London Aug 27, 2015 (Thomson StreetEvents) -- Edited Transcript of Hays PLC earnings conference call or presentation Thursday, August 27, 2015 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alan Thomson Hays plc - Chairman * Paul Venables Hays plc - Group Finance Director * Alistair Cox Hays plc - Chief Executive ================================================================================ Conference Call Participants ================================================================================ * Hans Pluijgers Kepler Cheuvreux - Analyst * Rory McKenzie UBS - Analyst * Tom Sykes Deutsche Bank Research - Analyst * Hector Forsythe Stifel - Analyst * Andy Grobler Credit Suisse - Analyst * Kean Marden Jefferies - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Alan Thomson, Hays plc - Chairman [1] -------------------------------------------------------------------------------- Good morning, everyone. I'm Alan Thomson, the Chairman of Hays, and I'd like to welcome you all to our results presentation for the year ended June 30, 2015. As usual, before we start I'd like to remind you, those here in the room, that the event's also being webcast and so when we get to the Q&A, please wait until you've got a microphone before asking the question. And remember to say who you are and which firm you're representing. As usual, this morning I have with me Alistair on my right here. That's Alistair Cox, the CEO of Hays; and on my left, Paul Venables, the Group Finance Director. Alistair will go through the operating review, as well as an update on the Group's strategy, but first of all, I'll hand over to Paul, who will give you an overview of the financial results for the year. Paul? -------------------------------------------------------------------------------- Paul Venables, Hays plc - Group Finance Director [2] -------------------------------------------------------------------------------- Good morning, and welcome to the Hays 2015 preliminary results presentations. I'm Paul Venables, Group Finance Director. I'll take you through the highlights of the financial review, before handing you over to Alistair Cox, our CEO, who will cover the operating review, strategic update and current trading. And then, as normal, we'll be happy to take any questions you have. Firstly, to summarize what is a strong financial performance: we achieved good net fee growth of 9% on a like-for-like basis and converted this into excellent operating profit performance, up 25%. This strong operational leverage further increased our sector-leading conversion rate by 210 basis points to 21.5%. And in line with our policy, the Board has proposed a 5% increase in the full-year dividend to 2.76p. Overall, in markets that have been broadly supportive, these results are a testament to our ability to rapidly invest to capitalize on growth opportunities. But at the same time, drive significant profit leverage by strong cost control and the ongoing benefits of our largely automated back office platform. We are pleased to have delivered such an excellent profit performance. Coming on to the more detailed income statement, on a headline basis net fees increased by 5% and operating profit by 17%. On a like-for-basis of organic profit growth at constant currency, net fees increased by 9% and operating profit by 25%. And the difference between the headline and like-for-like growth rates is primarily the result of material depreciation in the rate of exchange between the Australian dollar and euro versus sterling during the year. Exchange rate movements decreased net fees and operating profit by GBP35.8 million and GBP9.6 million respectively. And I'll cover FX in more detail later in the presentation. On this slide we summarized the like-for-like performance of our regional businesses. Starting with Asia Pacific, net fees increased by 8% and operating profit by 7%. In Australia and New Zealand net fees were up by 7%, driven by perm, which is up 17%, as candidate confidence improved in several key markets. And in Asia we delivered a strong performance with net fees up 13% and all five of our countries delivered record fee performances. CERoW, our largest division in terms of both fees and operating profit, performed strongly with net fees up 18% and operating -- sorry, with net fees at 9% and operating profit up 18%. Our German business delivered good net fee growth of 6%, with strong growth in the newer specialisms, especially accountancy and finance. In the rest of the region where market conditions were supportive, we rapidly increased headcount, driving net fee growth of 12% and at the same time delivered a material increase in operating profit up to GBP7.1 million. And finally in the UK and Ireland, net fees increased by 11%, or GBP26.5 million, and we converted 74% of incremental net fees into operating profit, delivering a GBP19.5 million increase in profit. Perm increased by 16% and our strong fee performance was broad-based across all regions and most specialisms. Moving on to look at the performances of our perm and temp businesses. Our perm business, which comprised 42% of net fees, delivered strong growth of 13%. Perm volumes increased by 10% as client and especially candidate confidence improved in many key markets around the world. Encouragingly, average perm fee increased by 3% as salary inflation returned to many markets, especially where candidate shortages became apparent. Our temp business, which comprised 58% of Group net fees, delivered good net fee growth of 7%. Temp volumes increased by 7% as client demand remained good, partially offset by a 2% decrease in business mix and hours worked. Underlying temp margin was managed up by 30 basis points. On this slide we provide the P&L sensitivity to changes in key exchange rates. As you can see, and as we have seen over the last few years, both the Australian dollar and especially the euro represent meaningful FX translation sensitivities for the Group. In fact, for -- each one cent movement in the average annual exchange rate, impacts operating profit by GBP0.2 million and GBP0.6 million respectively. Importantly if we retranslate the Group's FY15 operating profit of GBP164.1 million at current exchange rates, it reduced the reported result by GBP12 million, to circa GBP152 million. And this has worsened by GBP1 million since the Q4 IMS in July. As we said before, the Group does not undertake any P&L hedging translation activities. Moving on to operating leverage and conversion rates. As we set out at the interims, if you look at our industry in previous growth cycles, a 30% to 40% drop-through of incremental like-for-like fees into operating profit is the norm. But due to our strong effective management across the Group, combined with our largely automated systems, we are exceeding these levels. In FY14 we delivered a superb 68% drop-through of fees into profits as we drove higher activity levels through our consultant base. But the 51% achieved this year is more impressive as we invested significantly in our consultant headcount, which grew on average by 9%. In his section, Alistair will take you through how we've achieved this leverage. Looking forward, we expect to achieve a like-for-like fee to drop-through of 40% to 50% per annum at the Group level over the medium term, which includes a UK drop-through of 