Hays plc (HAS) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our FY '23 results. I think you'd all recognize that it's been a year full of challenges, and we've been incredibly busy navigating through what have been worsening economic conditions. But despite this, we've still delivered a resilient performance. We've grown our fees to record levels. We've cut costs, and we've reduced our overall headcount, but we've also protected our longer-term investments and we've continued to position Hays as a leader in the most attractive recruitment and talent services markets globally. The human story behind all of these results, though, is that we helped over 300,000 people find their next career move. And we helped many thousands of organizations find the skills that they need to thrive. Our year is really summed up by looking at our fee growth. It was up 15% in the first quarter, but then down 2% in the final quarter. And with such a rapid reversal, that meant that we had to be very quick in our actions to increase pricing, while at the same time, managing capacity downwards and focusing the business on productivity. However, just as we said that we would do at the interims, we increased our profits and our conversion rate in the second half over the first half. We also maintained our track record on cash management with 101% cash conversion. So let's turn to the detail. And as usual, I'll take you through the operating review. James will then cover the detailed financials and current trading, and I'll finish off with a strategy update. We'll then have plenty of time for Q&A. As you know, for several years now, we've been actively repositioning Hays to be right at the heart of the most attractive labor markets worldwide. That means higher value jobs in areas characterized by skill shortages, delivered in structurally immature regions. Those attributes in turn allow us to increase our own pricing power in a skill-short world, as well as earning the margin on more highly paid jobs. I think the benefit of this strategy is crystal clear in these results as the pricing power we've leveraged is behind the group record fees of up 6% to GBP 1.295 billion. Our strength was consistent throughout the year with record months in September, November and then March, and we also delivered individual fee records in 21 countries around the world. Growing our Temp & Contracting business is a major part of our strategy and that was also a key driver, with fees up 9% and activity broadly stable at good levels right through the second half of the year. Perm, however, became harder as the year progressed. The first half was up 12% and the second half down 6% as confidence in economies waned and time-to-hire processes lengthened. We should, however, recognize that in a tougher world, all of our fee growth came from improved margins and mix, with average volumes down to 2% in Temp and down 8% in Perm. In terms of key sectors, our largest specialism of Technology grew by 6% to a record GBP 333 million. Accountancy & Finance increased by 9% and Engineering grew by an excellent 21%. And in doing so, it became our third largest global specialism. Direct and indirect outsourcing fees with our enterprise clients were up 10%, and we continue to gain market share in this segment with a great pipeline of further opportunities ahead. As you'll recall, we started FY '23 on the back of strong fee growth as the world reopened post the pandemic, and we'd increased consultant headcount significantly in FY '22 to meet demand at the time. However, the sharp deceleration that we then witnessed in FY '23 meant that the number of roles filled per consultant declined by 12% last year. And we had negative profit leverage as headcount growth was ahead of fee growth as the market tightened. We responded quickly, though, and we reduced headcount in most markets, but particularly so in the United States, here in the UK and Ireland, Australia and in China. Year-end headcount was down 5% and aligned to underlying market demand. Our average headcount, which was up 17% in the first half, increased by only 1% in the second half, and it will decrease year-on-year in our first half in our new year. We did, however, take a very conscious decision to protect our recent investments in key strategic areas as well as our infrastructure and James will cover that later. Finally, another year of excellent cash generation, underpinned high levels of cash returns with GBP 165 million in core and special dividends paid, plus GBP 75 million worth of shares repurchased in the year. We still ended the year with over GBP 136 million in the bank. And given confidence in our strategy and our strong financial position, the Board proposes an increase in the core dividend of 5%, together with a further GBP 35.6 million cash return in the form of a special dividend, in line with our long-established distribution strategy. Turning then to our individual operations. While we delivered fee records all over the world, Germany was our standout performer. Fees were up 19% in what is already a massive business, and operating profit increased by 29% or on a working day adjusted basis by 36%. We delivered this growth despite German GDP declining between September and June. And I think that highlights the structural nature of demand for skilled contractors and Temps, driven by acute skill shortages in Europe's largest economy. Activity levels in these segments were broadly consistent through the second half, with a greater number of contract extensions, offsetting slightly fewer new assignments. Our largest area of contracting produced its own record with fees up 23%, and record numbers of contractors working. Temp grew by 12% working day adjusted, and our Perm business was excellent, up 22%. Sector-wise, Engineering was also excellent, also up 22%, including strong performances in automotive as well as the energy and renewable sector where we won several MSP contracts in all of the major energy utilities. Our largest sector in Germany, Technology grew by 10% and Accountancy & Finance was up 26%. What's notable in Germany is that in the last 2 years, we've added over 3,000 contractors and Temps to our volumes. That's effectively the same as creating what would be a top 5 business in the German white-collar non-perm recruitment market. But we've done all of that organically. And I think that shows the power of our brand and its relevance in Germany's economy today. That's the proof of our ability to further grow our market leadership, and that's why I'm convinced that we have decades of structural growth potential ahead as we continue to open up that market and we are ahead of our aspiration to at least double Germany's profits by FY '27. Moving now to the U.K. & Ireland. Fees increased by 1%, but profit was down 34%. Market slowed sharply through the year from growth of 11% in our first quarter to minus 7% in our final quarter, with Perm hit particularly hard in the second half. Again, a higher average headcount, which was up 7% year-on-year, drove negative profit leverage, but we took swift action to reduce heads, and we ended the year with consultant headcount down 11% and aligned to current market demand. Temp fees were up 4%, but perm was down 3%. Growth was entirely driven by improved fee margins and higher salaries as Temp and Perm volumes were down 6% and 13%, respectively. Fees in the private sector were down 1% and the public sector was up 7%. By sector, Technology delivered another record with fees up 5% versus tough comparators from a great year the year before. Engineering, another of our investment areas was also excellent, up 32%. Conditions were tougher elsewhere, particularly in Construction & Property, for example, down 3%. Turning now to Australia & New Zealand, where fees decreased by 6% and operating profit down 39%. It was without doubt a very difficult year throughout with conditions steadily deteriorating. And again, if you remember, markets were strong as we entered the year. We added around 20% more heads in FY '22 to meet that rapid increase in demand. Things change quickly, though, as our new year started and facing increasingly slowing markets, we reduced heads, including an 8% reduction since October. However, as in the UK, with our average headcount still 5% higher in FY '23 versus the prior year, we had negative profit leverage. Temp fees fell by 6%, driven by volumes, down 13%. Candidate availability fell, and we saw significantly lower client activity in banking and in the public sector. Perm fees were down 5%, including the second half down 16%. This was all volume related, and it was partially offset by higher average Perm fees. Construction & Property, which is our largest ANZ specialism, grew by 2% and Technology was down 2%. However, banking was much tougher, down 36% and the public sector fell 4%. With such a disappointing performance, we continue to take further steps to improve results, including headcount reductions and restructuring our management team. And while I'm not satisfied with last year, we shouldn't forget that we have the leading business in Australia and that the economy and labor market there continue to benefit from strong long-term fundamentals despite the current challenges. I'm confident that with the actions taken, that we will return to growth and overall, our long-term ambitions remain undiminished. Finally, to finish on a more positive note, New Zealand has continued its turnaround over the last few years, and it delivered another great performance with fees up 9%. Our Rest of the World division comprises 28 countries and 19 of them delivered their own fee records. Fees were up 5% overall, although operating profit was down 14%, largely due to China, where fees there were down 46% and a material slowdown in United States where fees fell 13%. Temp fees across the region increased by 9%, and Perm was up 3%. Regionally, EMEA, which is 60% of the Rest of the World division, was the standout and it grew by 12%, including records in France, Spain and the Middle East and I'll return to EMEA in our strategy section. The Americas was down 6% with a sharp slowdown in client and candidate confidence in North America throughout the year. Across in Asia, fees were flat, but behind that, though, we had records in Japan and Malaysia, both were up 21%, as well as Hong Kong, up 16%. China, however, continued to struggle, and the sharp decline in fees there resulted in a GBP 6.1 million year-on-year profit swing. We've adjusted our cost base, and our Mainland China headcount is now down 30%. However, we will maintain that current capacity as we're immediate in place ready for when things do improve. In summary then, we've delivered all-time record fees. We've maintained growth in our key strategic areas. We've taken market share and we protected our investments. Our strategy to move to the more attractive markets is paying off as it helps our pricing power, which itself has supported our fees despite volume declines in a more cautious world. As ever, we acted swiftly to align capacity to demand as we saw things change quickly in the markets. We also made a lot of progress in helping our broader societies, including an 85% in our Helping for your tomorrow volunteering program to nearly 18,000 hours, and we also completed our most comprehensive greenhouse gas emission data gathering exercise yet. I'm pleased to say that we're on track to deliver our science-based targets and a 50% reduction in emissions. I'll now hand over to James for a deeper look at our financial performance.

