Hello, welcome to the Hays trading update call for Q2 FY 2023. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, David Phillips, to begin today's conference. Thank you.
Thank you, Laura. Good morning, everyone. Welcome to Hays' quarterly update call for the three months ending December 31st, 2022, the second quarter of our 2023 financial year. I'm here with James Hilton, Group Finance Director. Before we begin, please be aware that today's call is being recorded, with the recording accessible using the number and the code provided in the release. Please be aware that our discussions 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 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 in 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 James.
Thank you, David. Good morning, everyone, and thanks for joining us. I'll present the highlights and key themes of today's update and discuss regional performances before taking questions. As usual, all net fee growth percentage are on a like-for-like basis versus prior year, unless stated otherwise. Performance overview. We performed well in the quarter, with strong performances across our key strategic areas, including temp and contracting, technology, and in Germany. Group fees grew by 8% and were stable at high levels, with November matching our previous fee record from September 2022. Performance was consistent across the quarter, and our December fee growth exit rate was 5% or 6% when adjusted for working-days. Growth was led by our temp and contracting business, up 9%, with perm up 7%. This represented the first outperformance of temp in seven quarters.
Currency translation had a positive impact, increasing headline net fees by 3%. Adjusting for three fewer working days in Germany versus the same period last year, group fees increased by 10%. I would highlight the following. One, growth in temp and perm was driven by our actions to increase fee margins and our focus on higher value markets, together with the positive effects of wage inflation. Two, activity remained at good overall levels. Temp volumes increased through the quarter, in line with our normal seasonal trends, but we saw overall perm volumes decrease modestly through the quarter. Three, we delivered quarterly fee records in nine countries, including a standout performance in our largest business of Germany and also in EMEIA. Our largest global specialism of technology, 26% of group fees, also delivered another record quarter with fees up 10%.
We grew direct outsourcing fees into enterprise clients by 7%, increasing our market share with a strong pipeline of opportunities ahead. Had an excellent performance in our engineering business, up 23% and now representing 10% of group fees. Four. Group consultant headcount decreased by 2% in the quarter, as previously guided, as we balanced modest investments in supported markets with selective reductions where underlying demand was lower. Consultant headcount increased by 10% year-over-year, in line with our underlying fee growth. Average consultant productivity was stable at good levels. Five. Our cash performance was good. Our December 31st net cash position was circa GBP 100 million, in line with our expectations after paying circa GBP 150 million in call and special dividends and circa GBP 19 million in share buybacks in the quarter.
I will now come on the performance by each division in more detail. Our largest market of Germany, which represented 28% of group fees, delivered another record fee performance, up 22% or up 28% when adjusted for working days. Fees increased sequentially through the quarter, driven by good levels of client demand and ongoing skill shortages in our high salary markets. Contracting, 59% of Germany fees, delivered another record quarter, up an excellent 26%. This was driven by 19% growth in contractor volumes, again to record levels. Improved margin and contractor rate mix increased fees by a further 11%, partially offset by a 5% headwind from fewer working days. Hopefully, average weekly hours per contractor was flat versus prior year, in contrast to a declining trend in recent quarters.
Temp, 23% of Germany fees, increased by 5% or by 20% on a working-day adjusted basis, driven by 17% volume growth. Perm delivered another record performance, up 32%. At the specialism level, technology, our largest specialism, was up 12%, engineering up 20%, accountancy and finance up 29%, and HR up an outstanding 160%. Consultant headcount was up 3% in the quarter and up 19% year-over-year. The U.K. and Ireland, 21% of group fees, increased by 4%, with fees sequentially stable through the quarter. Performance was led by temp, 55% of U.K. and IE fees, up 5%, entirely driven by increased margin and mix. Perm was up 2%. Private sector fees, 68% of U.K. and IE fees, increased by 3%, with the public sector up 6%.
Most regions traded broadly in line with the overall business, apart from Northern Ireland and the South West and Wales, which increased by 9% and 8% respectively, and the North West, which was down 3%. Our largest region of London was flat, including London City, up 4%. At the specialism level, technology produced another record quarter, up 13%, and accountancy and finance grew 4%, while construction and property declined by 2%. Ireland delivered another excellent performance, with fees up 22%. Consultant headcount decreased by 6% in the quarter and increased by 6% year-on-year. Our ANZ division, 14% of group, decreased by 4%, with fees broadly stable through the quarter. Perm, 38% of ANZ fees, was down 1%.
