SThree plc (STEM) Earnings Call Transcript & Summary

Welcome to the SThree Quarter 1 2022 Trading Update Call. [Operator Instructions] And at the end of the call, there will be the opportunity to ask questions. This call is being recorded. I now hand over to Timo Lehne, Interim CEO; and Andrew Beach, CFO. Timo, over to you.

Good morning, everyone, and welcome to SThree's first trading update of 2022. Thank you for joining us today. I'm here with our CFO, Andy Beach, who will take us through the numbers in detail shortly. Hi, Andy.

Good morning, everyone.

But before I go into our financial progress, I want to acknowledge the crisis in Ukraine. We have extended our support both as a group and have champions, individuals, who wish to do so, too. From an operating and financial perspective, our business has minimal exposure to Ukraine or Russia. Now I would like to turn our attention to our results. We have seen great momentum from the start of the year off back of our record performance in 2021. The headline figure, as we have seen in the RNS, is that group net fees are up 29% year-on-year, which we're very proud of and Andy will give further detail on later. This performance reflects strong progress across markets and sectors in both Perm and Contract and in our contract order book. As might be expected post pandemic, there is continued growth and emphasis, inroads in Technology, followed by Life Sciences and Engineering. We spoke at the year-end about our internal investment in our people, talent acquisition and infrastructure to drive long-term, sustainable growth. We are pleased to say that this is in line with plan and will gather pace through 2022. A number of the stories that will support our strategy and internal investment are in our 2021 Annual Report, and I hope you would take some time to read these. Finally, our results continue to demonstrate that our strategy positioned at the center of the secular trends of STEM and flexible working is exactly right. This has been long embedded in the business and makes us very unique. With that, I will hand over to Andy, who will take us through the numbers for the quarter. Andy, over to you.

Great. Thank you, Timo. And as Timo has just said, it's fantastic to see the momentum in the business that's testament to the hard work of our teams, our positioning in STEM and the delivery of our strategy. And as you just heard from Timo, we started the year with a strong first quarter with group net fees up 29% on a constant currency basis. Given our record performance in FY '21, we have stopped providing comparisons to pre-COVID period in our announcements. Having said that, let me take you through them just one last time. The comparative quarter, the 3 months to February 2021, was still impacted by the pandemic. But due to the resilience of our business, it was only 1% down on the nonimpacted period of Q1 FY '20. So the growth we are reporting today represents a genuinely strong performance, not only a bounce back. That means that we have delivered a 27% increase in net fees compared to the prepandemic first quarter of FY '20. Pleasingly, this growth is strong across both Contract and Permanent, and our Employed Contractor Model, or ECM, continues to be increasingly compelling proposition for both candidates and clients. Net fees for ECM for the first quarter grew by 41% year-on-year, while net fees from independent contractors grew by 26% year-on-year. Turning now to the regional and sector split for the quarter. We continue to have a well-balanced business, both geographically and by sector. 97% of our net fees come from our top 3 regions with DACH, EMEA, excluding DACH, and the U.S. recording net fee increases of 26%, 29% and 27%, respectively. From a sector perspective, we retain a strong and unique position in providing STEM skills. Technology remains our largest sector, and it grew by 30% with very strong performance in Germany, the Netherlands and the U.K. Life Sciences grew by 23%, driven largely by growth in the U.S. And Engineering grew by 31% with strong growth in the Netherlands and the U.S. Turning now to each region in turn, starting with DACH. The region grew 26% year-on-year, and the growth was driven primarily by Technology with increased demand for software development and ERP implementation skills. Solid growth was also delivered in both Engineering and Life Sciences. EMEA excluding DACH grew 29% year-on-year. Across the region, there was strong growth in Technology with high demand for software developers and project managers. The Netherlands experienced strong growth in Engineering. Pleasingly, the U.K. also continued its strength -- its trend of strengthening performance with net fees up 29% year-on-year driven by Technology roles. The U.S. grew 27% year-on-year with growth delivered across all main sectors: Life Sciences with increased demand for quality assurance, medical writing and clinic operation skills; Engineering with high demand for construction management roles; and Technology with demand for mobile application and software development skills. And finally, the APAC region, which grew by 71% year-on-year. This growth was driven primarily by Technology with high demand for cybersecurity and IT consulting. Finally, looking at future visibility of our Contract business and the strength of our balance sheet. We've seen continued growth in the order book, up 42% versus the same time last year, which is well spread across DACH, the U.S. and EMEA excluding DACH. ECM remains a key product, representing 46% of the Contract order book. We also have a strong balance sheet with net cash at the end of the quarter of GBP 41 million. This is down since the year-end and since the same time last year but for good reason: the sharp increase in number of contractors together with the timing of performance bonuses related to the record performance of FY '21. So to sum up, we're reporting a very positive trading performance. We delivered strong growth in net fees across all geographies and sectors. The Contract order book continues to grow, giving us increased visibility of future revenues. And we have a healthy balance sheet position. With that, I'll hand back to Timo.

Thank you, Andy. As you have heard, Q1 has been another period of very strong trading, the result of continued great execution by the team but also aligned with the right strategy. Our focus on strategic execution has not wavered and will remain driven to deliver growth. While we are mindful of the geopolitical and macroeconomic challenges that may be ahead of us, we remain positive about our growth prospects through 2022 as we continue to position ourselves as a leading STEM talent provider in the best STEM markets. I would now like to move us on to questions. So Trambling, back to you.

