Earnings Call: H1 2019

Feb 21, 2019

K. Morning, everybody. I think we're just about all here. We've killed the, the Jazzy lounge music. So, welcome to our year results. And, as per our usual format, I'll take you through the operating review, and then I'll hand over to Paul We'll walk through the detailed financials and current trading then I'll come back and give you an update on our strategy. So if we turn to the results, as you can see from the top right hand corner, net fees increased 9% to 1,000,000 operating profit up to 1,000,000 and EPS of 1,000,000, also up 9% and we've increased the interim dividend by has been consistent for many years now. The three things that are most important to us are maximizing our financial performance, investing in and building our future business, and that means obviously further expansion and diversification and then thirdly being world class in terms of efficiency, both in terms of cash generation as well as profit creation. And when we look at our first half, again, think we've delivered on all three of those aspects. So our profits grew 9% and the benefits of our international diversity education and investments, I think, are very clear in these results. Over 80% of our operating profits came from outside the UK and 20 of our around the world, international headcount was up 10% and we augmented this by opening 5 new offices and we had significant expansions right across Europe, Asia and in the Americas. And to support all that front office investment we've continued to scale up our back offices as well to handle significantly higher volumes as well as greater efficiency and we've also continued to invest in front office productivity enhancing technology in general. The conversion rate has remained strong. It did slip 40 basis points mainly due to a softer market in some parts of Europe. I'll come back to that in a little while, but our largest markets of Australia Germany and the UK, together they are 2 thirds of our net fees each saw solid conversion rate performance, spite the investment that we made in infrastructure around the world. And then on the UK, while the UK has remained a relatively stable market for us, albeit uncertain, our strong cost control there allowed us to deliver 6% profit growth. And then finally, in terms of cash, we paid out 1,000,000 in core and special dividends just back in November, and yet we still ended up the half with net cash of 1,000,000. So obviously I'm pleased with that set of results. Let me give you a little bit of color on each of the divisions, and I'll start as usual in Australia and New Zealand. I've used the word consistency in the past to sum up the Australian business. And here we are again, we've had another 2 quarters of strong growth, and that takes us now to 18 consecutive growth quarters. Fees and profits in Australia were both up 10% despite increasingly tough comparators And this was led by New South Wales up 9% and Queensland, Victoria, both up 11%. At the specialism level, we delivered excellent growth in IT, up 27%. Banking was up 20% and office support up 12%. Admittedly, after a long period of growth, we have been expecting a slowdown in construction and property, and we did see fees there decline by 9%. When we include New Zealand, the ANZ TEM numbers were very strong, up 10% and Perms grew 2%. And again, We hit record levels of temp workers over 21,000 temps and contractors on assignment at any point in time. Looking more generally at the local economy in Australia that does continue to be a tougher market in construction. However, in most of our and most of our markets there, particularly in the world of technology, we continue to see very supportive conditions. And as a result, we invested in the business and our Australia headcount was up 13% year on year, with a skew towards areas such as technology and digital, which again, is a key focus key sector for us around the world in general. Looking forward, there's obviously the Australian general election likely to be in May. We have to consider that and that may well bring the usual short term pausing activity in the public sector. And then finally a word on New Zealand, New Zealand's 5% of our total ANZ fees and it has been a very tough business for the last couple of years. Fees there declined 25% and it overall did impact our ANZ results, as you can see on this slide. However, we have made changes in New Zealand The early signs of those changes are very encouraging, and I personally fully expect that business to return to growth again in the near future. Let me turn now to Germany. As you know, our largest business, where we've delivered another strong performance against increasingly tough comparators. Net fees and operating profit both grew by 14% and when we adjust for the 2 additional working days in the half, versus the prior year, profits grew by 10%. Growth in the Flex business, which is 84% of German fees, remember, was 12%. And within this, contracting grew 7% and temps an excellent 22% up. The perm business had another tremendous half it was up by 27%. IT remains our largest specialism in Germany that grew 9% and the next biggest engineering was up 10%. However, the newer specialisms were again the standout performance, so accountancy and finance up 29%, sales and marketing up 20% and legal up by a phenomenal 75%. And these newer specialisms and now a third of the entire German business, and I think they represent some fantastic long term opportunities for us. We opened 1 new office in Germany in the period, and we materially expanded space in 3 others. Headcount was up 7% in the half 3% year on year as we vetted in the very significant numbers of new people that we brought on this time last year. If you remember, time last year would increase heads in Germany by 30% year on year. I do, however, expect a more linear pattern of headcount growth and additions in our second half, including some modest sequential growth in headcount in Q3. As we set out at the 2017 Investor Day, as the market leader in Germany, and we are far, far ahead of the competition there, We see a once in a lifetime opportunity to build a truly massive business, and that will serve us very well for many years to come. So I'm pleased with the results in the half in Germany. There's a lot of exciting stuff going on under the bonnet in that market, and I'll come back to that in a little while. Moving then to the UK and Ireland and given the backdrop here, I think the team have delivered a tremendous result, net fees up 3% profits up 6%. We all know about life in the UK, but the good news is that candidate competence remains high Employment as we saw yesterday from the ONS is at record levels and there remains significant skill shortages in this market. The private sector, which is 73% of net fees, was stable and it grew 1%. Conditions in the public sector have improved slightly, and fees there