Temp decreased by 6%, with volumes down 12%, partially offset by improved margin and mix of 6%. The private sector, 61% of fees, decreased by 6%, with the public sector down 2%. Australia fees decreased by 6%, with New South Wales down 3% and Victoria down 12%. Our largest ANZ specialism, construction and property, grew by 4%, while our second-largest technology was flat. Accountancy and finance was up a strong 15%, with HR down 11%, and our other smaller specialisms also down 11%. New Zealand, 9% of ANZ fees, continued its good run and increased by 10%. Consultant headcount decreased by 5% in the quarter and increased by 5% year-over-year.
In Rest of World, representing 37% of group fees and comprising 28 countries, fees grew by 6%, including eight countries delivering quarterly records. Excluding the fee impact of the closure of our Russia business in March 2022, Rest of World growth was 9%. Perm, 66% of Rest of World fees, increased by 6%, with temp up 7%. EMEIA, ex-Germany, produced record fees, up 13% or 19% excluding Russia, with broad-based growth across the region. France, our largest Rest of World country, and Switzerland both delivered record performances, each up 23%. Italy and Poland increased by 24% and 10% respectively, and the UAE delivered a standout performance, up 69%. The Americas decreased by 1%, with strong growth of 21% in LATAM and good growth in Canada, up 10%.
The USA was down 9%, with fees and activity slowing through the quarter, particularly in perm. Asia declined by 5%, with excellent fee growth in Japan, up 38%, and with Malaysia up 9%. China decreased by 28%, although Hong Kong significantly outperformed mainland China, where the pandemic continues to significantly impact performance. Excluding China, our Asia business grew by 20% overall. Overall, Rest of World consultant headcount was down 1% in the quarter and up 9% year-on-year. Cash flow and balance sheet. We had a good cash performance and ended the quarter with net cash of circa GBP 100 million after paying circa GBP 150 million in core and special dividends in November.
We saw a working capital outflow over the half year, driven by the excellent growth in contracting in temp in Germany and EMEIA, which are our highest salary and therefore most working capital-intensive markets. We also purchased and canceled GBP 18.6 million of shares under our buyback program in the quarter. Our buyback program has a residual balance of circa GBP 18 million outstanding at December 31st. Current trading and guidance. I would make the following points. As always at our Q2 update, it is too early to quantify our new year temp and contractor return to work. Our client and candidate activity remained at good levels in our temp and contracting business. Perm activity weakened in several markets across Q2, notably in Australia, the U.K., and the U.S., where we saw a lengthening of some client decision-making and increased candidate uncertainty.
Demand in our core markets continues to be underpinned by skill shortages globally. Our actions are driving supportive margin dynamics, as is wage inflation, and we expect to remain a net beneficiary of wage inflation through FY 2023. Having adjusted consultant headcount in several markets in Q2, we currently expect consultant headcount will be broadly flat in Q3 overall, as we focus on driving productivity while selectively investing in attractive structural areas such as technology. The group's cost base per period decreased through the quarter by just over GBP 1 million per period, and we remain focused on cost control. As flagged in the statement, group operating profit in H1 FY 2023 is expected to be between GBP 95 million and GBP 97 million.
In conclusion, we have performed well and executed the quarter with working-day adjusted fee growth at 6% led by our largest market of Germany. Clearly, we are mindful of macroeconomic uncertainties, and our highly experienced management teams will react swiftly to any changes and are watching lead indicators closely. Our focus is on further increasing margins and closely managing our overheads while capitalizing on the significant opportunities we see in the longer term. I will now hand you back to the administrator, and we are happy to take your questions.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our first question from Rory McKenzie at UBS. Your line is open. Please go ahead.
Morning all. It's Rory here. Three, please. Firstly, can you talk about the volumes in both temp and perm, how they evolved through the quarter? I appreciate December's a tough month to look at comparisons, just how those numbers evolved. Secondly, obviously the pricing component of fee growth, so the combined wage inflation and fee rate expansion. Is that still rising sequentially? Are you seeing any areas where you expect that to come down? Appreciate you've shifted the mix quite a bit. Lastly, you talk about how headcount is likely to be flat sequentially. Can you just say what that could then mean for the kind of periodic cost base we should expect in the second half? Thank you.
Thanks, Rory. I'll start with the question on volume on temp and perm through the quarter. I think what we saw in temp was good levels of activity overall. We grew our head count, our external head count, so our temp volumes sequentially by about 4% through the quarter, which is kind of consistent with what we would normally expect through this part of the year. That's why we put in line with our normal seasonal trends. We continue to see good numbers of temp starters with our clients. I think importantly, we saw our clients in most of our major temp markets looking to extend contractor placements. We saw lower levels of finishers than we would normally expect.
