Hays plc (HAS) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining the Hays plc Half Year FY '23 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alistair Cox, CEO of Hays. Please go ahead, sir.

Thank you very much, and good morning, everybody. Welcome to our half year results. It's been a busy few months as you've seen, as we've navigated a world that has changed and it continues to change so quickly. However, we've sought to continue to grow the business, to continue to strategically position ourselves for the future, as well as protecting our profitability and generating significant cash, whatever the markets through it is. So as usual, I'll take you through our operating review. James will then cover our detailed financials as well as our current trading, and then I'll finish up with a strategy update, and then we'll have plenty of time for Q&A. Turning then first to trading. The world of work has continued to change profoundly since the pandemic, and we designed our strategy, as you know, to capitalize on those changes, whether that be exercising our own pricing power in a skill-short world, for example; shifting our mix towards higher-value roles; or moving our resources towards the longer-term markets at our world needs. These actions have enabled us to deliver record half year fees up 12% to GBP 652 million and that includes monthly records in both September and in November. We had 19 countries in total deliver their own record, and all of this came from our focus on increasing our margins, servicing the most in-demand markets, as well as underlying wage inflation. Growth was similar in Perm, up 12%; as well as Temp, up 11%. However, in our second quarter, we saw our largest business of Temp outperform Perm for the first time in 7 quarters. And given that Temp is our larger business, I think that sets us up well for the future. Globally, our largest specialism, as you know, is now Technology, and that grew by 12% to a new record of GBP 170 million in fees. Accountancy & Finance and Construction & Property both increased by 15% and 9%, respectively. And our fourth largest specialism, Engineering now was up 26%. Direct outsourcing fees with our enterprise clients, they grew by 12%, and we continue to gain market share in this segment, which, as you know, forms a key part of our overall group strategy. We do live in an uncertain world, though, and it's understandable that we saw a deterioration in client and candidate confidence during the period in some countries, particularly in Perm, where time to higher decisions lengthened. This slowed our fee growth rates, which declined from 23% in our final quarter last year to 8% in our second quarter this year. And given that we entered FY '23 with significant headcount investment already in the business, if you remember, it was up 26% year-on-year as we started the year, this rapid deceleration of growth drove negative profit leverage as the number of roles filled for consultant declined by 15%. However, we dealt with this quickly, though, and we reduced headcount in several markets, particularly Australia and New Zealand, U.K., China and the United States, and our capacity is now aligned to the underlying market demand. At the end of the half, our consultant headcount growth was stable and comparable with our fee growth. And clearly, the benefits of our systems means that we have real-time data on activity levels, which allows us to respond quickly against whatever those indicators show. What's important at this stage though is to stay right up front that our new year return to work has been encouraging, and we've made a good start to our second half. Overall activity is stable, and we continue to benefit from our fee margin increases, and assuming the markets remain stable, I'm, therefore, confident that we'll drive productivity, profitability and conversion rate improvements in the second half, and that is very much our prime focus today. Finally, as ever, strong cash generation underpinned high levels of cash returns. With GBP 150 million in core and special dividends paid in November, plus nearly GBP 60 million worth of shares repurchased in the half. Yet despite all of this, we still ended the period with over GBP 100 million in the bank. So let me turn now for a moment to our investment approach. Even though the world felt increasingly challenging in a number of areas, we took the conscious decision to continue to invest in our key strategic themes that we outlined at our Investor Day last year in April. That meant getting the right balance between running the business for short-term profit maximization with repositioning it to capitalize on the many longer-term opportunities that our world is creating. So in total, we invested GBP 8 million across this program in the half. GBP 6 million went into starting or developing new services businesses, which are highly complementary and sit alongside our core recruitment expertise. Examples would include scaling our German Statement of Works solution business, where today, we now employ over 100 engineers based at our own facilities in Romania and they deliver technology-led projects for engineering and automotive clients in Germany. Similarly, we opened project service advisory businesses in France and Australia, and we invested in senior management and sales expertise to build these new areas. We also invested around GBP 1 million in establishing 3 new shared service recruitment centers in Casablanca, Zaragosa and Mexico City, and those are designed to support the growth of our enterprise client businesses in Europe and in the States. These centers will enable us to fill more jobs more quickly and at lower cost and they underpin our enterprise strategy to double the business and take share in that space. All 3 of those centers are already up and running. Finally, we invested a further GBP 1 million reinforcing our senior management infrastructure globally in key strategic sectors such as Technology, Engineering and Enterprise. And with those teams now fully staffed up, we can now scale fast and we have the talent in place to run significantly larger businesses as we grow. Clearly, nothing comes for free though, and these organic investments, while I'm certain are the right thing to do, have temporarily decreased our H1 conversion rate, which James will quantify. However, I do think that we've struck an appropriate balance between continuing to develop our business for the future with maximizing our short-term profitability. Let me turn now to our operations, and we'll start in Germany. We delivered fee records all over the world, but Germany, I think, is our standout performer. Fees were up 24% or on a working day adjusted basis, up 27% in what is already a massive business. Operating profit increased by 17%, or on a working day adjusted basis, a full 31%. Activity levels improved through the half with clients continuing to invest in new projects as well as extend existing ones, and Germany's skill shortages are particularly acute, and there are simply not enough talented people to fill all the roles available. That meant that our largest business of contracting produced record fees in itself, up 27%, and that was driven by record numbers of contractors working. Temp grew by 22% on a working day adjusted basis; and our Perm business was excellent, up 34%. Looking by sector. Engineering was a notable performer. It was up 24% and included strong performances in automotive as well as in the energy and renewable sector, where we won a number of major MSP contracts covering now all of the major energy utilities in Germany and you can imagine that's a great place to be. Our Technology business also grew by 12%, and Accountancy & Finance was up by 33%. With such high activity levels, we obviously increased consultant headcount, it was up 3% in the half, and that's 19% year-on-year. So overall, I'm absolutely delighted with our progress in Germany. I've said many times that this is our biggest profit growth opportunity over the next few years. And I think that these results show that, that is coming true. There are simply decades of structural opportunities ahead in that country. And as the far and away leader in the market, we have so many options to grow, and I'll return to that later in our strategy section. Moving now to the U.K. and Ireland. Fees increased by 7%, but profit was down 16%. Market slowed through the half. And given that our higher average headcount and the impact of pay increases, this drove negative profit leverage. However, as I mentioned, we took swift action to adjust our headcount downwards to ensure that we ended the half with consultant headcount aligned with current market demand. Temp fees were up 6% and Perm was up 8%, and growth was entirely driven by improved fee margin and a positive salary mix, as Temp and Perm volumes were down 6% and 3%, respectively. Fees in the private sector grew by 8%, slightly faster than in the public sector, which was up 4%. By sector, a familiar theme, Technology hitting new records with fees up 16% from an already high base. Engineering, again, was also excellent, up 64%, driven by our earlier investments. Conditions were tougher in Construction & Property, however, that was only up 1%, and HR was down 3%. Consultant headcount decreased by 4% through the half and ended up just 6% up year-on-year at the end of December. Across to Australia and New Zealand, where fees decreased by 1%, but operating profit was down 36%. I think it's fair to say it was a difficult half in Australia and conditions certainly deteriorated through the half with fee growth slowing from 12% in the final quarter last year to minus 4% in our second quarter this year. And that rapid slowdown, combined with the capacity and therefore, the cost that we had in place as we started the year, remember, headcount was up 20% year-on-year as we started our financial year, that led to the negative profit performance. Again, as you'd expect, we took quick action to reduce the headcount. That decreased by 2% in the half, including a more rapid 5% reduction in our second quarter. Temp fees fell by 6%, and that was driven entirely by volumes in Temp being down 10%. We saw reduced candidate availability, together with lower client activity, particularly in areas such as banking and financial services, which are very important sectors for us in Australia. Perm fees increased by 7%, but again, this was all driven by pricing as volumes were down 10%. There were a number of brighter areas though. Construction & Property, which is our largest specialism in ANZ, that grew by 12%; and Technology, again, was up 4%. However, as I mentioned, conditions in banking as well as in sales and marketing, for example, were much tougher, banking down 37%, sales and marketing down 13%. But to finish on a more positive note, though, New Zealand continued to power ahead and delivered its own record results, fees up a full 17%. And then coming to our Rest of the World division. As you know, that comprises 28 countries and 17 of them delivered their own individual fee records. Fees in the division were up 12% overall, although operating profit fell 7%, but this was wholly due to what was going on in China with the pandemic-induced economic problems, the closure of our Russian business a year ago and a sharp slowdown in the United States. Temp fees across the division were up by 15%, and Perm was up 11%. Regionally, EMEA, which is 57% of this division, grew by 16%. That was 23% if we exclude the Russian business. The Americas grew by 8%, although the largest market in that subdivision, the United States, declined by 1%, including our second quarter where the States was down 9%. Across in Asia, fees grew by 5%, and we hit records in Japan and Malaysia. Hong Kong fees increased by 25%. However, Mainland China was heavily impacted by the pandemic, as I'm sure you can understand, and fees there were down 47%, and that resulted in a GBP 4.5 million profit year-on-year swing. We have taken action, though. Our Mainland China headcount was down 18% in the half. That said, we do want to maintain our core capacity in China, ready for when things do improve. And while it's still too early to tell if the recent reopening has had any real positive impact yet, I do expect that to come. Looking beyond China then to the rest of the division. There are still many good growth opportunities in the rest of the world, and we, therefore, increased our headcount 3% in the half, and that's 9% year-on-year. So in summary, we've delivered record fees. We've made excellent progress in many of our key strategic areas. We've enhanced our leadership positions in the most skill-short markets, and we've ensured that we use our pricing power to be a winner from inflation. Where markets have tightened, we've acted swiftly to align our capacity to demand. Our clients increasingly want us to deliver more of their recruitment and more of their related HR services, and we're busy building our business to deliver on exactly that. Let me now hand over to James for a deeper look at our financial performance.

