Harvey Nash Group Regulatory News (HVN)

25 September 2018

Harvey Nash Group plc ("Harvey Nash" or "Group")

Unaudited Interim Results for the six months ended 31 July 2018

Harvey Nash Group plc (AIM: HVN), the global technology recruitment and outsourcing group announces 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

^ 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.

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."

 Enquiries:

Harvey Nash Albert Ellis (CEO) and Mark Garratt (CFO) 020 7333 2635

Panmure Gordon (Nominated Adviser & Broker) Ben Thorne, Erik Anderson, Andrew Potts 020 7886 2500

Hudson Sandler Michael Sandler, Hattie O'Reilly 020 7796 4133

Notes to editors

The Harvey Nash Group is a global technology recruitment and IT outsourcing business, with a focus on technology and digital recruitment. Our unique portfolio of services, executive search, technology recruitment and IT outsourcing, enables us to engage with clients at every stage of the business cycle. Our relationship-based model underpins the delivery of resilient financial returns and supports sustainable returns to shareholders.

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

* 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

* 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

* 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.

Service Line

* 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.

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.

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.

Consolidated Income Statement

(1) 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. Both comparative revenue figures have been restated. There is no impact on gross profit. See note 12 for further details.

Consolidated Statement of Comprehensive Income

(1) These differences may be recycled into the Consolidated Income Statement if specific conditions are met.

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

Notes to the Consolidated Financial Statements

1. General information

Harvey Nash Group plc ('the Company') and its subsidiaries (together 'the Group') is a leading provider of specialist recruitment and outsourcing solutions. The Group has offices in United Kingdom, Europe, United States and Asia Pacific.

The Company is a public listed company incorporated in the United Kingdom. Its registered address is 110 Bishopsgate, London, EC2N 4AY and its listing is on the London Stock Exchange (AIM).

2. Accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied across the Group in both periods presented.

Basis of preparation

This condensed consolidated interim financial information for the six months ended 31 July 2017 has been prepared in accordance with International Accounting Standards ('IAS') 34 'Interim financial reporting' and the disclosure and transparency directives of the FCA. It does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006 as it does not include all the information required for full statutory accounts. The interim financial statements should be read in conjunction with the statutory accounts for the year ended 31 January 2018, which were prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and were approved by the Board of Directors on 26 April 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. This condensed consolidated interim financial information has not been reviewed or audited by the Group's auditor Deloitte LLP.

Principal risks and uncertainties

Principal risks and uncertainties affecting the business activities of the Group are the same as those detailed within the Strategic Report on pages 20 to 22 of the Group's 2018 Annual report.

Significant accounting policies

Except as noted below, the same accounting policies, methods of computation and presentation have been applied as those set out in the Harvey Nash Group plc Annual Report for the year ended 31 January 2018. The accounting policies are drawn up in accordance with IAS and IFRS as endorsed by the European Union.

New and amended standards adopted by the Group

In the current period, the Group adopted IFRS 9 'Financial Instruments', IFRS 15 'Revenue from contracts with customers' and IFRS 16 'Leases'. Note 12 provides analysis of the impact that the adoption of these new standards has had on the results of the Group for the period to 31 July 2018.

There are no other new standards or IFRIC interpretations effective during the period that significantly affect this interim financial information.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 January 2018.

2. Accounting policies (continued)

Going concern basis

The Group meets its day-to-day working capital requirements through its bank facilities. The current economic conditions continue to create uncertainty particularly over (a) the level of demand for the Group's services; and (b) the availability of bank finance for the foreseeable future. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated interim financial statements.

3. Segment information

IFRS 8 'Operating Segments' requires disclosure of information about the Group's operating segments. It requires a management approach under which segment information is presented on a similar basis to that used for internal reporting purposes. The chief operating decision maker in the business has been identified as the Group Board. Services provided by each reportable segment are permanent recruitment, contracting and outsourcing.

