a 5% increase in consultant productivity and good cost control, driving profit leverage. And in the Rest of the World, while we delivered a strong fee performance, profit growth was lower than fee growth, primarily due to the slowdown in fee growth in EMEA ex-Germany across the half, as Alistair has already explained. And the investments in new and expanded offices especially in Asia, which cost GBP 1 million; and systems which also cost GBP 1 million.

Moving on to looking at the performance of our Perm and Temp businesses. Our Perm business, which comprised 42% of net fees, grew by 10%, driven by a 5% increase in volume and a 5% increase in the average Perm fee. The increase in average Perm fee was driven by underlying wage inflation and also a positive mix effect from the excellent Perm performance in Germany. We estimate the global wage inflation increased slightly to between 2% to 3% overall with, of course, pockets of greater inflection in certain skill shortage markets.

Our Temp business, which comprised 58% of group, also increased by 9%. This comprised a volume increase of 8%, a 4% increase in mix and hours primarily from Germany, partially offset by a decrease in underlying Temp margins, down 40 basis points in Australia and the U.K.

Exchange. As usual, we provide details on our P&L sensitivity to changes in key exchange rates. And as you can see, the Australian dollar, and even more so the euro, represent meaningful FX translation sensitivities to the group. In fact, each 1% movement in average annual rate impacts operating profits by GBP 0.4 million and GBP 1.2 million, respectively.

The total first half operating profit impact of movement in average exchange rates was GBP 2.1 million negative versus prior year. And if exchange rates hold for the remainder of the year, the impact on the FY '18 full year reporting operating profit would be GBP 3 million negative. This is GBP 2 million worse than we reported at the Q2 IMS in January. And as we said before, the group does not undertake any P&L translation hedging arrangements.

Moving on to conversion rates. Our conversion rate for the half decreased by 40 basis points year-on-year to 21.8%. Within that, there were several moving parts. I've already explained the changes in the conversion rate in the U.K. and the Rest of the World.

In ANZ, the reduction is purely due to trading in New Zealand. Australian conversion rate remained flat. And in addition, we've added a net 5 offices plus 15 significant expansions across the group, which increased property costs by GBP 3 million versus prior year and we expect property costs to increase by GBP 6 million in the full year as we stated in our FY '18 prelim results. We expect group drop-through of incremental fees into profit for the second half of the year to be similar to the 20% reported in half 1.

Moving on to interest and tax, the net finance charge in the first half reduced to GBP 1.5 million, driven primarily by GBP 0.7 million reduction in the IAS 19 pension charge. We continue to expect net finance charge for the full year to be around GBP 3 million.

Turning to tax, our effective tax rate decreased to 30.5% driven by a geographic mix of profits. And we expect the tax rate for the full year to remain at 30.5%.

On EPS, basic earnings per share was 5.86p, a 9% increase versus prior year, reflecting the group's higher operating profit, lower interest charge and lower effective tax rate.

Moving on to cash flow. On this slide, we summarize the key components of our cash flow. The chart on the left details the sources of cash flow starting with operating profit of GBP 124.1 million. We add back noncash items of GBP 14.2 million, predominantly fixed asset depreciation and share-based payments. We then deduct a GBP 59.8 million outflow in respect to working capital, driven primarily by normal seasonality and also the growth in our Temp & Contractor businesses in Germany, Australia and the U.K. This leaves an operating cash flow of GBP 78.5 million, a good underlying half-year conversion of profit into cash of 63%. For operating cash flow, we paid tax of GBP 31.8 million and net interest of GBP 2 million leading to free cash flow of GBP 44.7 million.

On the right-hand side, we've detailed how we've used the cash generated. And the main items were dividend payments of almost GBP 113 million, representing last year's final dividend of GBP 40 million and special dividend of almost GBP 73 million both paid in November 2018; CapEx of GBP 15.3 million; and pension deficit payments of GBP 7.9 million. And for the full year, we continue to expect CapEx to be circa GBP 30 million.

On net cash, our underlying cash performance was good. And as a result of these movements, we ended the half with net cash of GBP 32.5 million, which is similar to half 1 '18 despite the fact that we paid GBP 20 million additional higher core and special dividend payments. And in November 2018 as we've shown on the right-hand side, we extended our two thousand and ten (sic) [210] million pound bank facility to November 2023.