Thank you, Alistair, and good morning, everyone. To provide some background to these results, we exited FY '22 with strong fee growth in all our regions, having delivered rapid post-pandemic fee growth through FY '22, notably in Perm. To capitalize on this market, we had expanded our own consulting capacity through FY '22. And in Q4, headcount stood at 26%, in line with fee growth, positioned to continue positive momentum and sequential monthly fee growth in FY '23. Although we delivered record fees in H1, including monthly records in September and November, many markets tightened through the half with fee growth slowing from 23% in Q4 '22 to 8% in Q2 '23. We saw a notable deceleration in Perm growth in Q1 and again in Q2 as clients and candidate confidence reduced in many markets and placement volumes contracted. And while fees were sequentially stable through H1, we did not get the month-on-month fee growth that we had invested for. As many of our main markets slowed through H1, we took decisive action to reduce consultant headcount in several markets, notably in ANZ, U.K. & Ireland, China and the USA, aligning our capacity to the underlying market demand and to reduce costs. With our average consultant headcount up 17% in H1 versus fees up 12%, our productivity and profitability were negatively impacted. However, importantly, by the end of Q2, our working day adjusted fee growth of 10% was in line with our year-on-year headcount growth. Our fee growth exit rate in December was 6% on a working days adjusted basis. This slide summarizes our financial performance. On a like-for-like basis, net fees increased by 12% to GBP 651.9 million, with operating profit down GBP 4.6 million or 8% to GBP 97 million, and EPS was up 1% to 4.11p. Moving on to the income statement. Turnover increased by 21%. The main difference between turnover and fee growth was driven by the first year of a large contract in our Rest of World division, where we manage a large contingent worker supply chain. And currently, this is largely supplied through third-party agencies. However, over time, we will increase our direct fill proportion, driving fee growth. The difference between headline and like-for-like growth rates is primarily the result of the weakening of sterling versus our main trading currencies of the euro and Australian dollar. Overall, FX movements increased net fees and operating profits by GBP 19.1 million and GBP 3.5 million, respectively. I'll go through the operating profit in detail on the following slides. Whilst basic earnings per share was 4.11p, a 1% increase versus prior year, the increase was driven by lower interest costs and a 1 percentage point lower effective tax rate, together with a lower average share count due to our share buyback program. Moving on to the performances of Perm and Temp. Our Perm business, 45% of net fees, increased by 12%, with a strong 13% increase in our average Perm fee, offsetting a marginal decline of 1% in volume. We benefited from the effects of broad-based wage inflation, together with our actions to drive Perm margin in candidate-short markets and our focus on the most in-demand parts of the market. Our Temp business, 55% of group fees, increased by 11% due to 3 factors. Importantly, a 50 basis point or 3 percentage point increase in our underlying Temp margin driven by improvements in our pricing. A 9% increase in mix and hours driven by our actions to target higher value assignments and by wage inflation globally, partially offset by 3 fewer working days in Germany. And finally, a 1% decrease in Temp volume. And as the chart on the top right corner shows, our actions to drive improving pricing added over GBP 70 million to fees in H1, which has been a key driver of our overall H1 results. This slide breaks down our year-on-year operating profit bridge into its main buckets and also provides additional color on our cost control actions. Starting with H1 '22 profit of GBP 101.6 million, we added back the positive exchange impact on profit of GBP 3.5 million and the 12% increase in our like-for-like fees of GBP 67.5 million. Like-for-like costs increased by GBP 75.6 million or 16%. Firstly, payroll costs, excluding our strategic investments, increased by GBP 57 million. Of this GBP 35.5 million related to the 17% increase in our average headcount as we invested in our consultant base. GBP 15 million related to our 5% average pay increases, which were effective from the 1 July '22, and GBP 6 million related to higher commission and bonus payments to our consultants. This grew by 7% year-on-year, 5% below group fee growth, as the average commission percentage returned to more normal levels, particularly in our Perm business. As Alistair outlined, we continued our longer-term investments in new service lines and our infrastructure, which amounted to GBP 8 million of incremental cost in H1. Travel and entertainment costs returned to more normal pattern versus subdued levels last year. MTE costs are now in steady state and importantly are 25% below prepandemic levels on an FTE basis. We expect to maintain this lower level going forward, adjusting for inflation. Our property costs increased by GBP 3 million versus prior year, driven by higher energy and utility costs and in countries where inflation indexing is enforced in our rental agreements. We continue to align our property portfolio to the requirements of our blended office and work-from-home model and have now reduced average office space per FTE by 14% versus prepandemic levels. And lastly, we completed several of our back-office efficiency projects in H1 and have now in total delivered GBP 3.5 million per annum of cost saves and are on track to reach GBP 5 million annualized savings by June '23. This slide sets out the financial impact of several factors on the underlying profitability of the business in H1. Firstly, our German business had 3 fewer working days in H1 versus the prior year. This led to a GBP 5 million reduction in both fees and profit. Adding this back to our H1 profit of GBP 97 million delivers a working day adjusted profit performance of GBP 102 million. Secondly, the COVID pandemic in Mainland China significantly disrupted operations and led to a GBP 4.5 million profit reduction versus prior year. We expect this to reverse over time as market conditions normalize. And thirdly, as discussed, we invested GBP 6 million in building out new complementary service lines and GBP 2 million in our delivery capability and leadership infrastructure, all as part of our long-term positioning of the business. The combined impact of China and our strategic investments had a GBP 12.5 million profit impact in H1. Adjusting for this, our underlying H1 profit results of GBP 114.5 million was up 9% year-on-year and represented a conversion rate of 17.4%. On a reported basis, group conversion rate decreased from 18% to 14.9%. At a regional level, I would highlight that Germany's working day adjusted conversion