SThree plc (STEM) Earnings Call Transcript & Summary

Welcome to the SThree 2021 Half Year Trading Update Webinar. [Operator Instructions] There's a PDF of the slides on the right-hand side, and this webinar is being recorded. I now hand over to Mark Dorman, CEO; and Alex Smith, CFO. Mark, over to you.

Thank you, [ Tamsin ], and welcome, everyone, to the SThree Half Year 2021 Trading Update. We've a bit to get through, so we'll get on to that as quickly as possible, but I thought it'd be good just to lay out what we'll be doing this morning. And as you all have seen from our announcement earlier this morning, I'm very pleased and excited to say that we've announced the appointment of Andrew Beach, who will be our new CFO, who will be taking over from Alex Smith. Big shoes to fill from Alex, who's been our [indiscernible] CFO for the last 13 years, a terrific career. And again, I just want to say thank you to Alex for all his support for SThree and his support to me personally in joining SThree. And why don't -- and we've got a bit of good news to go through on our trading update, and it'd be great for Alex to get there. So we're going to go through the performance update and then we'll do a summary, and I'm sure we'll take some of your questions. So Alex, over to you for the numbers.

Okay. Thank you, Mark. So in Q2, we saw a strong performance, ahead of expectations, driving strong growth, both year-on-year, and really importantly, versus 2019. And you can see that Q2 net fees were up 8% versus 2019. H1 overall, up 3% versus 2019. We upgraded our profit guidance for the year at our unscheduled trading update on the 3rd of June. Q2 net fees were up 22% year-on-year; and on an adjusted -- working day adjusted basis, up 21%. We had 1 less working day in Q1, 1 more in Q2. So overall in the half, working days are flat year-on-year. So overall group net fees for the half, up 10% year-on-year. Strong performances, particularly strong in DACH, the U.S. and Netherlands. Life Sciences and Tech up significantly across the group. The contractor order book that the value of contracts written up to their contractual end dates up 33% year-on-year at the end of the half, that compares to up 1% at the end of Q1. And on a 2-year view, the contractor order book up 13% versus Q2 2019. So moving on to the next slide, thank you. So in terms of the performance by region, DACH, as I mentioned, strong performance. So net fees in the half, up 16%; in the quarter, up 28%, driven by Life Sciences and Tech, so up 21% and 25%, respectively, in the half. EMEA, excluding DACH, a strong performance from the Netherlands, up 8%, and that was Life Sciences and Engineering, in particular, driving that performance. And in the U.K., we saw some pleasing productivity gains moved into positive growth in the second quarter. U.S. has had a very strong performance in the half, up 24% and up 28% in the second quarter. And again, the U.S. driven by Life Sciences, so clinical operations, a significant work relating to construction in the renewable energy area and mobile applications, all continue to be in a particularly high demand. And in the APAC region, good performances from Singapore and from Japan, up 23% year-on-year in the half. So moving on to the next slide, please. So as we look at the group financially at the end of the first half, significant cash position, GBP 48 million of net cash or GBP 103 million of immediately accessible liquidity, including our revolving credit facility and overdraft facilities. 74% of the group contract that more resilient business model. Geographically and sectorally balance of 5, the top 5 countries within the group representing 86% of net fees. And a strong mix between technology, 47% of group net fees; Life Sciences at 24%; and the Engineering at 20% of net fees. So geographically and sectorally balanced and well positioned as we look into the second half. So I'd like to hand back now to Mark, please.

Thank you, Alex. Some technical grumbling this morning, but that's okay. We'll get through it. And so the half in summary. Look, I think we got really strong improvement in our performance with net fee surpassing the equivalent period in 2019. And as you saw, we upgraded our profit and expectations in June, and we'll work through more of that at our full trading update on the 19th of July. What's pleasing is we've got sustained improvement in our new deal activity and contractor retention rates and as we're going through this period. . And on other metrics that are important to us, as you will have seen in the FT and the publication of the ESG report and ranking on the Climate Leaders list, SThree is the only recruiter and staffing company in that list and 69 out of 300. So not only are we performing well on financial metrics, we're continuing to make good progress in terms of our impact more broadly on society. I think it's also important to recognize where we are in the phases of dealing with this global pandemic. As we shared throughout the time since February 2019 -- sorry, February 2020, we see this laying out in 3 phases: the initial response back in that time frame; this long phase, that seems to be going on for some time, of ongoing management; and ultimately, we'll get into the recovery phase. And where we see ourselves right now is, we may be at the tail end, but we're still in this ongoing management as we see still volatility in the market and vaccine rollouts being very dependent on how we go back to some sort of normal or the next normal, whatever that looks like. And so we are still working to focus on executing regardless of the circumstances. And it's great work by our people, supporting our clients and helping our candidates, regardless of the circumstances, that's what underpins our ability to execute in any circumstance and our confidence in the future. And so we've got a great H1 under our belt. And we look forward to the rest of the year recognizing that there is that continued uncertainty and volatility as we look forward that we need to be mindful of regardless of our good performance in H1. But with that, why don't we move on to questions. [ Tamsin ]?