60%. The result of this leverage is, over the last two years, we've driven a 400 basis point improvement in our conversion rate to 21.5%, which is industry-leading. Over the medium term we expect our conversion rate to return to 30%-plus levels, driven by one, the recovery of the UK business towards GBP100 million profitability; secondly, a sustained recovery in ANZ; and thirdly, the significant profit opportunity for leverage in our smaller countries. And this will help drive a material increase in profits, cash and dividends. At our Investor Day in November 2013, we set out our aspiration to broadly double the Group's operating profit from GBP125 million in FY13 to GBP250 million in FY18. We also described the economic backdrop needed to achieve that, which is the continuation of modest economic recovery seen at that time, a consistent and stable economic growth profile, modest improvement in GDP in the outer years, and regular, minor but manageable, shocks and no recession in any of our major markets. That is exactly the backdrop we've had in FY14 and FY15. Additionally we assume no material change in key exchange rates, which has clearly not been the case. In his section, Alastair will cover in detail our progress to date by each region. But I thought it useful in my section to look at the overall Group performance in the first two years of the up-cycle. Despite taking a GBP18 million hit on exchange, we've materially increased operating profit to GBP164 million on the back of organic profit growth of GBP57 million, or circa GBP30 million per annum. As I explained earlier, we're likely to take a further material hit on exchange in FY16. And thus looking ahead to the next three years, we will need to deliver almost GBP100 million of profit growth to achieve our FY18 GBP250 million aspiration. Encouragingly, after taking into account the profits we would expect to achieve from our Veredus acquisition, this means we need to deliver circa GBP30 million organic profit growth per annum over the remaining three years. And based on today's economic backdrop, and our performance to date, we remain confident we can deliver that. Additionally, looking at the right-hand side of the slide, it's interesting to note that translating the original GBP250 million aspiration at current exchange rates reduces it to GBP220 million. And thus for us to achieve operating profit of GBP250 million in FY18, would in effect equate to a GBP30 million outperformance. Moving on to interest and tax. The net finance charge for the year was GBP8 million. The reduction in the interest charge on debt was primarily due to the lower levels of average net debt versus prior year, offset by an increase in the non-cash IAS 19 pension charge, and the unwind of the discount applied to the future Veredus acquisition liability. We expect the net finance charge for FY16 to be around GBP7.5 million, with a significant decrease in external interest, broadly offset by an increase in the IAS 19 charge and the full year on Veredus. And turning to tax, our effective tax rate reduced to 32.5% following the material growth in UK profits and increase in profitability of our smaller countries. We expect the tax rate to reduce further to 31% in FY16. Moving on to earnings per share. Basic earnings per share was 7.44p, a 21% increase versus prior year, driven by both a 17% increase in headline operating profit, and lower effective tax charge. On this slide we summarize the key components of our cash flow. In the chart on the left we detail the sources of cash flow, starting with operating profit of GBP164.1 million. We add back non-cash items of GBP32.8 million, primarily the depreciation and amortization of fixed assets, and also share-based payments. We then deduct a GBP7.1 million outflow in respect of working capital, which with DSOs reducing by three days to 35 days was a good performance, albeit helped to an extent by year-end phasing. This leaves an operating cash flow of GBP189.8 million, an excellent conversion of profit into cash of 116%. And out of operating cash flow we paid tax of GBP43.6 million, and net interest of GBP5.2 million, leading to free cash flow of GBP141 million. Now on the right-hand side of the slide, we detail how we've used the cash generated. The main items are CapEx of GBP11.9 million, pension deficit payments of GBP14 million, dividends paid of GBP37.9 million, and the acquisition of Veredus in December, along with the related tax cash payment for a combined GBP35.7 million. In FY16 we expect CapEx to be GBP13 million. On this slide we compare the balance sheet at June 2015 with the prior year. I've already explained the increase in goodwill and intangibles, and movement in working capital. Additionally the IAS 19 pension accounting deficit increased to GBP58.7 million, primarily due to significant decrease in the discount rate, which is partially offset by Company contributions, a decrease in the inflation rate, and an increase in asset values. The results of the actuarial valuation is due in early 2016 based on data as at June 2015. We do not expect a significant change to our deficit recovery payments. Net debt decreased by GBP32 million in the year to GBP30.7 million, despite GBP36 million being spent on the Veredus acquisition. Importantly average net debt decreased by GBP20 million. Net debt remains at a low and manageable level, well within our renewed GBP210 million bank facility, which expires in 2020. And we expect to move into a net cash position in FY16. Moving on to dividends. Our priorities for free cash flow are to fund the Group's investment and development, maintain a strong balance sheet, and deliver a sustainable core dividend at a level which is affordable and appropriate. In line with the dividend policy outlined in the middle box on the slide, the Board proposes to increase the final dividend by 5% to 1.89p, resulting in a full-year dividend of 2.76p, also up 5%. As such the full-year dividend will be covered 2.7 times by earnings in line with our strategy to build full-year cover towards 3 times. Finally the Group is highly cash generative. And in the third box on this slide we've reiterated our special dividend policy as set out in last year's prelims. So in summary, this is an excellent financial performance. With markets broadly supportive, we invested to drive good 8% net fee growth and through effective operational management delivered excellent leverage, with profits up 25%, most of which we converted into cash. It is this ability to deliver both strong fee growth and excellent profit performance that sets Hays business model apart from the competition. And with that I'll hand you over to Alistair who'll take you through the operational and strategic reviews. -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [3] -------------------------------------------------------------------------------- Thanks, Paul. Morning, everybody. As usual I'll give a bit more detail on the performance of each of our operations around the world, give you an update on our strategic progress, and then finish off, as ever, with a view on our current trading. And, as Paul has said, it's been a strong year for us. We've increased our operating profits 25%. We've delivered the best profit leverage that I think you'll find in the industry anywhere. We've