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EU referendum causes 19% decrease in operating profit YoY for Harvey Nash

Harvey Nash has announced its half year results, which are in line with the Board's expectations and show strong cash flows, despite increasing revenues, with a 5% uplift in the Group's interim dividend.


The Group has delivered revenue and gross profit growth in all principal geographic regions outside the UK & Ireland for the six months ended 31st July 2016. The UK & Ireland was slightly below the prior year's record results.


Growth in European contract managed services and a favourable Euro exchange rate lifted Group revenue during the period to £377.7m (2015: 328.7m), an increase of 14.9% compared to continuing operations in the prior year. The constant currency increase was 8.0%3.


Gross profit from continuing operations increased by 6.5% to £47.3m (2015: £44.4m), reflecting a change in the mix of revenue. On a constant currency basis the increase was 0.8%3.


Operating profit of £4.2m was 19.0% lower than the prior year, mainly due to the impact of uncertainty in the UK caused by the EU referendum. This significantly affected higher margin permanent recruitment fees, the impact of which flowed directly to operating profits. This gave rise to the inclusion of a number of one-off costs, relating to the reduction of headcount in the UK.  There were also some one-off costs in Germany relating to the disposal of Nash Technologies in December 2015, which also held back operating profit at the Group level.


The strategic review in 2015, which resulted in the disposal of Nash Technologies GmbH and the closure of the oil and gas practice, has de-risked the Group and the balance sheet has been strengthened. The focus on the core business combined with tight control of working capital resulted in stronger cash flows.


Statutory profit before tax of £3.8m (2015: £4.0m) was £0.2m lower than the prior period and earnings per share were 7.0% lower at 3.58p (2015: 3.85p). The tax charge for the year was £1.2m (2015: £1.2m), reflecting a slight increase in the effective tax rate to 31.3% (2015: 30.8%).


The Board proposes a 5.0% in the interim dividend to 1.565p per share (2015: 1.490p per share), which will be paid on 18 November to shareholders on the register on 21 October 2016.


The balance sheet at 31 July 2016 was strengthened by an increase in the value of non-sterling denominated assets to £57.5m compared to 31 January 2016 (£54.1m). Intangible fixed assets increased by 6.5% to £53.8m (2015: £50.5m) due to the appreciation of the Euro and the US Dollar against Sterling.


Net cash generated from operating activities improved materially on the prior year to £1.5m (2015: outflow £13.6m), a positive reversal of £15.1m, mainly due to improvements in working capital but also reflecting a swing away from working capital absorbing services. This was reflected in the net cash outflow on working capital of £1.4m in the period, compared to the outflow of £16.3m in the prior year.


The overall inflow of cash resulted in the Group's net borrowings reducing by £8.9m to £6.8m at 31 July 2016, compared to the same date in the prior year (2015: £15.7m).


Albert Ellis (pictured), chief executive officer, said, "The six months under review have produced year-on-year growth in revenue and gross profit, as well as strong cash generation. An increased interim dividend, despite the challenges of the first half, reflects the Board's confidence in the resilience of the Group's business model and its strong balance sheet.


"Although mindful of macro-economic challenges, client demand for new hires continues to be driven by digital transformation, cybersecurity and data analytics and the Group's strategy remains the prudent expansion of fee-earning capability and growth in market share, coupled with tight control of costs and working capital."


The results from the UK and Ireland were mixed with demand for permanent hiring subdued, compared to the strong demand experienced in the six months to 31st July 2015. The uncertainty arising from the EU Referendum began to have an impact on demand from the fourth quarter ended 31st January 2016. This resulted in a swing in UK operating profits from record levels in the first half to 31st July 2015 to lower levels of profit exiting the second half into 2016, reflected in the split of operating profit in the proportion 64:36 over the two halves of the year to 31st January 2016. This UK wide slowdown determined the lower run rates in permanent recruitment experienced in the UK & Ireland for the period leading up to the EU referendum vote.


