Hays plc (HAS) Earnings Call Transcript & Summary

As usual, you know the format, I'll take you through the operating review. And then Paul will walk us through the details financially. Our current trading, and then I'll come back to conclude with a short update on the strategy. So clearly, it's been a difficult 6 months. We've all faced weaker markets. And we've also had to [deal with external ] unexpected events that we've dealt with around the world. But I think the key point I want to make here is that we've continued to execute against our strategy. It's a strategy that we firmly believe in and we spent our time in the last 6 months, seeking to get the balance right between continuing to invest in those areas where we continue to see long-term opportunity, whilst also protecting our profitability in other areas through tight cost control and management. So let me turn to the results themselves. Net fees were down 2% to GBP 553.1 million, and operating profit was down 18% to GBP 100.1 million. And looking first at the fees. Sequentially, the underlying first quarter fees fell 1%, but the momentum deteriorated through the half and the second quarter was down 4%. The main driver of this was a sharp slowdown in Germany, which, if you remember, went from mid-teens growth a year ago to decreasing by 9% in our last quarter. As the German economy and its industrial base weakened particularly in the automotive sector. At the same time, however, just to put things in context, we did hit record fees in 7 countries around the world. And I think that's a good indication of how mixed the markets have been globally. Looking at cash. Cash generation, again, was good. Our underlying cash conversion was up 2 percentage points year-on-year. And we ended the half with GBP 13 million net cash, very much in line with our expectations. And as per our policy, we maintain the interim core dividend at GBP 1.11, which brings our total dividends to shareholders distributed since 2017 to over GBP 390 million. What have we've been doing? Well, clearly, as the markets got progressively tougher, we implemented a number of cost reduction initiatives, largely in November, predominantly in the overhead areas. And we believe that should benefit our second half by around about GBP 5 million. Consultant head count was down marginally in the second quarter. So while the average consultant head count in the half was up 1% versus a year ago, the period-end head count was reduced by 2%. In terms of investment, we added one new office to our network. We expanded several others, but we also continue to invest in those businesses, which we believe offer significant long-term potential. The technology sector is one obvious area and we added an additional 200 heads into the IT business globally in the last 12 -- in the last 6 months. The IT business is now nearly a 1/4 of our total group fees, and that makes it our largest specialism and it also interestingly makes Hays one of the world's largest recruiters in the technology space. So IT fees themselves were up 3% globally; and outside Germany, were actually up 8%. We're now starting to explore other interesting areas, little interesting sectors such as marketing and HR, which we believe over time can offer similar potential to the tech sector. To support our consultants, we continue to invest in building consultant productivity-enhancing systems. And as many as you -- many of you saw at our recent technology seminar, we've launched several new tools in the last year, all of which are designed to make our consultants more effective in their jobs. So just stepping back, we've been dealing with the world of political and economic uncertainty in many areas, together with some genuinely unforeseen external events in some of our biggest markets of the U.K., Australia and France. And against that, we've sought to defend our fees and our profitability in the more difficult markets. But we've also taken steps forward to invest in those areas where long-term opportunity is apparent. I think that's absolutely the right thing to do, even though it impacts short-term profitability because the long-term potential in those investment areas, I believe, is absolutely undiminished, despite the current economic backdrop. So let me now give you a little bit of color on each of our divisions. We'll start in Australia and New Zealand. As you can see here, fees in ANZ fell 4%, and profit was down 14% year-on-year. The Temp market was relatively resilient. It was down just 2%. We had an average of around 22,000 workers on assignment throughout the half, but Perm is obviously more difficult, and it fell by 9%. Stepping back from July through to November. Fees were broadly stable on a month-on-month basis, a pretty close to record levels, remember. However, in December, the bushfires effectively stopped all activity across the country, particularly in the Perm market. And we had a very weak end to the year. New South Wales and Victoria combined over half of the business, they fell 8% and 9%, respectively. Queensland and Western Australia were also down marginally, but South Australia was up 2%. Looking at the specialism level, Construction & Property is our largest sector in ANZ. That continued to be a very tough market. It was down 13%, and we adjusted our costs accordingly. A&F and Office Support were also more difficult, down similar amounts. But again, on the positive side, IT grew 5% and HR was up 7%. Head count across ANZ was down 6% year-on-year, and it was flat in the half as we focused on productivity and profit protection despite the investment that went into the IT business. And then finally, a shout out to our colleagues in New Zealand. I think the management team there that we put in 18 months ago, done a fantastic job, and that recovery has continued. Fees in New Zealand, up 12%. Turning now to Germany, our