I think that's indicative of a skill short market where companies still need work to be done and they're keeping hold of good talent. That again, was a tailwind to the sequential trend on temp volumes. Perm on the other hand, as we've put in the statement, did decrease modestly on a sequential basis through the quarter. As you say, it's always slightly difficult to get a read through on December because of seasonality. Again, I'd say that perm volume placement reduced by about 5%-10% sequentially in comparison to Q1. If I look at that on a month-on-month trend.
Your second part of the question was around the pricing dynamic within that sequential trend and whether we saw a continuation of prices, of positive pricing. Again, it's always difficult to look at it month on month because you get natural sort of ups and downs depending on the month in question. We did continue to see a positive support in perm and in temp pricing on a sequential basis as we move through the half. It perhaps wasn't quite as strong as what we saw in the six months to June, where I think that dynamic was clearly a very positive one. We did see it move forward through this half and into this quarter as well.
I think the final question was on headcount and cost base. I think we obviously, we put in the statement, we reduced headcount by 2% overall through the quarter with... That was a sort of, you know, selectively investing in countries such as Germany and Europe, where markets were positive and we reduced slightly in other markets, notably the U.K. and Australia, where things were a bit tougher. That's a balance that we're quite happy with, and we managed to keep overall average productivity at good levels and headcount in line with underlying fee growth. I think that was a good outcome for the quarter. Going forward, as we stand today, we expect it to stay pretty flat through the third quarter.
Clearly, if things change, we'll review that and respond appropriately. What does that mean for the cost base? Well, I think other things being equal, I would expect it to remain fairly consistent if we're keeping headcount, fairly level through the next quarter or so. As you know, we keep a close watch on all our overhead costs, and we did that through Q2, and we'll continue to do that through Q3. I expect it will remain broadly flat if our headcount staying broadly flat through the next quarter.
That's all really clear. Thank you.
Thanks.
Thank you. We'll now move on to our next question from Kean Marden at Jefferies. Your line is open. Please go ahead.
Morning, all. Another question I'm afraid on net fee margins. Just looking at Alistair's comments about further increasing them. Do you mind, James, just running through that in a little more detail? Are we looking for positive mix factors to drive that? Are you still looking at sort of real underlying expansion in fee margins in some pockets? I guess those will obviously be in sort of tight labor markets, which is pretty obvious. If you can call out any particular areas that maybe Alistair had in mind in that paragraph. Then secondly, we're still not seeing the sort of normalization in debtor days, which is great news for you guys and your finance team at the moment. Are you starting to see, any changes sort of payment behavior in any pockets anywhere that you might want to highlight? Thanks.
Thanks, Kean. Yeah, on the fee margin question's a good one. I think it's. What we're seeing is the positive pricing has really come from three areas. Clearly our own actions and efforts we have taken to increase our margin in a still short market. I think secondly, our focus on targeting parts of the market which are higher value and not just of long-term strategic growth, but also they're higher value and higher margin parts of the market, such as technology, such as engineering and other sort of skilled areas as well. That's had a clearly a mixed impact, which has been beneficial through this half, and we expect to continue going forward.
Finally, clearly, there's been underlying wage inflation in the market overall, which has clearly had a positive impact on pricing overall. I think the second of those factors is a really important one, and it's part of our long-term strategic positioning of the business on markets such as technology, where average day rates on contractors and temps are, you know, are significant and are high. Likewise, engineering, which in this quarter grew by 23%, is now our fourth largest specialism at 10% of the overall group fees. That mix and repositioning of the business to focus on those markets has been a significant positive, and I would expect that to continue. I think, Kean Marden, the second question was on DSOs.
Yeah, we've had a good half. I mean, going back to pre-pandemic days, we were at DSOs of 39 days, and we reduced that through the pandemic to 33-34 days. We've held on to that through the half. We saw, you know, usually cash collections are a little bit slower through the summer as people go on holiday. From September through to Christmas, we've had a good run on cash. We've collected well. The teams have done a great job. We've closed the half year at GBP 100 million of cash, which is where we expected to be, which reflects that performance, and that's after a clearly, you know, the dividend and the buyback payments through the quarter.
Thanks. To be clear, no pockets of a sort of, you know, slightly concerning behavior or just sort of lengthening terms or more difficulty in collection from any parts of the business? I appreciate the overall number's still pretty healthy.