Despite this, contractor numbers were steady and revenue increased by 7.3% to £125.2m (2015: £116.7m). Gross profit of £18.4m was lower (2015: £18.8m) due to the lower levels of permanent recruitment. Accordingly, operating profit of £1.6m (2015: £2.1m) was also lower than the prior year. On a constant currency basis, revenue increased 6.1%, gross profit decreased by 3.2% and operating profit was 26.9% lower.


Uncertainty impacted demand for executive recruitment in areas closely aligned with the public sector and financial services. A number of one-off costs, relating to the reduction of headcount in the executive search business, were also included in the UK operating profit.


Growth came from offices outside London. Gross profit in the UK regions and Scotland grew by 6.5%, while London declined by 8.3% and Dublin was 11.6% lower. However, following the vote for Brexit, gross profit from permanent placements in London improved by 24.5% in July compared to the prior year, which is encouraging as the business enters the second half.


Results from Europe were lifted by growth in the Nordics and Benelux with generally favourable currency tailwinds. In constant currency, operating profit was held back by investment in fee-earning headcount and management, to achieve critical mass in subscale locations, which offer the prospect of future growth. There were also one-off costs relating to the realignment of the German recruitment business following the disposal of Nash Technologies GmbH in the prior year.


Revenue in Mainland Europe increased by 20.9% to £218.6m (2015: £180.8m), whilst gross profit increased by 12.1% to £17.8m (2015: £15.9m2) and operating profit increased by 6.6% to £2.5m (2015: £2.3m). On a constant currency basis, revenue increased by 10.5%, gross profit increased by 3.1% and operating profit declined by 4.3%.


The Benelux countries enjoyed relatively favourable trading conditions with an improvement in the Netherlands in particular, which reported strong gross profit growth of 27.3% (15.8%). The majority of this growth was derived from new client wins in contract recruitment and managed services with a 57.9% increase in permanent recruitment.


In the Nordics, Sweden posted a 16.6% increase in gross profit (6.7%), driven mainly by specialist technical recruitment while executive recruitment was subdued with a decline of 6.6%. Growth also came from smaller offices in Denmark (+141.2%) and Norway (+19.5%), where the turnaround has been encouraging and the investment in management and fee-earners is beginning to pay off.


In Central Europe, revenue and operating profit were slightly lower than the prior year, despite the currency tailwinds. In Switzerland weak demand for permanent recruitment was linked to the strength of the currency, although tight control of costs resulted in a small improvement in the operating profit. In Germany, gross profit was 5.3% lower than the same period last year, due to shorter than expected temporary contract durations. This has resulted in lower contractor numbers partly mitigated by a strong increase in permanent revenue. The disposal of Nash Technologies GmbH required some limited restructuring with management re-aligned and back office synergies identified.


Revenue from the Rest of the World (USA and Asia Pacific) increased by 8.4% to £33.8m (2015: £31.2m), whilst gross profit increased by 13.7% to £11.1m (2015: £9.7m). Operating profit was lower at 0.1m (2015: £0.7m) held back by a bad debt write off in the USA, weakness in China and an adverse currency variance in Vietnam. On a constant currency basis, revenue increased by 0.3%, gross profit increased by 5.0% and operating profit would have been £0.1m.


Strong market conditions in the USA favoured permanent technology recruitment and executive search. The swing from temporary to permanent recruitment was significant, as client demand for software development skills particularly on the West Coast, continued to grow. Gross profit increased by 18.3% on the prior year, despite a decline in overall contractor numbers. Operating profit was 19.3% lower than the prior year partly due to a 7.3% increase in fee earners and record comparative figures.


In Asia Pacific, strong growth in executive recruitment revenue in Japan (+147.2%) and in technology recruitment in Australia (112.4%) offset weakness in Hong Kong, where it was down by 30.4%. Recruitment profits in Asia were £0.1m better than in the prior year, despite steady investment in the new Singapore office. The majority of the decline in profits came from Vietnam, where costs were impacted by adverse currency movements.


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