Thank you, Alistair, and good morning, everyone. To give some context to these results, we entered FY '23 with strong momentum and fee growth in all our regions. And although we delivered record fees in FY '23, including monthly records in September, November and March, most markets slowed sharply through the year, particularly in Perm. We moved quickly to align our consultant headcount to activity and fee growth while protecting our investments in key structural growth areas. This early action supported consultant productivity, which remained at good levels through the year despite the increasingly tougher markets, and was an important driver of our stronger H2 profit results and conversion rate versus H1. This slide summarizes our financial performance. On a like-for-like basis, net fees increased by 6% to GBP 1.295 billion, with operating profit down 9% to GBP 197 million. We finished the year with a strong net cash position of GBP 135.6 million after returning GBP 240.1 million to shareholders through core and special dividends and the completion of our share buyback program. Moving on to the income statement. Turnover increased by 12%, with the difference between turnover and fee growth driven by the relative resilience and outperformance of our Temp business versus Perm. In addition, we have the first full year of a large Temp outsourcing contract in our Rest of World division, where we manage a supply chain, which includes a significant volume of third-party agency supply. And over time, we will increase our direct fill proportion driving fee growth. The difference between headline and like-for-like growth rates was primarily the weakening of sterling versus our main trading currencies of the euro and Australian dollar, which increased net fees and operating profit by GBP 32.7 million and GBP 5.7 million, respectively. Basic earnings per share was 8.59p, a 7% decrease versus prior year, driven by lower operating profit and a higher effective tax rate in FY '23, primarily a result of a positive one-off settlements in the prior year. These were partially offset by a lower net finance charge, and a 3.7% decrease in average share count resulting from our share buyback program. Moving on to the performances of Perm and Temp. Perm fees increased by 3%, driven by higher average Perm fees up 11%, benefiting from our actions to increase fee margins and target higher salary markets, together with the effects of broad-based wage inflation. Perm volumes decreased 8% year-on-year as candidate and client confidence decreased through the year, increasing time-to-hire. Temp fees grew by 9% due to 3 factors; a 40 basis points or 3% increase in underlying Temp margin driven by improvements in our pricing, an 8% increase in mix and hours resulting from our actions to target higher value assignments and from wage inflation globally, partially offset by 3 fewer working days in Germany and finally, a 2% decrease in Temp volumes. And as the chart in the top right corner shows, our actions to drive pricing increased group fees by over 10% or circa GBP 135 million, a crucial part of our results. This slide breaks down our year-on-year movement in operating profit. Starting with FY '22, profit of GBP 210.1 million, we add back the net GBP 3.3 million cost impacts of closing Russia in FY '22, which gives an adjusted FY '22 profit of GBP 213.4 million. We then add the positive exchange impact of GBP 5.7 million and a 6% increase in our like-for-like fees of GBP 72.5 million. Like-for-like costs increased by 9%. Firstly, payroll costs, which exclude our strategic investments, increased by GBP 61 million. Of this, GBP 38.5 million related to the 9% average increase in our consultant headcount, GBP 30 million related to the circa 5% average pay increases, which were effective from July '22. And partially offsetting this, commissions and bonuses decreased by GBP 7.5 million year-on-year. We continued our longer-term investment in key strategic areas on our infrastructure, which amounted to GBP 12 million of incremental costs in FY '23. Of this, circa GBP 8 million was invested in scaling our Statement of Work businesses in Germany, together with opening SOW businesses in France and Australia. We invested a further GBP 2 million opening shared service centers in Casablanca, Zaragoza and Mexico City and GBP 2million reinforcing our senior management infrastructure in key strategic sectors such as Technology, Engineering and enterprise clients. Travel and entertainment costs increased by GBP 10 million, normalizing versus a subdued level last year. MTE costs are now in steady state and 29% below pre-pandemic levels on an FTE basis. Property costs increased by GBP 6 million year-on-year, driven by higher energy and utility costs and rent inflation indexing in countries where this is enforced. Average space per FTE has reduced by 14% versus pre-pandemic levels. And lastly, we completed several back-office efficiency projects in FY '23, delivering GBP 4.5 million of cost saves on an annualized basis. Our current operating cost base included in our FY '24 pay reviews is circa GBP 86 million per period, down GBP 2 million versus December '22. We have outlined how tougher market conditions through the year increased time-to-hire and reduce the average number of placements per consultant. This was largely offset by our positive actions to increase pricing and our active management of capacity, although overall productivity as measured by average fees per consultant decreased by 3%. Our tight overhead cost control measures further protected the bottom line, but ultimately, our conversion rate decreased by 250 basis points to 15.2% or 15.5% on a working day adjusted basis. However, in line with the guidance