invested decisively in the business, and we've also built out our platform and our service lines worldwide. When you look at that profit leverage, 51% of our incremental net fee growth has dropped straight through into operating profits. Our operating profits have grown three times faster than our fees, and our conversion rate is back above 20% for the first time since 2009. And we've delivered that excellent flow-through despite investing aggressively in the business. So, our worldwide headcount was up 9%. That shows how quickly we've taken advantage of good markets around the world and we've increased our capacity accordingly. I think that the key to achieving this twin result of leverage and investment is in our approach to driving consultant productivity. So in the UK, for example, we increased productivity here by 3% and that then gave us the latitude to invest in more heads in places such as Germany and in Asia. And then finally, back in December last year, as you remember, we made an important move into the United States market. I'm pleased to say that the integration of Veredus has gone extremely well. We'll come back to that later, and I'll also give you an update on how we've continued to roll out our contractor business worldwide. But overall, remember, our approach is designed to capitalize on the long-term structural opportunities, and there are many of those opportunities around the world, but also to drive strong profits and cash along the way. And I believe that it's important to be able to do both at the same time. So, turning then to each of our businesses and start across the other side of the world in Asia Pacific; good news in both parts of that business with Australia returning to growth for the first time in three years, and continued strong growth in the rest of Asia. Fees themselves in Australia and New Zealand were up 7%; profits there were up 5%, and the bulk of this growth was driven by a strong performance in the perm markets. Perms were up 17% whereas temps were only up 2%. The strongest specialisms have been the technical areas such as IT, construction, for example, although I think it's also fair to say that the mining industry has remained very tough, and remains so today. However, with that sort of performance in Australia we took the early decision to invest in additional headcount. We increased heads by 10% to ensure that we got the capacity in place to capitalize on the recovery. Across the waters in the rest of Asia, fees were up 13%; profits up by almost a quarter. Performance was good across all five countries in that region. We delivered record fees in every single one of them. And, as you can imagine in such a buoyant market, we added heads quickly and we increased the consultant base 20% over the year in the Asian business. A bit closer to home, Continental Europe and Rest of the World, another record year; fees were up 9%; profits grew twice as quickly. Germany was good. Fees and profits were both up 6%, and I'd describe the core IT and engineering contracting business in Germany as solid. Fees in that business were up 5%. But we did achieve faster growth in some our newer specialisms. Areas such accountancy and finance, for example: that increased 11%. And that, I think, shows the benefits of the earlier investments that we've made in those different market segments. And, again, in Germany as we've placed greater emphasis on the SME market across the country, we have added capacity, and headcount was up 14%, and that was particularly skewed towards our second half. As you know, we're also part way through an important project to automate our German back office, to put in place a more scalable system. And I'm pleased to say that we've continued to make excellent progress on that project and we remain on schedule. Across in the rest of the division we've had another strong year. Fees were up 12% and profit grew by GBP7.1 million, and that makes a real difference at the Group level. We had 16 countries in the division that grew at 10% or more, and we had 13 all-time records. So you can see how broad and how strong the recovery has been. Just a couple of examples: France's fees, for example, were up by 10%, and profits were up by 44%, and that continues our last four years of outperformance versus competitors in the French market. Across in North America, set to become a very important business for us over time in North America, both the United States and Canada had strong years. And in this division only Brazil remained difficult, although the rest of Latin America were excellent results. And then finally back here in the UK and Ireland, fees were up 11% and profit was up 75%, which I personally think is a fantastic result. It shows the benefit of our earlier investments. It shows the benefit of the strength of our management team there and their focus on productivity when they can turn incremental fees of GBP26.5 million into an extra GBP19.6 million of profit. That's a 74% flow-through. Both the public and the private sectors were strong, so education and IT, for example, underpinned the strength in the public sector. And we had many areas, including IT, construction, accountancy and finance, office support, for example, all doing very well in the private sector. Equally, every region in the UK grew quickly. Several of them were up 20% or more, as you can see. And, again, with supportive markets, we were confident to add more capacity in the UK, showing our ability to invest in the business whilst also driving productivity. So two full years into our five-year plan to broadly double our operating profit, you can see for yourself that we remain on track with our aspirations. On each of these four charts you can see that the top two bars represent our FY2013 and our most recent FY2015 operating profits. The next bar down is the original profit range that we declared back in November 2013, and then finally on Australia, Germany and the other countries segments, we've retranslated those original profit ranges at this week's exchange rates. So you can see both where we currently stand as well as the significant dilution that the depreciation of the euro and the Australian dollar have caused since 2013. So, starting then at the top left with the UK; two years into the plan we are already above the low end of the five-year range. I think that's an excellent result. I'm very confident that we've got a lot further to go there. Across in Australia at the top right, our trading is slightly ahead of where we originally expected we'd be by now and, as you've seen over the last 12 months, we've returned to growth. A lot of that benefit, however, has been diluted by the devaluation of the dollar when we translate back into sterling. As you can see, at the current exchange rates we're not far off the bottom of the five-year range, but clearly we have to push to get into the original range but we still have another three years to go. Germany in the bottom left has continued to grow but, again, a lot of that growth has been diluted on translation as the euro's weakened so dramatically. And in Germany I'd say that we are very slightly behind track in terms of trading. Our fee growth has been a shade below the plan range of 7% to 12%, and that has been exacerbated by the ForEx movements. Clearly we're working hard today