SThree plc (STEM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to SThree's Q3 Trading Update of FY '26. I'm joined by our Interim CFO, Damian Fehrenberg. And today, we will give you an overview of our Q3 performance, following which we will be happy to take your questions. Our Q3 performance showed continued sequential improvement with further positive new business activity, supporting growth in our contractor order book. We are encouraged by the improving trends we're seeing in the growing numbers of countries and by the continued resilience of our contract business. While market conditions remain mixed, we're seeing encouraging signs of stabilization supported by growth in U.S.A., moderating declines in several markets and continued productivity gains across the group. Alongside these market dynamics, the actions we have taken to strengthen our operating model and sharpen our focus on higher growth opportunities are supporting our improved performance. Operating entirely on a single standardized end-to-end platform, we're now seeing sustained and visible benefits across the business, supporting greater efficiency, higher quality execution and faster delivery for our clients. I will now pass over to Damian to talk us through the financials. Damian, over to you.

Thank you, Timo. Let me start with a key takeaway from the quarter. The direction of travel continues to improve. In the last quarter itself, our net fees were down 2% year-on-year. When compared with declines of 6% in Q2 and with 8% in Q1, this is another sequential improvement. A highlight is Contract, where Q3 net fees were broadly in line with the prior year. On the Permanent side, the decline was 8%. So market conditions remain mixed, but we have now seen a consistent moderation in the rate of decline throughout the year. And improving trajectory can be seen in 3 areas: improving demand trends, productivity, broadening signs of recovery. All of those 3 moved in the right direction during the quarter. So let's start with improving demand trends. One of the most positive developments in Q3 was that Contract new business activity grew year-on-year and also improved quarter-on-quarter. Encouragingly, 6 out of 11 Contract countries delivered growth year-on-year. This includes 4 in Europe. Extension activity also remained resilient. Contract represents around 84% of group net fees. And unlike Permanent recruitment, where revenue is recognized in full when a candidate starts, Contract net fees are recognized over the life of the contract. As a result, there's always a lag between improving placement activity and the impact becoming visible in reported net fees. It also makes it more resilient in a downturn. That is why new business activity is such an important leading indicator for the group. Today's placements become tomorrow's net fees. We started to see positive signs in new placement activity towards the end of last year. In the first half of this year, activity was stable year-on-year, but improved quarter-on-quarter. That momentum has continued in Q3. This underpins our confidence in future performance. The second area is productivity. Throughout FY '26, we have remained disciplined in how we manage the business. Period-end headcount was down 7% compared with the end of the last financial year, reflecting selective hiring, careful management of natural attrition and the ongoing delivery of our cost optimization program. At the same time, we continue to see positive signs from the technology investments and the operating model changes implemented over recent years. Productivity remains one of the most important indicators we track because it tells us how efficiently the business is operating. The group's historic measure of productivity increased 9% year-on-year in Q3, maintaining the momentum delivered since the second half of last year. We are generating more net fees per employee. That remains an important source of confidence as we continue to navigate mixed market conditions. It also supports our belief that the investments we have made in technology and operational efficiency are delivering. The third area is the broadening signs of recovery we are seeing across the business as we expected. While the regional picture remains mixed, the recovery is becoming broader. The U.S.A. delivered another strong quarter with net fees growing 11% year-on-year. Demand remained healthy across a number of areas, particularly Life Sciences and Technology, supported by focused execution in attractive end markets. Engineering was broadly stable against a record prior year comparative with the underlying demand outlook remaining positive. Japan was lower in Q3 against a particularly strong prior year comparative following 5 consecutive quarters of growth. Importantly, demand indicators remain encouraging, and we continue to see significant long-term opportunity in what remains a strategically important growth market for the group. Europe remains more challenging, but the trend is improving. Germany continues to operate in a challenging environment, although the rate of decline moderated. The German Perm business has yet to reflect the broader recovery in trading momentum. The Netherlands grew against softer comparatives, while the U.K. also delivered a further moderation in its rate of decline. So the simplest way to summarize the dynamic is the U.S.A. continues to lead the recovery, whilst Europe is becoming less of a headwind. Turning to our skills verticals. After 4 years, Life Sciences returned to growth, increasing 8% year-on-year and benefiting from strong demand in the U.S.A., the group's largest life science market. Engineering declined 2% with growth in demand for roles in Germany and the Netherlands, a resilient performance in the U.S.A. against a record prior year comparative alongside declines in Japan and several smaller markets. Technology declined 6% as growth in the U.S.A., the Netherlands and several smaller European countries only partially offset softer demand in other countries, albeit with moderating rates of decline in Germany and the U.K. The underlying theme across our markets and skill sets remain unchanged. Demand is evolving. Clients remain focused on critical STEM skills and continue to invest in areas aligned with their long-term strategic priorities. The contractor order book provides further evidence of improving business momentum, increasing 5% year-on-year. The order book provides visibility equivalent of around 5 months of future net fees and reflects the improving momentum we are seeing in new business activity. Finally, turning to costs, cash and the balance sheet. Our FY '26 cost optimization program remains on track. Costs associated with delivering the program were weighted towards the first half, while the benefits are weighted towards the second half. Those savings provide additional support to performance. We also continue to maintain a robust balance sheet with net cash of GBP 36 million at the end of August. Alongside this, we have continued to execute our share buyback program with GBP 10.5 million worth of shares purchased as of yesterday. As noted in today's announcement, we now expect FY '26 profit before tax to be at least GBP 12 million, ahead of our previous guidance of around GBP 10 million. The increase primarily reflects a focus on working capital efficiencies and other one-off benefits, which are not expected to recur. So to conclude, the direction of travel continued to improve in Q3. Demand trends strengthened, productivity gains were sustained, signs of recovery continue to broaden as expected. Taken together, these indicators reinforce our confidence in the improving trajectory of the business. Thank you. I'll hand back to Timo.

Thanks, Damian. To summarize, we're seeing continued sequential improvement with positive new business activity giving us strong visibility to the growth in our contractor order book. This provides us with greater confidence in our trajectory as we look ahead. More broadly, the strategic investments and transformation initiatives we put in place years ago are creating a stronger platform for scalable growth. We believe that our differentiated platform positions us to lead through this next stage of development with the use of AI and return to growth. And finally, as Damian referenced, we now expect to deliver PBT of at least GBP 12 million in FY '26.