rate grew to 26%, and I expect this to increase further in H2. U.K. and Ireland conversion rate fell by 310 basis points to 11.1%. However, we acted to reduce its periodic cost base by GBP 1 million in our second quarter, and we exited Q2 with headcount growth in line with fee growth. ANZ declined by 940 basis points for the reasons outlined earlier. And again, we acted to lower costs, cutting our periodic cost base by GBP 0.5 million through Q2. And in Rest of the World, excluding the impact of the pandemic in China, underlying conversion rate was 10.8%, up slightly year-on-year. Moving on to interest and tax. The net finance charge for the half decreased to GBP 3 million. The largest component remains the noncash IFRS 16 interest on lease liabilities. Looking ahead, we expect the net finance charge for FY '23 to be GBP 6 million, of which circa GBP 4 million is noncash. Our effective tax rate decreased from 30% to 29%. The decrease in ETR primarily due to reduced tax provisioning required following successful agreements reached with tax authorities in FY '22. We now expect the ETR in FY '23 will be 29%. On this slide, we summarize the key components of our cash performance. The chart on the left details our sources of cash, starting with profit of GBP 97 million. We have back noncash items of GBP 38.3 million, predominantly IFRS 16 property depreciation or the fixed asset depreciation and amortization and share-based payments. We then subtract our working capital outflow of GBP 44.3 million, reflecting growth in our Temp book. We then deduct lease payments of GBP 24.6 million. This leaves an operating cash flow of GBP 66.4 million, representing a good conversion of profit into cash of 68%. And this, we paid tax of GBP 33.2 million and net interest of GBP 1.4 million, leading to a free cash flow of GBP 31.8 million. On the right-hand side, we detail how we use the cash generated. The main items were the payment of GBP 119.1 million of special dividends and GBP 30.8 million of FY '22 final core dividends. The purchase and cancellation of 57.6 million of shares through the share buyback program, CapEx of GBP 12.3 million, and pension deficit payments of GBP 8.8 million. And we continue to expect CapEx in FY '23 will be in the range of GBP 25 million to GBP 30 million. We had another strong cash collection performance with DSOs of 35 days, in line with the prior year and below prepandemic levels. We ended the half with cash of GBP 101.4 million. And as a reminder, the group has in place a GBP 210 million revolving credit facility that reduces in November 2024 to GBP 170 million and expires in 2025. On this slide, we compare the balance sheet at December '22 versus June '22. Four key points to highlight. Firstly, our cash position reduced by GBP 194.8 million; and secondly, the increase in net working capital, both explained earlier. Third, we had a GBP 56.8 million reduction of other financial liabilities in FY '22, which represented the outstanding balance under the GBP 75 million share buyback program and was recognized as a liability due to the nature of the cancellation clauses in the buyback contract. This liability was still filled during H1 FY '23. Fourthly, we had a GBP 67.4 million reduction in the defined benefit pension surplus as calculated on an IAS 19 accounting basis. This was driven by lower expected return on scheme assets, partially offset by an increase in the discount rate, which reduced our defined benefit obligation and company contributions. There is no change to our deficit recovery payments of circa GBP 18 million in FY '23, which will increase at 3% per year. We've seen a notable reduction in recent months in the deficit of our scheme when calculated on a technical provisions and buyout basis, which positions the scheme well towards our long-term buyout objective. Our priorities for free cash flow remain unchanged, namely to fund the group's investments and development, maintain a strong balance sheet; deliver a sustainable, progressive, and appropriate core dividend; and to return surplus cash to shareholders. In line with this policy, the Board has declared an interim core dividend of 0.95p per share, or GBP 15.2 million, in line with the prior year. As a reminder, our policy for returning surplus cash to shareholders is based on distributing all funds above a cash buffer of GBP 100 million at each financial year-end through an appropriate combination of special dividends and share buybacks subject to the economic outlook. We currently have circa GBP 18 million remaining under our share buyback program, which we now expect to complete by the end of the financial year. So in summary, we've delivered record fees, made material strategic investments, and delivered highly cash back profits. Fee growth was entirely driven by management actions to increase fee margins, supported by positive effects of general wage inflation globally. We expect the net positive benefits of wage inflation to continue through FY '23. We are now highly focused on leveraging our investments and driving consultant productivity through the rest of the financial year. The group is highly cash generative and with a strong track record of returning significant levels of cash to shareholders. On a rolling 12-month basis to the 31 December '22, our total return to shareholders amounted to GBP 241.1 million. Current trading. Overall, our new year return to work has been encouraging given the economic uncertainties. Group Temp volumes have rebuilt post Christmas, in line with normal trends, supported by Temp and contractor assignments extensions. In Perm, activity has returned to the levels seen through Q2 in most of our markets. Both Temp and Perm continued to benefit from increasing fee margins and the broader impact of wage inflation, which we expect to continue across FY '23. We expect consultant headcount growth will be minimal in H2, and we are highly focused on driving returns from our investments and increasing average consultant productivity. Based on current levels of market demand, we are confident we will drive an increase in the group's reported profitability and conversion rate in H2 FY '23 versus those reported in H1. And at a regional level, in Germany, conditions remain good. Our return to work in Temp and Contracting is in line with normal trends, helped by good rates of assignment renewals and extensions. In UK&I, overall conditions are stable in Temp and Perm, with Temp return to work in line with normal trends. In Australia, our Temp return to work was in line with the prior year, but modestly behind normal trends, and Perm activity is stable versus Q2. In Rest of the World, we see good levels of activity in EMEA and Asia, excluding China. Perm activity continues to decrease in the Americas, notably in the USA, reflecting reduced client and candidate confidence. And with that, I'll hand you back to Alistair, who will update you on the strategy before we take your questions.

Thanks very much, James. Let me finish with a brief update on 3 of the main pillars of our strategy that we outlined at the Investor Day back in April, those being Germany, technology and our enterprise clients. We already had market-leading positions in each of these areas, and they're all central to our future as a more resilient and a higher quality business with stickier and more diverse earning streams. So let's have a look at Germany first. And here you can see the progress that we've made. From what was already, remember, a very big business pre the pandemic, you can see how we've accelerated and driven excellent growth over the last couple of years, including the last half. All 3 of our recruitment contract forms there have done extremely well. We've got record contractor and Temp numbers. We now have over 16,000 highly skilled, highly paid flexible workers out on site with our clients today. We've got nearly 5,000 more people working on our platform today than we had just 18 months ago, and we've built all of that organically. And to put that in perspective, that growth alone would be equivalent to a top 3 player in the German market today built from scratch in under 2 years. However, in the context of the German working population, I think that we're still in the foothills of what's achievable there. By way of comparison, for example, we've got nearly 25,000 Temps and contractors working today in Australia, yet Germany's white-collar workforce is maybe 10x the size of that of Australia's. So the opportunities that we face in Germany are crystal clear. The experts that we place represent scarce talent and we were able to both increase our pricing and achieve a double-digit positive mix effect in both Temp and Perm in the first half. What's also important is that our growth has been so broad-based, all of our sectors grew and it's very encouraging that some of our fastest growth came from sectors that we only started in the last few years, areas such as Accountancy & Finance, which is up 33%, and our Public Sector business, which is up 26%, and that now represents 14% of our fees, and again, that's from a standing start not that long ago. I'm often asked about our exposure to the Automotive sector, but that's also done very well and with huge investments going into e-mobility by all of the car manufacturers, we are now a leading supplier of the engineering talent that the automotive sector needs in this major transition. It feels to me today as if all the years of building our expertise, our brand and our reputation in Germany is now really starting to pay off, and that's a very hard thing to replicate. We've got a very strong team there who know the business inside out, and I expect this sort of performance to continue, in the shorter term, with improving profitability and conversion rates in our second half, as James has mentioned, and in the longer term with further strong growth in the years ahead. And that's why I'm comfortable to say that we are well on track today with our aspiration to double our profits in Germany. Turning to another 2 legs of our 5-year plan, Technology and our Enterprise clients. We delivered record half year fees in both technology and direct outsourcing with enterprise organizations. Both were up 12%. In Technology, having exceeded GBP 300 million in annual global fees for the first time last year, we're now tracking towards an FY '23 number of around GBP 350 million. We've doubled Technology fees over the last 7 years, that's despite the shock of the pandemic, and we've now built the leading global recruiter of technology talent. And given the world's need for those skills and the shear shortage of them, you can understand why this is a great place to have put ourselves. You'll also note that our first half growth was against the backdrop of downsizing in some of the world's biggest tech companies. But to be crystal clear, the tech titans are typically not our clients. They tend to look after their own recruitment in-house. Our sweet spot is placing technology experts into nontech businesses or government. Every company, frankly, needs cybersecurity people or cloud experts or developers to work on their own internal platforms such as SAP or Salesforce or Dynamics. And those are the roles that we are filling and that's what's driven our growth. I'm very pleased with how our strategy is delivering. So let me pick out a few standouts. We've invested through our SGI program in the past in Europe, and that grew by an excellent 37% in EMEA. France alone was up 40%, Poland up 41%, and the Middle East was up 122%. The U.K., it followed a record last year with another 16% growth. And in Japan, we were up 51% as our investments in tech there started to pay off. Remember, our longer-term targets were predicated on growing around our long-term run rate of 10% CAGR. Given that we've exceeded that in our first half, I'm confident that we are well on track for our medium-term goal of GBP 500 million in fees in the tech specialism. Similarly, our contracted outsourcing fees with large clients have also grown 11% CAGR since we globalized that business in 2016. Again, we grew slightly faster than that in the first half, we were up 12%. And there's an excellent pipeline in place predominantly with existing clients that we know well. And I think these examples show how we're delivering results from our earlier investments that we made in areas which are all fundamental parts of the strategy that we outlined a year ago. At the start of our presentation today, I outlined where we've just invested a further GBP 8 million. And as shown, that has gone into new adjacent areas designed to accelerate our growth further. In summary then, we've had a very busy first half, one with record fees and a lot of management attention to simultaneously manage our capacity at the same time as leveraging our pricing power. We're now highly focused on driving productivity, profitability and our conversion rate in our second half. And assuming our markets are stable, I fully expect to see improvements in those measures in the next 6 months. As you've heard, our new year return to work has been encouraging. Of course, we see the risks and the challenges that our world faces today, but those are outside our control. What we do know how to do is to react quickly and appropriately if conditions change. It's part of how we've run our business for years now, and we have the systems and the data to help us make the best decisions at any given time. Remember this, though, while near-term macro uncertainties certainly exist, we also live in a world of acute skill shortages, and that's where we build our market. Those skill shortages are simply not going to go away anytime soon. And that's why our future, I think, is so positive. And then finally, you'll have seen the news today that the Board is now commencing a succession process for my own role. It's still business as usual here though, and until a successor is in place, I'm continuing to run the business, but I'd like to go on record at this stage to say what an incredible [Audio Gap] it has been to have led this fantastic business for over 15 years so far. And in that time, we placed literally millions of people into their dream jobs and made a real and lasting impact on their lives. And I think that's something that I'm incredibly proud of. We've also transformed Hays from a U.K.-focused business, when I joined, to the global leader in our industry today operating all around the world and servicing tens of thousands of clients every single day. And as you've seen this morning, the business is in great shape today, and the foundations are in place for an even greater success in the future. We'd now be delighted to take any of your questions.

[Operator Instructions] The first question is from Kean Marden with Jefferies.

I have 3. First of all, just touching on job boards where we've seen some quite noticeable increase in fees from the providers recently. Would you just mind reminding us, please, of sort of the jobs that you place? Just quite how much that you pace through those channels. So I think probably the bulk of your jobs maybe never get sort of advertised externally. You also have your own in-house, on your Hays website, when we look at things like sort of Indeed, I don't think you seek in ,Australia from memory, and some of the other ones, just maybe a broad indication of the split and whether that sort of fee inflation maybe provides some sort of headwind to EBIT for your business for the next sort of 6 to 12 months? Then secondly, just on fee rates. I appreciate we've had quite distorted labor markets for the last sort of 12 to 18 months. Just taking a step back, are there any pockets where the fee rate percentage that you guys earn in Perm or Temp may be particularly high relative to previous peaks, and therefore, when the markets normalize, your risk of those rates coming down? I appreciate the strategy is obviously to hold on to that. But anything that you feel might be a little bit vulnerable would be helpful? And then finally, just a quick 1 for James, just if you can provide us with an update on the global VMS progress, just on the timing of the savings that you're looking to deliver from that, please?

Thanks, Kean. Let me kick off with job boards. So many years ago, we took the decision that we needed to strategically invest in building our own database capabilities because our real value add to our clients is having long-term engaged relationships with millions of people. So when job opportunities come our way for us to fill for our clients, we already know the people that will be perfect for that job, and we have a relationship with them. And that's been the core thrust of our internal technology investments in building our own systems over the years, going back to basically the day I joined 15-odd years ago. And having had those systems in place and continually upgraded them, bolting in new components from outside, as external companies invent new ways of doing things, chatbots, for example, we've got fully integratable systems that allows that to happen. What that does is it allows us to go out and attract and find literally millions of very talented people globally, build long-term relationships with them over a number of years, not just over a number of days, and that means we can react very quickly and very accurately when a client gives us an opportunity to fill a role, because we already have the relationships with the people that would be perfect for that job. That is light-years away from taking a job opportunity, sticking it on the Internet and seeing who applies. And it stands us in good stead because the vast majority of the jobs that we fill every single day, and this has been a truism for a number of years now, we fill them with people that we already have on our database. Now I think it is fair to say that job boards have a role in an omnichannel world, but really, our key thrust is to use a multiple range of routes, some traditional, physical networking events, some digital, many digital network platforms that we use. Remember, the LinkedIn deal that we did back in 2012, now over a decade ago. So we're very open-minded, and we spend a lot of time and attention and a lot of my personal time in looking at how that world is changing, so we can find better ways to, what I will call, find people and then engage with them because that allows us to deliver a much higher value service to our clients. We can help them very quickly with exactly what they want. So we're continually looking which are the most appropriate routes to find and engage with people, and we move our marketing spend according to where the best returns on that investment might be. So I'm not troubled at all by increases in job board fees, because frankly we're not dependent on those routes to go to market, which is in stark contrast to many of our competitors in the industry. If I could turn on to the pockets of fee rates, are they too high in some areas to be sustainable? I don't think so, Kean. I think one thing that is absolutely crystal clear in these results is the pricing power that we have had in a skill-short market. And remember, we get 3 benefits here. Number one, we're placing people that are earning higher salaries, simply because of inflation. Number two, we're placing higher value people because we've very consciously focused our mix towards more high-value and therefore, highly paid roles. So moving up the value chain, if you like, in terms of the types of jobs that we're filling. And then finally, we've taken the opportunity to increase our own pricing, our own percentage of what we charge, just like virtually every company in the world in any industry has increased its pricing over the last 12 months, and that's been a real tailwind for us. So while we're very conscious that as times change, will pricing come under pressure? Remember this, we're placing people that are in very short supply. And I think that gives us some real resilience in terms of our pricing capability. There are simply not enough people in the world to fill the jobs that organizations need. And I don't think that's going to change. And that's a big part of our thinking around our strategy, around building a bigger tech business, for example, and that's why I think that we've got a lot of resilience in that pricing power. Can I hand over to James for the VMS work?

Yes. Thanks, Alistair. Kean, I'll give a quick update on our VMS or vendor management system project. As you know, a lot of our Temps these days come via VMS systems. I think in the U.K., where about 45% of our work has, in fact, come from third-party systems as opposed to submitting time on a Hays electronic time sheet. And that creates challenges in terms of how you import approved time data from other systems into our own systems. So this has been a project we've been working on now for about 9 months. There is no standard solution out there. And so we are developing our own solution in terms of how we make that connection. We're moving well on that. We're actually heading towards a pilot test stage in the next 2 or 3 months, and we'll have a solution built this financial year. So to date, we've made a number of savings on our back-office efficiency projects. So I gave an update in the slides with about GBP 3.5 million on an annualized basis. We've completed 2 major back-office migrations during the half, which has been a lot of work, but it's been a good result overall. We haven't factored in any benefits yet from completing the VMS projects. I still see that as an opportunity ahead once we've got the solution live, but that should be later this financial year.

The next question is from Rory McKenzie with UBS.

It's Rory here, 3 for me please. And firstly, just on the net fee trends. And for most of last year, you were seeing kind of broadly sequentially stable fees bouncing around record levels. And now the return to work rate suggests you've rebuilt back to that? And does that suggest that H2 '23 is currently tracking towards a similar level of about the GBP 652 million in H1? Or can you remind us of any phasing to be aware of? And then secondly, following up on the previous question about fee rates, now you're getting further through your strategic investment program. What are you finding out about pricing power and potential target profitability, and especially in these new service lines, given that your 5-year plans reflect reaching new conversion margin highs, good to get an update with how you're finding these new business areas? And then lastly, Alistair, could you just share any more thoughts on why you and the Board think it's the right time to start looking for your successor. You already reflected on how much the business has invested and built these big new exposures in your tenure. So yes, just thinking about what's ahead and how you think about that transition?

Thanks, Rory. Let me hand over to James for the fee trends, and then I'll come back on the fee rates.

Sure. Thanks, Alistair. So Rory, the question was around the sequential stability. And standing back, we've seen a pretty stable trend since March last year. So we hit a record in March last financial year. We just got past that in September and again in November. So it really has been quite a solid top line sort of trend overall. I mean looking forward to this half year, clearly, I don't have a crystal ball, so it's difficult for me to say, will it be stable for the rest of this half. I think what we've seen in the return to work so far is a fairly reassuring and encouraging picture overall. So the Temp businesses have come back in line with what we would normally expect to see. Australia in line with prior year and slightly behind what we've seen in previous years overall. So that's kind of in line with where we hoped it would be, and I think that's fairly reassuring. On the Perm side of things, we've seen activity levels pick back up post Christmas back to levels we saw in October, November time. And what I mean by that is the number of new jobs that come into the business, new job registrations and the number of interviews that we've completed on those jobs. Well, I don't have perfect foresight yet is how much of that converts into Perm placements through the next few months. So whilst the levels of activity are encouraging and we're pleased with where we are on that, clearly, any change in client or candidate confidence or change in the time to hire could make that conversion into placements longer or it could change over time, we just don't really have a view on that yet. I think it's worth bearing in mind that March overall is seasonally our biggest month of the financial year and not just the biggest month of the quarter. So I think March will be really quite important to see whether that activity really is converted into Perm placements in line with what we would expect it to be and will be a big barometer of where we trend to through the second half of the year.

Just touching on my own situation then, Rory. Well, the first thing I'd say is I'm still here and will be for some time to come. There's lots of good stuff still to do, and I'm fully focused not just on the next 6 months and driving the improvements that we've taken you through, things like our profitability and conversion rates in our second half, but also the longer-term strategy that we laid out almost a year ago and that we're well on track with, and there's some very exciting opportunities there. So I'm very focused on making sure that we continue to make good progress on that. But stepping back 15 years and counting as CEO, I think we'd all probably say that's quite a long shift. So I think it's only right after all of that time that the Board have got absolute maximum space to fully consider my own eventual succession. So by being open, by being upfront, by being as transparent as we're being today, I think that gives them the opportunity and the time to do proper consideration and deliberation around my own succession. What I would say though is that we're in a great place today. As you've seen, fees are at a record level, our investments are paying off. I fully expect to see our profits lift in the second half as we now leverage what we've got and what we've put into the business. And beyond that, there's an absolute wealth of opportunities ahead, and that's very much where my focus remains and will continue to be so until my eventual successor is put in place.

Great. And just a follow-up on my question about the kind of beyond the fee rate. So I guess as you're going further into expanding the Australia program, can you talk about how you're finding profitability evolving in some of these new service lines, given it's kind of new additions you're bringing to the group?

Yes. It's early days to have reached any level of maturity in the new service lines. Some of them we've not even started yet, to be honest, but we've laid out the road map and we're busy putting in place the capability to deliver on those. In terms of pricing power, as I mentioned to Kean, I think we've got a lot of resilience in our pricing power. We see a lot of potential demand from our client base around some of the themes that we're talking about investing in. In the advisory services area, for example, we put leadership in place there. And we're having some extremely interesting, albeit early stage conversations with our clients about the help that they need. Clearly, in this ever-changing world, where there are so many profoundly different things going on, there's a completely different agenda that needs to be dealt with around the broad topic of workforce planning. And within that, there are so many aspects that organizations need a lot of help with dealing with challenges that they've never dealt with before. And I think that gives us the wonderful opportunity to build on the rock solid recruitment foundation that we've had for many years with them, to step up a level, if you like, and say, we can help you think through and execute your entire workforce plan. But that obviously requires additional capabilities alongside our recruitment capabilities to help in that more advisory space. Having worked in consultancies in the past myself, I fully understand how the economics of those work and what you need to do around pricing and utilization and costs to make sure that you're running an economic business. And that's absolutely part and parcel of our plan going forward. So I think it's too early at this stage to say what are the margins going to be on some of those areas. What I can say is that the investments that we're putting into making our business ever more effective and cost effective will increase our margins. So we put at the Capital Markets Day that one of our tenets, if you like, was to build our conversion rate over time to the 22% to 25% type range. That's very much our focus as we go forward. We've put investment into the business. We've got what we need in there now. We're now leveraging that investment through the second half, and that's why I'm confident we'll see our conversion rate start to ramp up in our second half. And we're getting close to that 20% hurdle as the first milestone and then headed north of that as we go forward. So that's very much our prime focus, having put in what we now need, now we can get on and leverage it.

