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UK - Hays sees strong international growth tempered by lacklustre UK

01 September 2011

In its results announced this morning for the year ended June 2011, revenues were up by +21% from 557.7 million Pounds in 2010 to 672.1 million Pounds in 2011 at Hays Plc (HAS:LSE), the second largest staffing agency in the UK. On a like-for-like basis (LFL) revenues were up by +18%.

Operating profits, before exceptional items (see below), was up by +42% (+33% LFL) from 80.5 million Pounds in 2010 to 114.1 million Pounds in 2011.

Profit before tax, before exceptional items, was up by +50% from 71.1 million Pounds in 2010 to 106.6 million Pounds in 2011. Profit before tax was up +273% from 29.7 million Pounds in 2010 to 110.7 million Pounds in 2011.

The temporary placement business, representing 54% of group net fees, increased by +10% (LFL). This comprised a volume increase of +6%, a favourable increase in mix/hours worked of +8%, partially offset by underlying margins slightly lower at 14.7% (2010: 15.2%). Margins have, however, remained broadly stable through the year. The lower level of growth relative to permanent placement reflects the temporary placement business' greater resilience in the prior year and its higher weighting to the UK public sector.

Net fees in the permanent placement business, representing 46% of the Group net fees, increased by +27% (LFL), with permanent placement volumes increasing by +23%. Hays capitalised on the significant improvement in trading conditions across the vast majority of its markets this period, and recorded strong performances across Asia Pacific, Continental Europe, South America and the UK private sector. The average fee per placement increased by +4% (LFL) compared to last year, driven by mix and modest wage inflation in Asia Pacific and parts of Continental Europe.

The group's operating cost base, excluding exceptional items, increased by +15% (LFL) versus prior year. This was principally due to the +11% increase in consultant headcount, together with an increase in commission payments which rose in line with net fees. The group's conversion rate, which is the proportion of net fees converted into operating profit, excluding exceptional items, increased to 17.0% from 14.4% in the prior year. This was driven by net fee growth, an increase in average consultant productivity and by strong management and control of the group's operating cost base.
The Group has recognised an exceptional credit of 4.1 million Pounds in the Consolidated Income Statement in 2011. This comprises a 24.0 million Pounds credit in respect of the Group’s successful appeal in reducing the fine imposed by the Office of Fair Trading in September 2009, and which was previously fully provided for in the 2010 accounts. The fine which was reduced from 30.4 million Pounds to 5.9 million Pounds, has been paid in full and brings this matter to a close. In addition, the Group incurred a 10.0 million Pounds goodwill impairment charge in respect of the UK healthcare business acquired in February 2006 for 17.9 million Pounds due to tougher conditions in the UK healthcare market, and a 9.9 million Pounds charge relating to the restructuring of the UK cost base. Including the effect of exceptional items, statutory profit before tax was 110.7 million Pounds, an increase of 273%.

Consultant headcount increased by +11% during the year. This was led by a +27% increase in consultants in the International business where the group continues to invest in order to capitalise on the substantial opportunities for growth across the majority of markets.  During the year, Hays launched businesses in Mexico City and New Jersey, their first entries into the Mexican and US markets and. since the year end, opened the first office in Colombia, based in

In the United Kingdom & Ireland, net fees decreased by -1% on an actual and like-for-like basis to 241.7 million Pounds, with operating profit, before exceptional items, dropping from 11.4 million Pounds in 2010 to 3.6 million Pounds. Net fees increased by +12% in the permanent placement business, but declined by -8% in the temporary placement business, as a result of its greater weighting to the public sector markets. The conversion rate declined from 4.7% to 1.5% as a result of the net fee reduction, full year depreciation costs in respect of new IT systems, dual-running costs of the back office automation project and modest cost inflation, partially offset by the headcount reductions made during the year.

In the private sector business, which currently represents 78% of UK net fees, the group delivered net fee growth of +19%, with good growth in the Accountancy & Finance, Construction & Property, IT and Corporate Accounts businesses. The group achieved growth of +27% in the first half, however, the group saw growth decelerate in the second half with net fees increasing by +12%, in large part due to tougher market conditions in the Banking and City-related businesses.

The public sector business faced tough market conditions throughout the year, with net fees decreasing by -35% and the group exited the year down -57% from peak levels. The front-line businesses have been relatively more resilient, with net fees decreasing by -17% versus prior year. However, market conditions in the back-office and Construction & Property businesses have been very difficult,
with net fees now down around -70% from peak levels. The UK public sector business represented 24% of UK net fees and 9% of group net fees in the year.

Consultant headcount in the United Kingdom & Ireland was reduced by -5% during the year, as Hays balanced managing the recovery in the private sector with the difficult public sector market, however the group expects consultant headcount to remain broadly at this level in the coming months. As a result of the lower level of momentum in the private sector recovery in the second half the group has reduced the non-consultant cost base of the business. These actions will generate cost savings of around 7 million Pounds per annum going forward.