The Group Board analyses segmental information as follows:

Gross profit

3. Segment information (continued)

Operating profit

*In the January 2018 Annual Report, Group and central service costs were restated to reflect the management information provided to the chief operating decision maker. The July 2017 results have been restated on the same basis.

4. Net finance costs

5. Tax

Taxation for the six-month period is charged at 24.2% (31 July 2017: 26.5%), representing the best estimate of the average annual effective tax rate expected for the full year, applied to the pre-tax income of the six-month period. The effective tax rate on profit before non-recurring items is 24.4% (2017: 22.9%).

6. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding those held in the employee benefit trust, which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares.

7. Analysis of changes in net funds

Net funds comprise cash and cash equivalents less overdraft and utilisation of the Group's invoice discounting facility.

8. Dividends

The Group paid a final dividend of 2.643p per share on 6 July 2018 to shareholders on the register as at 15 June 2018 (2017: 2.525p per share).

9. Non-recurring items

In the prior year, the Executive Directors implemented a transformation programme, closing underperforming offices, streamlining the business and reducing central overheads. The current year cost comprises £0.2m of Group and central service restructuring costs and a £0.4m cost in the US business for restructuring which includes an estimate of costs related to litigation.

The prior year cost of £6.0m comprised the following:

· Offices were closed in Hong Kong, Denver, Geneva and Cork with executive search businesses in Japan and Singapore closed at a total cost of £1.8m.

· Businesses were also streamlined in UK, Nordics and Central Europe at a cost of £0.8m, £0.7m and £1.3m respectively.

· Restructure and simplification of Group and central services totalled £1.0m and recruitment of a new CFO and consequent overlapping costs totalled £0.4m.

The Group's policy is to recognise acquisition-related costs as non-recurring items in profit or loss as incurred. The current period charge relates to the acquisition of eMenka NV.

In the current period a number of new accounting standards were adopted which each required detailed analysis. Given the material nature of the resulting adjustments to the Group's policies and financial statements, third party advisers were engaged, the cost of which is considered to be non-recurring in nature.

On 28 July 2017, the Group's shares were admitted to AIM and its listing on the London Stock Exchange's Main Market was cancelled. The cost of this listing was £0.2m.

In the prior year, the accounting estimate for aged accrued liabilities in Netherlands was re-assessed following a detailed review resulting in a release of aged accrued liabilities.

The final deferred consideration payable for the Beaumont KK acquisition in Japan exceeded initial estimates and the £0.2m shortfall was booked as a non-recurring item.

As a result of the decision to close the Group's executive search business in Japan, the goodwill recognised on the acquisition of Beaumont KK was fully impaired, leading to a non-recurring cost of £0.8m.

10. Business combinations

On 14 May 2018, the Group acquired 100% of the share capital of eMenka NV, a recruitment business in Antwerp, Belgium, for an initial cash consideration of €1.0m (£880k) and deferred cash consideration of up to €1.0m (£880k). The contingent consideration arrangements require the Group to pay the selling company, eMenka NV, if the average earn-out period EBIT is a positive amount, the additional consideration shall be equal to 37.5% to be capped at an aggregate amount of €1.0m.

The provisional fair value of the net assets acquired is approximately equal to the acquiree's carrying amount. The excess of consideration above net asset values has been attributed in full to goodwill as no other intangible assets have been identified.

Details of the net assets acquired and the goodwill recognised were as follows:

The assets and liabilities arising at the date of acquisition were as follows:

The outflow of cash to acquire the business, net of cash acquired, was:

11. Loan receivable

On 6 December 2015, the Group entered into a sale agreement to dispose of the German telecommunications outsourcing business Nash Technologies GmbH and its two fully owned subsidiaries, Nash Technologies Stuttgart GmbH and Nash Innovations GmbH ("NT Group"). On the disposal date, full control passed to the acquirer.

The Group has a £2.0m (€2.3m) loan receivable from NT Group included within non-current assets which is due to mature on 30 June 2025. The rate of interest is 3-month EURIBOR plus 1.5% and the interest received in the period amounted to £12,000 (31 July 2017: £6,000).

12. Adoption of new accounting standards

IFRS 9 'Financial Instruments'

The Group has applied IFRS 9 from 1 February 2018, taking the 'fully prospective' transition approach. Senior management have reviewed and assessed the Group's financial assets at 31 July 2018 and concluded that the application of IFRS 9 has had no material impact on the Group's financial statements.

Impairment of financial assets

IFRS 9 requires an expected credit loss model, rather than an incurred credit loss model to be applied. This requires the assessment of the expected credit loss on each class of financial asset at each reporting date. This assessment should take into consideration any changes in credit risk since the initial recognition of the financial asset. The main classes of financial asset held by the Group are trade receivables, which are short-term in nature.

At 31 July 2018, senior management have reviewed and assessed existing financial assets using reasonable and supportable information to determine credit risk and concluded that there is no material financial impact on the Group.

Classification and measurement of financial liabilities

The Group does not hold any financial liabilities which are held at fair value through profit and loss, and as such, the application of IFRS 9 has had no impact on the classification and measurement of the Group's financial liabilities which are held at amortised cost.

IFRS 15 'Revenue from Contracts with Customers'

The Group has adopted IFRS 15 from 1 February 2018 taking a full retrospective approach. IFRS 15 introduces a five-step approach to measuring and recognising revenue from contracts and replaces IAS 18 'Revenue' and related interpretations. Under IFRS 15, revenue is recognised when a customer obtains control of the goods or services.

The Group has performed a detailed analysis of the impact of the transition to IFRS 15, including a review of contracts, to determine the timing of the transfer of control in each of its service lines.

Principal versus agent considerations

The Group derives a significant proportion of its revenue from the provision of temporary workers to clients. Whether the full invoiced amount is recognised gross (inclusive of the costs of the temporary workers), or net (exclusive of costs of the workers) depends on whether the Group acts as principal or agent. IFRS 15 moves away from the 'risks and rewards' concept of revenue recognition used by IAS 18 'Revenue' to a concept of 'transfer of control'. Its core principle is whether the good or service is controlled by the entity prior to delivery to the client. For the purposes of determining whether an entity acts as an agent or principal, IFRS 15 provides indicators of where control may exist. Significantly, these indicators do not include credit risk as an indicator that an entity is acting as a principal.

A summary of the changes which have impacted the Group upon transition to IFRS 15 is shown below.

Temporary contractors

Where Harvey Nash has the primary responsibility to deliver and fulfil the promise to provide contractors to the client, this indicates that the entity controls the service before it is transferred to the client. This includes the acceptability of the service meeting the client's specifications. The Group is acting as principal. Revenue recognised is the gross amount billed to the client for the services of the temporary workers. This includes revenues from the placement of temporary contractors where Harvey Nash has a contract management services contract with the client. Revenue recognition therefore remains consistent with the current policy under IAS 18.

Contract management services - temporary contractors arranged by third party agencies

Harvey Nash acts as an agent when its primary responsibility is to provide administrative support to clients, acting as an intermediary between two parties. Harvey Nash does not control the service provided to the client as the primary responsibility to deliver the services to the client sits with a third party agency. Revenue is recognised as the commission only (exclusive of costs of the worker) and not gross as under IAS 18. There is no impact on cash flow or on gross profit, as there is an equal and opposite decrease to cost of sales. There is also no net impact on retained earnings in prior years, as the timing of revenue recognition has not changed.