to accelerate that fee growth to put us on track over the next three years, for example, investing in the additional headcount to focus on the SME market that I mentioned a moment ago. And then finally, in the bottom right, all of the other countries together are doing extremely well, even after we take into account FX movements. We're already well within the five-year profit range, and again, I'm confident that we have a lot of further growth to go for there. So, in summary, we have faced FX headwinds, which have taken something like GBP18 million out of our profits on translation. Despite that, two years into the plan period, the sheer strength of our operational performance means that we're on track today to hit the original GBP250 million five-year aspiration. So turning now to our strategic progress; let me start with a reminder of our overall goals. Firstly, we want to significantly grow and to diversify our Group profits. Secondly, we want to turn all of that profit into cash and distribute meaningful returns to our shareholders. And then finally, we want to build a much bigger business across the global network and to reach real scale in more of our businesses. And altogether I think that means doing two things particularly well. Firstly, investing in the many long-term opportunities that we do see around the world, whether that means rolling out new specialisms or new contract forms, opening more offices or simply adding additional headcount into our existing network. Then secondly, running the business as efficiently and as productively as we can at all times, to ensure we earn the profits and the cash, which then gives us the latitude to invest further. When we look at our investment opportunities, we characterize them into four key areas. Firstly, reinforcing and growing our three core businesses on the left there: Germany, Australia and the UK. Secondly, quickly building those businesses where we already have reasonable scale in a large and attractive market, so that they themselves can quickly become, individually, significant profit contributors. Places such as Japan, now the United States, Canada, France are good examples of that second area. Thirdly, reinforcing those businesses, which already make a meaningful return in what I'd characterize as a medium-sized market, somewhere such as Belgium for example, or secondly, our newer and smaller businesses in potentially huge markets such as China. Then finally, ensuring that we maintain a global network, which is important for many of our clients. This gives us a framework to help us prioritize our resource allocation around the world, to ensure that we're making the right calls on where to invest aggressively versus where to be more profit-focused at any point in time. Now as you can see on the chart, we have evolved this chart over the last two years since we first put it up, to reflect the strong performances that we've had in a number of our businesses, as well as the challenging conditions that we've seen in one or two others. The second key lever for running the business though is profit leverage. Again, I think there are four key drivers behind that. Firstly, our productivity improvements; secondly how much we choose to invest in the business; thirdly how efficiently our back offices process transactions; and then finally, how well we can capture the benefits of scale across a large network of businesses around the world. Let's look at the results first over on the right-hand side of the chart. Fees were up 9%. That's an extra GBP65 million to GBP764 million in total. Profits were up GBP33 million. That's a drop-through of 51% at the Group level, and that's far superior to any of our rivals' profit drop-through. Total profit therefore was GBP164 million. That's a 21.5% conversion ratio, the best conversion ratio we've had since 2009. And profits were up almost three times faster than fees. Now I think that that's a great equation. And it shows that even though we've invested aggressively and quickly in the business, we can still deliver excellent profit leverage because of the way we run the business and the tools and the systems that we have at our disposal, which makes us more efficient. Over on the left-hand side then are examples of how we've actually done that. In the UK, we've concentrated on further improving productivity, and as I mentioned before, productivity was up 3% here. That extra profit gave us the space to invest in additional capacity in places like Germany, as we sought to expand their network, or in Asia where we've seen very strong and buoyant markets. So Group headcount was up 9%, and that extra capacity alone helped us drive some of our top line growth. Then the automation that we've previously done in the UK back office, and which we're now underway with in Germany, does two important things for us. Firstly, it lowers the total cost of administration, and secondly, it lowers the marginal cost of each additional transaction. For example, as we see the UK recovering, back office costs have remained constant, and we get to keep more of the fee growth for ourselves. We anticipate this to continue going forward. You combine that with the efficiencies that you'd expect in a business with a single IT system, a common way of doing things around the world, across 33 different countries, and you can see why we believe we have the most efficient network in the business and that's what drives our profit leverage. I personally think it will be very difficult for anyone to replicate that, and the results on a financial perspective speak for themselves. I think it's worth a moment just showing how sustainable that profit flow-through equation actually is. This shows our fee growth rates each quarter for the last three years. On the left-hand side in the gray bars, the first 18 months, we were sitting around low single digits, as the world economy started to stabilize, starting in autumn 2012. The recovery really started to kick in in the last 18 months, and you can see how quickly we saw our growth rates accelerate to high single digits, on the right-hand side. And how consistently banded they've been since then; six consecutive quarters within a very narrow range of fee growth rate. At the bottom then, you can see the profit leverage that we've delivered off that fee growth, somewhere between 48% and 58% in each half. As we go forward, and recognizing that while the world is recovering, it is not rapidly accelerating, I think we can expect to deliver a 40% to 50% drop-through of fees into profits, if we continue to see fee growth rates in these same mid to high single digits. In other words, if these growth rates become the new norm, we can do very well in terms of profit growth as well as invest in the business. Let me turn to two key investments that we have made over the year. Obviously our acquisition of Veredus in the United States was an important move for us because overnight it gave us a sizeable business in the world's biggest recruitment market. The acquisition, I'm pleased to say, has gone extremely well. Integration of a new business is always a risk, but we're complete with the integration now and that integration has covered everything from branding, systems, office network, management structure, etc. We've got our entire US business now on our