we gave at our half year results, our H2 conversion rate of 15.6% represented a 70 basis point increase versus H1 and delivered an H2 profit result of GBP 100 million despite the tougher trading conditions. Moving on to interest and tax. Our net finance charge decreased modestly to GBP 4.9 million. And looking ahead, we expect the net finance charge for FY '24 to be circa GBP 6 million, of which circa GBP 4 million is non-cash. Our effective tax rate increased by 350 basis points to 28%, driven by positive one-off tax settlements in the prior year. We expect the group's ETR to be circa 29% in FY '24, the increase resulting from the rising UK corporation tax rate, which was effective from April 2023. We delivered an excellent cash performance, with cash from operations of GBP 19.3 million, representing a conversion of profit into cash of 101%. Our working capital outflow of GBP 28.7 million was driven by growth in our Temp business. From this, we paid tax of GBP 65.8 million, which included a catch-up from lower cash tax paid in the prior year and net interest of GBP 1.7 million, leading to a free cash flow of GBP 131.8 million. On the right-hand side, we detail how we use the cash generated and the main items were the payment of GBP 119.1 million of special dividends and GBP 46 million of core dividends. The purchase and cancellation of shares through the buyback program at a cost of GBP 75 million; CapEx of GBP 29.1 million and our acquisition of Vercida Consulting for GBP 1 million. And finally, pension deficit payments of GBP 17.7 million. And our FY '24 CapEx guidance is circa GBP 30 million. Underpinning our cash performance, we maintained our DSOs at 33 days, in line with the prior year and well below pre-pandemic levels. We ended the year with cash of GBP 135.6 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 June '23 with prior year, with 3 key points to highlight. Our cash position reduced by GBP 160.6 million with an increase in net working capital, both explained earlier. FY '22 had GBP 56.8 million of other financial liabilities, which represented the outstanding balance under the GBP 75 million share buyback program, and this liability was fulfilled during FY '23. And we had a GBP 76.3 million reduction in the defined benefit pension surplus 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 and company contributions. We continue to make pension deficit recovery payments of circa GBP 18 million, which will increase at 3% per year. Hopefully, we have seen a sizable reduction in the deficits of our scheme when calculated on an actuarial basis, which positions the scheme well towards our long-term buyouts objective. Our priorities for free cash flow remain unchanged, namely to fund the group's investment and development, maintain a strong balance sheet, deliver a sustainable, progressive and appropriate core dividend and to return surplus capital to shareholders. In line with this policy, the Board has declared a full year core dividend of 3p per share or GBP 47.8 million, up 5% versus prior year. And in line with our well-established policy, we have today announced a further GBP 35.6 million return to shareholders via a special dividend of 2.24p per share. So in summary, we have delivered record fees and as markets deteriorated through the year, actively managed our headcount and costs while protecting our strategic investments to deliver highly cash-backed profits. Fee growth was entirely driven by our early management actions to increase margins, supported by the positive effects of general wage inflation globally, offset by volume declines notably in Perm. And we remain focused highly on leveraging our investments and driving consultant productivity. The group is highly cash generative with a strong track record of returning significant levels of capital to shareholders. Turning to current trading. Despite macroeconomic challenges, overall Temp volumes remained stable on a sequential basis. In Perm, conditions remained tough with increased time-to-hire driven by reduced clients and candidate confidence. Our key markets continue to be supported by skill shortages. Both Temp and Perm fees continue to benefit from our actions to increase margins, which we expect to continue through H1 '24 and by the positive effects of wage inflation globally. We expect group consultant headcount will reduce by 3% to 4% in Q1 FY '24, as we continue to focus on consultant productivity and leveraging our investments. As previously reported, the group's June '23 net fee exit rate was down 2% year-on-year. And given the strong fee growth in the prior year, we have a tough H1 FY '24 growth comparative. Overall, we expect group fees will decline year-on-year in H1 '24, driving a reduction in first half conversion rate as we protect key strategic investments to benefit from future recovery and structural growth opportunities. At a regional level, in Germany, Temp & Contracting remains good overall, with modest volume growth supported by positive pricing. Perm is flat against strong comparatives. In addition, 2 fewer working days in H1 will negatively impact H1 fees and profit by circa GBP 3.5 million. In the UK and in ANZ, Temp & Contracting remains broadly stable overall, but we are continuing to see an increase in time-to-hire in Perm. In Rest of the World, EMEA remains solid overall, and the Americas remains tough. In Asia, China remains tough with activity elsewhere stable. And finally, FX represents a headwind to FY '24 operating profit. And retranslating FY '23 profit of GBP 197 million at current exchange rates would result in an GBP 8 million profit decrease. And with that, I'll hand you back to Alistair, who will update you on strategy before we take your questions.

