This year’s Annual Report marks a milestone in the development of Hays. It covers an exceptional period during which we have made significant progress towards transforming Hays into a pure specialist recruitment and HR services business which will become a world-class leader.

My statement provides an overview of our trading year. It is followed by Colin Matthews’ Review (on page 4), in which he describes the work and objectives of his Strategy Review and reports on the progress of our divestment plan. Denis Waxman’s Review of Operations (on page 64) not only details the progress made by Hays Personnel during the year, but also looks ahead to its future as the core business of our newly-defined Company.
These reviews have been designed to give you a clear picture of Hays as it is today. They will show you a Group with a new focus: one which will see us working in less diverse markets offering exceptional opportunities for future growth.

FINANCIAL HIGHLIGHTS

The Group’s overall operating performance is in line with market expectations, with profit before tax, goodwill amortisation and exceptional items of £178.9 million, 23% below last year. Despite this reduction, our businesses continued to focus on cash, generating £286.1 million from operations. Our specialist recruitment business performed strongly, generating £114.3 million of operating profit before tax, goodwill amortisation and exceptional items – 60% of the Group’s total profit – from £1.1 billion of sales. We believe that our business significantly out-performed its peer group in the year.
The Group incurred exceptional charges of £628.4 million, including the write off of £287.4 million of goodwill. These charges principally arise from the write down of assets, the cost of restructuring shared services, the cost of replacing the Group’s financing facilities and the crystallisation of certain pension liabilities, all associated with the transformation process. As a result, the Group’s loss before tax for the year was £476.8 million.
We announced the completion of a number of disposals after the end of the financial year for an aggregate consideration of £225.5 million. The businesses disposed of include Information Management Services, Business Process Outsourcing and related operations. They are classified as discontinued operations but remain in the Group balance sheet as at 30 June 2003.
The Group had £245.8 million of net debt at 30 June 2003. Cash proceeds from the disposals completed since year-end have been used to repay debt. In addition, a one-off payment of £51.7 million was made after the year-end into the Hays Pension Scheme to address part of the deficit in that scheme. The Group will continue to adopt a conservative approach to funding its operations. Net debt currently amounts to approximately £120 million and is within the range that the Board considers appropriate for the future. We expect to generate surplus cash as a result of the disposal process. Once the transformation has been concluded, we plan to use cash we hold in excess of that required for the future development of the business to buy back shares in the open market. We shall therefore seek renewal of the mandate to buy back shares at the Annual General Meeting on 19 November 2003.

INCREASED DIVIDEND

As a consequence of our excellent cash flow, the Board is recommending a final dividend of 3.63p which, if approved at the Annual General Meeting, will be paid on 28 November 2003 to shareholders on the register at 24 October 2003. Together with the interim dividend of 1.75p, this represents an increase of 15% on last year.
The dividend is covered 1.3 times before goodwill amortisation and exceptional items. Future dividends will be rebased to reflect the level appropriate to our specialist recruitment business, taking into account its future investment needs, with a target cover in the range of 1.5 to 2.5 times. Future dividend growth will depend on the growth rate achievable by the Personnel business across the economic cycle.

MANAGEMENT AND ORGANISATIONAL STRUCTURE

Last November, when Colin Matthews joined Hays and launched our Strategy Review, the Board expected significant structural change within the Group. In the event, led by Colin, the Board was convinced that shareholders’ interests were best served by an even more radical simplification and re-focusing than had been anticipated.
As the disposal programme progresses, Hays will cease to be a diverse group. Accordingly, the role of Group CEO will become redundant as the transformation moves towards conclusion. In the future, Hays will require a CEO who will focus on our continuing activity and Colin has made it clear that his interests and future aspirations do not lie in leading the specialist recruitment business. Equally, Denis Waxman, who founded the original business and runs Hays Personnel today, is the natural choice to become CEO when the transformation is complete. We expect that Denis will assume the role of CEO during the course of calendar year 2004.
I would like to take this opportunity to thank both Denis and Colin for their ongoing contributions to our Company. Denis and his team have built the long-established specialist recruitment business which is becoming our core. Colin remains fully committed to the successful transformation of the Group, including the sale of Logistics and setting the strategy to dispose of Mail.
It is my sad duty to advise that the health of Neil McLachlan, our former Finance Director, has not recovered sufficiently to enable him to work in the demanding role of a full time Executive Director. Consequently, Neil resigned from the Board with effect from 8 September 2003 but continues to be supported by the Company’s permanent health scheme. During his ten years with the Group, Neil successfully introduced many improvements to our accounting, IT and risk management systems. For the last four years, as Finance Director, he was an active participant on the divisional boards and in managing all of the financial aspects of our business. He is missed by everyone in the Group and we all wish him a speedy and complete recovery.
The Board for the future Group will consist of two executive Directors, Denis Waxman as Chief Executive Officer and John Martin as Finance Director, with the non-executive component remaining unchanged.
We have recently told our staff of our proposal to relocate the Group Head Office from Guildford to the current Personnel offices in Moorgate, in the City of London, with Group administration being centralised at New Malden.
Our people have stood up to many challenges during this difficult year, remaining extremely loyal and understanding throughout. On behalf of the shareholders and the Board, I would like to thank them all, including those who have left the Group, for their support and hard work.

FUTURE PROSPECTS

Our Personnel business has recorded gross fees in the seasonally quiet summer months 2% to 3% ahead of the same period last year, continuing the trend established during the second half of our financial year.
Within our Mail business, volumes through the existing DX network remain flat, with future growth principally expected from the rollout of new services. Whilst the prospects of building high quality future income streams are good, the impact of new services in the current year is expected to be modest.
Elsewhere, the outlook for the Logistics business is satisfactory, whereas conditions in the French courier market are demanding.
We have made good progress towards transforming Hays into a pure specialist recruitment and HR services business and our results underline why we are sure that our strategy for the future is correct. Future trading will depend upon the economic outlook, which remains uncertain, yet we are confident our newly focused Company will continue to out-perform, thus delivering premium value to shareholders.

Bob Lawson
Chairman
8 September 2003