In Continental Europe & RoW, net fees increased by +32% (+33% LFL) to 220.4 million Pounds, a record for the division, and operating profit, before exceptional items, increased by +89% (+95% LFL) to 32.4 million Pounds. The difference between actual growth and like-for-like growth was mainly due to the modest depreciation in the Euro. The conversion rate increased from 10.2% in 2010 to 14.7% in 2011 driven by strong net fee growth and the return to profitability in the majority of countries across the division during the year.

The German business, representing 48% of the division's net fees and the significant majority of the division's profits, recorded +37% (LFL) net fee growth and posted several record monthly performances as momentum remained strong through the year. Growth was broadly based across the contracting and temporary placement businesses and across all of the sectors in which Hays operates. Hays diversification into Accountancy & Finance, Construction & Property, Sales & Marketing, Legal and Pharma, continues rapidly and these specialisms now account for 24% of total net fees (2010: 21%).

Other businesses in this division, covering 21 countries and focused principally on the permanent placement markets, delivered strong net fee growth. In France, Hays' second largest country in the division, the group recorded +19% (LFL) net fee growth with strong momentum through the year. Hays provided a detailed insight into annual (LFL) net fee growth for all of its other European businesses:

• Luxembourg  +89%
• Poland  +58%
• Austria  +50%
• Italy   +43%
• Denmark  +41%
• Netherlands  +35%
• Spain   +27%
• Switzerland  +26%
• Hungary  +26%
• Belgium  +23%
• Czech Republic +23%
• Sweden  +19%
• Portugal    +7%

Consultant headcount increased by +31% during the year, led by increases of +34% and +50% in Germany and Brazil, respectively. Market demand and growth momentum remains strong in the majority of the countries within the division, and the group is continuing to increase its consultant headcount.

In Asia Pacific, net fees increased by +44% (+30% LFL) to 210.0 million Pounds and operating profit increased by +50% (+35% LFL) to 78.1 million Pounds. The difference between actual growth and like-for-like growth was predominantly due to the appreciation in the Australian Dollar. The business achieved a strong conversion rate of 37.2%, up from 35.5% in the prior year, as the group carefully balanced profit growth with the significant investment made to capitalise on the long term growth potential of the region.

In Australia & New Zealand, net fees were up +27% (LFL) versus prior year. Temporary placement net fees increased by +23% (LFL) with demand increasing across all regions through the year and the group exited the year at record temporary levels. Permanent placement net fees increased by +33% (LFL) with a good performance across the year, particularly in the resource-based regions of Western and South Australia and notably in Accountancy & Finance, IT and Resources & Mining. The public sector business, which accounts for 23% of net fees in Australia & New Zealand, remained strong with net fees increasing by +14% (LFL). The businesses in Brisbane and Christchurch responded strongly to the challenges imposed by the natural disasters earlier in the year, limiting the combined second half net fee and operating profit impact of these events to approximately 1 million Pounds.

The Asian business, which accounted for 13% of the division's net fees in the year, achieved net fee growth of +51% (LFL) versus prior year. The businesses in Hong Kong, China and Singapore each achieved net fee growth in excess of +60% (LFL) and set several monthly net fee records during the year, driven by growth across a broad range of specialisms. The business in Japan was significantly impacted by March's earthquake and subsequent disruption, with net fee growth decreasing from +43% (LFL) in the first half of the year to +5% (LFL) in the second half. The business has responded strongly to the challenges faced, limiting the second half net fee and operating profit impact to around 1.5 million Pounds.

Consultant headcount in Asia Pacific increased by +22% during the year, with consultant headcount increasing by +15% in Australia & New Zealand and by +46% in Asia. In Australia & New Zealand, the outlook remains good and the group continues to increase consultant headcount, most notably in Western and South Australia. In Asia, the group has more than doubled its consultant headcount in the past 18 months and Hays is continuing to invest aggressively in order to capitalise on the substantial long-term growth opportunities that exist across the region.

Alistair Cox, Chief Executive, commented "this is a strong set of results with operating profits up by +42%. Our International performance was excellent, delivering +31% net fee growth with the majority of our overseas operations trading at record levels. We have invested heavily in those businesses and will continue to do so, where market conditions remain appropriate, as the long term structural growth opportunities are excellent. Our strategy of international diversification is delivering returns and two thirds of our group's net fees are now generated outside the UK."

"The UK market has been tougher, particularly as recruitment activity in the public sector has dropped significantly over the year. The UK private sector grew strongly in the first half but growth slowed as the year progressed. Consequently, we took early action to both reduce costs as well as focusing our resources on those areas offering the best opportunities."

"Whilst we remain mindful of the continuing economic and fiscal uncertainty around the world, we continue to see good levels of momentum across most of our markets. In Asia Pacific we continue to see good growth in Australia & New Zealand and strong growth in Asia."

"In Continental Europe & Rest of World growth remains strong across the division, led by our German business. In the UK we have seen slowing levels of growth in the private sector business, with continued tough but broadly stable markets in the public sector. Looking ahead, we remain focused on taking advantage of the many opportunities available for Hays to grow a more profitable and diversified business."

In early trading Hays' shares responded well and were up by +5.63% to 79.75 Pence.


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