grew by 9% in part helped by slightly easier comps, but due to IR35 from this time last year. The perm market was flat, whereas our larger temp business delivered a good 6% growth. Looking regionally, the Southwestern Wales was again the standout growth of 14%. Northern Ireland, I think deserves a mention, up 6% but further north in Scotland, Scotland was tougher and fees in Scotland fell by 9%. Now our largest region here in London was up 3% and then a shout out to Ireland continue to deliver strong net fee growth, up 10%. Looking by sector, we had an excellent performance in IT. That was up 14%. Our other larger businesses in construction property and ANF also grew. However, as has been the case in the recent past, the education business has remained tough. So overall, we maintained a flat headcount in the UK. We're focused on driving consult productivity, that was up the world. As you know, this comprises 28 different countries. We group them into 3 sub regions. The overall fee growth of 11% was strong, However, a slowing of growth in parts of Europe across the half meant that our conversion rate fell by 70 basis points. We have 17 Countries in EMEA, excluding Germany, 11 of which had a record half, Spain, Italy and Poland with a stand out, growing by 18%, 15% and 9%, respectively. Belgium was tougher, it declined at 6% and growth in France and the Netherlands slowed through the half to 5% and 3%, respectively. As a result, our profits in EMEA, excluding Germany, declined 7% year on year. And as you'd expect, we've taken out cost to best protect our profits. Across the world in Asia, we enjoyed another strong performance with fees up 19% and profits up 13%. Profit growth was slightly below fee growth in Asia due to significant investment in property and IT of around 1,000,000. Including major office expansions in Shenzhen, Beijing and Tokyo. China is now our largest Asian country, It grew by a superb 31%. IT there was up by 2 thirds. Legal was almost tripled in the half. And we're building a business of real scale in China now with over 17,000,000 in fees in the first half and around 250 fee earners The net fee CAGR over the last 5 years in China has been 24% with headcount up only 11% CAGR so we're clearly getting strong productivity gains. And I'm personally convinced that China will become a much more important part of our group in the longer run. And then finishing up in the Americas where net fees grew by a strong 18% despite tougher markets in Latin America, In the United States, fees were up 17% including construction and property up 26%. And as you know, Our strategy is to invest to build scale in the States, and we expanded our offices in New York and in Atlanta. We also invested in our fledgling account and finance business, we combine in experienced consultants transferred in from around the world with local talent to build out that team. Further north in Canada, we had a fantastic half. Fees were up 27%. And within this, our Flex business grew 56%. And we've seen some excellent wins in our large corporate accounts business, and our pipeline there looks strong. Despite all of these investments, we still grew our Americas operating profit by 1,000,000 in the half. So overall, across the rest of the world, given the strength of our market, we invested aggressively in headcount, up 17% in the Americas and in Asia. And as usual, I'll end this section with a traffic light assessment of our performance versus our long term profit aspirations. Now as you know, we aspire to significantly grow our profits to between 1000000 and 1000000 by FY22. And I think we remain in a good place 18 months in. Top left ANZ remains green fee growth in the 1st 18 months of the plan is annualizing at 11%. That's above the top end of our targeted range. And on a constant currency basis, We saw ANZ profits grow by 1,000,000 and Australia alone delivered 10% like for like profit growth. In the top right, as I said at our full year results, if Germany delivered a combination of strong net fee growth and rising conversion margins, then we'd return it to a green light. I'm pleased with the fee performance, but until we do get profit leverage, which we expect to deliver in FY 2020, We'll leave it on amber for now. Bottom left, the UK and Ireland is already within our 5 year plan range and it's outperforming the market. However, I'm mindful of the wider uncertainty created by the Brexit negotiations, so it would seem unusual to move the K to a green light before we see the eventual outcome from those discussions. However, I am delighted with the performance in the UK and Ireland but the political situation means that we'll leave the UK on amber for now too. And then finally, bottom right, in the rest of the world, I'm really happy with our performance 18 in some parts of Western Europe, and our profit performance there was softer than I would have liked. That said, This part of the division is on track in terms of our 5 year plan, and our profit run rate is not far off the bottom of the range with half years still to go. Hence, we keep the rest of the world on green. And with that, I'll now hand over to Paul, who can take us through a deeper look into our financial performance well as an overview on Thank you, Alastair. And good morning, everyone. Starting with the highlights of the financial review. Firstly, to summarize what has been a good first half. As you can see on the slide, net fees increased by 9% on a like for like basis, and we delivered 1,000,000 of operating profit with good underlying profit performances across most of our international businesses and strong cost control in the UK. As a result, EPS increased by 9% and the board has increased the interim core dividend by 5% to 1.11p. In market conditions that have been mixed but broadly supportive, These results are a testament to our ability to invest rapidly and capitalize on growth opportunities such as Germany, North America and Asia, whilst at the same time focused on driving improved consultant productivity and good cost control in other markets such as the UK. In order to consistently our performance apart from the competition. Coming on to the more detailed income statement, On a natural basis, net fees increased by 8% and operating profit by 7%. On a like for like basis of organic growth constant currency net fees and operating profit both increased by 9%. And the difference between the headline and like for like growth rates primarily the result of the depreciation of the average rate of exchange between the Australian dollar and sterling. Overall FX movements decreased net fees and operating profit by 1000000 and 1000000 respectively. And I'll cover FX in more detail later. Alastro has already covered the regional trading details, so I'll cover a few technical issues. Germany saw strong growth in net fees and profits, but adjusting for the 2 additional working days underlying