[Operator Instructions] We've got a question from Sanjay Vidyarthi at Liberum.

A couple of questions for me. The first one is -- I know it's always difficult to gauge, but how materially do you think you've outperformed the markets? Because it looks like a very strong performance. But do you have any sense for your level of outperformance? The second question is just in terms of headcount investment in the second half. Again, I know you'll calibrate that depending on how markets kind of evolve. But can you give any kind of sense of the level of headcount investment in the second half?

Thank you, Sanjay. Two good questions. On the level of overperformance relative to the market, I think we're confident that we are in our core markets, at least broadly, outperforming the market. It's very difficult to tell, and now really early as to what that look like and so right now we've got just anecdotal information. There's not much that we can point to. And it will be, I would think, a couple of weeks once we get through the first half that we'll be able to look back and highlight that. And certainly, we'll be able to come back and show how we're performing in the market because as you know, we're very focused on that. It's the only true measure about we really going forward, and we believe we are, but difficult at this time. I think what we can say is that we're very pleased that the businesses are performing well. We've seen good increases in productivity. And our specialization and focus in the key niches is helping us continue to see that performance moving forward. In terms of headcount, Alex, do you want to have a look at what that looks like through the balance of the year?

Yes. So as we think forwards, we would expect to see and we plan to see a reasonably significant sequential move from where we are now to the end of the year. So quarter 3 new grads coming through, we normally see a step up. So we're looking to drive, I would say, a double-digit growth sequentially between where we are now and the end of the year, all being well, but subject again to our fine-tuning as we go as appropriate, but a reasonably significant step-up in the second half is the intention.

And we'll go to Andy Grobler at Crédit Suisse.

Could I ask 3 questions, please? Firstly, the lack of holidays taken by your candidates, I guess was supportive through the first half. Can you quantify that to any degree? Secondly, on wage inflation, what are you seeing amongst both your candidates and consultants? And thirdly, you mentioned we're still in this kind of management phase of the pandemic, which I guess is supporting some of that shift to agencies as internal HR departments don't staff up that quickly. How sustainable do you think that, that shift is going to be once we get into kind of a more normal, if that's still a relevant word, more normal type of recovery?

Thank you, Andy. What don't I do the last one first and then ask Alex on the lack of holidays and the wage inflation? Look, I -- it's hard to predict what's going to happen relative to HR departments moving forward. I would say, however, that the type of talent that we deliver into the market, so we're placing largely at the top end of specialists within specific niches. So these are hard candidates to find at the best of times. And these are in extreme demand at the moment. And so I would imagine there's going to be a need. We add real value by trying to find those candidates because these are people that are making a real impact on the programs and projects that our clients have. And so even as you go back to internal recruitment coming up in many clients, the need for what we do and the types of candidates that we place, we believe, is still going to be in demand. Because the supply constraint isn't going away. We think it's going to continue to get more challenging for clients to find those specialist candidates. And so I think it is sustainable into the long-term regardless of the conditions, and that's a function of the value that we add to our clients. In terms of lack of holidays and wage inflation, we've certainly seen that in the pandemic, generally. And I think there's certainly a pent-up demand for it. Alex, do you want to crack at kind of how we're thinking about that?

Yes, sure. Yes. So in terms of the holidays, we measure theoretical hours worked and actual hours worked. And there's normally a slight delta as people aren't taking holidays, not always working their full contracted hours. If you unpack that comparing H1 2021 to a kind of prepandemic level, I would estimate, and this is an estimate, that we have got our contractors working roughly 5% more in terms of hours worked. And so that's the point which is kind of -- and that's 5% more than you would typically get in a prepandemic level. So that's kind of benefiting our contract net fees, as we think about it at the moment, and that's the potential risk, I guess, looking forwards. In terms of wage inflation, yes, we are seeing wage inflation. And what we would like to do is to talk more about that at the interims. But yes, we are seeing it across perm and contract, and we're seeing good progression, too, in terms of our contract margins and our perm margins. But again, that will be something we'll talk more about at the interims.

And we've got a question from Steve Woolf at Numis, who asks: is it too early to talk about skills shortages and in what areas leading to an increase in fee rates?

Well, thank you, Steve. Good question. I think as I just answered with Andy, I think we tend to choose to operate in supply-constrained markets. So one would argue that one way of defining supply-constrained markets is of skill shortage. So that's why we operate in those. And the reason that we've got good, strong fee generation as well as improving retention rates and moving forward as those skills are in demand. And we're certainly seeing that demand is increasing as you're seeing in our numbers that we posted in H1. And so we think that, that will continue for some time. And we'll continue to focus on how can we find those specialist niche candidates within Technology, within Engineering, within Life Sciences that are going to make an impact for our clients. So certainly, that's where our focus is to make sure that we can keep that fee rate high.

And we've got a question from Adrian Kearsey at Panmure Gordon.

