# Harvey Nash Group plc Increases revenues in a challenging market - Link: https://www.directorstalkinterviews.com/harvey-nash-group-plc-increases-revenues-in-a-challenging-market/412758935 - Published: 2018-09-25T07:18:50+01:00 - Author: Giles Arbor **Harvey Nash Group plc** (LON:HVN), the global technology recruitment and outsourcing group announced today its unaudited interim results for the six month period ended 31 July 2018. **Highlights** · Transformation programme now substantially complete, delivering against strategy · Robust UK performance in weaker market · Continued growth in Europe particularly in the Benelux · Strong results from Vietnam based IT outsourcing business · Recent acquisitions trading in line with expectations · Gross profit up 7.2%, 11.1% on a like-for-like basis · Profit before tax up 19.2%, up 52.0% before non-recurring items, · EPS up 22.6%, up 48.7% before non-recurring items · Interim dividend of 1.75p per share, up 6.5% · Net debt up to £21.5m (2017: £10.0m) reflecting expanding working capital | Financial Highlights | July  2018 | July  2017 |   Change | Constant Currency | | | Revenue^ |  292,186 | 254,462 | 14.8% | 15.3% | | | Gross profit | 51,680 | 48,213 | 7.2% | 8.7% | | Operating profit before non-recurring items | 6,531 | 4,225 | 54.6% | 47.7% | | Non-recurring items* | (739) | 467 | (258.4%) | | | | Operating profit | 5,792 | 4,692 | 23.4% | | | | Profit before tax before non-recurring items | 6,003 | 3,951 | 52.0% | 44.6% | | | Profit before tax | 5,264 | 4,418 | 19.2% | | | | EPS before non-recurring items | 6.24p | 4.19p | 48.7% | | | | EPS | 5.48p | 4.47p | 22.6% | | | | Cash outflow from operating activities | (5,858) | (7,594) | (22.9%) | | | | Net Borrowings | 21,540 | 10,025 | 114.9% | | | | | | | | | | |   ^ The adoption of IFRS 15 resulted in a reduction in reported revenue, where the Group operates as an agent, under the criteria of this new standard. The comparative revenue figure has been restated. There is no impact on gross profit. See note 12 for further details. * Non-recurring items mainly comprise the cost of the Group transformation programme offset by a release of aged accrued liabilities. > **Harvey Nash Group plc Chief Executive Officer, Albert Ellis commented:** > “I am pleased that in a challenging market our UK business has increased revenues > and delivered a robust financial performance despite declines reported across > the recruitment sector in light of uncertainty surrounding the negotiations between > the European Union and the UK. The Group’s businesses in Mainland Europe performed > well whilst results from the rest of the world were mixed, with a decline in US > revenue set against a strong performance from our Vietnam based IT outsourcing > business. Overall, trading remains in line with the Board’s expectations for the > full year.” **CEO Statement** For the six months ended 31 July 2018 gross profit increased by 7.2% to £51.7m ( 2017: £48.2m). However, excluding the impact of offices closed during the prior year, gross profit increased by 11.1%, 12.7% on a constant currency basis. This was largely due to increases in contract recruitment, contract management and IT outsourcing as a result of both organic growth and acquisitions. Permanent recruitment has been broadly flat and executive search subdued when compared to the prior period. Operating profit before non-recurring items increased by 54.6% to £6.5m (2017: £ 4.2m). After a non-recurring charge of £0.7m, statutory operating profit was up 23.4% at £5.8m. Profit before tax and non-recurring items increased by 52.0% to £6.0m (2017: £4.0m), 44.6% on a constant currency basis. Earnings per share before non-recurring items increased by 48.7% to 6.24p (2017: 4.19p). During the period, there were a number of items which fell outside the usual course of business. These costs are presented as non-recurring items and are discussed below. Statutory profit before tax of £5.3m was £0.8m higher than the prior period and earnings per share were 22.6% higher at 5.48p (2017: 4.47p). Interest costs were higher at £433k (2017: £274k) and the effective tax rate reduced from 26.5% to 24.2%. **Revenue restatement under IFRS 15** Total billing over the period increased by 20.6% on the reported revenue of £425.3m in the prior period (19.9% on a constant currency basis). However, the adoption of