Thanks, James. Let me finish with a brief update then on our strategy, starting with the components that we outlined at our Investor Day last April. These are the fundamental core of our future to be a more resilient and higher-quality business with stickier and more diverse earnings streams. Clearly, the economic backdrop has deteriorated significantly since we set out our ambitions in early 2022 as the world reopened post-COVID. And we always said that external factors would play a major part in the timing of our delivery. However, despite that, I think that we've made solid progress. We're ahead of our plan to double operating profit in Germany. We're on track to deliver GBP 500 million in Technology fees and GBP 400 million in enterprise client fees. However, slowing economies, sharply rising interest rates and a decrease in overall business confidence have had a significant impact on ANZ and the UK & Ireland. We're behind schedule in both to deliver on our ambitions by FY '27, particularly so in Australia. Remember though that our Investor Day was designed to set out our art of the possible in our businesses based on stable macro conditions, and those ambitions remain undiminished. Once we see a return to economic stability and then growth, I fully expect us to reach our ambition in due course, albeit most likely slightly outside the original timeframe. I mentioned earlier that I'd return to EMEA, which has been a strong performer in recent years, including last year, up 12% and it's worth a deeper dive into what's behind that growth. EMEA fees are up 140% in the last decade. And last year, they represented 21% of the overall group. Our fee CAGR is a healthy 9% with Temp outperforming Perm. Growth has been consistent across the decade across all of the EMEA countries, although it was led by Italy, up 15% CAGR, followed by Spain, up 13%. Our largest Rest of the World country, France, has grown by 9% CAGR and is now over GBP 80 million in fees. In more recent years, the Middle East has become a major contributor. It was up an excellent 53% last year to now over GBP 10 million in fees. A key part of the EMEA success story has been our building of a large non-Perm business in line with our overall group strategy. The average number of Temps paid per period in EMEA outside Germany has increased by 165% to nearly 9,500. Putting that in context, we currently have around 50% more Temps and contractors in Germany alone than we do in the rest of EMEA combined. So, there's clearly a lot more that we can do. A big driver of the success has been the investments that we've made in our Temp infrastructure, particularly in the last 18 months or so, with new shared service centers coming on stream in Zaragoza and in Casablanca, complementing our existing center in Krakow. We now have the operational scale and just as importantly, the management teams to run significantly bigger Temp businesses across Europe and we're leveraging the expertise of our German colleagues in replicating what they have done so successfully over many years. We're also becoming more diversified by sector in our large countries and leveraging our enterprise client relationships across the continent, with over 20 large clients extended their geographic relationships with us in the last year alone. All of that gives me the confidence that we can tap into a significant potential to grow our Temp and contractor volumes and therefore, our overall business right across Europe and the Middle East. And we've started the new year with positive momentum. In summary then, we've had a very busy year, but by carefully managing our capacity, leveraging our pricing and investing in our long-term opportunities, we've delivered all-time record fees. We do, however, continue to face an uncertain world, and we'll need to continue to strike the right balance between cost reduction on the one hand and investment in building the future of Hays on the other. We're very focused on driving productivity in the business, and we've rightsized our capacity. But the investments that we make and the slowing market will challenge our short-term conversion rate in the next few months. That said, we have very purposefully built a business that is the leader in the world that's characterized by acute skill shortages, and those shortages are not going away anytime soon. That gives us a very bright future, and we're well experienced in tackling any challenges that the world may throw at us in the short term. And then finally, as you know, this is my last set of results as Chief Executive. It's been a tremendous privilege to have led this great company for the last 16 years. And during that time, we've helped over 4 million people around the world secure their next career move. And that human aspect is the thing that I'm most proud of, as it has touched so many lives for the better. Our business is unrecognizable today from the one that I joined. And when I became CEO back in 2007, over 80% of our fees came from the UK & Ireland. Since then, we've taken that local success story and we've turned it into a global one, where over 80% of our fees are now international and we operate at record scale around the world. We've created a powerful global brand. We've digitally enabled our business for the modern world, and we've built a global leader in white-collar recruitment. It's been a true team effort, though, and my heartfelt thanks go to all of my colleagues around the world, both past and present for their hard work and expertise. Above all, the world will always need talented people. And as a leader in that market, I'm sure there will be many exciting future chapters of Our Hays Stories ahead. And I wish my colleague, Dirk, every success as the next Chief Executive of Hays. We'd now be delighted to take your questions.

[Operator Instructions] And the question comes from line of Rory McKenzie from UBS.

It's Rory from UBS here. And just firstly, on the current trading, given that volumes are generally lower in summer, is the stable comment you make referring to the year-over-year volume growth trends? And then within that and within Germany, is that volume growth still reflecting lower new starters and more extensions? Has there been any change to that picture? And then secondly, can you make any comments about how the jobs being lifted over summer and are in terms of wages or your expected fee rates? Do you still expect a good tailwind from pricing and mix in H1? Or will that keeps fading from here, I guess, is the big step-up you took starts to annualize? And then finally, can you just talk about the enterprise client category? And is that just outperforming because those end clients are more resilient? Or are you already seeing good early signs of success with expanding your services in those key accounts?

Rory, I'll pick up the questions on current trading and I guess what we're seeing so far through the summer. As you know, we only have 1 month of actual results, and we're kind of -- as you know, that's a summer month as well, which we do lose visibility of it as people go on their vacations, et cetera. So I mean, overall, the Temp and contracting has continued a stable trend overall. We saw sequential stability through the second half of the last financial year, and that's continued into the new financial year, albeit we do have to adjust the normal seasonality within that because as I say, people go on holiday and we lose volume in our education business in the UK, for example. In Germany, in question of your volume growth, we're seeing -- continue to see sort of low 2% to 3% volume growth year-on-year across our Temp and contracting business, but we continue to see good pricing dynamics there as well, which is supportive. So on a fee basis, we're continuing to grow at sort of 10%, 11% year-on-year in Temp and contracting in Germany. In UK, as I say, it's a pretty stable trend in terms of Temp, adjusting for the normal seasonality. And likewise, in Australia, the only extra thing I'd call out in Australia is that we've seen the loss of some public sector Temps into federal government. There was a number of finishes at the end of June, which weren't renewed. Putting that to one side, the underlying picture in Australia continues to be stable overall. So, I think in terms of volume growth in Germany, we talked about slightly lower numbers of new starters and that's been offset by contract extensions and fewer finishes and we continue to see that through the summer. We have a natural break, less of an impact than we have in December, but we do have finishes in June and we saw slightly lower finisher rates in Germany in June than normal, about 2 percentage points lower, which is helpful. And that gives us a little bit of support going into the new financial year and has helped maintain that 2% to 3% volume growth year-on-year. In terms of new jobs coming into the business through the summer, in the Q4 trading update, I talked about modestly lower job flow coming into the business. And then on that lower -- modestly lower job flow, we've been seeing an increase in time-to-hire. And it's the same trend, again, Rory. I mean, obviously, July and into August is impacted by holidays anyway. So it's difficult to get a read across. But I wouldn't say there's been any fundamental shift at all in the last 6 weeks of trading. In terms of pricing, we talked about that at the Q4. And clearly, we've got a good year-on-year growth impact in the second half last year, but it's been pretty stable on a sequential basis, i.e., we're not seeing an acceleration in that at all at the moment. What does that mean for next financial year? We'll continue to have a tailwind year-on-year. So, I expect to see some pricing impact year-on-year. But unless we see that pick up, it will probably run its course through the first half, but we'll certainly get some support in the first half of the year. Alistair, I'll hand over to you on the enterprise.

Yes. Thanks for your question on enterprise, Rory. As you know and we put out at the Investor Day in April '22, doubling down on our enterprise capabilities and growing market share in the enterprise market is fundamental to our future. So it's great to see that we're well on track with our growth in that standpoint. And I think it comes from a couple of areas. Number one, we've got access to the people that our clients need. I'll come back to that in a moment. And number 2, our clients, in general, are asking for a broader set of services, a more holistic talent services value proposition, if you like, from their suppliers. And that's been behind our strategy to expand and broaden our services away from just recruitment into adjacent areas such as training, DE&I consulting, et cetera. I'll come back to them in a moment. There's an awful lot more that we can do, but I think these results in a difficult economic backdrop, the fact that we were up 10% in enterprise shows that we are delivering on our strategy there, we are growing market share and we are broadening our offering. I'd point to Germany, for example, where we won a number of MSPs in the energy sector. We now work for all of the major energy utilities in Germany. Clearly, that's a great place to find yourselves. And that's because of the quality of the product that we're selling. We have access to the talented individuals in the skill-short market that German utility organizations need. So well done to the team over there. And then in terms of broadening our offering to respond to the client demand, you'll have seen that we bought Vercida, a DE&I consulting business based in the UK, but with a global offering. We bought that a few months back and they're actively delivering to our clients right now, as well as building a pipeline and talking to a whole host of further clients that we can plug them into and I expect great things there. Another example would be the move that we've made into creating talent as opposed to just moving talent around. And our apprenticeship business is off to a great start. We have our first cohort of technology apprentices into government. They're well underway with their program, their first program, where we recruit and then train and deploy those individuals into our clients. And we're busy actively recruiting the next wave of cohorts of people into that space right now because that's our way of starting to create more talent that we can supply into our enterprise client organizations as opposed to just consuming talent. And I think that that's a great example of the way we're broadening our whole sort of talent life cycle services. And I think that will be a core part of how we continue to be even more successful in the enterprise segment as we go forward. Hope that helps, Rory.