On this slide, we compare the balance sheet as of 30th of December, 2018 versus June '18 -- sorry, versus June '19. The 2 noteworthy movements are a reduction in the IAS pension accounting surplus to GBP 19.2 million, [with] GBP 75.9 million, which is primarily due to the increase in asset values and the accounting impact of the buy in; an increase in working capital which I've already explained earlier.

As previously announced in August 2018, the pension scheme trustees in agreement with Hays plc, entered into a bulk annuity purchase, or buy in, with Canada Life for a premium of GBP 270.6 million in respect of ensuring all future payments to the existing members of the Hays defined benefit pension scheme. This was funded via existing pension at scheme assets.

This material balance sheet derisking exercise is in line with our long-term strategy to reduce future volatility of the group's defined benefit schemes and their financial impact on the group. And in addition, the 2018 triennial valuation has now been completed and quantified the actuarial deficit at GBP 44 million, which compares to, in 2015, GBP 95 million. There is no change to our deficit payments, which will continue to increase at 3% per annum.

Moving on to dividends, our priorities for free cash flow remain unchanged, namely to fund the group's investment and developments, maintain a strong balance sheet and deliver a core dividend at a level which is sustainable, progressive and appropriate. The board has increased the interim core dividend by 5% to 1.11p per share. And finally, the group is highly cash-generative, as it now paid combined core and special dividends of GBP 223 million in the last 2 years. And in the third box of the slide, we have reiterated our special dividend policy.

So in summary, with market conditions that have been mixed but broadly supportive across most of our businesses, we have delivered a good set of results.

We've invested in our major businesses, including Germany, Australia and North America. And despite this investment, we've driven good profit growth, particularly in our international business, especially Germany, whilst at the same time improving the underlying profitability of our U.K. business. And our conversion rate of 21.8% remains sector leading. Our ability to then turn these profits into cash means that after paying GBP 113 million in dividend, we ended the year with a net -- half year with a net cash position of GBP 32.5 million, however, increased our interim dividend by 5%.

In conclusion, these results continue to demonstrate the significant diversification we've achieved in our business over the last decade or so, with our non-U. K. business now representing more than 80% of group profits.

So turning to current trading. We continue to see good conditions in most international markets, while the U.K. remains stable despite economic uncertainty. In Australia, we continue to see good growth. The return to work in our Temp & Contractor business since the new year has been in line with prior year trends. However, we're mindful of the likely general election in May and the impact this may have on our business.

We see good growth in Germany despite tough comparators. Our return to work in Temp & Contractor has been good overall. However, contractor extensions have been 3% lower than in prior years, which has modestly reduced our overall German growth rate by circa 1.5%. The good news is that the actual level of new contracting assignments to date in 2019 on a weekly basis are at the same strong level they were before Christmas.

Here in the U.K., growth remained solid. Return to work in our Temp business was in line with trends seen in prior years. In the Rest of the World, growth remains good across Asia and Americas, but more mixed in EMEA ex-Germany. And then finally, it's worth noting that we continue to overlap increasingly tough international growth comparators from the prior years, especially in Q4 FY '19.

With that, I'll hand you back to Alistair who will update you on our strategic priorities and progress before we take your questions.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [3]

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Thanks, Paul. Paul already addressed our progress versus our FY '22 plan in the last section, so for the next few minutes, I just wanted to talk about our strategy in general and some of the initiatives that are going on around the Hays world.

Now as you know, we follow a series of 4 key themes in how we run our business. Each of these is interrelated and it creates a cycle of investment, growth, diversification, distribution and then further reinvestment. And as you can see, we've made some good progress on each of these areas.

I'd again highlight, for example, the fact that 20 of our 33 countries delivered record net fees, and that our cash at the half year matched the end of the half year in 2018 despite GBP 20 million higher dividend payments. And as Paul has just said, cumulatively, we have now paid around GBP 223 million in cash to shareholders since our 2017 Investor Day.

During the half, we've made good progress in rolling out our newer specialisms into more key markets. In the States, for example, our fledgling construction property business grew 26% against the very tough comp of 75% growth last year. Our more nascent United States A&F business, it grew fees over 80%. And as global leaders in A&F around the world, we obviously have high ambitions in this area for the medium term as I mentioned earlier.