proprietary OneTouch system, so they too enjoy the benefit and the advantages that that system gives us. We've also successfully launched our construction and property specialism. But net net it is the results that matter most, so it was good to see us hit record temp levels and record perm fees in June. Looking ahead, we've got a very simple list of priorities that we're busy delivering on right now. Number one, accelerating the expansion of the core IT specialism; number two, rapidly scaling our C&P business across the entire office network in the States; number three, leveraging both the Hays and the Veredus client relationships, to win work into, as well as out of, the United States; then finally, looking at how we might expand the office network by opening more offices, particularly towards the Western states. Clearly there's lots to do but it is a great business. We've got very supportive markets, so I'm very optimistic about our future there. We've talked a lot in the past about the importance of the contractor markets around the world. We've very focused on building much bigger businesses to capitalize on that opportunity too. We've been progressively rolling out the contractor model around the world for the last two years now, and we've used the expertise that we've got in our German business to help establish and then grow in each location. You can see how rapidly we've grown in a number of markets since then. Clearly, Veredus coming on board accelerated that further. Over-night, it gave us another 700 contractors in the States market. I personally think that the contractor business will become a much more important part of our overall offering over time, and in its own right, it will become a material profit generator. It also positions us better to respond to client as well as candidate needs when you can offer expertise in multiple contract forms. However, it's worth pointing out it is different to perm recruitment in many ways, although I do believe we've got the systems, we've got the processes, and we've got the management expertise to be equally successful in both. In summary, I'm pleased with this set of results because we've delivered excellent financials. We've done what we said we'd do, and we've made some important steps forward strategically. I think our profit and our cash performance speaks for itself, when our conversion rate is above 20% for the first time in six years. That shows the benefit of our approach and the strength of our management teams around the world. Two years into our five-year plan, we're on track to double our profits in that time, despite the significant currency headwinds that we've faced. And finally, our business is stronger and better positioned than it was, even a year ago, and that puts us in a great position to capitalize on the many markets we're in, as they recover. Then finally, turning to current trading. Over in Australia, the market backdrop is still subdued but we see good growth overall, led by places such as New South Wales and Victoria, as well as a strong public sector. Things are still tough in Western Australia however, as you can imagine. Across the water, the rest of Asia remains strong. Here in Continental Europe, Rest of the World, we're seeing good growth overall in most markets, including in Germany. And I would characterize the markets in several of our countries as strong. Then finally here in the UK, good growth continues across all regions and most specialisms, although we have not seen any increase in activity levels post the election. With that, thank you and very happy to take any of your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Alan Thomson, Hays plc - Chairman [1] -------------------------------------------------------------------------------- There are two ladies, one on the right-hand side, one on the left with microphones. Who'd like to open the batting? -------------------------------------------------------------------------------- Hans Pluijgers, Kepler Cheuvreux - Analyst [2] -------------------------------------------------------------------------------- Hans Pluijgers, Kepler Cheuvreux. Question on Australia; last year, 7% fee income growth, operating profit up 5%. You invested quite a lot in headcount. How do you see it, going forward? Do you want to get more leverage now, out of that business, also looking at the market? Or would you want to continue to invest to capture more of the growth? So how do you see that going forward? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [3] -------------------------------------------------------------------------------- Let me kick off and then hand over to Paul. The recovery in Australia started about September, October last year, so we're about nine, 10 months now, into that recovery. So it's still relatively early days. As you can imagine, at that stage of any recovery, confidence is cautious, and I would say that confidence varies by region, and by industry. So Western Australia, which is largely mining-related, is a very tough market, and has been for some time. However, the mining industry, or our recruitment in the mining industry is less than 10% of our overall Australian business, so it's a much less important part of the business. The stronger growth however is in New South Wales, and in Victoria, and that is in areas outside mining obviously, and particularly strong markets, such as IT, construction, whether that's residential or in any many areas, commercial. And that has been strong for some time, and I suspect will continue to go forward. We have invested in headcount in Australia, as we saw those first early signs, because we didn't want to run out of capacity. I would expect that we will very modestly increase headcount further, because we have already put in a reasonable slice of additional capacity. And our focus is on making sure that they're bedded in, and brought up the productivity curve as quickly as possible, which is what's happening. Paul? -------------------------------------------------------------------------------- Paul Venables, Hays plc - Group Finance Director [4] -------------------------------------------------------------------------------- Yes, our focus this year is on profit growth in Australia, so there will be limited investments, certainly in the next six months. We've put the headcount in. We now want to sweat the assets to drive productivity and drive profitability. As Alistair said, I think the positive parts are there are some very large state and federal-driven infrastructure projects. We're benefiting from those. One-quarter of our business in Australia is in construction and property, so that's set fair. IT is set fair. But I think being there three weeks ago, and there's no doubt, it feels a very subdued economy. So we've been very consistent from the start. We expect to drive fee growth of 5% to 10%. We may be towards the lower end of that range for the next couple of quarters, but I think that 5% to 10% range still holds. It is not going to be strong -- even before what's happened in the last week or so, it's not going to be strong acceleration. So from our perspective, we'll drive the profits, and I think we can drive some really good profit leverage into this year. -------------------------------------------------------------------------------- Rory