net fee growth of 13% and operating profit was 10%. The shortfall of profit growth to fee growth is due to our continued investment strategy that set out at the Investor Day with 1,000,000 of incremental revenue investments in property, including a new office in Weisbarden and material expansions in 3 others and a further 1,000,000 in our ongoing development of our front and back office systems scaling them for significant future growth which is partially offset by an improvement in consultant productivity. In the UK growth exceeded net fee growth with a 5% increase in consultant productivity and good cost control driving profit leverage. And in the rest of the world, we delivered a strong fee performance, profit growth was lower than fee growth primarily due to the slowdown in fee growth in EMEA ex Germany across the half, as Alastair has already explained, and the investments in new and expanded offices, especially in Asia, which cost 1,000,000 and systems, which also cost 1,000,000. Moving on to looking at the performance of our permanent ten businesses, our perm business, which comprise 42% of net fees, grew by 10%. Driven by a 5% increase in volume and a 5% increase in the average perm fee. The increase in average perm fee was driven by underlying wage inflation, and also a positive mix effect 3% overall, with of course pockets of greater inflection in certain skill shortage markets. Our temp business, which comprised 58% of group, also increased by 9%. This comprised of volume increase of 8%, a 4% increase in mix and hours, primarily from Germany, partially offset by a decrease in underlying temp margins, down 40 basis points in Australia and the UK Exchange, as usual, we provide details of our PNL sensitivity to changes in key exchange rates. And as you can see, the Australian dollar and even more so the euro represent meaningful FX translation sensitivities to the group. In fact, each 1% movement in average annual rate impacts operating profits by 1,000,001,200,000, respectively. The total first half operating profit impact of movement in average exchange rates was 1,000,000 negative versus prior year, And if exchange rates hold for the remainder of the year, the impact on the FY 2018 full year reporting operating profit will be 1,000,000 negative This is 1,000,000 worse than we reported at the Q2 IMS in January. And as we said before, the group does not undertake any P and L translation hedging arrangements. Moving on to conversion rate. Our conversion rate for the half decreased by 40 basis points year on year to 21.8%. Within that, there were several moving parts. I've already explain the changes in the conversion rate in the UK and the rest of the world. In ANZ, the reduction is purely due to trading in New Zealand, Australian conversion rate remained flat. And in addition, we've added a net 5 offices plus 15 significant expansions across the group, which increased property costs by 1,000,000 versus prior year. We expect property costs to increase by 1,000,000 in the full year as we stated in our FY 2018 prelim results. We expect group drop through of incremental fees in profit for the second half of the year to be similar to the 20% reported in half 1. Moving on to interest and tax. The net finance charge in the first half reduced to 1,000,000, driven primarily by a million reduction in the IAS 19 pension charge. We continue to expect net finance charge for the full year to be around 1,000,000. Turning to tax, our effective tax rate decreased to 30.5%. Driven by geographic mix of profits and we expect the tax rate for the full year to remain at 30.5%. On EPS, basic earnings per share was 5.86p and 9% increase versus prior year, reflecting the group's higher operating profit lower interest charge and lower effective tax rate. Moving on to cash flow. On this side, we summarize the key components of our flow. The chart on the left details the sources of cash flow, starting with operating profit of 124,100,000 We add back noncash items of 14,200,000, predominantly fixed asset depreciation and share based payments, we then did up to GBP 59,800,000 outflow in respect to working capital, driven primarily by normal seasonality and also the growth in our tracting businesses in Germany, Australia and the UK. This leaves an operating cash flow of 1,000,000 a good underlying half year conversion of profit into cash of 63 percent. And from operating cash flow, we paid tax of 1,000,000 and net interest of 1,000,000 leading to free cash flow of 1,000,000. On the right hand side, we've detailed how we've used the cash generated And the main items were dividend payments of almost 1,000,000, representing last year's final dividend of 1,000,000 and special dividend of almost $73,000,000, both paid in November 2018, CapEx of $15,300,000 and pension deficit payments of $7,900,000. And for the full year, we continue to expect CapEx to be circa 1000000. On net cash, our underlying cash performance was good. And as a result of these movements, we ended the half with net cash of 1,000,000 which is similar to half 118, despite the fact that we paid GBP 20,000,000 additional higher core and special dividend payments. And in November 2018, as we've shown on the right hand side, we extended our million bank facility. To November 2023. On this slide, we compare the balance sheet as at 30th of December 2018 versus June 18, so I visited June 19. The 2 noteworthy movements are a reduction in the IS pension accounting surplus to $19,200,000 was $75,900,000, which is primarily due to the increase in asset values and the accounting impact of the buy in and the increase in working capital, which I've already explained earlier. As previously announced, in August 2018, pension scheme trustees in agreement with Hayes PRC entered into a bulk annuity purchase or buy in with Canada Life for a premium of GBP 270,600,000 in respect of ensuring all future payments to the existing members of the Hayes defined benefit pension scheme. This was funded via existing pension scheme assets. This material balance sheet de risking exercise is in line with our long term strategy to reduce future volatility of the group's defined benefit schemes and their financial impact on the group. And in addition, the 2018 trial evaluation has now been completed and quantified the actuarial deficit £44,000,000, which compares to in 2015, 95,000,000, there's no change to our deficit payments, which will continue to increase. At 3% per annum. Moving on to dividends. Our priorities for free cash flow remain unchanged, namely to fund the group's investments and developments, maintain a strong balance sheet and deliver a core dividend at a level which is sustainable, progressive and appropriate. The board has increased the interim core dividend by 5 percent to 1.1 per share. And finally, the group is highly cash generative. Has an outpaid combined core and special dividends of 1,000,000 in