Great. As you said a lot of good stuff to do.

Lots of good stuff to do. It never stops, Rory. That's one of the beauties of this business.

The next question is from Andy Grobler with BNP Paribas Exane.

Three for me as well, if I may. Firstly, just on tech and tech wages, as you've said today and many times before, you're not really recruiting into the tech majors. But I wondered, as recruitments in those companies falls, what you're seeing in terms of wages and kind of broad attention within that market. Is it beginning to really change? Secondly, and kind of similarly, in terms of Perm markets, you note that activity levels in terms of demand has remained pretty robust, but time to hire has lengthened for many companies. Can you just talk through some of the trends you're seeing and kind of the implications of that lengthening? And then thirdly, and just kind of building on Rory's question within HR services. To what extent do you think you're going to move into training and kind of broader skills-based recruitment rather than experience-based recruitment over the past?

Thanks very much, Andy. Let me deal with the tech and the HR services, and I'll hand over for the middle question on the Perm activity. So tech wages definitely not under any form of pressure in the world that we live in. They have gone up by and large double-digit inflation over the last 12 months or even longer than that actually. And we're not seeing any real weakness outside the States. The States is a more difficult market for us, but it's not our biggest business in the world, obviously, although clearly, strategically, we do want to grow that over time. So I'm not concerned at all about seeing any weakness in tech, because even though many of the tech titans are laying off people, they're not necessarily all in the tech space. A lot of them may have been in the HR and recruitment space, frankly, over the last 18 months, where they've staffed up their own internal recruitment teams with capability, and now they don't need that capability any longer. It may have been in sales and marketing. So it's not just tech talent that is leaving these organizations. It's broader corporate talent as well. But clearly, there is some tech talent coming to the market. What I would say is the world is so short that the vast majority of those people are being mocked up by other organizations very quickly, and they're moving into new roles. And as you quite rightly said, Andy, we're not building a business around recruiting for the tech titans. They look after themselves. We're building our business helping every other type of organization, private sector as well as government, to find the people that they need, because I certainly believe the world will only be ever more driven and enabled by tech and new types of tech are being invented every day. So where are the people going to come from who are going to do those jobs. And that's what we're very much focused on, and was part and parcel of behind our strategic thinking going back probably 5 years now, when we said we could build a much bigger tech business if we started to really double down on it, which is exactly what we've been doing. So I think that's a very exciting place to be. And outside the States at least I don't see any issues in our ability to be growing, right now, our tech specialism globally. James, do you want to talk about the Perm activity and the time to hire?

Yes, sure. Thanks, Alistair. So Andy, we spoke about it, I guess, through the Q1, and in the Q2 IMS is where we reported Perm fees had slowed from a growth of 16% in Q1. That growth decelerated to 7% in Q2. And we talked about the reduction in, firstly, client confidence in the Q1 IMS, and then subsequently, lower candidate confidence in the second quarter. And the combination of those 2 increasing the time to hire. And what we saw clearly through that 6-month period was lower Perm volumes on a sequential basis as a result of that. So whilst we continue to drive hard on the average Perm fee, the actual volume underpinning the level of business has clearly slowed. I think we did see, through the second quarter, more counter offers and candidates more susceptible to counter offering, which clearly is a factor in time to hire because you're kind of almost back to square one in some respects in the recruitment process. As I mentioned earlier, I think how does that play out going forward in activity in Perm versus where we were in the second quarter. As I said, activity levels in terms of jobs, interviews, CV sends, et cetera, which are the key indicators for us, are back at the levels we saw in October, November. And therefore, we did see a bit of a slowing into Christmas, which was a bit of a cause for concern. And why was that? I think people just stopped making decisions as we run into Christmas and there was a little bit of nervousness there. So it is reassuring that the volumes have come back from an activity perspective in the new calendar year. As I mentioned, just it's difficult at this stage to say how much of that is going to convert to Perm placements and how quickly. But certainly, January, our first month result, is in line with the exit rate that we had in Q2, which again is reassuring. And overall, we continue to see good productivity in our Perm business. So I think that's overall fairly reassuring. And I don't know what more really I can say at this stage on time to hire and overall levels of confidence.

Thanks, James. Let me turn then, Andy, to your final question around, is there a role for a training service in our overall package? And just stepping back and giving you my own sort of context and philosophy about this. I absolutely believe that the world's economies and every organization that drives those economies are driven by 2 things: capital and people. Now we don't do the capital, that's you guys. You look after the capital. But our future is around looking after the people, because no organization thrives unless it's got the right talent in place. So 50% of the world economy is driven by capabilities of people, that's our job. Now stepping back, where do we find ourselves today? We're in a very interesting and unique position in our business, because we understand 2 things very well. We understand what do organizations need in terms of capability and resources to move forward, because we see that demand in a real-time basis. And at the same time, we see what skills and capabilities workforces currently have. And there are very few organizations that have that overall picture of what's required and what's available. And we do see and we've seen for a long time and commented on this, there is a big mismatch in a number of areas between what the world wants versus what the world has got enough supply of. So then you're starting to say, is there a role of bridging that gap, and that's where your question around training, I think, is a very interesting one. Now over the last 2, 3 years, we have started to test the waters in that area. We've got a couple of things that are great examples today. We work with a partner, Go1, Australian aggregator of training, fantastic business. We've worked in partnership with them for a number of years now. And through that platform that we jointly present, we have literally hundreds of thousands of individuals that have undergone training courses over the last 2, 3 years through our platform. Come back to the earlier question around how do we add value to our clients by knowing and having a relationship with lots of talented people, using a platform like that to find and build the relationship with people, because we're providing them training, is a very powerful tool. And then secondly, we've more recently moved into the whole Hire-Train-Deploy model, initially in the U.K., but we see that, that will be applicable in a number of countries around the world, where we will go and recruit people that we believe have got the attributes that we can train up in a certain area, typically in technology, obviously. We'll bring them on board in conjunction with our client who needs them, we'll train them, and then we'll come them out on projects to our clients around the business. We can use our apprenticeship levers to do that, for example. So there's so many positive facets to that. So that, in a way, is another entry point into the world of training. What I would say, having looked at this very closely myself, the training world is a very, very fragmented industry. And we need to be very thoughtful and careful and consider it, and that's what we're doing around what should our approach be into that broader training space. But I think being able to square the circle, if you like, between what does the world want? What does it have available? And could we increase the supply of those talented skills in some way through training and development? That's a very pertinent question, and I think it does have some relevance for our future. But do we have a grand plan sitting right here now that we're certainly going to unleash on the world? No. But we are doing our thinking and homework as I'm sure you'd expect us to do.