No, no. We've seen, you know, pretty good trends on collections. No, no real change in insolvency risk and underlying risk with clients. Our ledger aging is consistent, and we've not seen that deteriorate, which is a positive. all the-
Yeah.
all the relative buckets are kind of in line with where we'd expect to be. I think great performance from the guys. Like, clearly, you know, we keep a very, very close watch. Personally, I spend an awful lot of time watching it and we'll continue to do that. I think the teams around the world have done a great job.
Yeah, agreed. Okay. Thanks very much, James.
Thanks.
Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We'll now move on to our next question from James Rose at Barclays. Your line is open. Please go ahead.
Hi there. Good morning. Two from me, please. Firstly, on headcount, in the second quarter was down a little. I guess why the guide for flat headcount in Q3? That's still up year-on-year, or why not take that down a little bit? I mean, it seems like quite a positive signal coming from you still. Secondly, on Germany, it still looks really strong. How broad-based is that across your customer base and across the regions? Are there any areas which are slowing down? Any sort of helpful comments on changing customer behavior you're seeing in that region would be appreciated. Thank you.
Sure. Okay, I'll start with the headcount. As you mentioned, James, it's down 2% in the quarter. Why have we guided flat for the next quarter? I think, you know, simply we've made some corrections where it was appropriate to through this quarter, and we've got the balance in line overall with the underlying level of fee growth. We exited at 10% headcount increase, and that's consistent with the underlying fee growth through the quarter. I think that's been quite a good correction and the right one to make. I think as the market is today, we're happy with that level of capacity that we've got in the business.
Bearing in mind, you know, the market is a little bit tougher than where we were 12 months ago. The, we need the headcount we have to drive the fees to the level that they are, and I think that we've got the right level of mix of headcount in the business. Clearly we'll continue to review it, and we'll tweak where necessary, but, you know, we'll keep a close watch on the market, and we'll make any adjustments if we have to. I mean, I would add that through this half we've added close to 300 heads in our SGI program. That's continuing the strategic investment and positioning of the business into long-term growth markets.
I think, you know, clearly that's a cost implication of about GBP 8 million through the half. I think we're starting to see the benefits of that coming through in the performance of the business where clearly we've performed strongly in those areas. Overall, we're pretty pleased with where headcount is. We're happy with it now, and we'll keep a close watch on the trends in the new year. I think your question on Germany. I mean, we're absolutely delighted with the performance in Germany. I think it really is a superb performance. Given the scale of that business, and bearing in mind that business did over GBP 90 million in fees in the quarter and is in a business with 2,100 consultants.
It's a big business, and to grow that at an underlying rate of 28% I think is a really standout performance. All of our contract areas perform well, whether that's contracting temp and perm, all performed well during the quarter. I mentioned on one of the previous questions around some of the trends we've seen on client behavior. We've definitely seen that in Germany, perhaps more so than anywhere else, where clients have been hanging on to contractors and temps, and we've seen lower finishing numbers than what we would normally do. Clearly that's a tailwind to overall volumes. We're continuing to see positive pricing dynamics across Germany, and that w e expect that to continue given the skill shortages in the market.
I think this performance has underlined our strong market position as market leader in Germany. Perm, actually we had a record perm performance in December, which was again, very pleasing. Being up 32% in the course in perm was a really strong performance. End client-wise, we continue to see good dynamics and conversations with clients in automotive, in manufacturing, broad-based in defense technology areas. There's no real obvious pockets of weakness in the market. It's a pretty consistent picture and I think it is indicative of the underlying level of activity in the German economy.
Very clear. Thank you very much.
Thanks.
Thank you. We'll now take our next question from Karl Green at RBC. Your line is open. Please go ahead.
Yeah. Thank you very much. Just one outstanding question from me. Just in terms of Australia and New Zealand in construction and property was actually probably a little bit more resilient than one might imagine, reading some of the negative press about what's going on in the Antipodean property market at the moment. Just in terms of your line of sight on how that looks in the short term, just going into next quarter, on what your clients are saying in the C&P segment there. Any color would be appreciated, please.
I think Karl, I think that's a good spot, and I think our C&P business did hold up quite well in Australia. However, it's not immune from some of the factors which are impacting the market there. A key one is candidate scarcity. We are in really quite tight labor markets and availability of skilled candidates is very tight in Australia. I think we've seen that impact in our business quite broadly across most sectors. Our C&P business was up 4% in the quarter. Actually, we did 19% growth in Q1, so that has come off a little bit and is kind of consistent with the trend that we've seen in our markets.