the last 2 years. In the third box of the slide, we have reiterated our special dividend policy. So in summary, with market conditions that have been mixed broadly supportive across most of our businesses, we've delivered a good set of results. We've invested in our major businesses, including Germany, Australia and North America, And despite this investment we've driven good profit growth, particularly in our international business, especially Germany, whilst at the same time improving the underlying profitability, of our UK business. And our conversion rate to 21.8 percent remains sector leading. Our ability to then turn these profits into cash means that after paying GBP 113,000,000 in dividend, we ended the year with a nat half year with a net cash position of GBP 32,500,000 out of increased our inventory and dividend by 5%. In conclusion, these results continue to demonstrate the significant diversification we've achieved in our business, over the last decade or so, with our non UK business now representing more than 80% of group profits. So turning to current trading. We continue to see good conditions in most international markets, while the UK remained stable despite economic uncertainty. In Australia, we continue to see good growth, return to work in our Templer Contracting business since the New Year has been in line with prior year trends. However, we're mindful of a likely general election in May and the impact this may have on our business. We see good growth in Germany, despite tough comparators, Our return to work in Tempur Contracting has been good overall. However, contractor extensions have been 3% lower than in prior years, which has modestly reduced level of new contracting assignments to date in 2019 on a weekly basis are at the same strong level they were before Christmas. Here in the UK, growth remained solid. The return to work in our temp business was in line with trend seen in prior years. In the rest of the world, growth remains good across Asia and Americas, but more mixed in EMEA ex Germany. And then finally, it's worth noting that we continue to overlap increasingly tough international growth comparators from the prior years, especially in Q4 FY 2019. With that, I'll hand you back to Alastair. We'll update you on our strategic priorities and progress before we take your questions. Thanks, Paul. I've already addressed our progress versus our FY 'twenty two plan in the last section. So for the next few minutes, I just wanted to talk about our strategy in general and some of the initiatives that are going on around the Hayes world. And as you know, we follow a series of 4 key themes in how we run our business. Each of these is interrelated, and it creates a cycle of investment growth, diversification, distribution and then further reinvestment. And as you can see, We've made some good progress on each of these areas. I'd again highlight, for example, the fact that 20 of our 33 countries delivered record net fees and that our cash said, cumulatively, we've now paid around 1,000,000 in cash to shareholders since our 2017 Investor Day. During the half, we've made good progress in rolling out our newer specialisms into more key markets, In the state, for example, our fledgling construction property business grew 26% against a very tough comp of 75 percent growth last year. Our more nascent United States A And F business, it grew fees over 80% and as global leaders in ANF around the world, we obviously have high ambitions in this area for the medium term, as I mentioned earlier. Net fees in the German legal specialism were up 75%. That's even better than the performance they delivered last year. In Canada, the Flex business was up 51% helped in part by, by help from our successful German business, both in terms of process as well as expertise. And these are all examples of what I would class as relatively low risk growth as our brand is already well known in each of these countries, and we can leverage existing infrastructure, whether it be office space, online websites or the successful management teams, and it's a key part of our strategy to steadily infill our specialisms around the world and across all of our regions. Our prioritized pipeline of opportunities enables us to focus our investments around the world, and a good example I'd pick out this time is China, where we've put in additional resources over time And in the last two years, we've really started to reap the benefits in that market. The first half profit was 1,000,000, and Greater China has clearly been promoted to box 3 where it was the top performer recently. However, a lot of our effort obviously continues to remain on our core profit drivers, which are together 70% of our net fees. That's the gray box on the left hand side of this slide, one that we've shown you many times, today, I just wanted to focus on some of the initiatives that we have going on in Germany. When we bought a was the forerunner of the German business back in 2003. Back then, it was a pure IT Flex Recruvo, made an annualized profit of about 1,000,000. Last year, we made nearly 1,000,000, and our organic growth has compounded at 20% every year since 2004. Diversification in Germany is a key part of that success story. And in the early years, we added engineering Flex, followed then by perm recruitment. IT and engineering still represent nearly 2 thirds of German net fees. And as the chart shows, despite their size, they've been growing at a very healthy CAGR of 11% since FY13. However, the newer German specialisms, which include ANF, legal, sales and marketing, construction property, have been growing significantly faster, as has our perm business. So we now have 9 specialisms in Germany, but contrast that with 17 in ANZ16 in the UK and Ireland. So there clearly remains a lot of white space for us to grow into, and large parts of the German market remain very immature. So for example, our construction property business in Germany which grew at 16% in the first half, has net fees, which are less than 1 third the size of the Australian CMP business, even though Germany is by far the larger economy. Historically, the business in Germany is focused on contracting, and in recent years, we've made some great progress in temp up 22% in the last 12 months and 22% coincidentally in the last 6 months too. Temp today, is 28% of our German fees. It's come from nowhere just a few years ago, and we make very similar margin in that employment type as we're doing contracting. There are many reasons for this growth, some are regulatory some are just due to changes in the client behavior, but I think what's important to note is that the penetration in white collar temp in Germany is still significantly lower than it is in, say, the United States here in the UK or in Australia. So even though we continue to take market share, there remains some huge structural opportunities in a market that