IFRS 15 resulted in a reduction in reported revenue, where the Group operates as an agent, under the criteria of this new standard. This materially affects the Group’s contract management services where revenue is now recognised as just the profit margin. The adoption of IFRS 15 has resulted in an adjustment to reduce revenue and cost of sales by 43.0% (2017: 40.2%), which sits within the 30-50% range indicated in the 2018 Annual Report. The current period impact is lower than the prior period, as the Group’s service line mix continues to evolve. There is no impact on gross profit. The full year impact for revenue in the year to 31 January 2018 was calculated as a reduction of 39.9%. **Transformation programme** The transformation programme, now substantially complete, has been a success, boosting profitability and margins across the Group. Earnings growth over the first half includes gains achieved from the transformation programme and M&A which, by their nature, represent a step-change in performance rather than a continuous progression. During this period, actions were taken in the US to turn the business around. This followed a significant decline in gross profit over the current period and prior year, resulting in an unexpected loss in the final quarter to 31 January 2018. Actions were taken in the first quarter, and profitability has since stabilised. **Acquisitions** On 15 May 2018 the Group announced and completed the acquisition of eMenka NV (“ eMenka”), a Belgian IT solutions company, for an initial cash consideration of € 1.0m (£0.9m) with a further €1.0m (£0.9m) of potential deferred consideration. Based in Antwerp, eMenka focuses on placing Microsoft specialists in full-time employee and independent contractor roles. This acquisition is in line with the Group’s strategy to grow businesses in its core markets and specifically, eMenka will augment the Group’s existing operation in Antwerp and strengthen our market-leading position in Belgium. This also enables the Group to take advantage of the strong software development market which is thriving across the world and particularly in Europe, where acute skills shortages in niche sectors drives demand and hiring activity. The Group continues to assess and pursue value enhancing acquisitions in its core geographies. **Balance sheet** Net assets at 31 July 2018 were £59.8m compared to £60.7m at 31 January 2018. Intangible assets increased by 7.4% to £67.0m due to goodwill arising on the acquisition of eMenka NV and a £1.0m measurement period adjustment to goodwill arising on the acquisition of Crimson Ltd. Net debt at 31 July 2018 was £21.5m, compared to £6.7m at 31 January 2018 and £10.0m at 31 July 2017. This increase reflects the expansion in working capital required to finance the increased number of contractors and additional headcount recruited in Vietnam to support current demand, as well as the costs of both the transformation programme and of the acquisitions made in the second half of the year to 31 January 2018 and the first six months of the current year. Tight control of working capital was maintained, with debtor days of 41.3 at 31 July 2018 (2017: 41.4 days). Trade and other receivables increased by £36.2m to £188.8m (31 January 2018: £152.7) reflecting the growth in contract recruitment and contract management services over the period. Trade and other payables increased to £174.6m (31 January 2018: £148.3m). Total deferred consideration stands at £5.6m (31 January 2018: £4.1m) an increase of £1.5m mainly due to the acquisition of eMenka in Belgium. Provisions decreased from £2.3m at 31 January 2018 to £1.1m at 31 July 2018 as the Group’s transformation programme continued into the current period. **Cash flow** Operating cash flow before changes in working capital increased by £4.0m to £8.8m due to the robust trading. Taking account of the expansion in working capital referred to above, there was a £5.9m outflow of cash from operating activities (2017: outflow of £7.6m). The cash impact of non-recurring items charged in the period was an outflow of £ 0.3m (2017: £1.5m) and income tax paid increased by £0.4m to £2.9m. Cash used in investing activities was £1.7m (2017: £2.1m). The current period includes the acquisition of eMenka for a net cash outflow of £0.6m, settlement of deferred consideration of £0.3m and fixed asset additions