Harvey Nash reveal revenue growth of 8%
31 July 2014
31 July 2013
Adjusted operating profit
Adjusted profit before tax1
Adjusted earnings per share1
Profit before tax
Earnings per share
Albert Ellis, Chief Executive Officer, said:
"I am very pleased with the performance of the business this year, which has been achieved despite currency headwinds and the continued challenging markets in Europe. On a constant currency basis Group revenues, profits and dividends have grown by at least 10%.
Global multinational clients are beginning to hire selectively at the executive and strategic level and have also been impacted by the severe skills shortages in the digital and mobile technology sectors. These trends have been the key drivers for growth in both contract and permanent recruitment in the first six months of the year.
Our investment in the growing markets of the UK, USA and parts of Asia provides a strong platform for further growth in the second half of the year."
The Group's results for the six months ended 31 July 2014 were strong, with revenue and adjusted operating profit showing double-digit growth on a constant currency basis despite the on-going weakness in Europe.
Revenue increased by 8.1% to £355.9m (12.2% on a constant currency basis) compared to £329.2m in the previous period, while gross profit rose by 1.1% (5.9% on a constant currency basis) to £43.6m (2013: £43.1m).
Operating profit was 4.7% higher at £4.6m (2013: £4.4m) due in particular to robust performances from the UK & Ireland, Benelux and the USA, with growth in demand for recruitment continuing. Strong contracting activity in Europe offset subdued demand for permanent recruitment, particularly in Germany. Asia also performed well despite subdued conditions in Australia. Profit before taxation rose by 5.4% to £4.2m (2013: £4.0m). There were no non-recurring items in the period (2013: costs of £2.2m).
The tax charge for the period was £1.2m (2013: £0.5m). The effective rate of tax before non-recurring items was 28.1% (2013: 30.5%). Adjusted basic earnings per share of 4.16p (2013: 3.75p) rose by 10.9%, owing to a combination of higher profits, a lower effective tax rate and a lower weighted average number of shares in issue.
1 Stated before non-recurring costs related to restructuring of £2.2m in the six months to 31 July 2014.
Harvey Nash maintains a sound balance sheet. Net assets decreased by 5.0% to £64.2m (2013: £67.6m) due mainly to the impact of foreign exchange on overseas assets. An addition of £0.7m in relation to the initial development of software for clients has been capitalised under intangible assets.
Trade and other receivables increased by 13.2% to £133.5m (2013: £117.9m) due to a combination of higher revenue and a year-on-year increase in debtor days (2014: 46.1 vs. 2013: 43.3). Trade and other payables increased by 9.7% to £117.5m (2013: £107.1m) owing mainly to higher levels of trading.
The deferred tax asset decreased by £0.8m, owing mainly to the de-recognition of the deferred tax asset related to the restructuring costs in Europe. Consideration of £2.1m represents a contingent liability in relation to the acquisition of Talent-IT BVBA and its wholly owned subsidiary Team4Talent BVBA, and is based on performance over the three-year earn-out period ending on 31 March 2015.
The Group's balance sheet remains robust with the increase in net borrowings at 31 July 2014 of £4.3m (2013: net cash £1.2m) related to increased working capital.
Cash generated from operating activities during the period, before movements in working capital, was £5.4m (2013: £3.2m). In the six months to 31 July 2014 there was a net increase in working capital of £7.9m. Tax paid in the period was £1.3m (2013: £0.5m), with the low figure in the previous year due to tax refunded in Germany. Combined outflows on net share purchases of £1.3m, dividend payments of £1.4m and net interest paid of £0.3m resulted in an overall net cash outflow in the six months to 31 July 2014 of £8.2m (2013: outflow of £3.7m).
Capex totalled £0.7m (2013: £0.8m), broadly split 70/30 between internal investment and external client-related spend. Internal capex relates to investment in modernising and updating the Group's technology platforms, and external client capex is the investment in the Group's networks laboratory in Vietnam. An amount totalling £0.8m (2013: £nil) of software development was capitalised in relation to a specific opportunity for new client product development in Germany.
The Group maintains substantial headroom in its banking facilities used to fund working capital peaks to allow for future growth. The facilities were increased on 12 February 2013 to £52.0m and currently comprise £50.0m of invoice discounting facilities and £2.0m of overdraft facilities. The geographic split of the invoice discounting facilities is as follows: £26.0m in the UK, the euro equivalent of £19.0m in Benelux and the US dollar equivalent of £5.0m in the USA.
The Group's strategy is to continue to grow the business, increasing revenues, profits and dividends through a balanced portfolio of services across an increasingly broad geographic base. This portfolio delivers competitive advantages and a cash-generative business model, which enables the Group to grow organically through investment in new services, geographic locations and increasing headcount, as well as through earnings enhancing bolt-on acquisitions. The core of the Group's business model is its unique portfolio of services, which enables client engagement at each stage of the business cycle. This relationship model underpins the delivery of resilient financial results, demonstrated during the last downturn, and supports returns to shareholders.
A balance of permanent recruitment, contract recruitment, managed solutions and offshore services, combined with our market-leading position in technology and executive recruitment, provides Harvey Nash with competitive advantages.
On 21 August 2014, the Group completed the acquisition of Beaumont KK, an executive recruitment company in Tokyo. This small but strategically valuable bolt-on acquisition builds on our existing office in Tokyo, expanding the portfolio into executive recruitment and consulting services, and complements existing Asia Pacific operations in Hong Kong, Vietnam and Australia.
The Group's broad geographical spread diversifies the risk of reliance on a single country or economic area. Operating in 16 countries, revenue and gross profit generated outside the UK represented 71% (2013: 69%) and 63% (2013: 65%) respectively in the six months to 31 July 2014.
As part of the Group's on-going review of its technology platforms the Board believes that investment in modern digital systems supports the recruitment business model, takes advantage of new technology innovation and can strengthen existing or add new client relationships. This process has begun in 2014 and will continue into next year eventually covering all offices and each service line.
United Kingdom and Ireland
Revenue in the UK and Ireland increased by 2% to £114.2m (2013: £112.2m) and gross profit increased by 9% to £17.7m (2013: £16.3m). Operating profit increased strongly by 10% to £1.9m (2013: £1.7m1), as market share gains and growth from new offices increased operating margins and profits.
Growth was delivered by Birmingham, Leeds and Manchester, where investment in headcount in the prior year is having a positive impact. The new locations in Bristol, Newcastle and Warrington are performing as expected. In Scotland, buoyant demand in the first quarter appears to have slowed as the vote on Independence drew closer.
Gross profit from offshore services increased by 27% on the prior period, benefiting from contracts secured with a number of new clients along with additional software and development work from existing clients.
In Ireland, revenues were up 21% despite currency headwinds, due to strong demand from multi-national corporations for IT contractors and a full period of revenues from the Cork office. Operating profit was broadly flat year on year due to investment, leaving the office well positioned for the full year.
Rest of Europe
Revenue in mainland Europe increased by 13% to £217.1m (2013: £192.4m), whilst gross profit decreased by 4% to £18.9m (2013: £19.7m). Operating profit was 1% above the prior period at £2.3m (2013: £2.3m1), which was mainly as a result of strong contracting revenues in Benelux offset by muted permanent revenue in Germany and the Nordics.
The Group's operations in the Benelux grew strongly, with revenues increasing by 21% and gross profit increasing by 7%. The gross margin change is due to a change in the mix towards contract services management. This excellent performance was attributable to strong organic growth from increased contracting revenues in both Brussels and Antwerp. The new office opened in Ghent in the prior year also performed well, increasing gross profit by 46% on the comparable period last year.