does have significant barriers to entry. We've also been actively pursuing a key account strategy in Germany, investing in our largest clients. And at the end of December last year, we had 27 key account managers working hard to drive our client services and cross selling nationally. That's an almost 50% increase in capacity, And the skills of these senior people bring a real differentiator in what is today still a fragmented yet structurally growing market, where we're already the clear leader, and we're already starting to see a fee uplift in the accounts where we've made those investments. Now this investment doesn't come cheap, obviously, it does represent a modest drag on our near term conversion, but it's absolutely the right thing to do for us to be to become invaluable as well as a lifelong partner to our clients. And again, it represents a real barrier to entry. And then finally, as you know, we do see technology as a real enabler of our consultants productivity and it's a key part of how we grow our operations in Germany. Germany obviously has been busy on this front in the last year, for example, we've automated our front to back office contracting systems. That's been implemented across roughly half of our business partners or contractors, as we call them, An example such as this, I think, will yield very good payback via efficiency improvements in the years to come. Which brings me nicely onto an update on our group wide technology strategy. Now main aim here is to equip all of our P with the best tools for them to do their job. And we do that both via specific technologies that we build ourselves as well as through partnerships and collaborations with external and companies in their own field. Remember to make a successful and rapid match in today's recruitment world, you need to do three things well. You need to connect with the right people, you need to determine their approachability for any given role, and then you need to execute the contract efficiently. And this framework which we view under 3 broad prisms of approachability, connectivity and efficiency lies right at the heart of how we approach technology. We seek to build tools which are linked to 1 touch, which is our own in house proprietary system, that will improve our capability at each of those three stages. And the old world model of advertised jobs and then apply is simply not good enough in today's market, which is why we shifted some time ago to our Find and Engage model let me give you a few updates on what we've done in the last 6 months. Firstly, our partnerships with SIG, LinkedIn and now Zing in Germany continue to perform very well More recently, our collaboration with Stack Overflow in the IT space has made a very good start as we engage with many, many more IT developers and we help them grow their careers. Secondly, I'm pleased to say that our LinkedIn page won best company page last year, defended our win from 2017 and with 2,700,000 followers on LinkedIn were now by far the most followed recruiter in the world on that important platform, Thirdly, Google's job search, their algorithm has now been fully incorporated into our own architecture, and that's now the engine that powers our own candidate searches globally and it's delivering some excellent results. And I think this proves again that we have the ability to react with speed and agility to integrate our data with that of some of the world's biggest and most well known global players in the world of technology. Next, our Hayes hub app, which many of you saw at the Investor Day in its infancy back in 2017, is now live in many of our education clients, It's yielding some excellent in engagement with schools. And despite the fact that education remains a very tough market, we're now on track have around 100 UK schools live on the app by Easter, not just helping schools to fill very urge and critical roles, but also bring in world class compliance into the education market. And then finally, we've rolled out Salesforce Marketing Cloud across all of our major countries now and that it further improves our find and engaged lead generation program as we connect digitally with literally millions of talented individuals on a daily basis. After all, remember building and reinforcing relationships with the world's best talent is core to our future success. And that's how we place over 12 hundred people into a new job every single working day. So to wrap it all up, I think we've had another good half year, financially operationally as well as strategically, we balanced investment with growing our profits and collecting cash along the way, We're more diversified and we're more technology enabled than ever before, but remember, we also have the strongest management throughout the business around the world that we've ever had. So while I'm mindful of the uncertain economic headlines that we read about every day, conditions in most of our markets do remain good and we will continue to invest in those areas where we see plenty of opportunity. And with that, I'll be delighted to take your significantly at the back, I need to say it's being webcast. There are mics in your seats, so it's always a good first initiative test for somebody. So if they can get the mic to work, if you can repeat your name, so that everybody knows kind of around the world who's saying what. Steve, should we start with you? Surprise man to go first with that. Yeah. Sounds good. There we go. Good morning, it's Steve Wall from Numis. Just to follow-up on the point on Germany and the contractors, if I may. Just some feedback on what the clients themselves are saying for not extending some of those contracts or the level whether you think it's a competition issue, or whether it's more broad based and what proportion of those extensions that haven't come through are represented by that verifiable on the key accounts, etcetera? Let me kick off then I'll hand over to Paul. I would put it down to, Christmas is a normal time to do a bit of housekeeping if you're in any company. And undoubtedly some clients and it's not in any specific sectors. It's just generally across the piece. Some clients will have said, you know, we need to get that project finished and, and let's not continue with it in the new year. We do the same in our business Steve, you know, as we finishing things off, Christmas is a nice watershed to say, let's get it done so we can start the new year without that, that further work or distraction. In terms of competition, no, absolutely not. I don't see that it's anything to do with competition. We're as big as the next handful of of rivals in the German market added arise by acute skill shortages in many, many sectors just as most of the rest of the world is, but Germany feels it particularly, painfully. So if we have access that talented pool of candidates and take them to our clients, both new and old candidates, then