Yes. That's very helpful. Alistair, I wanted to say thank you very much for your time on this and many other results calls and meetings. And helping 4 million people into new jobs is a big impact to have. So all the best for whatever you choose to do next.

That's very kind. Thanks, Rory. It's worth getting out of bed on the morning, if you can help 4 million people get new jobs. So that's the job worth doing in my book.

And the next question comes from line of Hans Pluijgers from Kepler Cheuvreux.

Yes. A few questions from my side. First of all, on headcount, you indicated that you will reduce consultant headcount by about 3% to 4% in Q1. Maybe some flavor where you plan to reduce and at the same time, where you still see less opportunities for investments? And then going back on your guidance. Yes, Perm a little bit more, let's say, down as I see it, while Temp is still stable combined with the fact that you indicated that you expect conversion ratio to be somewhat down year-on-year. Must I read it that, let's say, also on the fee income side, you, let's say, see a slightly increase in the decline compared to 2% exit rate. Could you maybe some feeling on how we should read that guidance?

All right. Hans, I'll pick both of those. The first question on headcount, we've clearly guided in the statement 3% to 4% reduction in Q1. I'd say that would be fairly broad-based, but I think probably the ANZ will be one area that we expect the headcount to come down in the next quarter as we redress the capacity there versus demand. And secondly, in the UK, I expect there to see some further reductions in the UK. And then I think it will be more broadly based around Rest of World on a market-by-market basis. There will be little pockets as well where we do invest, of course. And importantly, we'll be replacing a lot of the people who do leave as we normally do. So it will be relatively selective. Hence, why 3% to 4% in the quarter feels like the right level of balance. I mean, we've taken 6% of the headcount out in the second half of last year and we've aligned our headcount at the end of Q4 pretty well to where the level of demand is. So, we were down 5% in June versus a fee growth down 2%. So, I think we did a pretty good job through the second half of correcting that. So, I don't think it needs sort of major surgery. It's more kind of just being selective market-by-market. In terms of guidance for the first half, we've put that in, I guess, for 2 reasons. Firstly, on the fee line, we exited the year at minus 2% growth in June. And we faced tougher comps in the first quarter. We were up 15% growth last year, and we hit a record in September and we hit a record in November. So, we've got some pretty tough first-half comps coming up in the first half. So even if we stayed sequentially stable from where we were in June, that itself would see an acceleration in the year-on-year fee decline. So, we've got some time to go. Clearly, September is a big month for us and then October's and November's an important period as well. So, we've got plenty of trading ahead. But what we wanted to signal that even on a sequentially stable basis, that year-on-year fee decline would accelerate. And importantly, that would drive a reduction in the conversion rate. So whilst we've been selectively taking headcount out for a period of time and what we expect to do so in Q1, we will only be selective and we do want to protect our investments and our infrastructure. So, we will expect with fee declined, the conversion rate to compress as well in the first half.

And the next question comes from the line of Kean Marden from Jefferies.

I've got 3, if I can. Just first of all, coming back to the enterprise business again. Would you mind, Alistair, just giving us a bit more information regarding the size of the pipeline, if you're flagging here that it's potentially increased in scale over the last 6 months to 12 months. Just some insight into how long it would normally take to convert that opportunity set? Then secondly, your point regarding sort of price/mix over the last 12 months is very well made and very resilient to date. But I guess we are seeing softening in some pockets of labor markets around the world. I'm just particularly interested in whether you're seeing fee rates start to ease in those areas where the sort of the supply-demand balance in the labor market is starting to switch? And then one for James. So, we're also seeing rising bankruptcies at the moment, but your DSO don't seem to be increasing. So just trying to rationalize that. And I guess, if we take a step back, DSO was 39 days pre-COVID. It's 33 days now. What really explains that structural shift and in your view, how permanent might that be?

Thanks, Kean. Let me kick off on the enterprise one. So yes, the pipeline is steadily building. During COVID, obviously, people were more worried about the short term than the long term. So pipeline generation back then was more difficult. Things have definitely picked up in the last 12 months. And we've reoriented our team over that time and invested in it. And I'm pleased to see how the pipeline is developing. In terms of the time to convert things, it really depends on the client situation. It can be as quick as 2 months, 3 months, 4 months. It can be as slow as 18 months plus. So when you're looking at a major outsource or you're looking at a re-tender that might be coming to market, it can take you over a year from initial conversations to actually complete and win in that deal. So it's really horses for courses. But the pipeline is the strongest that I think we've -- I've ever seen, actually. And I think that's part and parcel of our thrust into enterprise, together with our expansion of services to those organizations. So, we're talking to new organizations today that we've never spoken to before because maybe we didn't have the offerings for them. Well, as we expand our services, we're now starting to have those offerings. Could you just repeat the second question for me, Kean? I'm sorry, I missed it.

It's about fee rates. So overall, that's continued to be a tailwind, but we are seeing labor markets loosen in some areas. I'm just wondering whether fee rates remain firm in those deteriorating labor markets or whether we're starting to see them ease off a bit?

Yes. I'm sorry. Got it. Yes. So wage inflation is still evident. It may have moderated back from some of the numbers that we were seeing a year back, and that's understandable. So the cost of the people we're supplying, if you like, continues to go up. Our margins that we are charging for our services have remained stable. So, I've seen no real downward pressure on our own margins. So that's good. We haven't bought them up anymore because we put them up quite a lot, but we've got a tailwind behind us there. And I think also the strategic decisions that we've taken and the actions behind those decisions and to move further up the salary chain, further up the value chain, if you like, in terms of the types of jobs that we're seeking to fill more of, they are obviously higher value jobs. They tend to be scarce of supply. They tend to be less price sensitive, if I could put it that way. That shift up the value curve, as well as leveraging our own pricing power by building a business that's more and more in the hotter in demand markets as opposed to maybe some of the more longer-term traditional markets that we've been in over the last 50 years, that's all helping us. So it's not just the case of, if you like, moving up and down with where the market is. It's a case of purposeful action to go to the places where pricing and activity is going to be strongest over time.