biggest country, net fees were down 5% against a very tough comp last year, and profit was down 20%. Fee growth slowed progressively through the half as business confidence fell and clients started to shift more into cost control mode. And I think this was particularly evident amongst our larger clients, which are some of the biggest names in Germany in automotive, manufacturing and financial services sectors. On a more positive note, we did see growth amongst the smaller and the midsized clients. And we're clearly directing more of our resources into that Mittelstand area as we speak. The Flex business, which is around 83% of German fees was down 5% in total, and that comprised of Contracting down 7% and Temps down 4% and Perm itself was down 3%. Looking by industry, our largest specialisms were the toughest. So Engineering was down 10%, and IT was down 3%. But the newer specialisms performed much better, including Sales & Marketing, which was up 17% and our Legal business, which was up 4%. And those new businesses now constitute around 1/3 of the overall German fees. We did reduce head count by 4% year-on-year. That was broadly in line with volume, and it was mainly in the second quarter. But again, in terms of investment, we opened one new office in Bremen, very much in line with our network expansion strategy. So while things have been more difficult in Germany, I believe the long-term opportunity in a skill-short market remains as intact as it ever was. And our job now is to make sure we set the business up to capitalize on that long-term potential to continue to reinforce our market-leading position there because we believe that there's a massive amount of value to unlock. And then moving to the U.K. and Ireland, net fees were down 4%, profit down 21%. And unsurprisingly, in the run-up to the election, conditions became more difficult as confidence between both clients and candidates weakened, always happens around every election, and this was no different. Temps is around 58% of the U.K., Ireland net fees. That was relatively resilient. It was down just 1%, but Perm was much tougher, and Perm fees fell 8%. The public sector had another good run. It was up 8%, but the private sector, which is almost 3/4 of the U.K. business was much tougher, and that was down 8%. Looking by region, Northern Ireland continue to do well, fees up 2%. But the North was much tougher, it was down 9%; and London is our biggest region, as you know, was down marginally, down 2%. Looking by industry sector. Our largest specialisms of A&F and Construction & Property, both decreased at 6% and 8%, respectively. Education is a big business for us. It was down 6%. But the good news there is after several tough years, the Education business did stabilize towards the end of the half for the first time in a number of years. IT repeated the success story, it grew 8%. And Health Care, another interesting investment area of ours, delivered some very strong growth, up 15%. Looking at consultant head count. We increased head count by 2% over the half, mainly as we added around 60 consultants additional into our IT business to support demand there. And then finally, the Rest of the World division, it comprises 28 countries around the world, grouped into 3 subregions. Overall, across the entire division, fee growth was 2%, but profits decreased by 20%, primarily due to 3 specific factors: number one, a marked slowdown in fee growth throughout the half, particularly in China and Canada; number two, the strikes in France; and number three, the investments that we've chosen to make right across the business. So looking at the largest subregion first. We've got 17 countries in Europe outside Germany, 6 of which had record halves. The largest market in that region is France. It was growing at about 3% from July through to November, but the general strikes in December took away all of the momentum in France, and France ended up with flat fees over the half. Of the smaller countries in Europe outside Germany, we had a range of different outcomes. So the Netherlands was very tough, it declined 12%, and it weakened through the half. More positively, Belgium showed signs of stabilization. It was down very marginally, down 1%, but a shout-out to Italy, which was the standout performer this time around, it grew a very strong 10%. And operating profit in EMEA outside Germany fell 18% year-on-year, largely due to the French slowdown and our continued investment in the IT business right across the patch. Across the world in Asia, fees grew 4%, including 7% in Japan and a fantastic 29% in Malaysia, however we did see the sharp slowdown through the half in China, including Hong Kong, obviously. But when coupled with additional property investment across Asia, that meant that our Asia operating profit declined 16%. Then finally, in the Americas, fees were up a healthy 7%. That was led by the United States, which itself was up 12%. We continue to reinvest most of our profits in that region to build scale faster in the States. However, Canada was tougher and Canadian fees were down 5%. Right across the entire division, average Rest of World head count increased 1% in the half and 2% year-on-year as we expanded capacity. And then finally, our usual traffic light assessment of our performance versus our long-term profit aspirations. As you know, our 2022 plan aims to significantly grow our profits to between GBP 300 million and GBP 450 million, based on macro conditions remaining as they were in November 2017. I think we all know that the world has become significantly tougher since that date. And last year, we said it may take us longer to achieve the midpoint of that range. I think the factors that we're dealing with now will probably mean that we'll -- it will take around 2 to 3 years longer. But rest assured that we're still managing our business against that