McKenzie, UBS - Analyst [5] -------------------------------------------------------------------------------- Rory McKenzie, UBS. Can you wrap it altogether a bit more broadly, about your headcount trends for the year ahead, with good trading? And what that means for the drop-through rates, as you might slow the pace of increase in headcount. So that one first, please. -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [6] -------------------------------------------------------------------------------- Yes, I think if you look at the drop-through rates, it's pretty obvious isn't it? If we're growing at 9% or 10%, then we're going to have a greater proportion drop through, because there'll be a bit more activity. We'll always be slightly behind in headcount investment, etc. So what we're trying to do today is if we're in this 5% to 10% range, we're confident we're going to drop through about 40% to 50%, and the 50% will be at the top of that, and the 40% will be at the bottom of that. I think we put some big numbers in last year, certainly -- both in Germany, both in Australia, as I've covered. Therefore what we're trying -- in the first, let's say the first three to six months of this financial year, our headcount overall may well go up by 2% to 3%. It's not going to go up by 5% at the moment. Of course, the beauty of our business, if we see a very strong September and October, we see an acceleration, then we'll increase our headcount, but I think with the headcount we've got, we can drive productivity a bit more. We can drive good profit increase, and we'll see how we are. In the UK, we'll always have a higher increase in headcount at the start of the year. But I still think for the UK business, as we put in the outlook, we haven't seen a pick-up in activity levels, a pick-up in growth, post election. We're very confident we can continue to deliver good growth in the UK business. But our headcount growth again, for the next six months there, is going to be 2%, 3%, 4%. -------------------------------------------------------------------------------- Rory McKenzie, UBS - Analyst [7] -------------------------------------------------------------------------------- Thanks. And the same question on the UK itself. What are the current signals you're seeing on wage inflation? And again, how do you [expect] that to feed through to your business? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [8] -------------------------------------------------------------------------------- We see more and more skill shortages, across the white collar market, in the UK. We've been talking about that as an emerging issue for the last couple of years now. It's become more acute over the last 12 months, as the markets have been stronger. It's in areas such as engineering, IT, for example. And that does translate into real wage growth, and that has been a phenomenon that we've see for at least the last 12 months, and continues. It's not -- I would not characterize it as rampant, but we do see people changing jobs and getting a well-above inflation pay rise. And we also see a lot of counter offers; as an employee hands in their notice, their current employer will sometimes seek to keep them through an increased remuneration. Which sometimes works, and often doesn't. So wage inflation is a factor in our business, but wage inflation is our friend. But it's not really materially driving the business. It's our management action as well as a supportive market that I think is driving the profit flow through in the UK. -------------------------------------------------------------------------------- Tom Sykes, Deutsche Bank Research - Analyst [9] -------------------------------------------------------------------------------- Tom Sykes, Deutsche Bank. I wondered if you could just make some more comments on Australia, and then some on Germany. Just on the Australian conversion, it is your lowest level of conversion for about seven years. Is that just that mining and Western Australia commodities are holding it down? Or -- I know you've commented about the headcount you've put in elsewhere, but if you look at the distribution of your conversion across your branches, are you seeing a lower level of conversion than you would have expected in the non-mining? Because New South Wales, Victoria, some of the increases in volumes have been quite high, at the market level there. -------------------------------------------------------------------------------- Paul Venables, Hays plc - Group Finance Director [10] -------------------------------------------------------------------------------- The way I'd answer it Tom, is without doubt, the last two years have been much more difficult for Australia, than the Lehman's crash was. In hindsight, the Lehman's recession, which massively impacted most parts of the world, including here, as we all know, was almost like a television recession in the US. So people watched it, and then they got on with their business. And you know our conversion rate came through without any scathe. This has been a real meaningful downturn. You can ignore the headline GDP numbers. If you strip out the construction of mines within that, over a period of time, GDP has been mildly positive. So with that backdrop, and then with everything that's gone on in the mining sector, there's no doubt that -- for example, our temp margin has come under pressure in Australia, over the last period of time. What's really quite pleasing in the results we've had today, the overall Group temp margin increased by 30 basis points. But the temp margin in Australia has fallen almost by 2% in the last two to three years, and all of those things have come into how we're doing. The good news about Western Australia, if you take that sort of market, we're now a very dominant player in that space. I know that's not a word that a certain individual would like, but we've got a new office in Perth. We took the opportunity of the property market to take a new office. We've got 80 consultants there. A lot of our competitors disappeared from that marketplace. And whilst the wage levels are a lot lower than they were two years ago, they're still higher than anywhere else in Australia. So actually our conversion rates are not massive different across the offices. Of course, we've had a better growth in New South Wales, and I think New South Wales and Victoria will continue to take that economy out of its difficult conditions, and we'll perform well. I think the real pity is we haven't had a meaningful recovery yet in Australia. As we get that meaningful recovery, we'll drive leverage. And I think you'll start to see that this year. And I'm very confident this year, with everything we see today, the visibility we've got, is that we're well set, as I said earlier, to drive fee growth in the 6%, 7%, 8%, whatever it is, that sort of range. And we'll drive much greater profit leverage, and that will start to improve our conversion rate. -------------------------------------------------------------------------------- Tom Sykes, Deutsche Bank Research - Analyst [11] -------------------------------------------------------------------------------- And just on -- you've added quite a lot of headcount into Germany, I just wondered if you could go through the timeline of that over the course of the