of £0.8m. The comparative period included the acquisition of PAT Management AB for £1.6m and £0.5m of fixed asset additions. Cash generated from financing activities of £17.6m was £8.4m higher than the prior period due to an increase in borrowings of £10.2m offset by lease capital repayments of £1.4m, under newly adopted IFRS 16 (2017: nil). **Dividend** The Board has declared an interim dividend of 1.750p per share (2017: 1.643p per share) representing an increase of 6.5%, which will be paid on 29 October 2018 to shareholders on the register on 5 October 2018. **Operational Review** **United Kingdom & Ireland** | | 2018   | 2017 Core | 2017 Total | Variance | | | Total | Restated* | Restated* | Core | Total | | | £m | £m | £m | % | % | | Gross profit | 21.8 | 18.0 | 18.2 | 21.3% | 20.0% | | Operating profit | 3.7 | 2.5 | 2.4 | 49.7% | 53.9% | | | | | | | | | Group and central service costs | (3.1) | (2.6) | (2.6) | 21.4% | 21.4% | | Total Operating Profit | * Core results exclude the impact of offices closed during the year ended 31 January 2018. There were no office closures in the period to 31 July 2018. Comparatives below are discussed on a core basis, comparing the businesses on a like-for-like basis. In January 2018, Group and central service costs are presented separately to show underlying trading performance in each segment. The July 2017 comparative results have been restated on the same basis. The UK and Irish businesses performed well, benefiting from the Crimson acquisition and strong organic growth. This was achieved despite a challenging market and declines reported across the recruitment sector in light of uncertainty surrounding the negotiations between the European Union and the UK. Gross profit increased by 21.3% to £21.8m (2017 Core: £18.0), up 21.9% on a constant currency basis. Excluding the Crimson business (acquired in September 2017) gross profit in the like-for-like business increased by £2.6m, 14.6%. The UK & Ireland represented 42.3% of the Group’s gross profit in the period (2017: 38.7%). Executive Search and interim revenue accounted for 8% of gross profit, Technology Recruitment 75% and Outsourcing 17% (2017: 11%, 77% and 12% respectively). Executive and permanent technology recruitment has been affected by the uncertainty in the UK market with demand in favour of temporary or contract placements and outsourcing. The number of freelancers increased over the period by 6.9% to 3,658. Operating profit of £3.7m was £1.2m (49.7%) ahead of the prior period, £0.4m of which was generated by Crimson. Demand continues to be more robust for technology recruitment outside London with the UK regions and Scotland up 18.1% (excluding Crimson) compared to London and Dublin both up 5%. The Crimson result was adversely affected by exposure to the logistics business, Palmer and Harvey entering administration. However, recent client wins have helped mitigate this negative effect. As discussed above, the adoption of IFRS 15 resulted in a reduction in reported revenue where the Group operates under the IFRS 15 definition of an agent. This affects the Group’s contract management services where revenue is now recognised as just the profit margin. There is no change to the recognition of gross profit. Contract management services account for 28.4% of freelancers in UK. Group and central service costs include Group marketing, IT and finance functions as well as listing and Board costs. The cost for the six months ended 31 July 2018 was £3.1m, an increase of 21.4% on the prior period, largely due to an increased share-based payment charge in the current period.   **Mainland Europe** | | 2018   | 2017 Core | 2017 Total | Variance | | | Total | Restated* | Restated* | Core | Total | | | £m | £m | £m | % | % | | Benelux | 10.3 | 9.1 | 9.1 | 13.7% | 13.7% | | Nordics | 7.3 | 6.8 | 6.8 | 8.4% | 8.4% | | Central Europe | 3.7 | 3.4 | 3.6 | 9.2% | 2.9% | | Gross profit | 21.4 | 19.2 | 19.4 | 11.1% | 9.9% | | | | | | | | | Benelux | 3.8 | 3.4 | 3.4 | 13.7% | 13.7% | | Nordics | 0.4 | 0.2 | 0.2 | 141.6% | 141.6% | | Central Europe | 0.5 | 0.2 | 0.1 | 119.5% | 355.7% | | Operating profit | 4.7 | 3.8 | 3.6 | 26.3% | 30.3% |   * Core results exclude the impact of offices closed during the year ended 31 January 2018. There were no office closures in the period to 31 July 2018. Comparatives below are discussed on a