original plan. And we're taking actions to ensure that we eventually get to those profit numbers. So looking first to ANZ in the top left, the combination of lower fees and a slower economy means that, that business has turned amber. We still have the chance to deliver on the 2022 aspirational profit range, but there are more risks today than last time we met. Turning to Germany, in the top right. The pace of the fee decline in Germany is accelerated with Automotive and financial services, very tough sectors. And with the German industrial base going through its own transformation, I think it's prudent to downgrade Germany to red. It will be beyond 2022 when we reached that aspiration of doubling profits from our 2017 levels. But again, I am very confident that we will get there, and that will come when we see a period of stability and a return of GDP growth in Germany, which should get us then back to our historical levels of German fee growth. Bottom left, U.K. and Ireland is still tracking very close to our 5-year plan range and it's outperforming the market. I do hope that the decisive general election result will provide a much-needed market impetus over time. However, I'm also very mindful that we still need to get through the details of the future trading arrangements with Europe and to rebuild some positive fee momentum. So with all of that going on, we'll keep the U.K. on amber for now as well. I've also kept the Rest of the World on amber. I'm very happy with our United States performance. And encouragingly, France has rebounded very well after the December strikes. However, China and potentially other countries across Asia are likely to be significantly impacted by the coronavirus outbreak. Understandably, this has caused deep concern, both in China as well as globally, and we're very closely monitoring the situation. Our #1 priority is the health and safety of all our colleagues and our clients and we'll do whatever we can to provide any support that they need in what is a very difficult time. I think today, it's still too early to assess whether the markets will stabilize relatively quickly as they did with the SARS outbreak, back in 2003, or whether it takes longer. But it is a material uncertainty that we need to manage through in the second half. So overall, it's been a tough half, but our long-term opportunities are undiminished. I'm very confident in our strategy. We're blessed with excellent management teams throughout the world who've navigated through many periods of uncertainty. And we'll continue to do the right thing for our shareholders, which is both investing for the long term, while striking a balance in managing our cost base in the near term. I now hand over to Paul for a deeper look at our financial performance.

Thank you, Alistair, and good morning, everyone. Starting with the highlights of the financial review. Firstly, to summarize what's been a tough first half. As you can see on the slide, net fees decreased by 2% on a like-for-like basis, whilst operating profit declined 18% to GBP 100.1 million, impacted by a sharp slowdown in our largest country, Germany, 3 external events in December and GBP 9 million of net reported cost increases, driven by strategic investments in our IT specialism, Property and IT capability. As a result, EPS decreased 22%, but in line with our dividend policy, the Board has maintained the interim core dividend at GBP 1.11 per share. These results reflect the tough conditions we've experienced, combined with our continuing investment in key areas to support future growth. Coming on to the more detailed income statements. On a reported basis, net fees decreased by 3% and operating profit by 19%. On a like-for-like basis of organic growth at constant currency, net fees decreased 2% and operating profit by 18%. And the difference between the reported and like-for-like rate is primarily the result of the depreciation in the average rate of exchange between both the Australian dollar and the euro versus sterling. Overall, FX movements decreased net fees and operating profit by GBP 3 million and GBP 1.4 million, respectively. And I'll cover FX in detail later on. Market conditions, Alistair covered trading earlier, and I will not repeat that here. But I thought it useful to set up the market backdrop that we faced, how our clients have changed the way they manage their business and that how Hays has responded to weakening conditions. Over the last 18 months, we see a material weakening in global economic conditions, and our group net fee growth has slowed materially from 14% growth in Q4 FY '18 to a 4% decline in Q2 FY '20. This trend has been seen across all of our large international businesses other than the U.S. And in the U.K., after stable fee trends until Q3 FY '19, we've seen a decline due to Brexit and election uncertainties. As a result, since Q1 FY '19, we've seen our clients move initially to reduce investment spend then to cost control, and then over the last 6 to 9 months, increasingly to cost-reduction mode. As our client confidence is reduced and decision-making slowed, we've also changed our approach to managing the business. The start of FY '19, we were focused on investment to capitalize on the many growth opportunities around the world. But over the last 12 months, we've moved to a more surgical approach, still investing in those parts of the market that are growing and which are strategically important, such as IT, while simultaneously reducing costs in those parts of the market that have become more difficult. And overall, we have reduced total consultant head count by a net 200 since the peak. As you know, our H2 FY '19 European restructuring reduced our overheads by GBP 5 million. And additionally, in Q2, FY '20, we completed a program to further reduce our global overhead by GBP 5 million, helping to protect our second half