year, because I can't quite remember when that's actually gone in. And then it hasn't had a huge impact on your conversion rate, so is there a difference in remuneration policy at all, of the new people that you're putting in, or are they very junior? Just maybe some comments over that would be great. -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [12] -------------------------------------------------------------------------------- Yes, 14% increase in headcount is quite an aggressive statement basically. And an aggressive -- it shows our commitment and our confidence in that market. And it was very heavily skewed towards the second half. Absolutely no difference in remuneration of the individuals. They're exactly the same sorts of people brought in. They're focused on a slightly different market, because historically a large part of our German business has been focused on the bigger corporates. But there is a large mittelstand SME market, which is somewhat untapped, and we put in additional capacity to leverage that opportunity. Exactly the same sorts of people, exactly the same compensation. They haven't been there very long, and working in a contractor business, versus a perm business, always takes you a little bit longer to build up your book, and build up to the productivity. But then you have much more of an annuity run rate-type business. So I'm confident that Germany is going to start to see a modest uptick from the sorts of rates that we were seeing last year. -------------------------------------------------------------------------------- Tom Sykes, Deutsche Bank Research - Analyst [13] -------------------------------------------------------------------------------- Great. Thank you. -------------------------------------------------------------------------------- Hector Forsythe, Stifel - Analyst [14] -------------------------------------------------------------------------------- Hector Forsythe, Stifel. Three questions actually. The first one on the IT contracting model that you've outlined and you go in a little bit of detail. Can you scale it within the Group for us so we understand how big it is? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [15] -------------------------------------------------------------------------------- Yes, if I start in the numerics, I think if I first of all take all of our contracting business, it's now about 20% of our Group. Clearly, a large element of that is within Germany. But if I take IT and engineering, if you don't mind, because it's easier for me to do the numerics on it, we're now -- we've got more than 7,500 contractors in that space and, of course, why 7,500 contractors might be more important than 7,500 temps in some of our other markets is simply the salary levels. Really, whether it's what we've seen in Germany, or what we see in France, or what we see in other countries, the salary levels are EUR100,000 and above and the margins are pretty good, so you're talking 20% margins. Therefore, it's pretty lucrative for us, so it's an increasing part of our business. -------------------------------------------------------------------------------- Hector Forsythe, Stifel - Analyst [16] -------------------------------------------------------------------------------- Okay, fine. That's helpful. A couple then, on -- can you just walk through what you think is going to happen over the next couple of years in terms of depreciation and CapEx numbers please? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [17] -------------------------------------------------------------------------------- Yes. Of course, we're going to, at some point, get a benefit because we've spent GBP60 million to GBP70 million on building our new IT systems and that depreciation starts to fall out predominantly in FY18. So we get an improvement in that year. But I think if you think back, if you go outside where we've done the systems investment, every year I've been here and this is now my 10th year of results I've presented which is (laughter) an interesting point, but anyway -- but our CapEx has always been between GBP10 million to GBP15 million and the bulk of that is driven by what offices are we doing. So, for example, next year, we're going to a new flagship office in Paris. We will spend a little bit over GBP1 million in the fit-out of that. So our office spend is normally about one-third of it; then our IT spend is about one-third of it; and then there are some other parts to it. And we have no need at all to have suddenly a large increase in capital expenditure because one of the really good parts here is if you take the UK and all the work we did, we just did a complete refresh of our PeopleSoft system in the UK last Christmas and that's in the CapEx this year. So CapEx continuing to be in the GBP10 million to GBP15 million range and then in FY18, our depreciation number falling down by something like GBP8 million or GBP9 million. -------------------------------------------------------------------------------- Hector Forsythe, Stifel - Analyst [18] -------------------------------------------------------------------------------- Okay. And then on tax rate, nice drop in tax rate into the current year. Given the mix of profits that you're seeing, your aspirational GBP250 million, where do you see tax rate maybe in two or three years' time? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [19] -------------------------------------------------------------------------------- Yes, and I'll answer it in a slightly different way and I'll come back to that because I remember Andy Grobler asking me a question at the Investor Day, what did I think the tax rate was going to be in the FY18 year, then I'd said 29% on the day. Of course, since then, two major things: one, UK tax rates have come down; secondly, the proportion of our profitability in the UK is greater. So I think if you went a long term, we're going to have something like a 27% tax rate and that'll be beyond FY18. But I think we'll see coming to 31% this year and something like a 150 basis point fall per annum for the next two to three years fits in well. So we're going to go through a period of time where we'll drive good profit growth. We'll certainly have less cash interest exiting the business as we eliminate debt and we'll have less tax as well. So, if you like, below the line, which is normally not massively relevant in our business, we'll certainly be positive in the next few years. -------------------------------------------------------------------------------- Hector Forsythe, Stifel - Analyst [20] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Andy Grobler, Credit Suisse - Analyst [21] -------------------------------------------------------------------------------- Andy Grobler, Credit Suisse. Not about tax rates, but just in the contracting business, are you seeing any pressure on margins as the likes of Upwork begins to take -- continues to grow and they're charging out at 10% margins? Is that having any impact on your business or not? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [22] -------------------------------------------------------------------------------- Not on a case-by-case basis. I think where you may pick up a very large contract with scores or hundreds of contractors, clearly, the client will push for some sort of discount on the whole lot in exchange for the volume and the exclusivity. But that's the normal course of business. We're not seeing any major shift. There's always procurement pressure. Clients will always want to pay less than we would like to charge or that the contractors themselves would like to charge, but that's just normal run-of-the-mill cut and thrust of business I think. -------------------------------------------------------------------------------- Andy Grobler, Credit Suisse - Analyst [23] -------------------------------------------------------------------------------- And do you think as that the whole sharing economy grows and those websites and those tools become more accessible to more people, that the status quo, as it is, is sustainable, or is it inevitable at some stage people will compare and contrast (multiple speakers)? -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [24] -------------------------------------------------------------------------------- It's horses for courses I think, Andy, because some types of work lend themselves to being delivered in different ways and some times of work don't. And I think there will always be a very large market for clients wanting to have a human being turning up and physically being there doing the job, even if the job could be maybe done remotely. And there'll be other examples where work could be done remotely or even crowd-sourced for example. So there are the emergence, and has been for some years, the emergence of different models. We don't see it impacting on our business whatsoever. When you look at our contractor growth rates, which is finding skilled individuals and having them turn up at the client's premises usually, sometimes at our own premises, to physically do the work that the client wants, that's the contractor business that we're in, it's growing very quickly. I think one of the macro trends that you do see in the world of work, driven both by the desire of many people, particularly in younger generations, want to build their career on a series of projects; that lends themselves well to working in the contractor world versus a job for life world. Combine that with clients often looking for greater flexibility in their workforce so they can balance their own cycle better than they might do with just the permanent workforce, for example, it gives them that greater responsiveness and greater access to niche skills when they want them. Then I think those two trends mean that the contractor workforce around the world in general will become bigger and more important over time. All of that bodes well for us as we're building our contractor business in those important markets. -------------------------------------------------------------------------------- Andy Grobler, Credit Suisse - Analyst [25] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Kean Marden, Jefferies - Analyst [26] -------------------------------------------------------------------------------- Kean Marden, Jefferies. Just to touch on the branch -- the office network point and just looking at slide 43 in the appendix. So you obviously were a net closer of branches last year. Is that -- and also, I think that's you basically collapsing two or three branches into one more efficient. So has that branch optimization process largely played out now, or is that something that can continue for another year or two? -------------------------------------------------------------------------------- Paul Venables, Hays plc - Group Finance Director [27] -------------------------------------------------------------------------------- There's always opportunities and some point to the market to take a slightly bigger office in the perfect space in town with really good infrastructure and consolidate two to three smaller offices into it. And the beauty of our property strategy, which has really two parts, we go for some big flagship office and a lot of you here have been in to our Cheapside office, and for that we clearly needed to do a 10-year lease, that's just where the economics were. So there's some flagship offices on long term and then we have periphery ones, or secondary cities, where we're generally on three to five-year leases and that's been a big benefit for us over the last certainly five years. We've pretty much consistently reduce the cost of our property footprint, got into better offices at lower cost because of where the market has been at and yes, this was just consolidating. So really, it's very much round the edges now. If anything, we're -- if you take the UK, are we more likely to add five offices or lose five offices in the next couple of years? I think we might add five offices. We know we were very questioning of our office footprint in the tough times and therefore, we may add a few back, but certainly the bulk of the benefits has gone. But under Alistair's leadership, we've been exceptionally ruthlessly focused on upscaling our office footprint and giving ourselves really good offices around the world in line with the fact we've improved the brand and everything else. So we've still got a few opportunities as certain properties come up for renewal. -------------------------------------------------------------------------------- Alistair Cox, Hays plc - Chief Executive [28] -------------------------------------------------------------------------------- We haven't pulled out of anywhere, Kean. -------------------------------------------------------------------------------- Kean Marden, Jefferies - Analyst [29] -------------------------------------------------------------------------------- And then a quick one on Veredus. So my recollection from six months ago was that the amortization of the deferred consideration would be something in the region of about GBP1 million for the FY15 and then about GBP1.5 million for FY16. I think you've come in a little bit below that. So is that FX or has something changed or did I misinterpret the comments six months ago? -------------------------------------------------------------------------------- Paul Venables, Hays plc - Group Finance Director [30] -------------------------------------------------------------------------------- No, I probably gave guidance on a full year I think, Kean, because we hadn't actually -- our Group Financial Controller, Mark Berry, is in the room, but we hadn't actually finalized our policy on that and we had to June to do that. So as the initial consideration, we've allocated GBP3 million to the Veredus brand. That will be amortized over three years and clearly, we've got a very clear brand strategy where we've had Veredus, the Hays Company and we've now got Hays powered by Veredus, so all of these parts to merge over time towards an endgame of a Hays brand. So the amortization charge will be GBP1 million a year and we took just around GBP0.5 million in FY15, so an incremental GBP0.5 million next year. -------------------------------------------------------------------------------- Alan Thomson, Hays plc - Chairman [31] -------------------------------------------------------------------------------- Very good then, if that's all, thank you very much for your attention. We'll next speak to you all on October 8, with our first quarter IMS. Thank you very much.
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