The trading environment during the period was particularly challenging. Turnover was marginally ahead of last year, although profit before tax, goodwill amortisation and exceptional items fell to £178.9 million. Once again the highlight of the year was a strong performance from Personnel which generated £114.3 million of operating profit. Operating cash flow of £286.1 million represents a conversion ratio of 151%.

PROFIT AND LOSS ACCOUNT

We have amended our segmental analysis this year to provide further visibility of the ongoing Personnel and Mail operations.
Once again the highlight of the year was another strong performance from our Personnel business, providing confirmation of the validity of the Strategy Review. Gross fees of £1,080.5 million were slightly ahead of last year on a like-for-like basis. Operating profit before goodwill amortisation and exceptional items of £114.3 million was down 7% on last year, with the shortfall mainly arising in the first half. The net margin in the year of 10.3% was 1.1% down due principally to the impact of acquisitions, investment in new offices and systems, and market conditions in continental Europe.
Both volumes and pricing in the mail market remained static, though the loss of two customers in the prior year reduced turnover by 3% to £127.6 million. Operating profits of £33.2 million were 25% down after investment in new infrastructure and other cost increases. The business launched its first products under the new licence in June 2003 with encouraging, though modest, early progress.
The performance of the businesses being disposed was disappointing. Turnover weakened 1% to £1,263.7 million, but operating profit before goodwill amortisation and exceptional items of £42.6 million was down 47%. The commercial operations contributed most significantly to the downturn, particularly the BPO activities, and we have secured the successful disposal of these activities since the year end. The Logistics activities generated good sales growth, with strong performances from the retail and consumer businesses in France, the Netherlands, Spain, Poland and Greece. Profits were held back, however, by continued problems in the German Logistics and French Transport activities, which are being restructured. Average margins across the Logistics operations in the period were 3.6%. Performance of the French courier business also continued to deteriorate as a result of poor market conditions, and we are continuing to restructure this business, prior to disposal.

EXCEPTIONAL ITEMS

The Group incurred exceptional charges of £628.4 million during the year, including a £287.4 million goodwill write-off, £151.8 million of which had previously been charged to reserves.
Impairments in the carrying value of assets, combined with losses on disposals incurred in the year and after the year end, led to charges of £560.1 million. For those businesses that have now been disposed, the value of the underlying assets has been finally determined and this led to losses on disposal and provisions against net assets of £21.9 million and £63.4 million respectively. £416.7 million has been charged in respect of ongoing disposals, based on the latest evidence of the expected recoverability of those assets. As a consequence of the disposals, ‘own shares’ held as a hedge against share options issued have been written down to market value, generating a charge of £32.0 million. Within our Personnel Division, the short term future trading prospects of our IT services business are poor and £26.1 million of capitalised goodwill in respect of this business has been written off. This is the only business within our Personnel operations where we incur the ‘bench risk’ of staff downtime.
£47.2 million of restructuring costs have been charged, £10.6 million of which relates to the restructuring of operating activities in the BPO and Logistics businesses during the year. On completion of the transformation process, the shared service facilities operated in the UK will no longer be required and £36.6 million has been provided to cover the commitments associated with their closure.
£21.1 million of exceptional finance charges were incurred in the year. The Group’s facilities included
£150.8 million of long term borrowings at rates fixed significantly above the current market rate. This facility was not appropriate for the future of the Group, and was repaid on 29 August 2003 at a cost of £15.8 million. A further £5.3 million was incurred in respect of the termination of the Group’s other facilities during the year.

INTEREST

Net interest payable in the year, before exceptional items, reduced from £19.2 million to £17.3 million. The Group continues to benefit from strong working capital controls but, given that the majority of the Group’s borrowings were long term, and at fixed interest rates, the impact of lower base rates was limited. The repayment of long term fixed interest borrowings since the year end is expected to deliver full year savings of £5.5 million.

TAX

The tax charge on profit before goodwill amortisation and exceptional items of £58.8 million represents a high effective rate of 32.9%. We have not recognised deferred tax assets in relation to losses where these are unlikely to be relievable in the foreseeable future, such as in the German Logistics business. The effective tax rate for the focused Personnel business is expected to be close to the composite rate in the countries within which we operate, currently estimated at approximately 31%.

DISPOSALS

For each major disposal a dedicated team has been established to provide project management, corporate finance, accounting, legal and property resources.
Since June 2003 the Group has completed a series of transactions to dispose of the whole of the former Commercial Division except for the Rentacrate business. Consideration for these disposals was £225.5 million. The Group continues to make progress towards the disposal of the Logistics, Rentacrate and non-UK and Irish mail activities.

ACQUISITIONS

The Personnel strategy includes the ability to exploit opportunities for growth through selective acquisitions. The Group is presented with numerous acquisition opportunities but we continue to adopt rigorous criteria in the appraisal of acquisitions. The suitability of the business model and the quality of management are clear criteria for success. This applied to the acquisitions of Ascena and IOS which were completed during the year and as a consequence post-acquisition performance and integration are progressing well.

