Hello, welcome to Hays Q1 Analyst Call. My name is Molly and I'll be your coordinator for today's event. For the duration of the call, the lines will be on listen only. However, you will have the opportunity at the end of the call to ask questions. This can be done by pressing star one on your telephone keypad. If at any time you require assistance, please press star zero and you will be connected to an operator. I'll now hand you over to your host, David Phillips, to begin today's conference. Thank you.
Thanks, Molly. Good morning, everyone. Welcome to Hays Quarterly Update Call for the three months ending 30 September 2019, the first quarter of our 2020 financial year. I'm David Phillips, Head of Investor Relations. I'm here with Paul Venables, Group Finance Director. Before we begin, please be aware that this call is being recorded, with the recording accessible using the number and the code provided in the release. Please be aware that our discussion may contain forward-looking statements that are based on current expectations or beliefs, as well as assumptions on future events. There are risk factors which could cause actual different results to differ materially from those expressed in or implied by such statements.
Hays disclaims any intention or obligation to revise or update any forward-looking statements that have been made during this call, regardless of whether these statements are affected as a result of new information, future events, or otherwise. I'll now hand you over to Paul.
Thank you, David. Good morning, everybody, and thanks for joining us. I will summarize the highlights of today's update, cover key themes, and discuss regional performances before we take any questions. As usual, all net fee growth percentages I give will be on a like-for-like basis versus prior year, unless stated otherwise. First, highlights of the results. We delivered a solid quarterly performance with group net fees flat on a headline basis, in line with market expectations. This is despite tougher macroeconomic conditions, ongoing signs of reduced business and candidate confidence, and a 9% year-on-year growth comparative. When adjusted for working days, net fees decreased by 1%. Currency translation had a positive impact and increased headline net fees by 1% in the quarter. I will highlight the following key features in the results. First, 10 of our 33 countries delivered double-digit growth, including eight all-time quarterly records.
Overall growth was flat in both our temp and our perm businesses. Australian net fees declined by 2%, or 3% working days adjusted. The overall market is broadly sequentially stable at near record levels, although conditions in construction and property remain tough. Third, Germany delivered flat net fees or down 2% working days adjusted, and we saw broad signs of reduced business confidence and increased client cost control, particularly in the manufacturing and automotive sectors. Four, in the U.K. and Ireland, fees declined by 4% or down 5% working days adjusted, which comprised a good 6% growth in our public sector business and tough conditions in the private sector where net fees fell by 7%. Five, performance in the rest of the world was solid at 4%. Asia and Americas both performed well at 7%, and EMEA ex-Germany was up 2%.
Six, consultant headcount was up 1% in the quarter and year-on-year, and we opened one new office in Bremen, Germany, in line with our long-term plans. Seven, cash performance was good, and we ended the quarter with net cash of GBP 90 million, 10 million higher than Q1 FY 2019. I'll now comment on the performance by each division in a little more detail. Our ANZ division, 18% of group net fees declined by 2%, or down 3% on a WDA basis. Temp, which represents 68% of ANZ fees, declined by 1%, and perm down 3%. Important to note, the overall market is broadly sequentially stable at close to record levels. Australia decreased by 3%, and in New South Wales and Victoria, together 57% of Australian business net fees decreased by 6% and 5% respectively. Queensland declined by 2%, although South Australia and ACT were up 5% and 1% respectively.
At the Australian specialism level, net fee growth in IT was strong, up 11%, and HR grew by 6%. Construction and Property, our largest business in Australia, remains challenging and declined by 16%. It is now 21% below peak. Banking and Finance was also difficult and reduced by 13%. Finally, I'm pleased to say that following management changes made in New Zealand last year, we now return to growth in that country at a strong 19%. On headcount consult, headcount in ANZ increased 1% in the quarter but was down 2% year-over-year. Our largest business, Germany, 27% of group net fees, was flat and down 2% on a WDA basis versus the prior year. As noted earlier, there are broad signs of reduced business confidence and increased cost control. We also face a +13% growth comparative from prior year.