that's how we create our market. The good news, if you look at the returns work in the first half is, yes, there was a 3% lower level of extensions But the recovery the in line with how it has been in previous years. It's just off a marginally lower base. And let's put things in context It's a 3% lower extension rate in a market that is still vibrant, supportive, and full of skill shortages Paul? I'd only add one point. I think if numerically, if you took our growth for the 6 months, it's bigger than at least the next top 10 competitors put together a numeric term. So we are massively bigger than anybody else in the market, and we're still growing significantly. So to be number 1 by a long way in market growing up 14%, call it 13% from the working days adjusted basis. And I absolutely reiterate, to Alice's point, feels like a little bit of housekeeping, and that's why I tried to give the 2 parts. It is the extensions are a little bit lower, From our standpoint, the most important thing is if I take every week over the last 6 weeks, absolute number of new acquisitions, new contractors, which for us, as you know, means we've got 9 months average revenue stream on all of those that continues at the very high level we had in Q2. So So it's always a little bit disappointing, but more importantly, that growth is still significant going forward. Paul. Hi, it's Paul Cheggett from Barclays. I just wanted to ask another question on Germany one in Australia and then the tech side. Can I ask if, if we sort of look at Germany, if if we were to enter a period of slow growth rather than sort of talking about precisely what's happening here and now, if we were to enter a period of slow growth in the marketplace, How would the strategy be modified through that period? Clearly, it's a medium term strategy that's focused on increasing your share, but through that downward phase, how would it modify and what do you think the conversion rates would do in that period? And then Australia, I guess it's an area that for me, I look at that construction and property number and worry that it's a precursor to us a more broad based slowdown. Could you give us a sense of what you're seeing and your thoughts on that? And then the last one on the technology side, at the Investor Day, you talked about the approachability index not being rolled out to consultants. Is there a how is that going And from your perspective, Alastair, if we looked at the next 1 to 2 years in the marketplace more broadly, what are the changes that you think are coming through at the moment Thanks. Shall I kick off on Germany? If you do Germany, I'll pick CR and I'll do Australia. You do tech. There we go. So I don't see that we're going to have slower growth. So let's just put that to bed, but it may happen, right? So if it does happen, what does this mean? It means that we will be slightly slower at doubling the size of our German business, but the strategy, it remains unchanged. And untouched. It would just take us a year or so longer to actually get to the doubling insight that we talked about at the 2017 Investor Day. Why do I say that? Two key things. The market is massively underpenetrated and immature still. Compared to the standards that we see in, say, the UK or Australia or the United States, maybe 20%, 25% white collar jobs come outside the internal HR department to an agency such as ourselves in Germany, contrasted with maybe 80% plus the more mature market. So the structural opening up of Germany is the long term prize, and that will happen come what may But if there is a more uncertain economic period for a period of time, it will just slow slightly the structural opening up, but the opportunity is still there and we're still gonna for it, Paul. What we would physically do differently is we would put people in more slowly into the business so that we can balance between growing fees and growing profits with also exploiting and capturing the long term opportunity. We don't want to do one, but not the other. Our job, we believe, is to get the balance right and be able to do both in sync at the same time. But in terms of going into the middle Dan that we've talked about in the past and continue to do so. In terms of going into the bigger corporates with a key account type approach, exactly the same in terms of going into statement that weren't exactly the same, in terms of opening up the newer specialisms and growing them exactly the same. So we're talking about it might be a 6 year plan instead of a 5 year plan, but it's still a plan to double the size in Germany. That's not changed. And I think the second factor that reinforces that apart from the immaturity of the market and as Paul said, word by father market leader, opening up that market, don't forget that Germany is again a high employment market. It's a high skilled market with massive shortages of skilled people, 100,000 engineers short even today's world. So even if it did slow down, there's still many tens of thousands of engineers short, and they many of their clients simply do not have access to the people, but we do. That's our job. Paul, do you want to talk about CI? I just a couple of things first of all, Paul, really on the CI. Just depends what scenario we're planning at the moment. What we've tried to say here is that we're still growing at good level. So whether that 10 or 9 or 8 or 11, who knows? But at the moment, sitting here, we expect to grow at good levels certainly for the next 6 to 9 months. There is no sign of any any significant weakness in the market at all. That's why we've used the phrase today, housekeeping. So then, of course, you'd you'd do scenarios, that's what drives the CR rate. The nice thing as well, a lot of the initiatives we're doing, you know, when we've just done in all of the, the extensions in the major offices, of course, you take space for the 3, 4 years. So we've kind of all have that in our P and L by the end of the year. We expect all of the major systems initiatives to be finished by the this calendar year. So again, that'll be there. Actually, that goes into the P and L, but we'll then have a nice period of time to really focus on productivity improvements, hence why Allo stores alluding to our focus is on getting to leverage. So I think coming to Australia, I was there 3 weeks ago, and, I guess the really pleasing thing about the outlook was that We've had a good return to work in Australia. Absolutely, construction properties, well, it was 28% of our business because the business is still growing. It's now 24%. Think Alastair and the team have to take a hell of a lot of credit for the significant investment we put in our IT specialism, the IT professionals that we are helping our clients hire and both in the digital space. If you actually look at our headcount, we must have put more than 100 headcounts in Alice for over the last couple of years and that specialism