12. Adoption of new accounting standards (continued)

Revenue earned on a retained basis

Revenue for permanent executive recruitment and assignment fees is based on a percentage of a candidate's remuneration package, recognised over time as the services are provided. Under IAS 18, an up-front retainer fee was recognised. Under IFRS 15 recruitment and assignment fees are considered as one performance obligation, delivered over time. When revenue is recognised over time, it is necessary to determine the entity's performance towards satisfaction of the performance obligation. Revenue can therefore not be recognised until the entity has performed a service that will take it closer to fulfilling the performance obligation. This resulted in the deferral of revenue to later stages of the contract. The Group has quantified the potential impact of this adjustment and concluded that it is immaterial.

Commissions

Under IAS 18, incremental costs incurred in obtaining a contract (such as sales commissions) are expensed as incurred. However, under IFRS 15, these costs are recognised as an asset and amortised over the life of the contract if they are expected to be recovered from the client. Given the short-term nature of the Group's contracts, the Group elected to take the practical expedient offered under IFRS 15 for contracts less than 12 months, allowing commissions to be expensed as incurred.

Impact on Income Statement following adoption of IFRS 15

The tables below show the impact on adoption of IFRS 15 as discussed above.

IFRS 16 'Leases'

The Group has elected to early adopt IFRS 16 'Leases' and it has been applied from 1 February 2018, using the modified retrospective approach, under which the right-of use asset is measured at the same amount as lease liability on the date of initial application (1 February 2018), adjusted only for any prepaid or accrued lease payments recognised in the 31 January 2018 balance sheet under IAS 17 'Leases'. Comparative information has therefore not been restated, and is reported under IAS 17 'Leases'.

Right-of-use assets are initially measured at cost, comprising the initial measurement of the lease liability, plus any initial direct costs and an estimate of asset retirement obligations, less any lease incentives. Subsequently, right-of-use assets are measured at cost, less any accumulated depreciation and any accumulated impairment losses, and are adjusted for certain remeasurements of the lease liability. Depreciation is calculated on a straight-line basis over the length of the lease.

12. Adoption of new accounting standards (continued)

The lease liability is initially measured at the present value of lease payments, discounted using the Group's incremental borrowing rate. The lease term comprises the non-cancellable period of the contract, together with periods covered by an option to extend the lease where the Group is reasonably certain to exercise that option. Subsequently the lease liability is measured by increasing the carrying amount to reflect interest on the lease liability, and reducing it by the lease payments made. The lease liability is remeasured when the Group changes its assessment of whether it will exercise an extension or termination option.

The Group has elected to apply exemptions for short-term leases and leases for which the underlying asset is of low value. For these leases the lease payments are charged to the income statement on a straight-line basis over the term of the relevant lease.

Right-of-use assets are presented within non-current assets on the face of the Consolidated Balance Sheet and lease liabilities are shown separately on the Consolidated Balance Sheet in current liabilities and non-current liabilities.

Statement of Directors' Responsibilities

The Directors confirm that, to the best of their knowledge, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union. The interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related-party transactions in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report.

The Directors of Harvey Nash Group plc are listed in the Harvey Nash Group plc Annual Report for 31 January 2018. A list of current directors is maintained on the Harvey Nash Group plc website: www.harveynash.com

The Directors are also responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

By order of the Board.

Mark Jonathan Garratt

Chief Financial Officer

24 September 2018

Cautionary statement

This Half Year Report (the "Report") has been prepared in accordance with the Disclosure Rules and Transparency Rules of the UK Financial Conduct Authority and is not audited. No representation or warranty, express or implied, is or will be made in relation to the accuracy, fairness or completeness of the information or opinions contained in this Report. Statements in this Report reflect the knowledge and information available at the time of its preparation. Certain statements included or incorporated by reference within this Report may constitute "forward-looking statements" in respect of the Group's operations, performance, prospects and/or financial condition. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance shall not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities shall not be taken as a representation that such trends or activities will continue in the future. The information contained in this Report is subject to change without notice and no responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this Report shall be construed as a profit forecast. This Report does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase or subscribe for any shares in the Company, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares of the Company or any invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000. Past performance cannot be relied upon as a guide to future performance.