FY '20 profitability. A key -- as key Hays strength are experienced management teams around the world, we will continue to seek out growth where possible, but also drive tight cost control where appropriate. We've been here before, and we'll deal with it appropriately, planning for the long-term whilst executing for the shorter term. Alistair's already covered regional training. So I'll cover a few technical issues on this slide. In ANZ, we invested an incremental GBP 2 million in our IT specialism, GBP 1 million of which was funded by cost reductions in other areas. In Germany, cost increased by a net GBP 2 million like-for-like, representing increases in cost base, property, partially offset by overhead reductions. In the U.K., we invested an incremental GBP 2 million in our IT specialism, all funded by cost reductions in other areas. And in the rest of the world, costs increased by GBP 8 million like for like, including GBP 1 million in our IT specialism, GBP 3 million in expanded offices, especially in Asia and GBP 4 million in base pay and commissions net of overhead reductions. On this slide, I've set out an operating profit bridge comparing the profitability in the first half of the last financial year with first half FY '20, starting with GBP 124.1 million, we deduct the negative impact of exchange on profits of GBP 1.4 million and the 2% decline in like-for-like fees of GBP 11.9 million explained earlier. Then there are 5 main cost buckets, which impact profitability. Starting with our GBP 5 million investment in 200 consultant, IT consultants and other costs to accelerate the growth and capability of our IT specialism in the U.K., Australia, France and Spain. GBP 4.1 million in property costs, which is net of IFRS 16, increasing capacity in existing offices, primarily in Asia. These decisions are often taken 2 years before the office has come on stream. Thirdly, GBP 2 million investment in our IT capability and cybersecurity; and finally, GBP 4.6 million of pay, mainly inflation and other net cost increases offset by GBP 5 million of cost savings, including GBP 2 million of last year's reduction in European overheads and GBP 3 million in reduced current year management's incentive costs. Excluding our IT head count investment, our average consultant head count decreased by 1%, and this average consultant productivity also fell by 1%. And as Alistair explained earlier, we're trying to get the balance right between investing for the long-term and cost protection in the shorter term. Moving on to look at the performances in our Perm and Temp businesses. Our Perm business representing 42% of group net fees decreased by 3%, driven by a 10% increase in volume, partially offset by a 7% increase in our average Perm fee. The increase in average Perm fee was in part due to client mix, where we saw a greater decline in volumes from larger clients where the average Perm fee tends to be lower. We estimate the global wage inflation with circa 2% overall, with pockets of higher inflation in certain skill-short markets. Our Temp business, 58% of driven net fees declined by 2%. This comprised a volume increase of 1%, a 2% increase in mix and hours, primarily due to the relative strength of our IT specialism, net of reduction in German Temp powers, together with a decrease in underlying Temp margins down 50 basis points in Australia and Germany. As usual, we provide details of P&L sensitivity to changes in key exchange rates. The Australian dollar and even more so the euro, represent meaningful FX translation sensitivities for the group, each GBP 0.01 movement in the annual average rate impacts operating profit by GBP 0.4 million and GBP 1.2 million, respectively. And the total half one operating profit impact of movement in exchange rates was GBP 1.4 million negative versus prior year. If currency exchange rates hold for the remainder of the financial year, the impact on the FY '19 full year reported operating profit will be GBP 7 million negative. This is GBP 3 million worse than that at the Q2 IMS in January and GBP 12 million worse than our Prelims. As we said before, the group does not undertake any P&L hedging translation. Moving on to conversion rates. Our group conversion rate for the half decreased by 370 basis points year-on-year to 18.1%. The decrease is almost equally split between the decline in fees and increase in costs. And I explained the regional cost, changes in cost base earlier in the presentation. IFRS 16 for leases became effective for the group from the July 1, 2019, and the group is reporting this under the new standard for the first time. We've applied the modified retrospective approach with no restatements to prior years. On this slide, we set out on the left-hand side, the impact on the income statement, which leads to an increase in operating profit of GBP 0.8 million and a reduction in profit before tax of GBP 2 million. And on the right-hand side, we set out the impact on the balance sheet with the capitalized leases and outstanding lease liability both at the start of the year and at the end of December 2019. The reduction in asset and liability levels during the 6 months, reflects that after a number of new leases started in the 12 months through June 2019, which led to the increase in property costs explained earlier. There were minimal new leases signed during the first half, and thus the balances have reduced. Moving on to interest and tax. The net finance charge for the first year decreased -- increased to GBP 4.5 million, primarily due to the adoption of IFRS 16, which increased the interest charge by GBP 2.8 million. We expect the net finance charge for the full year to be around GBP 9.5 million. And turning to tax, our effective tax rate decreased to 29.5%, driven by the geographic mix of profits. We expect the tax rate to remain at 29.5% for the full year. Basic earnings