core basis, comparing the businesses on a like-for-like basis. In January 2018, Group and central service costs are presented separately to show underlying trading performance in each segment. The July 2017 comparative results have been restated on the same basis. **Mainland Europe** Mainland Europe accounted for 41.3% of the Group’s total gross profit (2017: 41.4%). Gross profit overall increased by 11.1% to £21.4m (2017 Core: £19.2m). On a constant currency basis, growth was 11.4%. Operating profit increased by 26.3% to £4.7m ( 2017: £3.8m), up 24.5% on a constant currency basis. **Benelux** The Group’s platform in Benelux continues to drive organic growth, with the number of freelancers up 11.1% to 5,046. Gross profit increased by 13.7% to £10.3m (11.7% on a constant currency basis). Operating profit increased to £3.8m (2017: £3.4m), also up by 13.7% mainly driven by the results from the Netherlands with Belgium flat compared to last year’s record performance. This excludes the impact of eMenka, the Group’s recent technology solutions acquisition, which contributed £0.2m of gross profit and is integrating well. The adoption of IFRS 15 led to a reduction in revenue recognised. This change affected 88.4% of freelancers in Netherlands and 50.0% in Belgium. On a like-for-like basis, total billing for the six months ended 31 July 2018 increased by 19.7% on the prior period. **Nordics** Gross profit increased by 8.4% to £7.3m (12.0% on a constant currency basis) and operating profit improved to £0.4m (2017: £0.2m). The current period benefitted from the July 2017 PAT Management acquisition in Sweden, which contributed just one month to the comparative result. Excluding PAT, gross profit growth was 3.9% and operating profit of £0.4m was up 32.3% (both on a constant currency basis). Gross profit from Sweden (excluding acquisitions) was 1.5% down on the prior year period. However, the acquisition of PAT has been very successful with a strong performance over the last twelve months, ahead of expectations. Results from the smaller businesses in Finland and Denmark were also strong, with gross profit up 60.2% and 113.9% respectively, albeit from a low base in each case. Results from Norway were below budget where the turnaround continues to be slower than expected. Nevertheless, the reduction in the cost base has improved the overall result compared to the prior year. **Central Europe** The Group’s Central Europe region performed in line with expectations, emerging from the prior year restructuring with a 9.2% increase in gross profit (9.6% on a constant currency basis). In Germany, gross profit grew to £2.4m (2017 Core: £2.1m), up 12.2% on a constant currency basis following the successful delivery of a material recruitment campaign for the European Central Bank. Operating profit was £0.3m, compared to a small loss in the prior period. Switzerland remains stable gross profit of £1.0m and the number of freelancers flat on the prior year. Investment in fee earner headcount led to a 12.5% reduction in operating profit on a constant currency basis. Poland continues to outperform, with freelancers up 48.1% and gross profit of £0.3m up 16.9% on a constant currency basis and operating profit more than doubled to £0.1m.   **Rest of World** | | 2018   | 2017 Core | 2017 Total | Variance | | | Total | Restated* | Restated* | Core | Total | | | £m | £m | £m | % | % | | USA | 5.9 | 7.6 | 7.6 | (22.4%) | (22.9%) | | Asia Pacific | 2.6 | 1.7 | 3.0 | 53.4% | (12.0%) | | Gross profit | 8.5 | 9.3 | 10.6 | (8.5%) | (19.9%) | | | | | | | | | USA | 0.4 | 0.4 | 0.3 | (5.3%) | 15.9% | | Asia Pacific | 0.9 | 0.3 | 0.4 | 150.3% | 92.8% | | Operating profit | 1.2 | 0.7 | 0.8 | 68.7% | 61.3% |   * Core results exclude the impact of offices closed during the year ended 31 January 2018. There were no office closures in the period to 31 July 2018. Comparatives below are discussed on a core basis, comparing the businesses on a like-for-like basis. In January 2018, Group and central service costs are presented separately to show underlying trading performance in each segment. The July 2017 comparative results have been restated on the same basis.   **Rest of World** Results from the rest of the world were mixed, with strong performances from the Vietnam based IT Outsourcing business set against declining revenues in the USA and Australia. **USA** IT outsourcing, recruitment solutions, permanent recruitment and executive search all declined during the period. However, the number of freelancers ended the period up 4.6%, following a significant decline in the prior year. The Executive Search market remains buoyant but overall performance fell short of the record performance in the prior year. Gross profit decreased by 22.4% to £5.9m, (down 16.8% on a constant currency basis). In the current year, 17% of gross profit related to Executive Search, with 65% Technology Recruitment and 18% Outsourcing (2017 Core: 25%, 52% and 23% respectively). Following the restructuring, profitability was stabilised. Excluding the costs of these actions a contribution of £0.4m was reported, 5.3% down on the prior year and 1.9% down on a constant currency basis. **Asia Pacific** Gross profit was £2.6m (2017 Core: £1.7m), up 61.0% on a constant currency basis, and operating profit increased to £0.9m (2017 Core: £0.3m). The Group’s focus in Asia Pacific is almost entirely IT outsourcing centred in Vietnam with sales offices in Japan, Singapore and Australia. A small but growing executive and technology recruitment business in Australia has held back overall results for the period. Further investment is planned for the second half of the year, to grow the contracting business with a break-even target next year. In Vietnam, the client chargeable headcount increased by 182 to 1,498. Software development saw strong growth due to new business in Japan and Singapore. * Core results exclude the impact of offices closed during the year ended 31 January 2018. There were no office closures in the period to 31 July 2018. Comparatives below are discussed on a core basis, comparing the businesses on a like-for-like basis. In January 2018, Group and central service costs are presented separately to show underlying trading performance in each segment. The July 2017 comparative results have been restated on the same basis. Gross profit and Operating profit increased in Technology Recruitment and IT outsourcing whilst executive search was affected by the closure of a number of offices particularly in Asia. Technology Recruitment performed strongly and IT outsourcing reported the strongest growth albeit from a relatively smaller base growing to 14.3% of the Group’s operating profits compared to 8.0% in the prior year. Outsourcing conversion ratio rose from 10.4% to 19.6% in part reflecting the Crimson acquisition but also the higher margin growth in the Japanese market. **Transaction Update** Further to the announcement on 7 August 2018, that the Board had reached agreement on the recommended cash acquisition of Harvey Nash by The Power of Talent Ltd , a newly incorporated entity indirectly owned and controlled by investment funds controlled and managed by DBAY Advisors Limited, for 130 pence in cash and one interim dividend of up to 1.75 pence for each Harvey Nash share, the scheme circular was posted to shareholders on 4 September 2018 (the “Scheme Document”). The Scheme remains subject to shareholder approval, which will be sought at the shareholders’ meeting on 2 October, sanction by the Court at the Court Hearing and the satisfaction (or, where applicable, the waiver) of the other Conditions to the Scheme (as set out in the Scheme Document). Subject to the satisfaction or, where applicable, the waiver of these conditions, the Scheme is expected to become effective in the fourth quarter of 2018. Capitalised terms used in this Transaction Update have the same meanings as set out in the Scheme Document. **Outlook** Despite a challenging market our UK business has increased revenues and delivered a robust financial performance despite declines reported across the recruitment sector in light of uncertainty surrounding the negotiations between the European Union and the UK. Harvey Nash Group plc businesses in Mainland Europe performed well whilst results from the rest of the world were mixed, with a decline in US revenue set against a strong performance from our Vietnam based IT outsourcing business. Earnings growth over the first half includes gains achieved from the transformation programme and M&A which, by their nature, represent a step-change in performance rather than a continuous progression. Overall, trading remains in line with the Board’s expectations for the full year. Share on: