“We are delighted that after two and a half years of difficult trading conditions our Personnel business has returned to creditable growth. Operating profit before goodwill amortisation increased by 12% on turnover up 24% compared to the prior year, with growth in each of our four principal markets of UK, Eire, Australia and Germany.”

The last six months has been a period of considerable achievement for the Group. We have completed two thirds of our Group transformation, disposing of substantially all of our former Commercial and Logistics operations. Hays Personnel, our specialist recruitment and HR services business, has continued to perform well in a recovering market, increasing operating profit for the first time in two and a half years. Our Mail business is now generating stable profits and has successfully launched three new products in the deregulating UK mail market.

RESULTS SUMMARY

Group operating profit before goodwill amortisation and exceptional items of £89.7m (2002/03: £94.7m) is in line with our expectations.
Our Personnel business generated turnover of £623.2m, up 24% over the equivalent period last year (2002/03: £502.2m), and operating profit before goodwill amortisation¹ of £60.1m (2002/03: £53.6m), up 12%. On a like-for-like basis, excluding the benefit of acquisitions and favourable foreign exchange movements, turnover increased by 12% and operating profit before goodwill amortisation by 6%.
After two and a half years in which trading has been challenging, the markets for our Personnel business now appear to be recovering. Whilst the overall results are positive, the pace of recovery varies. Australia, the Northern regions of the UK, Montrose, IT and Ascena in Germany all performed well, but other markets in Continental Europe and those for Accountancy in the South East of England continued to be difficult.
Once again, we believe that Hays Personnel has performed well compared to the competition. We continue to strive to gain market share and increase efficiencies, as well as invest for future growth adding a further 13 offices in the period. Hays Personnel generated an excellent net operating margin in the period of 9.6%, compared to 10.7% in the same period last year. Over half of the reduction in operating margin is as a result of the acquisition of two specialist temporary recruitment businesses in Continental Europe, Ascena in Germany and IOS in Belgium, whose performance has matched our expectations. Our UK IT and Contact Centre businesses grew quickly, contributing to overall profit growth but diluting average margins. In addition, in the period we won a number of recruitment management contracts. These contracts enable us to capture a higher share of a client’s regular specialist recruitment business but result in a reduction in reported margin as a result of having to record the gross fees for those temps sourced from third parties on which we earn a management fee. The overall margin has also been impacted by further investment, particularly in Accountancy where we have continued to build new specialisms. In the period, we saw little evidence of the opportunity to generate significant operating leverage at this stage of the cycle.
Mail turnover of £65.5m was 2% ahead of the same period last year (2002/03: £64.1m) and operating profit was stable at £16.3m. We are pleased that the benefits of a strengthened management team and the focus on our UK operations are now evident. During the period, the business successfully launched three new products under its new licence which are demonstrating promising growth potential in the liberalising mail market. The business has borne the associated launch costs without significantly impacting its results.
The financial statements for the period include the results of several operations that have been sold or are being disposed. In the period, these businesses contributed turnover of £553.0m (2002/03: £622.2m) and operating profit before goodwill amortisation of £13.3m (2002/03: £24.8m). The management teams of these businesses remained dedicated to their customers and employees and we are confident that they will capitalise on the opportunities for development under new ownership.
Our investment in Albion Chemicals generated operating profits of £1.2m during the period (2002/03: £2.4m). Whilst the distribution activities performed well, manufacturing faced increased utility costs and weakness in selling prices, accounting for the decline in operating profits.
Interest charges of £3.0m compare favourably to the same period last year (2002/03: £8.6m) as a result of the repayment and refinancing of higher rate debt facilities, lower interest rates and continued careful control of working capital. Tax includes an exceptional charge of £20.5m relating to the disposals completed in the period. The net exceptional gain of £1.9m is as a result of accounting for the disposals concluded in the period.