per share was GBP 0.046, a 22% decrease versus prior year, reflecting the group's lower operating profit, higher interest charge due to IFRS 16 and lower effective tax rate. The impact of IFRS 16 reduced basic EPS by GBP 0.01. On this slide, we summarize the key components of our cash flow. The chart on the left details our sources of cash flow, starting with operating profit of GBP 100.1 million. We add back noncash items of GBP 35.1 million predominantly, IFRS 16 property depreciation, other fixed asset depreciation and amortization and also share-based payments. We then deduct a GBP 45.9 million outflow in respect of working capital, driven primarily by normal seasonality, net of a decline in our Temp and Contracting business. We then deduct lease payment to GBP 24.1 million. This leaves an operating cash flow of GBP 65.2 million, a good underlying conversion of profit into cash of 65%, which is up 2% on last year. And for operating cash flow, we paid tax of GBP 31.9 million and net interest of GBP 0.7 million, leading to free cash flow of GBP 32.6 million. And as normal, on the right-hand side, we set out how we use the cash generated. The main items, our dividend payments of GBP 121.6 million, representing last year's final and special dividends paid in November, CapEx of GBP 15 million and pension deficit payments of GBP 8.1 million. For the full year, we expect net -- we expect CapEx to be circa GBP 30 million. On cash, our underlying cash performance was good. We ended the half with net cash of GBP 13.2 million, some GBP 20 million below prior year, due to lower profitability, GBP 9 million higher dividend payments, net of lower working capital outflow. In October 2019, we extended our GBP 210 million facility by 1 year to November 2024, exercising our option in the banking agreement. On this slide, we compare the balance sheet at December 2019 versus June 2019 and the 3 noteworthy movements are: Impact to the presentation of IFRS 16, as explained earlier; an increase in the IAS 19 pension accounting surplus to GBP 29.2 million, primarily due to company contributions, an increase in asset values, net of an increase in liability due to a lower discount rate and the increase in working capital explained earlier. Moving on to dividends. Our priority for the free cash flow remain unchanged, namely to fund the group's investment in developments, maintain a strong balance sheet and deliver a core dividend at a level which is sustainable, progressive and appropriate. The Board has maintained our interim dividend at GBP 1.11 per share, in line with our policy. And finally, the group is highly cash generative and has paid or proposed more than GBP 390 million in core special dividends since the start of FY '17. And in the box -- on the third box on the slide, we have reiterated our special dividend policy. So in summary, with market conditions that have been tough, especially in Germany and where we've been impacted by 3 specific events in December, we've tried to get the balance right between investing for the long-term and managing our cost base in the short term. We have continued to invest in our largest and fastest-growing specialism IT, whilst at the same time, continuing to reduce our cost base in other areas with our focus on reducing the overhead cost base of the group to provide some profit protection in the second half. Our ability to then turn these profits into cash means after paying GBP 122 million in dividends, we ended the half with a net cash position of GBP 13 million and have maintained our interim dividend. And in conclusion, these results continue to demonstrate the strength and depth in management we have across the world, which is especially important in such uncertain times as these. Before I talk about the regional trading trends for current trading, 2 overall comments. First, understandably, it's too early to quantify the effect of the coronavirus on our second half trading; and secondly, exchange remains a material sensitivity to reported profits and movements since the Q2 IMS further reduced profits by GBP 3 million. On regional trends. In Australia, overall trading remains subdued. The return to work in our Temp & Contracting business has been 3% slower on average than prior year trends, impacted by the bushfires, although that gap has reduced in recent weeks. In Germany, trading remains tough, our return to work in Temp & Contracting has seen a 2% lower level of contractual extensions than the prior year. However, since then, the actual level of new Contracting and Temp assignments are broadly in line with the trends seen in previous months. We continue to closely monitor average hours worked per assignment, which are running at 4% below the prior year, modestly better than the trend seen in Q2. And given the step down in German fees and a difficult outlook, we are again reviewing the cost base of that business. In the U.K., overall trading remains subdued. And in our Temp & Contracting markets, our return to work to date has been 2% lower than trends seen in prior years, primarily in the private sector IT markets. As we all know, expected changes in IR35 regulations in the private sector from April, may well lead to a hiatus in Temp activity coming up to that date and beyond, primarily in the private sector. In the Rest of the World. In Asia, China is increasingly tough with additional public holiday and travel restrictions relating to the coronavirus outbreak, materially impacting market activity. This is likely to continue across the whole of Q3 FY '20 at a minimum. Elsewhere, growth remains good in the Americas, led by the U.S.A. and in EMEA ex Germany, the return to work has been solid, including in our largest rest of the world market of France. With that, I'll hand you back to Alistair, who will update you on strategic priorities and progress before taking any questions.