Historically, we've sort of seen traditional contracts sort of growing, but ECM models growing much more quickly. Are you continuing to see that acceleration of ECM? And are there any particular geographies that are adopting ECM sort of more quickly or starting to adopt ECM for the first time?

Thanks, Adrian. Great question. I think broadly across the globe, as we talked about before, employed contractor model is becoming more attractive. In some markets, it's already the norm. So if you think of the U.S., that is the normal model where we take on people as our temporary employees back-to-back contracts with the projects and programs that we have. But what we see across Europe, certainly in Germany, the Netherlands and to some extent, in the U.K. as well, you've got different flavors of the same dynamic going on as governments look to react to this desire for both clients and candidates to work in a more flexible way. But I think -- and where we saw in H1, I think, Alex, it's 42% increase year-over-year? Was it...

In the contracts order book for -- yes, that's correct. Yes. So of that 33% employed contracts, it was growing at 42%, freelance at 26%. So it's a slightly greater weight of growth. Yes.

Yes. Yes. No, it's a smaller part. So you've got a bit of the numbers going there. But yes, and we see that to be the -- be a broad trend moving forward.

And we'll go to Matthew Lloyd at HSBC.

A couple of questions. One, sort of dull one, is there anything one-off in Japan? I know just the growth rate was -- the inflection was pretty strong. I wanted to check there wasn't something I was unaware of that might have lifted that? And then secondly, in terms of demand, are you seeing more SME demand? And are you still seeing a lot of the vacancies being sort of location agnostic so an effective work from home potentially?

Thanks, Matthew. So on Japan, I think it just -- there's nothing one-off in the numbers there. I think what you're seeing is when it's -- it's almost exclusively permanent in Japan for us versus most of our other markets are weighted way towards contracts. So probably just the dynamic of seeing those 2 numbers together is what sticks out. In terms of the SME versus enterprise mix, we're not seeing any shift between the 2. It's still pretty consistent with how we're weighted in the markets we operate in. So you'll see Germany is more SME weighted. So you'll see the Netherlands and the U.S. more enterprise weighted, and that hasn't really shifted. And lastly, I'd say, in terms of the work from home component, so there's a bit of that going on, but it's mostly within the markets we operate. So you'll see that location-agnostic piece culturally more normal in the U.S. and the U.K. And I think you still got a bit of geographic constraint in Germany and Continental Europe, more broadly. So you still got to be relatively close. So you're not seeing huge shifts in terms of people now are working cross-border or doing anything. Certainly, on the margins that's happening. And you do have people working in 1 country that were living in another country before the pandemic and choosing to do that. But that's on the margin. It's not known. I think we're seeing the way in which we operate in the market and the way the markets have historically performed, that's been consistent, although with a kind of pandemic flavor over-the-top there.

Okay. So it's a national, it's -- I'll look at a candidate from Birmingham for a job, sort of maybe 2 days a week in London rather than I'll look in India or the Philippines.

Yes. And you'll see in the U.S., you'll have people that will be working from Florida that used to be working in the Northeast, for example. But you won't see people in, as you said, the Philippines doing work for somebody in some other market. That's not what we're seeing.

And who can blame them from working from Florida.

And we'll go back to Andy Grobler at Crédit Suisse.

A couple more from me, if I may? Just on ESG. You mentioned your positioning within the Leaders ranking. Is that getting on to client RFPs? So is that making a difference in terms of how you win business apart from the other benefits of that ranking? And then secondly, with Andrew coming in and having experience in M&A historically, is that kind of an indicator of where you are thinking or trying to move that strategy forward for the coming years?

Thanks, Andy. So on the ESG piece, it's becoming more normal that there's some question. It's not the majority by any stretch of the imagination. And -- but we do expect that we'll get more questions around it moving forward. So I think it will become more important as more companies become sensitive to ESG. And then in terms of Andy coming on, it hasn't changed our strategy at all. Our strategy has always been, as we laid out at our Capital Markets Day event way back in November 2019, it's always about growing our market share within those top 5 core markets. And we've always viewed M&A as a means to a name, not a name [ in itself ]. So if it makes sense, we might do it, but there's a high hurdle rate to get over to get there.

And that's the end of questions. Mark, do you have any closing remarks?

So well, thank you, everyone. We've got a strong H1 under our belt, which is always good to see in a year. We still, just to remind everyone, a volatile environment, as you'd have seen from the U.K. government ease -- this morning about the easing of lockdown. And so we've got to navigate through that. We're confident that the way in terms of we are operating and focusing on execution regardless of the environment that we'll be able to do that, but there will be the knock-on impacts of the macroeconomic environment that we operate in as we look to H2. So still volatility, but we're certainly confident that we can manage through that. And exciting that we've on -- as planned, we've got our new CFO joining us. And we'll see you all again, excitingly, on July 19 for our interim results presentation. So thank you, everyone.

Many thanks, Mark and Alex and you all for joining. This is the end of the webinar.