TRANSFORMATION

In March 2003 we announced our intention to transform the Group into a pure specialist recruitment and HR services business. We have made good progress since that date, having disposed of substantially all of our former Commercial and Logistics operations.
In addition to the IMS, BPO and Logistics disposals previously announced, during the period we also completed the sale of our former Field Support, Sameday Courier, US Home Delivery and German Multi-user Network businesses, as well as several surplus properties.

POST BALANCE SHEET EVENTS

On 4 February 2004 we completed the disposal of the bulk of our Logistics operations.

On 5 March 2004, we disposed of theremainder of our German Logistics business. The business lost £2.6m in the year to 30 June 2003 and was disposed for nominal consideration with net cash of approximately £4.9m which will enable the new owners to complete the necessary restructuring. We have also recently entered into a contract for the disposal of the French and Belgian courier businesses. These businesses generated losses of £4.4m in the year to 30 June 2003 and also require further restructuring. The businesses will be sold for nominal consideration with net cash of £14.0m and we expect to complete this transaction shortly.
Aggregate gross headline consideration from disposals to date (including Logistics, a number of surplus properties, the German logistics business and the French and Belgian Courier businesses which have completed or are expected to complete shortly) amounts to £355.0m.
The sale of further surplus properties is ongoing and we expect to make substantial progress on this in the second half of this financial year. In addition, processes to dispose of the small, but profitable, Rentacrate and Management Services businesses are ongoing. The dismantling of shared facilities in the UK is also proceeding well.
Finally, we are actively reviewing our options for the method and timing of the divestment of our Mail business.

CASH FLOW

Operating cash flow in the period, after a one-off contribution to the Hays Pension Scheme of £51.7m and exceptional cash costs relating to the Group transformation of £1.6m, was £28.3m (2002/03: £136.9m). After proceeds of disposals and payment of the final dividend for the last financial year, net cash flow of £151.3m reduced net debt to £94.5m.
Net capital receipts in the period of £18.3m comprise £36.5m of receipts from the sale of properties less £18.2m capital investment principally relating to Logistics. Net cash flow from disposals was £198.8m. Exceptional cash costs of £18.0m were incurred in connection with the restructuring of our debt facilities.

DIVIDENDS

The Board has declared an interim dividend of 1.0p per share payable on 28 May 2004 to shareholders on the register at the close of business on 23 April 2004. As previously announced, the dividend has been rebased to reflect a level appropriate to Hays once the transformation is complete. We expect that the ratio of interim to final dividends will be broadly similar to earlier years. The Board is mindful of the importance of maintaining a progressive dividend policy.
Our target net debt range following the Group transformation remains £50m to £150m, as previously indicated. The Group remains committed to returning surplus cash proceeds from disposals to shareholders on conclusion of the transformation.