Thanks, Paul. So let me just spend the next few minutes looking slightly longer term, so you know where our priorities lie. And as I said earlier, we haven't changed our strategy nor our approach to running the business because we follow these same 4 key themes to run Hays to make sure that we build both profitable and a cash-generative business and one that's also sustainable over many years to come. So even though many of the markets were tougher in the first half and we cut costs in those markets, we still made good progress in several other areas. So we did hit record net fees in 7 countries, including the United States, Russia and Japan, for example. And we did end the year with GBP 13 million in net cash despite the lower profit and having paid GBP 9 million more in dividends in November. We also made good progress, rolling out some of our newer specialisms into key markets around the world. So just over a year ago, I talked about the launch of Accountancy & Finance into the States, and that business just grew 42%. Over in Germany, we launched sales and marketing fairly recently, and that business grew 17%. And I think these are great examples of what I'd call relatively low-risk growth, where we take a business where we're already the global leader. And we transplant it into an existing infrastructure and management team into a new market, leveraging, remember, the single Hays brand. It's a key part of our strategy to steadily infill all of those specialisms across all of our regions. Another key plank of the strategy is to embrace technology to make us all better at our jobs and to bring more valuable services into the market. And to do this, we continue to initiate and grow partnerships with some of the biggest technology companies in the world because we believe that technology can augment our human expertise but will not replace it. A great example is here in the U.K., where we recently launched some new services into the education market to help our schools and our teachers, meet the demands that are placed upon them. And I think those new services that can help literally every school and every teacher in the land so our ambition to make a real contribution into that space is very high indeed. Already, our Hays Hub app is now being used actively by several thousand teachers and over 2,000 schools. You've seen this slide many times over the years. We're obviously highly focused on the core profit drivers over on the left, they constitute around 2/3 of our net fees. And as we've shown,this morning, each of those 3 markets have had issues and headwinds to deal with. And that hasn't happened in tandem since the global financial crisis. However, we're also the market leader in each of these 3 countries, and we'll use that privileged position to continue to invest to ensure that we remain ahead of the competition. One such investment, obviously has been the IT specialism globally, where we grew head count by over 200 consultants. That's as big as most people's entire IT business, by the way. We added that in the last year, and I think that's worth a closer look. Slightly busy slide, but back in 2008, IT represented around 14% of our group net fees, and it was our third largest specialism. Today, it's 23% of group fees, and it's our largest specialism. Our IT fees now, globally are around about GBP 0.25 billion and that makes us one of the world's largest technology recruiters with over 1,700 consultants worldwide. However, I do believe that there's a lot more to come. Remember, these are skill-short markets. Pretty much every company in every country in the world needs more technology people. There's obviously a wide range of skills and subsectors beneath the overall IT banner. So we are targeting the most skill-short areas as well as anticipating what are likely to be the greatest in demand submarkets in different economies. And when I think about some of the hottest parts of the market today, areas such as cybersecurity, machine learning, Artificial Intelligence, Big Data, Python programming, many of those were very, very small by comparison just 5 years ago. And in fact, many of the jobs that we're recruiting to fill today simply did not exist just back then. So between 2010, 2016, you can see our global IT fees grew organically at around 6% CAGR. And each region is shown in the dark blue column on the screen. However, in the last 3 years, we've invested both more aggressively and on a more sustained basis. And we've seen the global fee CAGR accelerate to 12%. In 4 regions, growth has accelerated and dramatically so in the places such as ANZ, Asia and across most of Europe. So today, despite all of the tough conditions that we've talked about, we still grew IT fees by 3% in the half. And if you exclude Germany, with its well-known economic issues, IT fees globally were up 8%. I'm personally very proud of the progress our teams have made in the IT specialism just over the last few years. And there's no reason why that specialism can't become more than 30% of our group net fees in the foreseeable future. So wrapping up, we have faced some tough markets. We faced uncertain politics, but the business is adapting to it. We have a very clear strategy that we believe in very deeply. We also have experienced management teams who have been through such cycles many times. Our priorities are to constantly balance both long-term investment with short-term profit protection as well as collecting the cash to allow us to maintain our strong distribution. And that approach has allowed us to deliver, remember, nearly GBP 400 million in net dividends -- in total dividends since FY '17. So while it might be difficult to predict exactly what the markets might have in store for us for the next 6 months, nor which new events might grab the headlines, please do rest assured that we believe we can navigate through all types of conditions, we will protect our business, and we'll also make sure that we exploit any opportunities that are available. So with that, Paul and I are happy to take any of your questions. And because we are being recorded, there is a mic by the side of the chair, if you could use that. Paul?

It's Paul Checketts from Barclays Capital. Can I just ask about Germany and China, please? With regards to Germany, the hours-worked point where it's gone from minus 6% to minus 4%, is there any sort of comparative benefit? Or is that genuinely a move in the right direction? I know it's still minus 4%. And more broadly, on Germany -- but can you give us Alistair, how you think the best way to address the market is at the moment, given the challenges it's facing? And is there anything you've seen that causes you to modify your medium to longer-term strategy? I know there's a few points within that. And on China, perhaps you could just give us the latest on the state of play in terms of demand? Your operational situation? And the cost base?

If I start off with the German hours in H2, I just take some comfort it hasn't got even worse, Paul. So we went from nothing to 6% in that last quarter. I was quite clear on the call that there were some specific clients had furloughs where they were asking contractors to take time off, so unpaid leave in December. So the 4% at the moment, feels a more normal level and what that seems -- that seems to be tracking fairly stable on a week-by-week basis. But clearly, we need to see another couple of months first. So what I was trying to do is kind of give some comfort. It hasn't got worse. There were a few one-offs in December. But underlying, this is really tight cost control by our clients.