Net fees in the German Legal specialism were up 75%. That's even better than the performance they delivered last year. In Canada, the Flex business was up 51%, helped in part by help from our successful German business, both in terms of process as well as expertise. And these are all examples of what I would class as relatively low-risk growth as our brand is already well-known in each of these countries. And we can leverage existing infrastructure, whether it be office space, online websites or the successful management teams. And it's a key part of our strategy to steadily in-fill our specialisms around the world and across all of our regions.

Our prioritized pipeline of opportunities enables us to focus our investments around the world. And a good example I'd pick out this time is China, where we've put in additional resources over time. And in the last 2 years, we've really started to reap the benefits in that market. The first half profit was GBP 4 million and Greater China has clearly been promoted to box 3 where it was the top performer recently. However, a lot of our effort obviously continues to remain on our core profit drivers, which are together 70% of our net fees. That's the gray box on the left-hand side of this slide, one that we've shown you many times. So today I just wanted to focus on some of the initiatives that we have going on in Germany.

When we bought [Assayna] which was the forerunner of the German business back in 2003, back then it was a pure IT Flex recruiter. It made an annualized profit of about EUR 3 million. Last year, we made nearly EUR 100 million. Now our organic growth is compounded at 20% every year since 2004.

Diversification in Germany is a key part of that success story, and in the early years, we added Engineering Flex followed then by Perm Recruitment. IT & Engineering still represent nearly 2/3 of German net fees, and as the chart shows, despite their size, they've been growing at a very healthy CAGR of 11% since FY '13. However, the newer German specialisms, which include A&F, Legal, Sales & Marketing, Construction & Property, have been growing significantly faster as has our Perm business. So we now have 9 specialisms in Germany but contrast that with 17 in ANZ and 16 in the U.K. & Ireland. So there clearly remains a lot of white space for us to grow into and large parts of the German market remain very immature.

So for example, our Construction & Property business in Germany, which grew at 16% in the first half, has net fees which are less than 1/3 the size of the Australian C&P business, even though Germany is by far the larger economy.

Historically, the business in Germany is focused on Contracting. And in recent years, we've made some great progress in Temp, up 22% in the last 12 months and 22% coincidently in the last 6 months, too. Temp today is 28% of our German fees. It's come from nowhere just a few years ago. And we make very similar margins in that employment type as we do in Contracting.

There are many reasons for this growth. Some are regulatory, some are just due to changes in the client behavior. But I think what's important to note is that the penetration in white collar temp in Germany is still significantly lower than it is in, say, the United States, here in the U.K. or in Australia. So even though we continue to take market share, there remains some huge structural opportunities in a market that does have significant barriers to entry.

We've also been actively pursuing a key account strategy in Germany, investing in our largest clients. And at the end of December last year, we had 27 key account managers working hard to drive our client services and cross-selling nationally. That's an almost 50% increase in capacity. And the skills of these senior people bring a real differentiator in what is today still a fragmented yet structurally growing market, where we're already the clear leader. And we're already starting to see a fee uplift in the accounts where we've made those investments. Now this investment doesn't come cheap, obviously. It does represent a modest drag on our near term conversion. But it's absolutely the right thing to do for us to become invaluable as well as a lifelong partner to our clients. And again, it represents a real barrier to entry.

And then finally, as you know, we do see technology as a real enabler of our consultants' productivity. And it's a key part of how we grow our operations in Germany. Germany obviously has been busy on this front in the last year. So for example, we've automated our front to back office contracting systems. That's been implemented across roughly half of our business partners or contractors as we call them. And examples such as this, I think, will yield very good payback via efficiency improvements in the years to come.

Which brings me nicely onto an update on our group-wide technology strategy. And our main aim here is to equip all of our people with the best tools for them to do their job. And we do that both via specific technologies that we build ourselves, as well as through partnerships and collaborations with external experts and companies in their own field. Remember, to make a successful and rapid match in today's recruitment world, you need to do 3 things well. You need to connect with the right people, you need to determine their approachability for any given role and then you need to execute the contract efficiently. And this framework, which we view under 3 broad prisms of approachability, connectivity and efficiency, lies right at the heart of how we approach technology.

We seek to build tools which are linked to OneTouch, which is our own in-house proprietary system, that will improve our capability at each of those 3 stages. In the old world model of advertised jobs and then apply is simply not good enough in today's market, which is why we shifted some time ago to our Find & Engage model. So let me give you a few updates on what we've done in the last 6 months.

Firstly, our partnerships with SEEK, LinkedIn and now XING in Germany continue to perform very well. More recently, our collaboration with Stack Overflow in the IT space has made a very good start as we engage with many, many more IT developers, and we help them grow their careers.

Secondly, I'm pleased to say that our LinkedIn page won best company page last year, defended our win from 2017. And with 2.7 million followers on LinkedIn, we're now by far the most followed recruiter in the world on that important platform.

Thirdly, Google's job search. Their algorithm has now been fully incorporated into our own architecture. And that's now the engine that powers our own candidate searches globally and it's delivering some excellent results. And I think this proves, again, that we have the ability to react with speed and agility to integrate our data with that of some of the world's biggest and most well-known global players in the world of technology.

Next, our Hays Hub app, which many of you saw at the Investor Day in its infancy back in 2017 is now live in many of our education clients. It's yielding some excellent engagement with schools. And despite the fact that education remains a very tough market, we're now on track to have around 100 U.K. stores live on that app by Easter, not just helping schools to fill very urgent and critical roles, but also bringing world-class compliance into the Education market.

And then finally, we've rolled out Salesforce marketing cloud across all of our major countries now. And that it further improves our Find & Engage lead generation program as we connect digitally with literally millions of talented individuals on a daily basis. After all, remember building and reinforcing relationships with the world's best talent is core to our future success. And that's how we place over 1,200 people into a new job every single working day.

So to wrap it all up, I think we've had another good half year financially, operationally as well as strategically. With balanced investment, with growing our profits and collecting cash along the way, we're more diversified and we're more technology-enabled than ever before. But remember we also have the strongest management throughout the business around the world that we've ever had.

So while I'm mindful of the uncertain economic headlines that we read about every day, conditions in most of our markets do remain good. And we will continue to invest in those areas where we see plenty of opportunity.

And with that, I'll be delighted to take your questions.

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Questions and Answers

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Paul Venables, Hays plc - Group Finance Director & Executive Director [1]

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This is being webcast, and David is just kind of signaling near the back and he's saying it's being webcast. There are mics in your seats, so there's always a good first initiative test for somebody to see if they can get the mic to work. If you can repeat your name so that everybody knows kind of around the world who's saying what.

Steve, should we start with you? He's a brave man to go first for that.

Yes, sounds good.

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Steven John Woolf, Numis Securities Limited, Research Division - Analyst [2]

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There we go. Good morning. Steve Woolf from Numis. Just a follow-up on the point in Germany and the contractors, if I may. Just some feedback on what the clients themselves are saying for not extending some of those contracts or the level, whether you think it's a competition issue or whether it's more broad-based. And what proportion of those extensions that haven't come through are represented by that, [relative to] key accounts, et cetera?

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Alistair Richard Cox, Hays plc - CEO & Executive Director [3]

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Let me kick off then I'll hand over to Paul. I would put it down to -- Christmas is a normal time to do a bit of housekeeping, if you are in any company. And undoubtedly, some clients -- and it's not in any specific sectors, it's just generally across the piece, some clients will have said, "We need to get that project finished and let's not continue with it in the new year." We do the same in our business, Steve. As we're finishing things off, Christmas is a nice watershed to say, "Let's get it done so we can start the new year without that further work or distraction." In terms of competition, no, absolutely not. I don't see that it's anything to do with competition. We're as big as the next handful of rivals in the German market added together, we are by far the market leader. And remember, Germany is a market characterized by acute skill shortages in many, many sectors, just as most of the rest of world is. But Germany feels it particularly painfully. So if we have access to that talented pool of candidates and take them to our clients, both new and old candidates, then that's how we create our market. The good news, if you look at the return to work in the first half, is yes, there was a 3% lower level of extensions. But the recovery rate, if you like, the gradient of the growth curve going forward from that slightly lower base is exactly in line with how it has been in previous years. It's just off a marginally lower base. And let's put things in context, it's a 3% lower extension rate in a market that is still vibrant, supportive and full of skill shortages. Paul?

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Paul Venables, Hays plc - Group Finance Director & Executive Director [4]

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I'd only add one point. I think if -- numerically, if you took our growth for the 6 months, it's bigger than at least the next top 10 competitors put together in numeric terms. So we are massively bigger than anybody else in the market. And we're still growing significantly. So to be #1 by a long way in a market growing at 14%, call it 13% on a working day adjusted basis, and I absolutely reiterate Alistair's point, it feels like a little bit of housekeeping. And that's why I try to give the 2 parts. It is the extensions are a little bit lower. But from our standpoint, the most important thing is if I take every week over the last 6 weeks absolute number of new acquisitions, new contractors, which for us, as you know, means we've got 9 months average revenue stream on all of those that continues at the very high level we had in Q2. So it's always a little bit disappointing but, more importantly, that growth is still significant going forward.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [5]

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Paul?

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [6]

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It's Paul Checketts from Barclays. I just wanted to ask another question on Germany, one on Australia and then the tech side. Can I ask if we sort of look at Germany, if we were to enter a period of slower growth, rather than sort of talking about precisely what's happening here and now. If we were to enter a period of slow growth in the marketplace, how would the strategy be modified through that period? Clearly, it's a medium-term strategy that's focused on increasing your share. But through that downward phase, how would it modify? And what do you think the conversion rates would do in that period? And then Australia, I guess it's an area that for me, I look at that Construction & Property number and worry that it's a precursor to a more broad-based slowdown. Could you give us a sense of what you're seeing and your thoughts on that? And then the last one, on the technology side. At the investor day, you talked about the Approachability Index not being rolled out to consultants. How is that going? And from your perspective, Alistair, if we looked at the next 1 to 2 years in the marketplace more broadly, what are the changes that you think are coming through at the moment?

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Alistair Richard Cox, Hays plc - CEO & Executive Director [7]

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Shall I kick off on Germany?

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Paul Venables, Hays plc - Group Finance Director & Executive Director [8]

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You do Germany I'll pick CR and I'll do Australia, you do tech. Nice mix.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [9]

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There we go. So I don't see that we're going to have slower growth, so let's just put that to bed. But it may happen, right? So if it does happen, what does this mean? It means that we will be slightly slower at doubling the size of our German business. But the strategy, it remains unchanged and untouched. It would just take us a year or so longer to actually get to the doubling in size that we talked about at the 2017 Investor Day. Why do I say that? Two key things: the market is massively underpenetrated and immature still compared to standards that we see in, say, the U.K. or Australia or the United States; maybe 20%, 25% of white-collar jobs come outside the internal HR department to an agency such as ourselves in Germany, contrasted with maybe 80%-plus in the more mature markets. So the structural opening up of Germany is the long-term prize, and that will happen come what may. But if there is a more uncertain economic period for a period of time, it will just slow slightly the structural opening up. But the opportunity is still there and we're still going to go for it, Paul. What we would physically do differently is we would put people in more slowly into the business. So that we can balance between growing fees and growing profits with also exploiting and capturing the long-term opportunity. We don't want to do one but not the other. Our job, we believe, is to get the balance right and be able to do both in sync at the same time. But in terms of going into the Mittelstand that we've talked about in the past and continue to do so, in terms of going into the bigger culprits with a key account type approach, exactly the same. In terms of going into statement of work, exactly the same. In terms of opening up the newer specialisms and growing them, exactly the same. So we're talking about, it might be a 6-year plan instead of a 5-year plan. But it's still a plan to double the size in Germany. That's not changed. And I think the second factor that reinforces that apart from the immaturity of the market, and what as Paul said, we are by far the market leader opening up the market. Don't forget that Germany is a high employment market, it's a high skilled market with massive shortages of skilled people. 100,000 engineers short even in today's world. So even if it did slow down, they are still many tens of thousands of engineers short. And many of the clients simply do not have access to the people. But we do. That's our job.

Paul, do you want to talk about CR.

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Paul Venables, Hays plc - Group Finance Director & Executive Director [10]

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A couple of things first of all, Paul. Really on the CR, it depends on what scenario we're planning. And at the moment what we've tried to say here is that we are still growing at good levels. So whether that is 10 or 9 or 8 or 11, who knows? But at the moment, sitting here we expect to grow a good level, certainly for the next 6 to 9 months, where there's no sign of any significant weakness in the market at all. That's why we've used the phrase today housekeeping. So then, of course, you do your scenarios, that's what drives the CR rate. The nice thing as well, a lot of the initiatives we're doing and what we've just done in all of the extensions in the major offices, of course, you take space for the next 3, 4 years. So we've kind of have that in our P&L by the end of the year. We expect all of the major systems initiatives to be finished by the end of this calendar year. So again, that will be likely, that goes into the P&L. But we'll then have a nice period of time to really focus on productivity improvements, hence why Alistair was alluding to our focus is on getting to leverage. So I think coming to Australia, I was there 3 weeks ago and I guess the really pleasing thing about the outlook was that we've had a good return to work in Australia. Absolutely, Construction & Property is -- well it was 28% of our business because the business is still growing, it's now 24%. I think Alistair and the team have to take a hell of a lot of credit for the significant investment we put in our IT specialism. The IT professionals that we are helping our clients hire in both of the digital space. If you actually look at our headcount, we must have put more than 100 head count in, Alistair, over the last couple of years. And that specialism growing at 30%, that will outgrow Accounting & Finance. And second half of this year, our IT specialism would be bigger than Accounting & Finance. If you would have told me that 5 years ago, I wouldn't have believed you. So I think we're doing a hell of a lot of things to get into the right spaces of the market. Absolutely Construction & Property is down 9%. We expect that to continue. So we're very cognizant of some underlying trends in Construction & Property. But again, the more broader Australian economy, I think that has some of the same issues that we're seeing in other parts of the world. So I think we're in a good space there. If you look at the headcount, we've said that what we're going to do in the second half of the year, we're going to keep headcount broadly flat. We're just going to drive productivity, focus on profitability.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [11]

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And then finally, Paul, the world of technology. As you know, we see technology and human capability as being symbiotic and being part and parcel of the same solution. So it's not about one or the other. It's about both. And when we look at product -- technology, what does it really allow us to do? It allows us to make our people better at their job. That means more productive, that means filling more jobs more quickly and bringing in more fees and more commission for themselves. So our people love it if we can give them those tools. It also allows us to do more things at greater scale. We have literally tens of millions of people on our database. You cannot physically call them every single day. But you can communicate with them electronically and that's why our Salesforce marketing cloud is such an important initiative for us because it allows us to send out digitally, highly personalized and tailored content to individuals to help them think through their career, whether it would be something that has an immediate impact on us like, "I'd like to apply for a job." Or it could be something that's longer term helpful for them, along the lines of -- to move to the sort of job you aspire to, you need to do training in the following skills. And here is a way that you can do that. And when you've done it, come back to us and we can help you into your dream job. So we're really trying to help our candidates on their journey through their career, not just help them at the one-off point in time when there's a new job to be filled. That's our philosophy, if you like. The Approachability Index, as many of you know, is something we designed a couple of years ago as a tool to help our consultants understand who would be on the market for this job but we don't yet know because we haven't spoken to them. So it's looking at collecting data from the outside world to infer this person would be interested in that job. So therefore, call them up and have that conversation with them about it. Clearly, the more data you put into something like that algorithm, the faster and better it will learn because these are learning things. More data in equals better result out. Hence, we connect with more and more external organizations, XING for example. Now Stack Overflow. Bringing in that data into our own networks to say, here are the people who would want that job that you have just taken on from the client. It's all part of this Find & Engage. When you think about, does this work? One of the metrics I would look for is how many business development calls do you need to make to find a job to fill from clients? How quickly can you shortlist a handful of top talent to put forward to a client? Does it take you a couple of weeks because you're advertising? Or does it take you literally a few minutes or an hour because you already know those people and you know them electronically off your database? These are some of the metrics that we look at to say, is this working? Net-net, of course, you expect to see your fees per consultant per month increase, it's a standard productivity measure. And we're seeing positive movement in all of those facets. When you say, what might come next? I think the world of engagement with talented individuals is going to be an interesting and exciting what's next. Because if we can connect with more people and have a more ongoing dialogue with them all the time, then I think we'll know more about who wants which job as we bring in the jobs, and we'll be able to put shortlists out and then fill jobs faster than we might do without that data. So data really is an important part of our business, something to be nurtured and protected as well. We cannot own all data in the world. It's physically impossible. But we can work with other organizations that supplement and complement the data that we have. And that's our partnership approach to this. That's why we work with XING, LinkedIn, Google, Stack Overflow, and we will build more and more of these partnerships around the world. Because again, it works for our partners. If we can help them drive traffic to their sites, it also helps us as well. Makes sense? Thanks.

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Paul Venables, Hays plc - Group Finance Director & Executive Director [12]

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The gentleman on the left-hand side.

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Hans Pluijgers, Kepler Cheuvreux, Research Division - Head of Research of Benelux [13]

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Yes, good morning, Hans Pluijgers, Kepler Cheuvreux. Two questions from my side. First of all, on the IT back-office cost. You already indicated that in Germany, you expect that project to -- let's say, to be finalized towards the end of this calendar year. Can you give us some feeling on some other major projects that you are actually starting up or have been planning or over, let's say, the next 12 to 18 months and delivered at the timing of these? And maybe also a little bit on additional costs you will incur? And secondly, on the drop-through rate for H2, 20%. Could you give maybe some flavor on the developments by region?

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Alistair Richard Cox, Hays plc - CEO & Executive Director [14]

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Those are yours, Paul.

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Paul Venables, Hays plc - Group Finance Director & Executive Director [15]

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Why don't I take the systems one first. Most of the major system changes that we're looking to do, so at the moment in Germany, having finished stage 1 of automation of back office, we're doing an upgrade in the operational system, our consultants do and we're doing some further work now in the middle office. And I said it earlier on, we expect that to finish at the end of the -- end of 2019. Clearly, that will then start to depreciate and that will be something like a GBP 3 million additional cost coming in at that point in time, likely to hit the P&L over a couple of years. We are in the process at the moment of doing automation projects both in the U.S. and Canada. Having finished the major countries, having done most of Europe, those are the next obvious markets. But those are much cheaper projects in relation to it. So you're probably talking about P&L cost of about GBP 1 million when that hits. And then we should be in a nice position. While we continue to do all of the work that Alistair has just been describing from the front office standpoint and from marketing and candidates, and that's been an ongoing investment, I don't actually think we're going to have any major IT projects then for 12-, 18-, 24-month period of time. And I think that will enable us to drive leverage across the group. And that's when we expect, as long as we've got growth at these sorts of levels to drive some real profit leverage. On the second -- drop-through in the second half, look, I think one of the beauties of doing this business is we have 3 to 5 weeks visibility. There is limited forward secure revenue stream. And therefore, we've given guidance today saying we expect to have good growth in the next -- in certainly the next quarter. We have some uncertainties coming into that fourth quarter, which I think will impact the drop-through rates. So for example, Australia, there is an election. And it's hard to always guess what sort of impact that will have on that business, but of course, it leads to slightly less growth than we would've had a period ago. And therefore, I would expect drop-through to be slightly lower in the Australian business. We're sitting here, aren't we, in a country where there's going to be a degree of uncertainty over the next month or 2. And we would all hope that we will have a nice, smooth process, in which case, I think we'll continue to grow well in the U.K., we'll continue to drive leverage. And I think across the Rest of the World, we'll actually get better profit performance in the second half. We've done some pretty good adjustments of the cost base in some of those markets where growth slowed. So therefore, that's why this time I've kind of stuck at an overall, it will be about the same 20% and because I think there's kind of 1 or 2 big uncertainties within that, of which the U.K. is the obvious one. But we think 20% holds for the sorts of growth that we expect.

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Rahim Nizar Karim, Liberum Capital Limited, Research Division - Research Analyst [16]

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It's Rahim Karim from Liberum. Two or 3 questions, if I may. In terms of Germany, could you perhaps give a sense of your direct or indirect exposure to an industry like autos? And then on China, you obviously, have seen very strong growth. I was just wondering if there was any impact of the trade talks and perhaps slowing economy there in terms of the outlook? And then third, Paul, are you able to possibly give us a sense of where you might expect a net cash to end up at the end of the current year? I know there is a lot of uncertainty, but it was obviously a good result in the first half. So any guidance there would be great.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [17]

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Paul, you can big cash king. Directly, indirectly, we have about 20% or thereabouts of our German business will somehow be touching the automotive sector or its supply chain. However, we are not involved in production, remember. A lot of work, the vast majority of our work is more in the R&D labs looking at next-generation automotive. So don't get too concerned about what's going on in the world of current car sales and does that have a readthrough onto our own business. In terms of China, I've seen no impact as yet of what's going on with the trade dispute with the States and China. To see the sorts of growth rates that we're seeing is fantastic news for us. And it's obviously a business that we're seeking to invest in and I think longer-term, medium-term, I think China's going to move up to closer to the top table. However, even though we've not seen any of the impact of those trade discussions, remember we are still a small business in the overall economy of China and the sheer scale of that marketplace. But we are in a number of interesting sectors whether it's in technology, whether it's in life sciences, whether it's in banking, et cetera, which gives us a very broad remit right across the patch as well. Paul?

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Paul Venables, Hays plc - Group Finance Director & Executive Director [18]

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This would be my 14th year, end this year. I'd kind of like to also like to have a 15th, and therefore we have to do pretty well on the cash performance. One of the key things, which I've always said, is we have no ability to defer payments. So it's all around credit control. And in those last weeks -- last week of a normal month, certainly a big month like June, you're talking about GBP 150 million worth of cash coming in. Having said all of those protections, which hopefully I will still be here, I see no reason why we would have less cash than we had last year, because last year was a clean number. We've done a good job. We're actually quite delighted with where we are at the half year. We're probably GBP 15 million better than we would have expected. Therefore, why would we have any less than we had a year ago? And so I would have thought that sort of level and you could probably put a GBP 20 million range around that. But no reason why -- we went to the third very large special. And that we won't be sitting here in a year's time perhaps talking about GBP 350 million over 3 years that we'll have paid out. Those are pretty big, chunky numbers when you consider the market cap of the company.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [19]

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Yes, just behind.

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Anvesh Agrawal, Morgan Stanley, Research Division - Research Associate [20]

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Hi, this is Anvesh from Morgan Stanley. Just a quick question on Germany. As the other specializations kind of 1/3 of the business and they continue to outpace the growth of the other business, how does your consultant headcount [shape] in terms of the skill set? Like the consultants who are driving the growth in the core IT business can drive the growth in these other specialization? Or you kind of need to continue to invest into the newer skill set for the consultants?

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Alistair Richard Cox, Hays plc - CEO & Executive Director [21]

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In terms of the types of people that we recruit, they're exactly the same. So we look at the demand across all of the business and we say we need more people here and we don't need more people there because we've maybe just put a lot in and we're just bedding them in. So the type of individual, typically out of University, a little bit older in Germany because of the way the Education system works, probably not worked before, first job. Certainly never done recruitment and we'll train them up from scratch. And that's the model we apply everywhere in the world, Germany included. Slightly different DNA of an individual in terms of whether they'd be more successful and suited towards a Perm desk versus a Flex desk whether that's temp or contractors. And again, not much difference really whether they are going to go on to say Engineering versus Accountancy & Finance, at least at that initial stage. And we don't do much reallocation of people from one site to the other in Germany because everywhere is growing, so everywhere needs more people. That reallocation comes in when some of your sectors start to feel a bit more difficult but others are more buoyant. So for example, in areas like parts of Australia today, we'll be reallocating some resources away from maybe the more difficult residential construction in Australia, would be a classic. We're moving them to some other areas that are a little bit more buoyant in the construction world.

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Paul Venables, Hays plc - Group Finance Director & Executive Director [22]

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Just conscious that, if there are people on the webcast, you are able to ask questions and have David at the back who will kind of wave his arms around. We'll read out, we'll kind of speak those questions if we get to the right point.

Do we have any other questions to the room? David, do we have any from the webcast? No?

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Alistair Richard Cox, Hays plc - CEO & Executive Director [23]

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Okay. Well in that case, thank you for coming along today. Hope it was helpful and illuminating, and we'll see you in 6 months' time.

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Paul Venables, Hays plc - Group Finance Director & Executive Director [24]

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Thank you.

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Alistair Richard Cox, Hays plc - CEO & Executive Director [25]

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Thanks.