I think perm did come off a little bit more than temp as well. I mean, I'm not an expert on house building and residential construction in AMZ, but from what I read, it's remained relatively resilient. It's not a huge market and the property market is fairly orderly and not in any kind of peril in Australia. We're pretty pleased with our C&P business up 4% and, you know, hopefully it will continue through to the next quarter.
Yeah, that's great. Just a little unrelated follow-up, if I can, just in terms of the Hong Kong business, which you flagged as being in Asia Pacific, as being, you know, pretty strong. I think that seems to be a better performance than we saw at some of your smaller peers. Do you again, do you think that that can endure going through into the next quarter?
it is a difficult one to call, to be honest, Karl. I think you highlight Hong Kong itself is actually up 15% this quarter.
Yeah
If you exclude mainland China, which I think is a good performance. How that pans out over the next quarter is really difficult to say. I think whether we sort of see the broader impact of the pandemic that's been clearly so significant on the mainland start to impact Hong Kong, that could be a factor that hits that market in the future, but we just don't know. I think, you know, the guys have done a great job. China, mainland China itself clearly has been a difficult market for a period of time now, and clearly the lockdowns and restrictions have impacted significantly in many ways, very similar to the fourth quarter we had over here in FY 2020. It's, you know, it's a pretty similar picture.
How that comes back both within mainland China with the lockdown restrictions easing, but clearly with high levels of infection rates which impact, you know, our clients, candidates and our own business as well, and how that plays out in Hong Kong, very, very difficult to say. I'll just say that, you know, we're pretty pleased with how the business has got on over there in a really, really tough, in a really tough environment.
That's great. Thanks, James.
Thanks, Karl.
Thank you. We'll now take our next question from Andy Grobler at BNP Paribas Exane. Your line is open. Please go ahead.
Hi. Good morning, everybody. Just a quick one from me on technology. It's stayed pretty robust through the quarter. I just wondered whether you were seeing any impact as some of the larger tech firms retrench, and to what extent that could be working through the first half of the calendar year. Is, you know, is that affecting salaries, demand and availability?
Thanks, Andy. You know, we had a good record quarter in tech overall and pleased with the performance there. I think regarding the question on sort of larger tech and the titans and some of the dynamics that have played out largely in the States. That doesn't really directly impact us. Our clients are typically normal, you know, range of SMEs through to large corporates who are getting on with their own projects in ERP, whether it's cloud, whether it's security, whether it's cyber. Businesses are still committing to the projects that they wanna get on with. A good example of that is that our most in-demand roles today in tech are for business analysts and for project managers.
That suggests to us that our clients are carrying on with the projects that they wanted to, and they're not pulling away from those, and they're happy to start new projects. I think that's a good sort of lead indicator of the market dynamic. I'd say where the impact of large tech has impacted a little bit is in the wage inflation. I think 12 months ago, we were seeing pretty rampant wage inflation in tech in the sort of 15%-20% increases that people were getting to new job. A lot of that was being driven by large tech who were offering huge amounts of money to hoover up talent.
I think without that level of demand from them in the market, we've seen a more of a normalization in wage inflation in the sector, probably more into the 5%-10% space, which is consistent with what we're seeing more broadly across the economies that and the markets that we're in. I think that has moderated the wage inflation aspect, but the underlying level of demand from clients is still there.
Just if I could follow up just on the business analysts and project managers. Has that continued into 2023? Certainly anecdotally we're hearing of consultants having projects canceled or postponed given the uncertainty. You know, is that your experience too?
To be honest, Andy, I've only got a week's data to go with in 2023, so I'm not really sure at this stage how that will play out over the next few weeks. We'll Of course, we'll update on in February at our interim on return to work and the moving parts within it. I can say that through November and December that we continued to see a pretty robust trend and, you know, both in t emp, particularly in temp. Perm was still pretty good in technology, and I think those trends around business analysts, project managers, those are absolutely at the forefront through the quarter that we've just reported.
Okay, great. Thank you very much.
Yeah. Thanks, Andy.
Thank you. There are no further questions in queue. Once again, if you would like to ask a question, please press star one on your telephone keypad. Thank you. I still don't see any further questions. I will now hand it back to your host to conclude today's conference. Thank you.
Thanks. If that's all the questions for today, we'd like to thank you all again for joining the call. I look forward to speaking to you next at our half year results on the February 23rd. Should anyone have any follow-up questions, David, Charles and I will be available to take calls for the rest of the day. Thank you.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.