I think, Kean, the only bit I'd add to that is the last bit of the dynamic, which is hours and obviously, we track hours worked very carefully as well. And we've seen some reduction in hours in some markets, average hours worked by our Temps and contractors in some parts of the world, notably in Germany and in the contracting and Temp. And we do look at that very carefully. In the summer, we've seen probably a little bit more vacations than we have done previously, and we'll be watching that really carefully as people come back to work in September to see whether the trend -- I think the trend was broadly stable through the second half. We've seen a little bit of extra holidays in the summer. It will be interesting to see how that one returns in September. And just on your comment on our DSOs, I was really pleased with the performance this year. We've again held on to 33 days, which, as you mentioned, is about 6 days or so below where we were pre-pandemic. I mean, I'd put that down to the team doing a fantastic job around the world with absolutely dedicated focus on collecting cash. And that for us is a military operation. We're collecting GBP 130 million, GBP 140 million a week in cash, and it requires a lot of effort and a lot of teamwork to do that. So, my huge thanks to the teams around the world. Am I expecting that to worsen or to change going forward? Well, I think it's going to be hard for us to improve it. And we're always conscious that at some stage, will clients stop paying us on time and start to hold on to cash because cash has got a price now? And my nervousness is that it could do. But again, I just keep challenging the team to do a great job and they keep performing. And in terms of defaults, so far, we're seeing relatively low levels. It's not inconsistent with last year. And again, we remain completely vigilant on whether we see that. At the moment, we've not seen that in our numbers, but we watch it like a hawk. And in my view, high-quality credit control, getting the cash in early is the key thing to do to minimize default risk.

And the next question comes from the line of Karl Green from RBC.

Yes. Just 2 questions from me. Firstly, on the Technology discipline, could you just give us a bit more granularity on some of the sub-disciplines there in terms of latest trends what you're seeing, areas that are potentially growing faster than they were 6 months, 12 months ago, areas which have maybe slowed? And then secondly, just in terms of capital allocation, I think you've sent me confidence signal with that ordinary dividend increase. What kind of macro scenario would you envisage would lead you to sort of dial that progressive dividend expansion back? I mean, obviously, I think your target 2 to 3x, and it's very much at the upper end of that at the moment. What scenario would you envisage that potentially becoming sort of less progressive?

Let me pick up on the technology point, Karl, and then James can talk about distribution. So, we hit a record as you'll have seen. So, we've grown the tech business around the world. It has been a more difficult market. In some geographies, the states has been difficult, for example, well-trailed news from just the tech market over in the states. But when you look at the hotter market, a market that's in general doing very well anyway, areas such as cybersecurity, for obvious reasons, is a red hot market and not enough people available for the roles that are out there. As everybody is moving to cloud infrastructure, then there's a great demand for cloud engineers. Generative AI has hit the world and has become one of the fastest-growing phenomenon in technology in our lifetimes. And again, there's a massive shortage of people that understand and can work in generative AI. So, you can understand why all of those are particularly hot subsegments. I wouldn't point to anywhere that's particularly bad because the world is driven by technology. And if you're not putting in new technology, you're certainly having to maintain your existing technology. Some areas are as not as hot as generative AI or cybersecurity areas such as infrastructure, for example, people are not, by and large, putting in massive ERPs at this stage, but that will change in due course as people need to upgrade and refresh and move on to more modern systems. So, tech is our biggest business by sector around the world. And I confidently suggest that it is going to remain our biggest sector for a very, very long time to come, to be honest. And that's why we've been so focused on it for the last 5 years to build what today is the global leader in tech recruitment all around the world. I think that's a fantastic position to find ourselves. But we're going to double down on that, and we're going to continue to reinforce it.

All right. Karl, I'll pick up the question on capital allocation and the core dividend. And the core dividend for us is really important. It's the core part of our distribution policy, literally. And I think it's important that we've signaled them that it is progressive in this decision. We've increased it by 5%. And as you highlighted, it's still very well covered. It is still at 2.9x cover. And that's well within our range of 2x to 3x cover that we've had as our policy for some time. I mean it's difficult for me to answer the second part of the question, which is what would you need to see to not be progressive because we're not in that situation now. I mean the situation where we are in is that we're confident in our strategy and performance and outlook and in our financial position as well. And we give ourselves 2x to 3x cover to give ourselves a little bit of flexibility to support the dividend and to continue to have a progression in it, which I think is important and an important signal of intention as well.

And just the point I'd make on that, Karl. I think that progressive point brings great value actually, if we can continue to be growing the dividend. And as James pointed out, that's why we've got a range of cover. And while we're confident in the business as we are today, then it's a great signal.

And the next question comes from the line of Andy Grobler from Exane BNP Paribas.

Just 2 for me, if that's okay. Firstly, a shorter-term one. Just so that I understand your guidance into Q1, you're talking about headcount sequentially down 3% or 4%, which I guess means average consultants will be down 7% or 8%. And with productivity having been down a couple of percent for the last 6 months or so, is there the implication here that you're looking at in a high single digit, low double-digit declines in like-for-like net fees? And if that's wrong, could you tell me which bits are incorrect in that? And then secondly and kind of a bit longer term, Alistair, as you kind of -- as your tenure draws to a close and you think about how technology has impacted the business over the years and what your expectations are for the next 5 years or 10 years for Hays and for the broader industry?