growing at 30%, that will be that will outgrow a cancer in finance. In the second half of this year, our IT specialist will be bigger than the cancer in finance. Did tell me that 5 years ago, wouldn't have believed you. So I think we're doing a hell of a lot of things to get into the right spaces of the market. Absolutely, construction properties down 9%. We can expect that continue. So we're very cognizant of some underlying trends in construction and property, but again, the more broader Australian economy think that has some of the same issues that we see in other parts of the world. So I think we're in a good space there. If you look at the headcount, we've said we're going to do in the second half of the year, we're going to keep Hakan broadly flat, which is going to drive productivity focus on profitability. And then finally, Paul, the world of technology, as you know, we see, technology and human capability as being symbiotic and being part and parcel of the same solution. So it's not about one or the other. It's about both. When we look at product, technology, what does it really allow us to do? It allows us to make our people are at their job, that means more productive, that means filling more jobs more quickly, and bringing in more fees and more commission for themselves. So our people love it, we can give them those tools. It also allows us to do more things at greater scale. We have literally tens of millions of people on our database, You cannot physically call them every single day, but you can communicate with them electronically, and that's why Salesforce Marketing Cloud is such an important initiative for us because it allows us to send out digitally, highly personalized and tailored content to individuals to help them think through their career, whether it would be something that has an immediate impact on us like I'd like to apply for a job, or it could be something that's longer term help for them, for them, along the lines of to move to the sort of job you aspire to, you need to do training in the following skills, and here is a way that you can do that. And when you've done it, come back to us and we can help you into your dream job. So we're really trying to help our candidates on their journey through their career, not just help them at the one off point in time when there's a new job to be filled. That's that's our philosophy, if you like. The approachability index, as many of you know, is something we designed a couple of years ago, as a tool to help consultants understand who would be on the market for this job, but we don't yet know because we haven't spoken to them. So it's looking at collecting data from the outside world to infer, this person would be interested in that job. So therefore, call them up and have a conversation with them about it. Clearly, the more data you put into something like that algorithm, the faster and better it will learn because these are learning things. More data in equals better result out. Hence, We connect with more and more external organizations, Xyng, for example, now Stack Overflow, bringing in that data into our own networks to say Here are the people who would want that job that you have just taken on from the client. It's all part of this find and engage. When you think about does this work? One of the metrics I would look for is how many business development calls do you need to make to find a job to fill from clients? How quickly can you shortlist a handful of top talent to put forward to a client? Does it take you a couple of weeks because you're advertising or does it take you literally a few minutes or an hour? Because you already know those people and you know them electronically off your database. These will be some of the metrics that we look at to say, is this working? Net net, of course, you expect to see your fees per consultant per month increase, the standard productivity measure. And we're seeing positive movement in all of those individuals is going to be an interesting exciting what's next because if we can connect with more people and have a more ongoing dialogue with them all the time, then I think we'll know more about who wants which job as we bring in the jobs and we'll be able to put shortlists out and then fill jobs faster than we might do without that data. So data really is an important part of our business, something to be nurtured and protected as well. We cannot own all data in the world. It's physically impossible, but we can work with other organizations that supplement and complement the data that we have. And that's our partner approach to this. That's why we work with Zing, LinkedIn, Google, Stack Overflow, and we'll build more and more of these partnerships around the world, because again, it works for our it works for our partners. If we can help them drive traffic to their sites, it also helps us as well. Makes sense? Thanks. Yes, good morning. Hans Piles, Kepler Cheuvreux. Two questions from my side. First of all, on the IT back office cost You already indicated that in Germany, you expect that project. So let's say to be finalized towards the end of this calendar year, you gave some feeling on some other major projects that say you are, let's say, starting up or having a planning, I would like to say, the next 12 to 18 months and a little bit, but, at the timing of this and maybe also a little bit on what additional costs will incur. And secondly, on the drop through rate for H2, 20% could you give maybe some flavor on the developments by region? One answer, if I take the systems 1 first, most of the major system changes that we're looking to do at the moment in Germany, having finished stage 1 of automation in the back office, we're doing, an upgrade in the operational and our consultants do, and we're doing some further work now in the middle office. And I said earlier on, we expect that to finish at the end of the end of 2019 that will then start to depreciate and that will be something like a 1,000,000 additional cost coming in at that point in time, likely to hit the P and L over a couple of years. We are in the process at the moment of doing automation projects, both in the U. S. And Canada, having finished the major countries, having done most of Europe those are the next obvious markets, but those are much cheaper projects in relation to it. So you're probably talking about a P and L cost of about 1,000,000 when that hits. And then we should be in a nice position, while we continue to do all of the work that Alice has just been describing from the front office standpoint and from marketing and candidates. That's been an ongoing investment. I don't actually think we're going to have any major IT projects then for a 12, 18, 20 month format period of time. I think that will enable us to drive leverage across the group, and that's when we expect as long as we've got growth at these sorts of levels to drive some real profit leverage. And the second a drop through in the second half. Look, I think, one of the beauties of doing this business is we have 3 to 5 weeks visibility. There is limited forward secured revenue stream, And therefore, we've given guidance today saying, we expect to have good growth in the next in certainly the next quarter. We have some and certain is coming into that 4th quarter, which I think will impact the drop through rates. For example, Australia, there is no action, and it's hard to always guess what sort of impact that will have on that business, but of course it leads to slightly less growth than we would have had a period ago. Therefore, I would expect drop through to be Now to be slightly lower in Australian business, we're sitting here, aren't we in a country where there's going to be a degree of uncertainty over the next month or 2? And we would all hope that we'll have a nice smooth process in which case, I think, will continue to grow well in the UK. We'll continue to drive leverage And I think across the rest of the world, we'll actually get better profit performance in the second half. We've done some pretty good adjustments of the cost base in some of those market where growth slow. So therefore, that's why this time I've kind of stuck at an overall, it'll be about the same 20%. And because I think there's kind of 1 or 2 big uncertainties within that, of which the UK is the obvious one, but I think percent holds for the source of growth that we expect. Good morning. It's Ian Creem from Liberum. Two or three questions, if I may. In terms of Germany, could you perhaps give a sense of your direct or indirect exposure to industry like autos And then on China, obviously very strong growth. I was just wondering if there was any impact of the trade talks and slowing economy there in terms of the outlook? And then third, Paul, are you able to possibly give us a sense of where you might expect net cash to end up at the end of the current year. I know there's a lot of uncertainty, but it was obviously a good result in the first half. So early guidance, that would be great. Thank you. And Paul, you can be cash king. We have about 20% or thereabouts of our German business will somehow be touching the automotive sector or its supply chain. However, we are not involved in production. Remember, a lot of work, our work, the vast majority of our work is more in the R and D labs looking at next generation Automotive. So don't get too concerned about what's going on in the world of current car sales and does that have a read through onto our own business? In terms of China, I've seen no impact as yet of what's going on with the trade dispute with the States and China. To see the sorts of growth rates that we're seeing is fantastic news for us and it's obviously a business that we're seeking to invest in and I think longer term medium term. I think China is going to, move up to, closer to the top table. However, you know, even though we've not seen any of the impact of those trade discussions, remember, we are still a small business in the overall economy, of China and the sheer scale of that market place. But we are in a number of interesting sectors, whether it's in technology, whether it's in life sciences, whether it's in banking at which gives us a very broad remake, right, across the patch as well. Well, this will be my, 14th year end this year. I'd kind of also like to have a 15th, and therefore, we have to do pretty well on the cash performance. One of the key things which I've always said is we have no ability defer payments. So it's all around credit control. And in those last weeks, last week of a normal month, certainly big months like June, you're talking about 150,000,000 worth of cash coming in. Having said, all of those protections, which hopefully enable still be here. I see no reason why we would have less cash than we had last year because last year was a clean number. We've done a good job We're actually quite delighted with where we are at the half year. We're probably 15,000,000 better than we would expect it. Therefore, why would we have any less than we had a year ago? And, so I would have thought that sort of level and you could probably put a $20,000,000 range around that, but no reason why we went to the 3rd very large special and that we won't be sitting here in a year's time. Perhaps talking about 1,000,000 over 3 years that we'll have paid out. And that's pretty big chunky numbers when you consider the market cap of the company. Hi, this is Anvesh from Morgan Stanley. Just a very quick question on Germany. As the Other specialized specialization is kind of a third of the business and they continue to outpace the growth of the other business. How does your consultant headcount sit in terms of the skill set like the consultants who are driving the growth in the core ITs business? Can try the growth in this other specialization or you kind of need to continue to invest into the newer skill set for the consultants? In terms of the types of people that we recruit, they're exactly the same. So we we we look at the demand across all of the business we say we need more people here and we don't need more people there because we've maybe just put a lot in and we're bedding them in. So the type of individual typically, out of university, a little bit older in Germany because of the way the education system works, probably not worked before first job. Certainly never done recruitment, and we'll train them up from scratch. And that's the model we apply everywhere in the world, Germany included slightly different DNA of an individual, in terms of whether they'd be more successful and suited towards a perm desk. Versus a flex desk, whether that's temp or contractors. And again, not much difference, really, whether they're going to go on to say engineering versus accountancy and finance, at least at that initial stage. And we don't do much reallocation of people from one side to the other in Germany because everywhere is growing, so everywhere needs more people. That reallocation comes in when some of your sectors start to feel a bit more difficult, but others are more buoyant. So for example, in areas like parts of Australia today, be reallocating some resources away from maybe the more difficult residential construction in Australia will be a classic, and we're moving them to some other areas. A little bit more buoyant in the construction world. Okay. Just conscious that if there are people on the webcast, you are able to ask questions and have David at the back who will kind of wave his arms around and we'll read out, we'll kind of speak those questions if we get to the right Do we have any other questions in the room? David, do we have any, from the webcast? Nope. Okay. Well, in that case, thank you for coming along today. I hope it was helpful in illuminating, and we'll see you in 6 months time. Thank you. Thanks.