Just in terms of what are we doing about Germany? We very successfully built our business over 15, 20 years by concentrating on the bigger corporate end of town. Some of the biggest names in the German economy are our long-standing clients. And in contrast to most of the Rest of the World, Germany is more concentrated -- it's fee-based, is more traditionally concentrated in the larger corporates versus the Rest of the World, which is more towards the SME land. But make no apologies for that because it's allowed us to build, by far, the market leader over the last 20 years, and we're very proud of that position. However, a number of those large German corporates are going through their own transformation. The automotive industry, for example, as it's dealing with electrification and quite a transformation in terms of what they do and how they do it. What they're still doing, obviously, is a lot of R&D work because that's going to set their stall out for the future. But we also have difficulties in German financial services sector, for example. I mean, those are well-publicized, the restructuring that some of the banks are going through. Many of those organizations and our bigger clients. So it's understandable as they may be throttling back and controlling their costs more aggressively. That has an impact on us. What are we doing about it? Well, clearly, there is a big Mittelstand set of organizations in the German economy. There's about 3.7 million SMEs across Germany of varying sizes. Many of these employ thousands of people. So I would define an SME has been around about 3,000, 4,000 people and lower right the way down to very small organizations. We've traditionally not focused on that market, although about a year ago, we started to talk about it. And undoubtedly, there is growth in that Mittelstand sector. So we are actively diverting our resources and structuring our business, to more aggressively go into that part of the market that traditionally we've not focused on. We're not defocusing on the big corporates. We're there for them as they go through that transition, but we do see immediate growth opportunities in the smaller businesses. But clearly, to get the volume of contractors and Temps working in smaller businesses, requires a lot more sales and a lot more effort, but we are reorienting the business towards that. I'd also point to some of the newer specialisms that we mentioned, areas such as Life Sciences, Legal, Sales & Marketing, the Finance, Recruitment Specialism that we have in Germany, all relatively new, about 1/3 of the entire German business, and we're pushing more and more into there. So we're not just waiting for the corporates to come back or the German economy to come back. Although clearly, to get to double-digit fee growth, we do need something like 1% GDP growth or better and stability. If you look over a long period of time, whenever German GDP growth is 1% or more, our fees grow at 10% or more. And we're a long way up 1% GDP growth at the moment, but it will come. And then I think the final point on what are we doing right now, is we're looking at our own efficiencies. I think any business that's facing the market as tough as Germany is right now, you have to address how effective you are in running your own business. Clearly, there's been some cost reduction that has already going on. We're looking at where we might orient the business going forward. We are through and partway through a number of programs in the back office to make the back office continually more efficient so we can get economies of scale. And that's an ongoing process that frankly, doesn't stop, Paul. So we are doing a lot in Germany. To your question about, has our view for the long term changed, not one iota. And I say that with some confidence because of a number of facts. Number one, the demographic change in Germany over the next 10 to 15 years will be dramatic. Germany faces the second fastest-aging population in the world, second only to Japan. What does that mean? It means there will be millions less working-age Germans in about 15 years' time. That's happening on our watch. Number two, it's a skill-short market today. This is a high end, highly skilled economy and industrial base. Yes, it's going through its transformation. But I would not bet against the world's fourth largest economy to sort itself out over time. And that skill shortage is not going to go away because Germany, like virtually everywhere else is not educating and training enough of the people for the jobs that they're going to create, let alone the ones they're creating today. And then the final point I'd make is from a recruitment perspective, a white-collar recruitment perspective, Germany remains very immature compared to places like the U.K. or the States or Australia. And the vast majority of jobs in Germany are still done by internal HR departments in the companies. And when we turn up to see a new organization that we've never worked with before, it's surprising that they've never heard of the concept of outsourced recruitment. In the blue-collar market, yes, they have, but not in the white-collar market. So our strategy is completely unchanged, really. We're structurally opening up an immature market in a skill-short market that will take us 20 years before it's mature. At the moment, however, we have to divert some of our resources more towards those smaller companies, which are still actively recruiting, while some of the bigger corporates are going through their own transition. And that's just the nature of the base, but I'm absolutely confident. The market is there for the longer term. It's just going to take us a couple of years longer to get to that sort of profit aspiration, assuming that the German economy and the German GDP starts to return to a more normal 1% plus level in the near future. I'll touch on China and Paul can maybe talk about the economics of China. So as everywhere in China, our Chinese offices were closed down for the extended Chinese New Year period. So that started in the back end of January. And it went through to the 10th of February. We've got 5 offices in Mainland China plus Hong Kong. Obviously, Hong Kong was not closed down, but Mainland was. So nothing happened for the best part of a month. While basically, people were having to work from home, but you can understand, Paul, with something as serious as this outbreak, even if people are working from home, there wasn't a lot of activity as people are more concentrated on their own health versus finding a new job or recruiting for their business. Our absolute #1 priority has been the protection of our colleagues, making sure that they're safe and healthy -- and their families, too. We've done what we can from here to try and support them, medical supplies, et cetera. The good news is all of our offices have been opened since the 10th. The vast majority of our teams are back in the offices and everybody's well. Clearly, the markets are more subdued than you'd like, but there is activity going on in China. Paul, do you want to just talk about the cost base?