[Operator Instructions] The next question is from Anvesh Agrawal with Morgan Stanley.

I got 3 questions as well. The first, I think, James, you mentioned that the turnover growth was 21% and the fee growth was 12% and the difference is effectively the third-party work you're doing in Rest of the World and you're sort of trying to take a share over time of that. That sounds like a significant opportunity within Rest of the World, given the difference of 21% and 12%, that's quite significant. So maybe if you can give some details around the timeline, which geography, and how should we think about that? Then the second question is around the cash conversion. So clearly, it has improved year-on-year, but sort of impacted by the lower conversion margin and the profitability overall. So would you expect the free cash flow conversion to also improve in the second half? And how should we think about things like working capital with sort of volumes now flat to down? And finally, on Australia, some of the volume decline seems more structural than cyclical, especially around the public sector and what the government is doing there, and given how big public sector is as a part of the Australian business, maybe Alistair if you want to give some thoughts around that? And are you sort of looking to restructure that part of the business from here on?

I'll pick up the first couple of questions, and I'll hand back to Alistair for the question on Australia. So yes, we highlighted the gap between turnover growth, as you mentioned, at 21% versus net fee growth of 12%. Put simply, Anvesh, we had one large MSP contract win in the States to a major service provider which, as we took on the contract, was all third-party agency coming through the supply chain. So clearly, we act as principal on that. So we have to book the turnover. That's how we account for those. And clearly, the strategy on those types of contracts is to convert those workers over time into Hays direct fills and therefore, we make the net fees and the margin on those. I'd say, a, it was a very material contract. So therefore, the impact on turnover is significant. And secondly, I think with what's happened in the States over the last 6 months and the market cooling there, the actual number of new placements that they're effectively making has been behind where we expected it to be. That's the kind of the state of the market that's been there. So our conversion of making our own Hays Temps into that supply chain has been a little bit slower than it might have otherwise been. But that's the strategy, and we expect fully to convert those over time. Second question was on free cash flow and working capital as we head into the second half of the year. Our working capital is always a little bit skewed towards H1. Clearly, H1, we're happy with our cash performance. DSOs were flat in line with prior year. And the outflow we had, which is about GBP 45 million in the half, was consistent with what we expected from the growth that we've had in Temp through the half of 11%. So that kind of was in line with our expectations. Second half, clearly, we normally have a better cash performance with a June year end, that helps. People tend to pay us June better than they pay us in December. So we typically tend to expect seasonally a better performance in working capital in the second half. Clearly, the top line is a key driver of that. If we continue to grow our Temp business through the second half on a sequential basis, we'd expect to see some modest working capital outflow through the second half, but it will be driven by the top line, and we'll continue to focus heavily on collecting cash, as we always do, and managing an efficient balance sheet. So where that leaves us, again, it's a difficult one to land given that we collect GBP 150 million of cash every week. It's always difficult to land it on the 6 months, but there's nothing there to suggest that we shouldn't have a good second half cash performance.

Thanks, James. Yes, turning to Australia on the public sector question. We're clearly the market leader in specialist recruitment in Australia. Then the public sector is an important part of the jigsaw, just as it is in other markets such as the U.K., for example. So it is important. Remember, we operate at different levels in government, so federal, state and local. And around 3/4 of the work that we do across all public sector is in the temporary and contingent space. So 25% Perm, 75% Temps and contractors. So with the change of government fairly recently, obviously, a different approach to the use of contingent labor philosophically under the new government versus the past government. And that has been a bit of a headwind since the change of government over recent months. What I would say is a couple of things. It's not the first time that we've had to operate under that environment. There have been labor governments over many periods of time, over the last 10, 15, 20 years in Australia. So we know well how to deal with those circumstances. But as circumstances do change and there's been a change in philosophy around contingent labor, we have to adapt. And obviously, you can't make that adaptation literally overnight. It does take a little bit of time to sort of restructure and bed in. What I would say is the public sector still needs work being done, even though there's a new government that has got a different philosophy around the use of contingent labor. So our team down there, they've been there before many times, actually. And they're just working through the process of restructuring how we get that work done. Clearly, there's a greater shift towards permanent recruitment at the federal level. Remember, this doesn't really impact state level. We're really only talking about what's going on in the capital territories. But that is an important part of our business, as you quite rightly pointed out. So we're working that one through, putting in place what we've had in place in the past and restructuring how we get that work done for them because the work requirement hasn't gone away. It's just the way the work gets done, that is changing back to how it was some years ago.

That's very clear. Maybe if I can just add a follow-up on that. So if the things do move from Temp to Perm, in terms of your competitive positioning, is there anything materially different or you will be able to sort of take the share of the Perm as well whenever it comes, so to say?

Well, we're the market leader in everything that we do down in Australia, whether that's public, private, by specialism, by area. So I don't see any issues with that. But clearly, we'd need to divert our own resources towards a different offering that the market is now demanding, but that's work in progress. As I say, the team has been through this cycle more times than I care to remember, to be honest. So they know what to do, but it does just take a little bit of time to adjust the business when you have quite a sea change in just philosophy around workforces, but we know what to do and we're busy doing it.

There are no further questions, so I will now hand back to Mr. Cox for any closing remarks.

Okay. Well, thanks for joining us today. As you can see, it's been a pretty full 6 months. There's a lot more good stuff to be done in the next 6 months. And I think we've laid out our stall about where our priorities and our focus is as we go forward. We have put investment into the business. We now need to start to leverage that, and hopefully, if the markets remain stable, I'm confident that we'll start to see some of the important levers like conversion rate, profitability start to ramp up in the second half. With that, look forward to chatting to you all in the near future. And back on the results call in another 6 months' time. We've got a couple of IMSs between now and then, which I'll leave in James' capable hands. But thanks for joining us today. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.