Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the PageGroup Q3 2018 Results. My name is Jake, and I'll be coordinating your call today. [Operator Instructions]I'll now hand you over to your host, Kelvin Stagg. And yes, Kelvin, please go ahead.

[Kelvin Stagg]

Good morning, everyone, and welcome to the PageGroup's Third Quarter 2018 Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and I have with me, Steve Ingham, our Chief Executive Officer. I will shortly take you through the headline numbers and the financial review before handing over to Steve for the regional results and update on our innovation and digital strategy and, finally, a summary. Although I won't read it through, I'd just like to make reference to the legal formalities that are covered in the cautionary statement in the appendix for this presentation and which will also be available on our website following the presentation. The group delivered gross profit of GBP 207.7 million, our second consecutive quarter of over GBP 200 million. This represented constant currency growth of 19.7%, our strongest quarterly growth rate for 7 years. This is an increase from the 16% growth achieved in the second quarter. It is our fourth consecutive quarter of double-digit growth, with Asia Pacific and the Americas delivering their best-ever quarters. Foreign exchange had a negative impact during the year -- or the quarter, which led to a lower reported gross profit growth rate of 17.2%. In monetary terms, foreign exchange movements decreased gross profit by around GBP 4 million. Michael Page grew 19%, with slightly stronger growth in Page Personnel, up 21.4%. We closed the quarter in a strong financial position with net cash of around GBP 122 million, up from GBP 87 million at the end of Q2. This was GBP 13 million higher than our net cash position at the end of September last year, mainly due to cash received as a result of employees exercising share plans, driven by the higher share price. The combined interim and special dividends of 16.83p per share, totaling GBP 53.9 million, will be paid out today. I will now provide a more detailed financial review. In the third quarter, permanent recruitment grew 21.4% in constant currencies, with temporary up 14.8%. This gave a ratio of permanent to temporary gross profit of 76:24, slightly up on the 75:25 in Q3 last year. Our higher ratio of permanent recruitment reflects the mix of geographies and salary bands in which the group operates.In Latin American and large parts of Asia, for cultural reasons, the white collar temporary recruitment market has only recently emerged. In each of these geographies, where around 90% of our gross profit is derived from permanent recruitment, we saw growth of over 50% in temporary. In other markets, the permanent to temporary mix reflects the salary band in which we operate. In Michael Page, permanent recruitment represented 85% of gross profit, but in Page Personnel, it was less at 56%. Looking now at our gross profit by the disciplines in which we operate. Our original disciplines of Accounting and Financial Services grew 19.5% to represent 36% of the group, down from 37% in quarter 3 last year. This reflects the continuing success of our disciplined diversification strategy.Our Professional Services category, representing 24% of the group, grew 22.8%, with our Legal, Secretarial and Technology disciplines all delivering strong growth.Our Technical discipline category, which represented 23% of the group, grew 23.9%. Within this, there were strong performances from Property & Construction and Engineering. Finally, our Marketing, Sales and Retail disciplines, representing 17% of the group, grew by 11% despite particularly changing conditions in Retail. Turning now to headcount. Having added 786 fee earners in 2017 and 319 in H1, we added a further 242 in the third quarter. The additions were mainly into our Large, High Potential markets as well as those where we saw the greatest growth. By region, we added 108 in EMEA, 77 in the Americas, 33 in Asia Pacific and 24 in the U.K. Operational support staff headcount increased by just 19 in the quarter to give a joiner ratio of fee earner to operational support staff of 93:7. Our overall fee earner to operational support staff headcount ratio was maintained at 78:22.At the end of June, the group had a record 6,058 fee earners and 1,660 operational support staff, giving a total headcount of 7,718.This fee earner headcount and gross profit chart illustrates both our gross profit at reported rates and also our record fee earner headcount. The last column on the right shows the quarter in constant currencies to enable comparison with Q3 2017. I will now hand you over to Steve, who will take you through the rest of the presentation.

[Stephen J. Ingham]

Thank you, Kelvin. I'll start with a brief overview of our regional performance before presenting each region in more detail. As Kelvin has said, gross profit in the third quarter grew 19.7% in constant currencies, our highest growth rate for 7 years. The group maintained the double-digit growth it achieved in the last 3 quarters and saw improving growth in all 4 of our regions. Our Large, High Potential markets, now representing 36% of the group, grew 30% collectively, with all 5 markets delivering record quarters. Our largest region, Europe, Middle East and Africa, which represented 46% of the group, grew 20.9%. While many countries in this region performed strongly, the standout performance was from Germany, up 34%, which was a third consecutive quarter of over 20% growth and another record quarter. Asia Pacific, 22% of the group, delivered growth of 27.7% with strong performances in both Asia and Australasia. The U.K., 17% of the group, where market conditions remain challenging, delivered marginal growth of 0.8%. The Americas, 15% of the group, grew 30.1%, with record quarters in both North and Latin America.Across the group, 10 countries delivered record quarters and 22 achieved growth of over 20%. Adverse foreign exchange movements impacted our reported performance by 2.5 percentage points. Now moving to each of our 4 regions and starting with the largest, Europe, Middle East and Africa, which represented 46% of group gross profit. With a headcount of over 3,000, EMEA delivered its 17th consecutive quarter of double-digit gross profit growth, up 20.9%, with 8 countries delivering growth of over 20%. Michael Page, 55% of EMEA, grew 21%, while Page Personnel grew 20%. France, our largest country in EMEA, 1/3 of the region and 15% of the group with over 700 fee earners, grew 21%. Both Page Personnel and Michael Page grew at similar rates.Germany, 8% of the group, delivered a seventh consecutive record quarter and grew 34%, its highest growth rate since 2011. In our contracting business, Michael Page Interim, now 20% of Germany, our sustained investment in fee earner headcount, up 61% year-on-year, drove another record quarter and growth of 52%. Our other businesses in Germany, Michael Page and Page Personnel, grew 32% and 27%, respectively. Benelux grew 20%. Southern Europe grew 13%; with Spain, 4% of the group, growing 8% despite challenging conditions in Catalonia, which represented around 1/3 of our Spanish business. Italy and Portugal also delivered strong performances in the quarter, up 18% and 37%, respectively. The Middle East and Africa, which represented 2% of the group, grew 19%, driven by a record performance in the U.A.E, up 43%. Reflecting these positive trading conditions, fee earner headcount grew by 108 in the quarter, an increase of 4%. Fee earners were added to most European businesses, but our largest investment was in Germany. Our Asia Pacific region, 22% of group gross profit, grew by 27.7% and delivered a record quarter. In Asia, 77% of the region and 17% of the group, we grew 32%, a sixth consecutive quarter of double-digit growth. In Greater China, the group's third largest market after the U.K. and France, representing 10% of the group, growth improved again to 31%, which was a third consecutive quarter of increasing growth. Within China, there was strong performance across most regions, including outstanding performances from our Beijing, Guangzhou, Hong Kong, Shenzhen and Taipei businesses.Southeast Asia grew 24%, driven by strong growth in Singapore, up 35%. Vietnam, our fifth and newest country in Southeast Asia, is performing to plan. Elsewhere in Southeast Asia, both Indonesia and Thailand delivered record quarters. In Japan, where we've increased fee earner headcount by 27% over the last year, our focus on both the Gaishikei and Nikkei markets continue to bring success, with growth of 38%, a record quarter. India, with limited competition and where we now have over 100 fee earners, delivered another record quarter, up 68%, more than double its Q2 growth rate. Australasia, which represented 23% of Asia Pacific and 5% of the group, grew by 16% in the quarter. Australia's growth continued to accelerate, up from 10% in Q2 to 17% in Q3, following our strategic investment in fee earners in 2017 and the opening of a new office in Canberra last year. The region added 33 fee earners in the quarter into countries where we saw the strongest growth.The U.K. saw marginal growth for the first time in 2.5 years, up 0.8% in the quarter, despite Brexit and political uncertainty continuing to impact confidence. Although market sentiment remains weak, there were areas of strong growth.In Page Personnel, which represented 26% of the U.K. and operates primarily in finance and business support, we delivered growth of 17%, which was a record quarter. Overall, Michael Page declined by 4%.Most regions performed in line with the U.K. average, with our offices in the Midlands the best performing relative to the prior year. Fee earner headcount was marginally down year-on-year. Finally, to the Americas, which represented 15% of group gross profit with a headcount of nearly 1,300. This was our fastest-growing region, up 30.1% in the quarter, its best quarterly growth rate since 2011. Both North and Latin America delivered record quarters. In North America, 9% of the group and 59% of the region, we grew 27%. The U.S., 90% of North America, grew 26% and delivered a record quarter. In the U.S., our technical disciplines were the strongest performing. Our strategy of diversification, both in terms of location and discipline, continued with particularly strong performances from our regional offices at Boston, Houston and Los Angeles. Canada delivered a record quarter with growth of 35%, its best quarterly growth rate for 3 years.Latin America, 6% of the group and 41% of the region with a headcount of over 700, grew 34%, achieving another record quarter. Brazil recorded a fourth consecutive quarter of double-digit growth and grew 20%, broadly in line with our Q3 growth rate. Mexico grew 50%, following our significant investment in fee earners, albeit with a particularly soft comparator due to the impact of the earthquake last year. The other 4 countries: Argentina, Chile, Colombia and Peru, with collective headcounts of over 300, all delivered record quarters and grew 34%. Fee earner headcount in the Americas increased by 77 in the quarter with addition spread throughout the region. Now I will provide an update on recent progress on our innovation and digital strategies. Our focus on innovation continues. To remind you, we are continuing to expand our connected customer experience using platforms and tools to identify our customers, learning as much about them as we can and engaging proactively with them to build ongoing relationships through relevant communication. Our range of technologies is not limited to our sector. We have the ambition, size and capability to work with partners on a global scale, bringing the best from outside recruitment to benefit our business. Engaging with key partners, such as LinkedIn, Salesforce and Microsoft, is key to leveraging technology across the group. We recently invited 10 of our partners to join our global leadership conference in Frankfurt to demonstrate to our senior leaders what we've delivered to date and our targets for the future. Our program for continuous customer contact has been on the Salesforce platform for over 3 years now. Getting the conversation right takes time, and we've built up the knowledge to refine and evolve the effectiveness of our campaigns. We aren't reinventing wheels either. This program is live across all of our markets worldwide, picking up best practice and applying it to the millions of interactions we have. The result is that we continue to outperform with our engagement rates 3x the current recruitment industry benchmarks. In our last trading announcement, I talked about encouraging results from our job matching tool on our U.K., Spain and India websites. Our confidence in the continually refined algorithm at the heart of this program will see expansion to a further 10 markets before the end of 2018. Results have improved from when we last presented, with candidates who have shown matched jobs being over 130% more likely to apply than those showing results via our standard keyword search. Putting personalized communications at the center of what we do across web and CRM means we are pioneering not just in recruitment but across all sectors. Powered by Thunderhead technology, now sold as Interaction Studio on Salesforce, our program gives candidates the personalized experience more commonly associated with large-scale e-commerce businesses. Each candidate receives content and jobs that are relevant to them individually. The results from our U.K., German and Japanese websites, where we're currently active, continue to impress with over 40% growth in the likelihood of candidates to sign up to e-mail job alerts. In our CRM program, highly personalized, behavior-driven campaigns are still delivering click-through rates 10x the industry average. Our innovation pipeline continues to grow in line with the changing habits and needs of our customers. We were the first recruitment company to launch a responsive website over 5 years ago to address the growing importance of mobile. In June, we took that a step further, deploying a mobile app as a pilot for our French Page Personnel business. We want to ensure the interactions between customers and ourselves are convenient wherever they exist. Using native mobile technology on the app, such as thumbprint log-on or facial recognition and push messaging, we have seen candidates spend more time and coming back more frequently. We will expand this program to more markets before the end of 2018.I look forward to highlighting more of our successes in the future as it means we'll be delivering on our promise of better understanding our customers and delivering a connected customer experience. I will now finish with a brief summary of our third quarter results. The group delivered gross profit growth of 19.7% in constant currencies, our best quarterly growth rate for 7 years. 22 countries delivered year-on-year growth of over 20%. Our Large, High Potential markets grew 30% collectively with all 5 delivering record quarters. We added 261 heads in the quarter, of which 242 were fee earners and now have a record fee earner and total headcount of 7,718. Our financial position remains strong, with net cash of around GBP 122 million, an increase of around GBP 13 million from our cash position a year ago. As previously announced, our 2018 interim and special dividends totaling GBP 53.9 million will be paid out today. Going into the fourth quarter, we're mindful of the tough comparator last year of 13.8% compared to between 8% and 9% in the first 3 quarters. We also remain mindful around any potential impact from trade tariffs as well as uncertainty currently in the market. As a result of this pickup in the group's growth rate, we now expect 2018 operating profit for the year to be marginally ahead of the consensus of current market forecast. Kelvin and I will now be happy to take any questions that you might have.

[Operator]

[Operator Instructions] We have a question from Hans Pluijgers from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

First question on the U.K. Yes, could you give, let's say, some more feeling on how do you see market progressing? Of course, we're finding some growth -- limited growth. You already indicated the market remains tough, but do you, let's say, see some -- yes, could you give maybe some feedback from what your clients are currently looking at and what their expectation, especially now we are going into the, let's say, Brexit negotiation, the final outcome? And do you expect to be somewhat more hesitant, again to expound? Secondly, looking at your drop-through rate, could you give some feeling on what you expect? Also, going into next year, do you expect to continue to have a high investment also into next year? And especially looking at maybe some countries, you have been expanding quite heavily over the last few quarters. Do you see, let's say, any limits to current growth? Looking at your premises, do you have to invest in some of your bigger premises in the coming quarters, which could maybe result in some additional investments?

[Stephen J. Ingham]

Okay. I think there's 3 or 4 questions in there, Hans. I'll try and tackle a few of them, and I'm sure Kelvin will step in. Look, I'd love to think I know exactly what Brexit is going to mean for the U.K., and I probably have the same opinion for my clients; they don't either. And as a result, it's difficult to see exactly how it will progress. But what I can say is we're a very diversified business in the U.K. We operate from the lower levels, the clerical part, qualified levels in professions through to the qualified, through to the executive search and Page Executive. And we, as a result, have areas of growth and areas of disappointment. You'd expect probably the Retail sector as being quite tough. However, fortunately, other areas are still very strong. And we've seen strong growth in our Technology discipline, Property & Construction. And actually, our traditional business of Finance & Accounting has also continued to grow, as has our relatively small business now of Financial Services. We also have done particularly well at the lower levels. So our Page Personnel businesses, as I said a minute ago, had a very strong performance of growth as well in the quarter. So I think this mixture of business that we have across different disciplines, different levels, temp and perm is giving us some protection. But exactly what happens will depend on exactly what sort of Brexit deal is done, if it is done. And I think when we get clarity, that's when the clarity will probably reflect on the actions of our candidates and our clients, but it's way too early for me to be able to predict that. We are going to continue to invest in some of these larger countries. We feel that it's a good thing to do. We started investing into these Large, High Potential markets as long ago as 5, 6 years ago, and they were a relatively small proportion of the overall group. They're now 37% of the group. Will they always be growing at 30%? Of course, not. The reality is economies will change, and they will be influenced by things well outside of our control. But the size of these economies is huge and the opportunity there for long term is huge, particularly because many of these high potential markets, such as Southeast Asia, Latin America, China, we have very limited competition. And so we believe there's a real opportunity having cracked the code of how to do recruitment in these markets and how to manage these businesses locally with local people, retain them, keep them and grow them into this management of the future. We believe that we've got a gain ahead of many of our competitors and, therefore, a real opportunity to take ground and create big businesses for the future of the group. And so we will continue to invest in those markets as we've done so far. I know Kelvin is itching to say something, so I'll just finally finish by saying that, of course, we continue to invest where we see growth as well as those high potential markets. Of course, we will outgrow some of the offices that we're in, but this is a normal course of business. We've been outgrowing offices for 35 years. We've outgrown a couple of offices, for example, in our fifth biggest city, which is actually Milan. And we've already signed and leased and are currently doing the fit-out of a large office there, which we move into at the end of this year and the beginning of next. That is the natural course of business. I think last year, we had an unusually high number of large businesses that -- large offices that we were moving into, Shanghai, New York and so on, Paris. We've done some of the larger ones, and I don't think going into next year, Milan aside, there are any really significant big ones that will make any key differences to our overall results. Kelvin, anything you want to say on drop-through?

[Kelvin Stagg]

Sure. Yes, I think our drop-through rate this year was something of the order of about 23% or is likely to be somewhere around there. I think the next year, it will be a driver, largely by our growth rate. So if we carry on with these sort of growth rates, we've put in headcount investment so far this year of 10.2%, I think we would probably have somewhere around that level next year if our growth rate stood here or in the mid-teens as they're likely to end up for this year. So as we continue to see things, particularly in the Large, High Potential markets, as Steve noted, that's likely where you're going to see the headcount go in, or actually what Steve said around large offices in Singapore, Hong Kong, Shanghai all very recently. The larger offices in the larger cities we've got, we've all done within the last few years. So actually, I suspect it will be slightly lower in terms of capital investment into those offices. But obviously, we leave for our office[Audio Gap] With higher occupation rates in most of our offices across the group. And that, therefore, should breathe through into better drop-through rates and better conversion rates going forward.

[Operator]

We have a question from [ Taarak Dadya ] from HSBC.

[Unknown Analyst]

Firstly, you seem likely to achieve an expansion in your conversion rate. And should this growth be sustained, and how much further could this rise? Secondly, which countries are achieving over a 25% conversion rate? And also, which countries have less than a 25% conversion rate? And on those countries with less than a 25% conversion rate, how fast can they improve?

[Stephen J. Ingham]

I'll answer the second question while Kelvin thinks about the first one. I mean, look, we're not going to go country by country until we've got audited reports. But just to say that, for example, France, our second largest market, has a conversion rate comfortably over 25%, as do several others of the larger size. And frankly, they -- many others would as well if we weren't investing as heavily as we are in headcount as we expand and grow. All of them have a very similar structural ability to produce a conversion rate of 25% plus. So they're either not like the U.K. because we're not growing fast enough or they're not because of investment -- or they are like France, Spain and several others, Belgium, I mean, I could go on, but I'm not going to list 37 countries for you. But the reality is that, and I think this is the proof, that even though times have changed and the market dynamics have changed over the last few decades, the reality is our ability to still strike 25% plus in conversion rates is evidenced by our second largest market, France, a mature market where we are achieving over 25% today.

[Kelvin Stagg]

Coming back to conversion, I'd probably just point you back towards the slide that we had at the end of the investor afternoon deck that we presented back in May. That had a conversion bridge that steps up from the 16.6% conversion we delivered last year to a 25% conversion target, which we have in place for the group. There were a number of items within that. The one probably most simple to deliver next year is purely that we've been spending about GBP 6 million a year on transformation projects, the likes of shared service centers, transition to a new target operating model in IT, spending on Global Finance System, over the last 4 years every year. And actually, the end of those large expenditures was this year. So next year, you should see an improvement of GBP 6 million or 0.8% in conversion. Stepping forward, there are a number of other items, the ending of our amortization on our PRS, the Page Recruitment System, that falls away. That's another 0.8%. As we transition into our new business technology structure, which is largely about shutting our data centers and transitioning into the cloud, about operating through large global systems, we see that delivering another 1.4% of conversion rate improvement. Our shared service centers as we leverage, and you will have noticed in this statement, we actually stated that our -- the ratio of fee earners to operational support staff was 78:22. We are very close to 79:21 if that stretches out. We also had additions in the year -- quarter, sorry, of 93:7. So over time and as we build up a large number of fee earners towards our target of 8,200 fee earners, we believe that, that will improve conversion by another 2.4%. That takes us to 23% on conversion. We have appointed, as I think we also noted at the investor afternoon and at our interim results that we've appointed a CRO. His focus is on improving productivity for the group. And we set a target there of 5% improvement, which are bonuses, should deliver a 3% improvement to conversion and deliver us to 25%. So a fairly long answer. There's a video on our website of the investor afternoon. It's probably the best place to start with. Right at the end of that video, I do take you through the conversion bridge.

[Operator]

We have a question from Andy Grobler from Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Just 3 from me, if I may. China had a very good quarter. I know this is a bit crystal ball gazing, but given some of the uncertainties around the Chinese market and trade disputes and so forth, what are you thinking over the next 12 months? What are your clients doing? I'm talking about -- and can -- does it matter given how relatively immature that market is? That would be one. Two, just on engagement rates. You mentioned that engagement rates were 3x the industry benchmark. How do you measure that, if I may ask? And then lastly, on IFRS 16, is there any update on the impact of that into next year, particularly I guess given some of the new office openings and any impact of the phasing of those leases?

[Stephen J. Ingham]

I'll answer the first 2 and then Kelvin can enjoy the moment and answer IFRS. China, first of all, look, what are our clients saying? They're saying they're desperate to recruit people. And obviously, the businesses have been improving on the back of that. I have to say, structurally, the opportunity is huge, and we are very, very small. And we have very little competition in most of the cities that we operate. So I think our scope for growth is enormous, irrespective of certain uncertainties that have crept into the marketplace. Again, it's a bit like Brexit. We can't look into a crystal ball and predict the future. We can predict that China is going to be a big economy, whatever. And there's a local Chinese market and there's an international Chinese market, and the local Chinese market, I think, will remain pretty robust. We've seen an increasing share of our business coming from the local Chinese market, which I think as well structurally has changed over the last 5 years. It is much more technical. There are companies there that want more sophisticated candidates, more qualified candidates, and they're struggling to recruit them, particularly to recruit them in the cities that they're based. And as a result, they've got to look further afield, not just in the rest of China, but also outside of China, and they're finding that difficult. The Chinese are moving jobs more often. They're catching up with the rest of the world in terms of how people grow careers and change jobs more frequently. We've even started to see at the very, very beginning an emergence and certainly an appetite for temping and contracting. So lots of opportunity. Some of our biggest clients are in cities where we almost have no competition, and they are looking for very technically qualified candidates, and they're very, very difficult to find. And as a result, I think this plays to our strength. So are they talking at the moment about uncertainties? Are we seeing nervousness? Are we seeing jobs cancel, anything like that? No, we're not. We've just come out of Golden Week. So as you'll know it, China closes down pretty well for a week over that period. So it is a slightly difficult time to be asking us a question, but I've spoken to the management in the last day or so, and our KPIs look good in October. And we're delighted with the sort of returns we're getting there over the investment we've been making for some time, and that's great. And although I didn't mention them all, frankly, we're growing strongly in all offices, including our newest, Chengdu, in the West. So that's good to see. In terms of our engagement rate, how do we know this? It's measured by the actual applications that we use. So our partners, of which we've got multiple partners, I've mentioned a few, such as like -- such as Thunderhead, Cultrix, many others, they give us this data and measure it for us in the same way LinkedIn give us data in terms of how we're competing against some of the other planners that they have. And they give that to the broader industry, so we can see how we're tracking. So it's not data that we're drumming up. It is data that is provided by the partners that we're working with.

[Kelvin Stagg]

So on to your final question on IFRS and the lease accounting standards coming in next year. I mean, it is an unusual standard and I think somewhat of a controversial standard. And particularly for a business like ours, where we lease all of our buildings and where we run net cash, it will have a slightly unmuted effect on how we present our numbers going forward. Having said all of that, it doesn't have a huge impact at an EBIT level. So at an EBITDA level, we've modeled that it probably increases EBITDA by about GBP 25 million. So that's the lease cost charge coming out above the line and going in as a depreciation charge essentially. If you actually then look at an EBIT level, that really is only a matter of the distortion between the flat cash flow that you pay on an operating lease as opposed to the interest charge, which clearly on a -- well, it's the same that it would be on your own mortgage. You pay mainly interest at the beginning of the mortgage and you pay mainly capital back at the end of the mortgage. It means that actually, in the early years, we'll end up with a benefit of about GBP 1 million in the EBIT line, so nothing hugely material. It does obviously mean that whilst we run our net cash on the balance sheet, we will show debt on the balance sheet, and that probably needs a little bit of help through our communications to ensure that people understand the values of lease-related debt as opposed to real financial debt.

[Andrew Charles Grobler, Analyst]

Okay. And will that -- when will you start reporting under IFRS 16?

[Kelvin Stagg]

From the beginning...

[Andrew Charles Grobler, Analyst]

Through the year or...

[Kelvin Stagg]

Yes, through the year. So we'll start in January. We'll obviously first do that in the interims. For a bit more detail, we're actually intending to use the modified IMB approach, and we'll use some of -- each on our larger leases.

[Operator]

We have a question from Steve Woolf from Numis Securities.

[Steven John Woolf, Analyst]

Just on cash that is under the current system. Just sort of focusing on the improvement that you've got during this period, is there anything behind the improvement other than you sort of want to draw out in the sort of -- particularly the cash collections from a regional perspective? Or is that just a continuation of focus on DSOs, you just simply -- yes, since the half year?

[Kelvin Stagg]

The big variance in our cash balance was employees exercising share options. I think we've obviously, relatively recently, seen record highs in our share price, GBP 6.20, GBP 6.30, around that sort of level, and we actually received GBP 24 million as a result of employees exercising options. And therefore, that's probably the big distortion. Over and above last year, that's probably GBP 15 million more than last year and, therefore, probably also GBP 15 million more than most people are modeling and GBP 15 million more than we likely to have expected to have at the end of the year. So in recent years, we've ended the year somewhere around GBP 95 million. We tend to enter there because we have a pretty large payment somewhere just below GBP 30 million in terms of Q4 bonuses and annual bonuses to employees that goes out in January. And that brings us down nearer our sort of GBP 50 million, GBP 60 million net cash balance that we normally hold. We will be at the half this year, as I said, that came in after we'd looked at and decided what to pay on those special dividends. Outside of that, DSO hasn't really moved massively. We actually saw a slight deterioration in our DSO as we transitioned into our new finance system. That's since reversed, so that was a fairly short-term thing. The cash outflow that we had, working capital that was in the first half, which was quite sizable, it mainly related to the investment we've made in interim and temp around the world. Actually, some of that came back in the quarter a bit. So we may end the year with a slightly lower working capital outflow that we did after the first half, but it's not really DSO related. It's more about investments in temp.

[Operator]

We have a question from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Research Associate]

I just have one on Australia actually, where you have seen some nice pickup in the growth and the market where you have invested. But it's also the market where there is some political uncertainty going forward. So just how should we think about your investment going forward there? And have you seen any impact from that on your growth already or -- just on that?

[Stephen J. Ingham]

The answer is no. In fact, I spoke to the guy who heads up the office yesterday. We finished the quarter well and we start the Q4 well. So we -- whilst the group has a very strong or tough comparator year-on-year in Q4, Australia doesn't. And we're expecting reasonable growth going in. Our KPIs point in that direction. And I would also say that the majority of the investment that we need to make in headcount and the office in Canberra has largely been made. We're performing well in parts of Australia, particularly in Victoria and Brisbane. And we can, frankly, improve our performance in New South Wales, Western Australia, and we're hoping to do that. And we think we put the things in place to achieve what we need to achieve as well. So we're quite optimistic going forward. Yes, there is some political uncertainty, but these days, where isn't there? And -- but at the moment, our KPIs, which are the strongest indicator of direction, still remain favorable on there in 5 weeks' time.

[Operator]

We have a question from Paul Checketts from Barclays.

[Paul Daniel Alasdair Checketts, Director]

I've got 3 questions as well, please. The first is, I'm wondering if you've seen any improvement in either wage inflation or your own pricing since we last spoke, given the markets are so strong. The second one, I was hoping you could give us the number for year-on-year headcount increase for the Large, High Potential markets if you've got it. And then the last is regarding France and Germany, which clearly you've grown very strongly at the moment. But in the investment community more broadly, people are worrying about economic growth slowing. And the generalist businesses, which are very different, but they're saying conditions become a little more challenging. From your numbers, I would presume you're not seeing any signs of slowdown or concern at the moment, but can you remind us how you track trends for any early signs of a change?

[Stephen J. Ingham]

Sure. I mean, wage inflation and fee rates, yes is the answer. I mean, we definitely have candidate shortages in many of the markets that we operate. I guess some people would interpret that as a problem; we don't. That's good news because, therefore, the justification for a client to outsource recruitment to us is more likely. So the bigger influence, if you like, in candidate shortages is that clients fail to be able to find the talent they need and, therefore, they have to go to a third party like us to try to identify that talent. Naturally, of course, in order to land the talent, they may offer slightly more than they anticipated, and you see that coming through as wage inflation. And I guess the best time to ask us will be after January when, clearly, those that aren't moving jobs get salary increases and so on typically. But we are starting to see modest wage inflation in quite a few of our markets as we are starting to see in 1 or 2 markets some hardening in fees. But I have to say, that doesn't happen overnight. You see a very, very gradual improvement in our fee rate and it's the sort of -- you need to look 12 months rather than 3 months to see that improvement. They're just getting the answer in terms of year-on-year high potential markets headcount growth. In terms of France and Germany, look, yes, we're mindful of what some of the staffers have said. We're mindful of headlines in newspapers, but we can only really make decisions based on what we're seeing in our own business and the KPIs that we're seeing. You've seen France's growth rate, and that's off a very big number that we grew, now 21%. And you've seen the improvement, the steady improvement we've seen in Germany. That trend hasn't so far shown any signs of changing. We're mindful of competitors and staffers and so forth, but at the moment, it appears to be more a blue collar issue than it does a white collar issue. And I think there are, and I think I've said there are, other factors other than just the markets themselves causing them issues rather than just the markets. And at the moment, the markets have shown us no signs of slowing or any issues. We remain candidate short in both markets, and they remain strong. And I've been to both markets recently and so have a number of our senior managers and -- because we had our management conference in Germany. And our senior management went to each of the offices, and I have to say it's very positive, which is not surprising with the level of growth we've seen in Germany over the last quarter. So no signs yet. In terms of year-on-year headcount growth, we're not quite there. But needless to say, we have put in the last year a lot of heads into all of the markets, all 5 of them, particularly into Germany, which I mentioned particularly in the Page Interim, where we've been investing in the contracts business. I would also say, just drifting on while I give more time to make their calculation here, I would say in Germany, we haven't just been investing in our contracting business. We've also been investing in Page Personnel, which has a large proportion of its business in temp. So actually, if you look at the total investment in Germany, it's not just been into contracting. It's been temporary as well, which is quite a large proportion of our total German business. Paul, we'll have to get back to you on the year-on-year...

[Paul Daniel Alasdair Checketts, Director]

That's fine. That's fine.

[Operator]

We have a question from Kean Marden from Jefferies.

[Kean Marden, Equity Analyst]

Two quick ones. First one, Kelvin, if I may. Just for modeling purposes, Kelvin, what should we assume for the cash from employee share options for the full year? So is it just the GBP 19 million in H1 plus the GBP 24 million for Q3?

[Kelvin Stagg]

No. No, it's GBP 24 million for the year-to-date. So GBP 24 million year-to-date, it depends on where the share price goes, Kean. So if it stays where it is, we've recently been at GBP 6.20, I suspect there won't be many more exercises. If it goes back above that, we might be a few more. I think, actually, most of the people who either had to do things this year because of their 10-year plans and, therefore, they were either expiring this year or next year, they've probably done them. So if you went to GBP 25 million, that would probably be close enough.

[Kean Marden, Equity Analyst]

Okay, understood. And then secondly, just coming back on your drop-through comments earlier on for fiscal '19. So should I presume that the comments you made about a sort of another year of circa 23% drop-through, if net fee growth remains in the mid-teens, that will struck through the impact from costs dropping out of the business because that's sort of GBP 6 million to GBP 8 million. The drop side would obviously add about sort of 9, 10 percentage points to that. So we should be getting to a number that's more sort of the low to mid-30s instead?

[Kelvin Stagg]

I think that's right. Correct.

[Operator]

We have a question from Rahim Karim from Liberum.

[Rahim Nizar Karim, Research Analyst]

Just a question on the trends in Finance & Accounting. Obviously, like-for-like seems to be ticking up quite nicely over the course of the year. Can you give us any more color in terms of what's driven that? And in particular, for me, add some regional perspective, that would be helpful.

[Stephen J. Ingham]

Well, first of all, to explain, I'm thinking why have you asked the question. It's not in Financial Services, specifically. When we say Finance & Accounting, we're talking largely about accountants into broader industry, industry and commerce. I have to say, in terms of where we've grown strongly, it's been a global performance, actually including the U.K., where we've got positive growth in Finance & Accounting in the U.K. and elsewhere around the world. So there are no real sort of standout trends where a particular region or a particular country has outgunned the other. When we're growing at 9%, 20% across the group, then typically, you'd see our largest category of Finance & Accounting growing at similar. So there's no real exception.

[Operator]

We currently have no further questions. Back to you, Kelvin.

[Stephen J. Ingham]

Excellent. Well, as there are no more questions, thank you all for joining us this morning. Our next update to the market will be our fourth quarter trading update on the 14th of January.

[Kelvin Stagg]

Paul, just right at the last minute, the answer to your question, total fee earners in Large, High Potential markets, actually, we added 439 year-on-year. They were up 24%. And thank you all for the call.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.