Our temp and contracting business, which represents 83% of Germany's net fees, was flat, with contracting down 2% and temp delivering solid growth of 5%. Perm continued to slow and decreased by 2%. After strong growth in recent quarters, our German public sector business deserves a mention, as it now represents 11% of net fees, and it grew by 31% in the quarter, whilst private sector was down 3%. Our largest specialism of IT, 41% of the German net fees grew by a solid 4%. Engineering, our second-largest specialism at 27%, saw fees decline by 5%, due to continuing tough conditions in manufacturing and automotive sectors. Sales and marketing grew an excellent 21%, although construction and property was tougher, down 16%. Our consultant headcount was flat in the quarter and up 1% year-on-year.
In U.K. and Ireland, 23% of group net fees, conditions were tough and net fees were down by 4% or 5% working days adjusted. Perm declined by 8% while temp was flat. Growth in the public sector, which represented 28% of U.K. and Ireland, was a good 6%. Within this, temp grew by 8% and perm 1%. The conditions in the private sector were tougher as ongoing uncertainties continued to affect business confidence, we also saw a reduction in candidate confidence and thus net fees decreased by 7%. All regions traded broadly in line with the overall business, except for the South West and Wales, up 4%, and the Midlands and North, down 10% and 7% respectively. Our largest U.K. region of London fell by 2%. In Ireland, net fees declined by 13%.
At the specialism level, IT grew a solid 5%, accounting, finance, and office support both saw 4%, while construction and property was down 7%. Education continues to face tough term market conditions and declined by 11%. Overall, consultant headcount increased by 2% in the quarter and year-on-year, reflecting our graduate intake and investment in our IT specialism. Rest of the world, comprising 28 countries and representing 32% of group net fees, grew by 4% against a tough 14% growth comparative. Within this, eight countries delivered all-time records. EMEA, ex Germany grew by 2% and remained broadly sequentially stable. Within this, our largest rest of the world country of France was up 3%, Switzerland 7%, and Italy increased by a strong 11%. The Netherlands and Belgium were tougher, decreasing by 12% and 7% respectively. In Spain, we saw a decrease in the quarter, down 6%.
Americas delivered good 7% growth. Our U.S. business, the second-largest rest of the world country, produced a record quarter and grew by 12%, with growth in both construction and IT. Mexico increased by an excellent 36%. However, Canada was tougher and declined by 5%. Growth in Asia was also good at 7%. China, our third-largest rest of the world country, delivered another record quarter, up 7%. Japan grew by 3% and Malaysia produced an excellent result up 32%. In the rest of the world, consultant headcount was up 2% in the quarter and up 1% year-on-year. Cash flow and balance sheet. We delivered a good underlying cash performance in the quarter with a net cash position at 30th September of GBP 90 million, GBP 10 million higher than at the end of Q1 FY 2019. Current trading and guidance. I'd highlight five points.
First, the group's net fee exit rate was broadly in line with the working days adjusted rate of growth in the quarter. Second, we expect group headcount to remain broadly flat in Q2 FY 2020. Three, for comparative purposes, if we retranslate our FY 2019 profits at the average exchange rate seen during FY 2020, the reported operating profit of GBP 248.8 million will be GBP 248 million, which is a GBP 6 million reduction versus the position on prelim results in August. Four, looking ahead, we remain mindful of economic and political uncertainties and focused on managing the challenging conditions in cyclical sectors like CMP and engineering, while investing in key structured growth markets like IT. The ring-fenced investment into our IT specialism over recent years are delivering strong results with 11% growth in FY 2019 and 6% in the last quarter on a global basis.
In Q1 thus, we added a further 70 consultants into our IT specialisms in Australia, France, Spain, and the U.K., the initial tranche of a ring-fenced investment program. As we sit here today, and with the usual caveat that we've only got three to five weeks visibility and little forward secured revenue stream, I'd expect our group like-for-like growth rate in Q2 to be down 2%, slightly below Q1's working days adjusted growth rates. In conclusion, we've delivered a solid performance in tougher macroeconomic conditions. We'll continue to balance investing for the long term whilst managing the more challenging markets we currently face. Our cash performance was again good. We ended the quarter with GBP 10 million more cash at the same point last year, demonstrating again the highly cash-generative nature of our business model.
Our financial strength and global network, which is the largest and most balanced in the industry, means we have an excellent platform to manage more challenging markets while still investing to deliver our long-term strategic goals. I'll now hand you back to the administrator, and we're happy to take your questions.
If you would like to ask a question, please press star one on your telephone keypad and ensure that your telephone line is unmuted locally. You will then be advised when to ask your question. The first question comes from the line of Rory McKenzie calling from UBS. Please go ahead.
Morning all. It's Rory here with a few questions on behalf of Bilal. Just on that last comment you gave where you said that you expect the group to be at minus 2% in Q2. Is the bigger area of deterioration still in Germany? Can you talk about how business confidence may be still falling there? What should we be aware of in Germany in Q2 in terms of comps and working days, please?
Yeah. Thank you, Rory, and good to hear from you again. Look, I think we were very clear when we talked to the prelims that we'd seen a step down in activity levels in Germany and the U.K., and of course, that was clearly reflected in the results today. Whilst our exit rate in September overall was in line with the underlying growth in Q1, we have to remember two things, I think. First of all, September a year ago was a weaker quarter. That was the quarter in which we had a quite sharp decline. Then secondly, all the forward indicators we see show that we don't expect to see any improvement. In fact, a slight deterioration again in the U.K. and Germany.
In Germany's case, I think now what started off a year ago as the start of a quite sharp slowdown in the automotive and manufacturing sector, I think that's now for obvious reasons, hit confidence more broadly. You only have to follow the business press in Germany to see that there's a lot of discussion about will there be a technical recession? How long might it be? How deep might it be? All of us will have seen the PMI indices in Germany, which is whether it's in the manufacturing sector, where it's at 44, whether it's in the service sector, is well below that in Europe. For everything we're seeing, our clients have moved more to cost control. It's interesting within these numbers that you'll have seen that the temp growth quite significantly exceeded contractors. Again, contractors is a longer-term commitment from our clients.
Temp is a shorter-term commitment, whilst as you guys know, on average, our temp assignment last 12 months. They're on a rolling four-week basis. It gives clients more protection. The positive, both in those markets and everywhere in the world, is that we're seeing no distress at all in any sector or any country. What is clear is in Germany, we're seeing more cautious decision making from clients. Moving on to the U.K., I think it's fairly obvious that there's an enhanced level of uncertainty at the moment. The new news in this quarter was that we saw a reduction in candidate confidence, which means, of course, that you have a number of jobs where you get to the end of the process, an offer is made, and the candidate then pulls himself out of the process. This is fairly normal in a weaker market.
Again, I'm trying to give some comfort in many respects by saying, with the experience I've got, we expect Q2 to be worse than Q1. Therefore, we've said it, but we don't expect it to be significantly worse. There's no working days impact. Of course, a year ago, we were still growing pretty well. Rory, overall at group level, we were 8%, and in Germany was still double digits. Still against, in hindsight, some strong comparatives.
Yeah, sure. Just against that weakness you talked about, it was noticeable that EMEA ex Germany actually saw some trends stabilize or improve. Why do you think there's a difference there? What's different with the clients you're interacting with, particularly in France, for example, that those things have done a bit better?
Yeah, I think that point is very well made because France is our largest country within the rest of the world region. I think the mix of specialisms is different. We don't have a large automotive business in France. We have a greater proportion of our French business towards the professional services, accounts and finance. We also do have a decent-sized business in markets such as life sciences. Whilst there's no doubt that the broader trade issue has impacted all exporters globally, I think pharmaceuticals has been less impacted. Finally, Rory, a year ago, the real problem that we had in Q1 was very much in France and in Belgium and the Netherlands, where we saw quite a sharp slowdown in perm in that part. Of all of our regions, Europe ex Germany is the one that feels the most stable at the moment.
That's great, so we'll take that. We were trying to bring out separately the difference between, let's say, France and Germany, where I think in Germany there's a greater exposure, A, through manufacturing and, B, much more of the economy is export driven.
Great. That's helpful. Thank you.
Your next question comes from the line of Paul Checketts , calling from Barclays. Please go ahead.
Morning, Paul. I have three questions. The first, I would say the results are slightly better than expected in Q4, certainly better than I had it and possibly what you've guided to. Can you just run us through the areas that were better than feared? That's number one. Then it may cover this, but Paul, you often give us a run through Australia. You've seen your growth rate is quite divergent trends. Can you give us an update on how you see that panning out? Then the last one is, can you remind us how you're planning to strike the balance between cost and fees in a more difficult environment? Thanks.
Yeah. Again, Paul, thanks for those questions. If I don't answer them fully, please do come back. I think, remember though, when we came out with the prelims, certainly for any questions that we were asked when we went around the investor roadshow, et cetera, we said we expect to be -1%. In that, I was talking about kind of working days difference. For us, it's broadly in line. If anywhere, where is it a bit better? I'd actually say it's slightly worse in Germany, maybe one percentage point, it is definitely better in the rest of the world. Whilst in August we talked toFrom being broadly sequentially stable in Europe, ex-Germany. Of course, September is a large month for us. It is 40% of the quarter. It's heavily perm dominated.
I think it is fair to say that we were very pleased with what has happened in that region. When we look internally and we look at kind of the budgets that we've set and everything else, that was the best performing region in that they've. It's not just that they've hit the numbers we expected them to, but there's been no real surprises as we've gone across the quarter, in, A, Europe, and then, B, without a doubt, the U.S. growth acceleration is better than we could have expected. We had some kind of restructuring we did in the business about four or five months ago in some of the sectors. We've got some real momentum now. We've had momentum throughout in Construction & Property. Based on our own analysis, we're now number one in the U.S. market.
We're going to continue to invest in that sector. That's one of the ring-fenced investment areas. Secondly, IT has returned to growth. Perhaps it's just that we're taking the PLC board to the U.S. next week, and our U.S. colleagues want an easy time. Either way, perhaps we'll take the board around the world all the time because we've had a record quarter by some way, strong growth, real momentum. I'm very happy with that business. Coming on to Australia, I think it's an interesting market at the moment. For any of you that read the stuff that comes out of, for example, NAB or ANZ, what you've got is you've got the government and the Reserve Bank of Australia trying to do everything to stimulate the economy. You've had three cuts in interest rates.
For a full employment economy, to have interest rates at 0.5% is another kind of indictment on where we are as a world. You've also had tax cuts, so you've got stimulus being done on scale. At the same time, you've got business confidence remaining pretty subdued, and consumer confidence policy has held up, and there's no doubt the interest rate cuts have helped stabilize house prices. Things like cars are still down. Car sales are down 10%. I think Australia for me is still mixed. We're very happy with our business there. I think the best way to describe that is 18 months ago, Construction & Property was 28% of our business. Today it's 20%, and we've managed that within not much of a reduction in our fees. We're only 2%, 3% above peak all-time levels. I think we're doing well.
We've got good growth in IT. We've got good growth in HR. We've got good growth in policy. It is sequentially stable, but there's still some uncertainty in that market. I'm not saying we're out of the woods, but what I am saying is at the moment, we're broadly stable. I think your last point is a critical issue for all cyclical businesses. I guess the way that we approach this, and certainly the way that my mind is on, is in part related to the answer I gave to Rory a few minutes ago. There is no market anywhere in the world where we're seeing distress at the moment. What we are seeing is clients make very logical decisions after four to five years’ worth of strong growth and strong investment and being a lot more cautious at the moment.
Within that, of course, there are certain sectors, automotive and banking, which are, for obvious reasons, harder hit. What we're trying to do is balance between where we've got some calm down, some Construction & Property, absolutely reducing headcounts and making sure we're in line with that market. Equally, where we've got some long-term structural opportunities, and within that, IT across the world, life sciences, U.S., we're going to continue to invest. The balance is a hard one to have because we've often talked about consultant productivity. In good times, of course, both the tools and our management in the economy helps drive it. At the moment, even more in places like the U.K., where suddenly we've now got candidate confidence lifting.
Of course, we have a reduction in candidate confidence, and we've said before, if productivity is up or down 1%, that has a GBP 8 million impact on our profits. At the moment, we're in that down phase. Our aim currently is to be very cautious on headcount. We talked here about being broadly stable, which means it'll probably decline a bit because that's just the nature of recruitment businesses. Keep an eye on every market as possible, but make sure in the long term structural opportunities, we continue to invest for the long term on a controlled basis. That means, Paul, that through some of these investments, we'll make less money this year, but I think it positions us much better for a rebound when we see stabilization in the market.
Thanks very much.
The next question comes from the line of Anvesh Agrawal from Morgan Stanley. Please go ahead.
Hi, good morning. Just had one question, really. I know we are very early in the year, but just kind of if you give some thoughts around how should we think about the operational leverage in the business, especially given the mix of the growth and which is higher interest of the world, which is again, a lower conversion margin business, and any kind of metrics around what sort of impact on productivity on every % or two of the fee reduction, assuming we kind of remain in this minus 1%, minus 2% range for the year. Thank you.
I guess a real simply ready reckoner. In the end, none of us knows the next nine months are going to go. I've only done this job for more than 13 years, and you have to start off and be humble and say you've got three to five weeks visibility and not a lot of forward-secured revenue stream. That's the way we'll continue. 1% of fees is about 11.5 million GBP. On that, we save commission, which gets you down to slightly below 10 million GBP, and below that depends what you do on headcount. At the moment, we are expecting that our headcounts, which I think was 1% up year-on-year in these results, is above the underlying fee level of -1%. 1% of that currently is definitely reduction in productivity due to the uncertainties we've discussed. 1% is a decision to ring-fenced investment.
There are certain specialisms that we're going to invest slightly ahead of the curve because we focus on the long term. I think we also have the luxury in a very loyal shareholder base, our top 10 own 55%. Myself and Alistair have been here a long period of time, and therefore will do the right things for the longer term. Number one, I think productivity will be down this year unless we see a strong rebound in growth in the second half, and kind of 1% gets you to GBP 8 million, the reverse of that ready reckoner is how I got you to that GBP 10 million before, so it's in that sort of range. Then you're right, this is life. We want, over the longer term, a large business in the U.S. and a large business in Asia.
At the moment, those businesses combined are just above 10% of our group. They're not 30% of our group. Therefore, we will continue to invest in strength and depth of management across Asia. We will continue to invest in the U.S. We know by those sorts of investments, that investment is going to be a good GBP 5 million plus ring-fence this year, and that, of course, will have an impact on profit. I think those are the right things to do for the longer term part of the business. I take a bit of comfort, and it might be spurious, so feel free to shoot me down, but it's intriguing to me that the generalists have all stabilized at about -3%, -4%, and have been stable now for a couple of quarters. We look at every single activity every single month.
We will move quickly if we see any further real decline versus where we are now. The right thing to do, I think, is to kind of keep that head count where we are today, slightly lower. Finally, of course, we gave quite a lot of guidance on property and depreciation, et cetera, of which, of course, a greater skew of that is for the first half. Great question. I think we're in a nice position to make some choices, but rest assured, market gets tougher, we'll take more costs out. At the moment, we're more likely to continue with some modest investment programs and not do anything drastic.
Okay. That's very clear. Thank you.
Please be reminded, for the next question. If you'd like to ask a question, please press star one on your telephone keypad now. The next question comes from the line of George Poverary calling from Exane. Please go ahead.
Morning. Paul, just following up on that last comment of yours. In terms of the starting point and what you need to offset, is the base level of cost inflation, inherent cost inflation still around 2%? To what extent is that slightly lower in the current environment outside of your investments into the U.S. and what have you? Thanks.
I think two things. One, by its very nature, some of the property stuff that we put in that year-end note has some inflation in it, and that's just kind of life. If you look overall, it is less than 2% because there's parts of our cost base which are fixed. There's others which don't go up in line with inflation because, of course, things like commissions go up in line with salary inflation. If you looked at the overall cost base, you would have inflation of 1% to 1.5%, and then on top, we've got some specifics which I've covered earlier on. Positive is we're continuing to see a bit of wage inflation, so a nice part of it is there's still some wage inflation. Whilst we've seen no acceleration of that across this period, I don't think that's surprising.
With our average term fee, which is my best surrogate for that, is continuing to increase kind of modestly. I think from that standpoint, we're in a pretty good position. Again, we will continue to watch everything.
Thanks.
We have no further questions coming through on the phone line, so I'd like to hand the call back over to your host for any concluding remarks.
Brilliant. Thank you. If that's all the questions today, we'd like to thank you again for joining the call. I look forward to speaking to you at our next Q2 trading update on the 16th of January 2020. Should anybody have any follow-up questions, maybe Charles and I will be available to take your calls for the rest of the day. Thank you very much for joining us, and have a great day. Bye.
Thank you for joining. Please, you may now disconnect your lines.