Andy, I'll pick up that question on the Q1. And, yes, the 3% to 4% reduction is on a sequential basis and we exited the year with headcount down 5% year-on-year. So you're correct, that would probably lead us into sort of mid- to high single-digit year-on-year decline in consultant headcount. Where the quarter goes in terms of fee growth or should I say, fee reduction year-on-year, I don't really have a full view on that. As you're aware, I don't have August results yet and September for us is typically 42%, 43% of the quarter. And until I see that, I can't really make a call on where our overall Q1 fee growth might be, and therefore, where our overall productivity is. But what I would say is that the last 9 months, we've been pretty diligent in matching our headcount to where our overall like-for-like growth performance is. I put a slide in the deck that kind of tracked that over the last 12 months. And by and large, we've been pretty keeping that pretty much in line. And that's really the sort of the dynamic that we want to continue going forward, which is really to keep productivity at good levels overall. And therefore, a 3% to 4% reduction in headcount feels about right at this stage given the trends that we've seen in fee growth so far through the summer.

Let me pick up on the tech point, Andy, because I think it's a really interesting point. And I'm a passionate believer in the benefits that tech can bring to any industry, including our own, as well as the threats to business models as well. So, I'm not complacent about it. And it's impossible to predict what tech will become and what it will do and how it will evolve. But the one thing you can predict is it will do something and you'd better be alive and open-minded and aware and invest in it actually. It's one of those things that you need to keep on it because if you miss a wave, you're not going to catch up and catch the next wave. So, you have to try a lot of things. Many don't work out. But if it doesn't work out, you will have learned something. And that allows you to do a better job on the next wave that you're going to catch. The wave that we're working very hard on the whole world is working very hard on today is obviously a generative AI. And that really hit the world back end of last calendar year. And I think everybody in every organization in the world is thinking through the positives and negatives of that. We've been working on AI for over 5 years now, initially extractive AI and more recently on the generative AI. We work with a number of the large language model businesses, looking at how their LLMs work, using them behind our firewall on our data. And I think generative AI in time is going to give us a couple of benefits. It will enhance our internal efficiency and effectiveness by arming our people to do more and better. And it will potentially open up new revenue streams. I don't know what they might be at this stage, but I think that that's an interesting challenge for the company and the team to be thinking about how can you leverage it, not just to improve productivity or reduce costs or whatever, but also to open new revenue streams. The point I'd make, though, Andy, is at the end of the day, people drive businesses. Our business is to find the right talent for people. And our business is around people doing that job. We believe in the art and science of recruitment, though. And equipping our people to do more and better every day forever more is really at the core of our business. So leveraging tech, so our people can do more and do better is really the heart of our strategy for my entire tenure here and I'd suggest going forward as well. Does that help?

Yes. And Alistair, best of luck for whatever the future brings.

Thank you very much, Andy. Appreciate it.

And the next question comes from the line of Kean Marden from Jefferies.

Not a question, but before we bring the call to a close, I've just been asked to say a few words on the occasion of Alistair's final results meeting. But before I do that, let's cast our minds back to 2007, if we can. So Gordon Brown has just become Prime Minister. Steve Jobs launches something called the iPhone. And there's a bank run on a small building society, some of you may have heard of called Northern Rock. In the support services sector, a rather engaging Yorkshireman is appointed Chief Executive of Hays. He comes from an exotically named IT outsourcer called Xansa. He tells us that technology is going to transform labor markets and recruiters over the next decade. But rather unusually for this sector, he has never placed a candidate in his life. Within 3 years, the UK economy is in severe recession. Hays net fees have declined by 40% and recruiter share prices have halved. Welcome to the sector, Alistair. But just as equity markets are very different in 2023 compared with 2007, so is Hays. Net fees from highly cyclical sectors like banking and finance have been substituted with structural growth markets like technology. German EBIT has increased 4-fold as Alistair internationalized Hays and Hays technology toolkit has transformed consultant productivity. It turns out the technology has transformed labor markets and recruiters over that 16-year period after all. From the outside, Hays has always seemed a very happy, supportive and rewarding employer with cultural foundations laid by the mighty Bob Lawson and then nurtured by Alistair and Paul Venables. So on behalf of our analysts and investors today on this call, may I wish you all success in your next endeavors, Alistair. And we do hope that our paths cross again in the future. Many thanks.

That's very kind, Kean. I really appreciate it. I think over 16 years, I really do feel as though, we have seen it all, the good and the bad and the somewhere in the middle. But I'm glad that we got something right. I think at least that prediction that technology might change a few things has actually come to pass. And I'll confidently predict on the last day as opposed to the first day that it will continue to change a lot of things. So, we live in an exciting world. But it has been a long shift, but it's been a good shift. And it's great to be signing off with an all-time record top line. That's always a good time to be handing over the keys. But I'd like to just say a personal thank you to all of yourselves, whether in the analyst community or in the investment community. Thank you for all of the support that you've given me over the years. It's been truly appreciated, and you've made my job easier and you've also made it more fun. And I think that's an important part of life. So, thank you to everybody, and good luck to yourselves as well in future endeavors. And I do hope and I do know that our paths will cross again and I look forward to that. So thanks again.

Dear Speakers, there are no further questions or comments. I would now like to hand the conference over to Alistair Cox for your last closing remarks.

Okay. I think that's it. Everybody over and out. And I look forward to talking soon. Thanks.