PENSIONS

The Group continues to account for pension costs under SSAP 24. A triennial valuation of the Hays Pension Scheme was made as at 30 June 2002. This valuation showed a SSAP 24 deficit of £30.5 million after deferred tax. The Group has increased its contribution rates in order to address the deficit and has incurred an additional profit and loss charge of £3.8 million compared to last year.
The Group FRS 17 disclosures show a deficit (after deferred tax) of £111.3 million. In common with most large companies the FRS 17 deficit increased substantially during the year as AA bond yields, used to discount future liabilities, fell and continued weakness and volatility in stock markets around the world reduced asset valuations.
The Group has addressed part of the funding shortfall with a cash injection of £51.7 million made since the year end. This demonstrates our commitment to staff, deferred members and pensioners. It will also leave any potential deficit to be funded in the future by the Personnel business at more appropriate levels.

CASH FLOW AND CAPITAL EXPENDITURE

Strong controls over cash continued to be applied in the period. Days sales outstanding improved again in the period as did the ageing profile. The Group incurred no material bad debts during the period, and the overall bad debt charge was managed at a modest level for a Group of this size. The back office functions of our businesses responded to the uncertainty surrounding the outcome of the Strategy Review with professionalism as demonstrated by the progress in this area. Operating cash flow of £286.1 million represents an excellent conversion ratio of 151% (2002 – 123%).
We continued to support high quality capital investment opportunities where they arose, with a ‘business as usual’ approach to the businesses being divested. Investment in the Logistics operations included £12.1 million further investment in the crates business and £26.1 million for new Logistics facilities in the UK, France, the Netherlands, Greece and Spain to support contract wins and extensions. Within Information Management Services a further £2.3 million was invested in management systems and £6.2 million in a new London facility. A £4.6 million investment in mail tracking technology commenced in the Mail business. Net capital expenditure across the Group in the year totalled £74.5 million.
The capital investment needs of the business will reduce in future as the Personnel business is less capital intensive than the businesses being disposed.

TREASURY

Our operations are principally financed from retained earnings and bank borrowings. Borrowings are raised by the Group Treasury Department which manages the Group’s treasury risk in accordance with policies approved by the Board. The Group Treasury Department does not engage in speculative transactions and does not operate as a profit centre.
The principal treasury risks arising from the Group’s activities are interest rate movements, liquidity, currency and counterparty risk. These are managed as follows:

(i)	The Group’s exposure to interest rate fluctuations on its long term borrowings are selectively managed, principally using interest rate swaps. The Group operated a policy of fixing interest rates on core long term debt, whilst short term debt and cash were maintained at floating rates. The Group’s principal long term borrowings have been repaid since the year end.
(ii)	During the year the Group operated with a £450 million syndicated loan facility. This facility was cancelled following the establishment of a new, five year, £300 million floating rate facility on 29 June 2003 reflecting our view of the future needs of the business. The new facility is underwritten and will be syndicated shortly. As a result of the Strategy Review it became clear that the Group’s unsecured loan notes 2012, raised in 2000 in the US private placement market, were inappropriate for the future funding requirements of the Group and they were repaid on 29 August 2003.
(iii)	Group borrowings are primarily denominated in sterling and euros. The Group’s overseas profit streams and net assets are affected by movements in exchange rates. The Group aims to mitigate its exposure arising from the translation of foreign currency by a mixture of foreign currency borrowings and cross currency swaps to match 90% of foreign currency assets. At 30 June 2003 foreign currency liabilities represented 104% (2002 – 89%) of the net carrying value of foreign currency assets. Exposure to currency risk at a transactional level is minimal with most day-to-day transactions being carried out in local currency. On conclusion of the divestments, the Group’s overseas net assets will be reduced. The Group will continue to use flexible foreign currency hedging arrangements to manage and minimise currency risk.
(iv)	Counterparty risk arises from the investment of surplus funds and the use of derivative instruments. To manage this risk the Group restricts transactions to banks that have a defined minimum credit rating and limits exposure to each bank. All derivative transactions are executed under agreements conforming to standards set by the International Swaps and Derivatives Association.

CAPITAL STRUCTURE

At 30 June 2003 the Group had gross borrowings of £400.4 million and net debt of £245.8 million. Since then, in addition to the normal cash generation of the business, the Group has received proceeds from disposals of £225.5 million and made a cash contribution to the Hays Pension Scheme of £51.7 million. The Group will continue to adopt a prudent approach to financial risk, and will aim to maintain net debt in the range £50 million to £150 million for the time being. The Group expects to generate surplus cash from the disposal process and this will be used to buy back shares at the appropriate time.

John Martin
Finance Director
8 September 2003