Yes. Just the easiest way of doing is to say what is our cost base in China, isn't it? Because that gives you a scope that if we've got very minimal fees for a period of time, what's the underlying cost base? The underlying cost base is about GBP 1.3 million per month. So what you can see, if you kind of work through the math and where we would have expected to be, without a shadow of a doubt, just in this quarter, this will be GBP 3 million or more, but we haven't got a clue any of us, is how long will this go for? And also, will it become more broader? So as Alistair said, our focus is on our own people and their health and we'll continue on that. We've got a question across on the web, and I should have said earlier, it's my fault. So that if anybody on the web wants to ask questions. The question is quite a long one. I think I've got to read it out, haven't I, David? Excellent. "As U.K. market leaders -- " 3 parts of the long IR35 question. "One, what impact do you expect on Half 2 and into next year from the changes in IR35 regulations? Two, will you need to redeploy any consultants in the IT space? Or is it a productivity drag? And 3, what impacts do you think IR35 might have on the U.K. market?" I guess, if I just cover the numerics first and then Alistair will make some comments. And of course, it would actually be nice to know what the regulations are going to be first, wouldn't it. From a numeric standpoint, we have about GBP 45 million worth of Temp net fees, which go through PSC type arrangements across the private and public sector. What we've had in the return to work so far is everywhere outside that space has been exactly in line with every other year. But that has meant that overall, within the PSP space, we're about 6% down to date. And I think it's too early to say what the impact will be on the second half. And on the final part of -- it's on Perm, we haven't seen yet any shift from if there's been less contractors or less renewals into Perm space. But clearly, that is a possibility over the next 6 to 12 months, but very early at this stage.

Yes, just the word on IR35. So in 6 weeks' time, we're bringing in some of the most profound employment legislation for some time that will impact probably 0.25 million workers and literally thousands of employer organizations. And today, 6 weeks from implementation, the rules are not yet clear. I find that difficult to deal with, difficult to accept, but it is what we are facing. We're seeing a range of responses from employers. So in your own world, in the city, many of the banks have taken an extremely hard-line approach to it and said, every single contractor is in scope. Bearing in mind that many of your employers and the banks will employ literally many thousands of contractors today in areas such as IT and areas such as compliance, areas that keep the bank running then that could be a very difficult process to manage through. That's at one end of the spectrum. At the other end of this spectrum, there are many organizations who have not yet started to think about what the impact of IR35 might be on their contractor workforce despite it coming in less than 2 month's time. What I would hope for is some clarity from the government in terms of exactly what are these rules because they are not clear. We have put in place a long time ago, our own compliance checking process because unfortunately, the one made available by HMRC is flawed. So we are reliant on our own independent checking and compliance, which we believe is a market-leading proposition. We're obviously talking to many organizations about how to handle through what will be a difficult period of change. I don't personally see that we will be redeploying any of our own consultants from the IT space. People still need cybersecurity experts on the 6th of April just as they need them today. So that will remain a hot market. What I would ask for from the government is absolute clarity today, please. And if not, than a sensible view on when this could be implemented in a safe way that allows business to get on with doing business. And to build on the hopes for impetus that I think we're all looking for in the U.K. post the election.

I too think it's normal. We've seen it as well as a great time to get very close to our clients and do good business development. So we've done more than 50 seminar -- physical seminars across the U.K. We've done more than 50 webinars and we've spoken to more than 20,000 clients, so we're very close to our clients. We're giving them good advice, but there's still some real uncertainties about the legislation and the interpretation, but we'll continue to do all the right things.

We'll go to Bilal then.

It sounds like a [ center duty. ] And surely, that can't be the case.

There is a red line now. It's Kean Marden from Jefferies. So just on those 2 points. So it's the best way to characterize the headwinds that you've seen in U.K. Temp volumes at the moment, the Banking and Finance sectors has basically stopped. So you're not generating a huge amount of net fees from there? And if so, it might be helpful to give us maybe some sort of insight into what proportion of your sort of IT, IR35 related revenues that they account for? And then on Germany, just want to follow-up, do you have the -- do you need different tools and infrastructure to address the German Mittelstand to the large accounts? And therefore, would you potentially see some impact on profitability or investment from that area as well?