REVIEW OF OPERATIONS

Personnel

Our Personnel business has returned to underlying growth for the first time in two and a half years. During the period our principal markets continued their gradual recovery. Operating profit before goodwill amortisation increased by 12% on turnover up 24% compared to the prior year, with growth in each of the four principal markets of UK, Eire, Australia and Germany. On a like-for-like basis, excluding acquisitions and favourable foreign exchange movements, operating profit was 6% ahead of the same period last year on turnover 12% higher.
The ratio of net temp fees to perm fees in the period was 61:39. The higher proportion of net temp fees compared to the same period last year (2002/03: 59:41) is attributable to the acquisitions of Ascena and IOS. On an underlying basis the ratio was consistent.
We have continued to invest in the business, adding a further 13 offices in the period bringing our total number of offices at 31 December 2003 to 306 in 16 countries. At the end of the period our total number of consultants stood at 3,025, a 7% increase on the number at 30 June 2003.
In the UK, total gross fees were £475.5m, up 11% on the same period last year (2002/03: £430.0m). Net fees were 3% ahead at £141.8m (2002/03: £137.4m) and operating profit before goodwill amortisation was up 3% at £50.7m (2002/03: £49.0m).
Accountancy Personnel continued toperform strongly in the regions, but market conditions in London and the South East remained difficult throughout the period. Whilst gross fees were 4% ahead of last year at £159.0m (2002/03: £153.6m), net fees reduced by 1% to £66.4m (2002/03: £66.8m). Hays Montrose, which services the technical and ‘built environment’ sectors, continued its strong growth across all of its operations, with gross fees up 13% to £151.1m (2002/03: £133.2m) and net fees up 10% to £44.3m (2002/03: £40.3m).
Conditions in the IT sector improved and our IT business grew gross fees by 11% to £104.7m (2002/03: £94.7m) and net fees by 5% to £10.2m (2002/03: £9.7m).
Within our other specialisms in the UK, market conditions were mixed. Overall, gross fees grew 25% to £60.7m (2002/03: £48.5m) and net fees grew 1% to £20.9m (2002/03: £20.6m). Contact Centres was the largest individual contributor to gross fee growth as a result of winning a major new contract. However, because of this contract and the successful conclusion of a sizeable one-off project, margins were lower in this area, accounting for the difference between the growth rates in gross and net fees. Education and Banking also grew both gross and net fees. Financial Services and Legal have continued to experience difficult market conditions, although careful cost control restricted the impact on the overall performance of the Group.
Our business in Australia generated strong growth, increased its market share, and turned in an excellent overall performance. Gross fees increased 57% to £72.3m (2002/03: £46.1m) or 40% excluding the favourable foreign exchange effect. Net fees increased 39% to £21.8m (2002/03: £15.7m). Operating profit increased 42% on a headline basis and 24% after eliminating the foreign exchange effect to £8.8m (2002/03: £6.2m).
In Continental Europe market conditions were challenging. However, the Ascena and IOS acquisitions both continued to meet our expectations. Overall in Continental Europe, gross fees increased to £75.4m from £26.1m and net fees increased to £16.9m from £6.9m showing the effect of these acquisitions. Operating profit before goodwill amortisation was £0.6m compared to a loss of £1.6m in the same period last year.

Mail

Our Mail management team made significant progress on a number of fronts in the period. Firstly, they continued to focus on operational efficiency and service levels with the pleasing result that profits have been stabilised after previous years’ declines. Secondly, the Mail business has successfully launched three new products under its new licence. It is the only operator to have launched new products targeting the next day business-to-business mail market in the UK. In a relatively short period, these products have grown to volumes of over 300,000 items per week. Whilst the current financial contribution from these products is relatively modest compared to the existing business, the potential is significant. Finally, management has made substantial progress in establishing independent back-office functions to enable the business to operate on a stand-alone basis.

MANAGEMENT AND EMPLOYEES

Xavier Urbain served as a director of Hays plc for seven years prior to the disposal of the Logistics business in February 2004. He brought valuable insights to the Board of Hays along with extensive logistics experience and was vital to maintaining the confidence of clients of the logistics business during the disposal process. We wish him good fortune in his new role.
The management and employees of the Group have shown tremendous commitment to the transformation of our business and I wish to record my appreciation for their dedication and professionalism in support of Hays during a challenging period.

CURRENT TRADING AND OUTLOOK

Mail

Volumes within our core business are stable. We believe that the new licence presents excellent prospects for profitable growth and having launched our three new products successfully, we are well placed to capitalise on them.

Personnel

The financial performance of the business in the period reflected slightly more favourable economic conditions with net fees growing by 5% on a like-for-like basis. During January and February comparative year on year growth in net fees has been sustained at 5-6% with no evidence of any acceleration. We have not yet seen a strong recovery in the South East of England or in Continental European markets. Accordingly, our outlook remains cautious but we are well placed for any future stronger upturn.

Bob Lawson
Chairman
March 2004

1. Operating profit of Personnel is stated throughout the Chairman’s statement before goodwill amortisation of £6.6m (2002/03: £2.5m)