In the Nordics, turnover increased by 1% whilst gross profit and operating profit were broadly flat. The Group's business in Sweden performed well despite the challenging trading conditions, with 6% growth in both turnover and gross profit. Good permanent recruitment activity was supported by growth in interim and specialist technology recruitment services. Finland and Denmark also performed well, with strong organic growth and the stabilisation of demand for permanent recruitment services in the region. Whilst there are some concerns in Finland in relation to Russian trade sanctions, no visible impact has been reported yet. Norway has been impacted by a weakening economic backdrop, and a necessary rightsizing of the operation and property was implemented over the period. With a lower fixed cost base, performance is expected to improve in the final quarter.
Results from Central and Eastern Europe were mixed. Poland continued to grow revenue and headcount with the technology team expecting to move into profit in the second half. Increased demand from the financial services sector in Switzerland increased gross profit by 11% but revenue was flat overall in Germany with permanent recruitment down 71% compared to the same period in 2013.
1 Stated before non-recurring costs related to restructuring of £2.2m in the six months to 31 July 2014.
In the telecoms outsourcing business, revenue for the period was £10.1m (2013: £12.3m), producing gross profit of £2.2m (2013: £2.7m) and a small loss of £0.1m (2013: £0.2m). Software development totalling £0.8m (2013: £nil) capitalised in relation
to the development of a wireless solution for the automotive and rail sectors has been received well by the market and we are encouraged by the feedback so far. This innovation is expected to drive new client acquisition and revenues from new faster growing sectors.
United States & Asia Pacific
In the USA, revenue and gross profit were broadly flat at £22.2m and £5.3m as a slow start to the year impacted the results, mainly due to the winter storms on the East Coast. Permanent recruitment revenues were up 2% on the prior period, whilst contracting and outsourcing were slightly down. Demand continues to be strongest on the West Coast, with the pipeline improving across the other offices as the market begins to pick up. Investment in headcount was significant (an additional 10% in headcount including Vietnam) to take advantage of the stronger outlook.
Our Hong Kong office produced another excellent result with gross profit 105% ahead of the prior period, leading to a positive contribution to profit from the business for the first time. This was achieved through a number of executive placements with new multi-national clients, despite an increase in fee-earners. In Australia gross profit declined by 15%: the domestic economy appeared to stabilise following a period of corporate restructuring and job cuts but overall market conditions remained subdued. In Vietnam, demand for permanent recruitment in the first quarter was subdued but picked up in the second quarter with gross profit increasing by 21%. We continue to invest in our outsourcing business in Japan.
As previously announced, Tom Crawford and Margot Katz stepped down from the Board on 3 July 2014. Kevin Thomas was appointed as an independent non-executive on 1 May 2014. Kevin is a main board director of FTSE 100-listed engineering support services group Babcock International and is CEO of its Support Services division, which generates about a third of Babcock's £3bn plus turnover. His division employs over 11,000 staff in over 10 countries worldwide. Kevin is also a director of a range of Babcock subsidiaries and joint venture companies providing training and support services to civil government and international blue-chip customers.
Ian Davies continues in his role as Senior Independent Director but stepped down as Chair of the Remuneration Committee on
1 September 2104. David Bezem has assumed this role.
The Board has approved the payment of an interim dividend of 1.360p per share (2013: 1.238p), an increase of 10%, on
21 November 2014, to be paid to shareholders on the register as at 24 October 2014.
The Board is pleased with the way the Group's market-leading recruitment businesses in the UK and mainland Europe have performed, increasing revenues and profits despite currency headwinds and challenging market conditions for permanent recruitment in Europe. While this factor continues to impact results, the Group is prudently investing in headcount in selective markets.
Looking ahead, we expect the market for executive recruitment and technology professionals to continue its steady recovery, although it is clear we are still at the very early stages of a return to global growth. Subject to continued improvement in the market throughout the second half, the Board is confident that the Group is on track to deliver results in line with current market expectations for the full year.