[Operator Instructions] And we'll go to Andy Grobler at Crédit Suisse.

I hope everyone is well. Two questions from me, if I may. Just firstly and slightly predictably on wage inflation, what are you seeing? And how has that trended through the quarter? And I guess also, if there are any regional differences there. And then secondly on pricing and margins. In this kind of strong market backdrop, are you able to raise prices?

Probably a couple for me, Timo, yes, if you want to add anything. Let me start. Wage inflation is actually very similar to the full FY '21 so far in Q1. So we're seeing, on average, the roles that we placed, the salaries are around 5% higher on the Perm side. And on the Contract side, we're looking around 3.5% to 4% increase in average salaries. Just to say that doesn't necessarily -- isn't necessarily a proxy for wage inflation, but that's the average increase in the salaries that we've placed Q1 versus Q1 last year. So very similar to the whole of FY '21 averages. Pricing and margins, actually fairly static. So the margins on Contract are up 0.5%. On Perm, it's pretty flat with the whole of last year. So, so far in Q1, we haven't seen any particular pricing power increase in the margins. But of course, we do benefit with the wage inflation because we get the margin on top of the higher salaries.

And just in terms of wage inflation, how does that vary by region? Probably it varies a lot by [ specialization ]?

Yes, it does across both geography and sector. I haven't got all the specific details to hand, but it -- most of them do gravitate around the kind of the 3% to 7%. There are a couple of very specific sectors. Actually, Engineering is probably one of our strongest in terms of inflation. And actually, the U.K. and U.S. is particularly high in those areas. But yes, it's quite widespread, but average is around about a 5%.

And we'll go to Sanjay Vidyarthi at Liberum.

Just a question on recruitment and retention within SThree. If you can update us. I think last year, it was getting harder to find good hires. How that's progressing this year. And then in terms of retention, I think the churn rate was quite high last year. How that's progressing. Any initiatives that you have in place to make progress on both of those fronts. It'd be good to get some color.

Again, Timo, should I just start on a number of other things and then maybe you can give a little bit more flavor of what we've been doing? Yes. At the full year, we signaled that we aimed to grow our headcount from the year-end position 10% across FY '22. We've currently added 2% additional headcount to that. So just about on track. And we remain our ambition -- or retain our ambition rather of growing 10%-plus. So that is still the aim. Timo will talk a little bit further around some of the initiatives that we have to help us achieve that. On churn level, we can't give the specific numbers. But you're right, we were in the low to mid-40% churn levels for FY '21. Pleased to say that has come down, so we're now in the 30s. We'll give more details at the half year, but we're down certainly into nearer to our expected levels. So it has improved somewhat in Q1.

Yes. Quickly, to add from my side, I mean, we already talked about that last time, indicated that we've done a lot around our hybrid working, our digital learning. So we implemented a new learning platform for staff to come in. But also, we are in the middle of the processes of reviewing, as we do regularly anyway, I mean, we're doing this more on a yearly basis, to at least come up with a right inflationary adjustments. But on top of that, we're reviewing in some of our key topics, key regions, our reward, and that is a process which is full on at the moment. And therefore, we keep on being positive about our headcount growth ambitions for this year.

Okay. A follow-on from that. Now actually, a theoretical question rather than something that actually comes into reality. But if the macro environment does soften, I guess the first thing you do is just cut back in terms of that headcount growth. But I guess we're in a slightly strange position in that you've only just kind of rationalized the staff base and you'll probably be hiring. If the macros turns softer, then will you try to work your way through it? And what are the contingency plans in place? Because I guess it not a good idea just to cut back on headcount, that it's harder than last year. So I wouldn't plan to chop chop in the macro.

Okay. The connection wasn't absolutely great, but I think I got it. Let me start off and then hand over to Andy. But yes, I mean, obviously, we're watching that very closely. But overall, I would say we are feeling very confident with the regions we're in and also with the top 5 regions we are focusing on and ensuring that we have the right headcount there for future growth. So what I would say is we have a good insight on the parts of our group -- and this is not only regionally, this is also by sector or by vertical markets -- that if there would be any kind of stronger macroeconomic consequences, that we look first into that. But at the moment, we are not considering that as the momentum looks really positive still. Andrew?

Yes. No, absolutely right, Timo. And as you mentioned there, we're focusing on the regions and the sectors where we're seeing the most growth. So we're looking at that as an executive team very, very regularly and making sure we allocate our resources and hiring in the right places. I think although it has come down, our churn level is helpful in that regard because, of course, if we do need to manage headcount levels for any uncertain or sudden economic uncertainties, then actually natural churn is one way to help us manage that as people leave the business anyway. So you just -- you can just curb recruitment and allow churn to come through. But as Timo says, no current intention because the demand is strong. So right now, we are continuing to grow headcount in the right sectors and the right markets.

And we'll go to Adrian Kearsey of Panmure Gordon.

Well done on the quarter. Question on the infrastructure spend. Just it'd be good to sort of hear how that's progressing and perhaps for you sort of give an indication of now or into the year, what kind of phasing of you are we likely to have first half versus second half.

Yes. Sure.

Andrew?

Yes. So absolutely. So we are on track, and we've taken some plans to our Board recently which were approved. So we are in discussions at the moment in vendor selection stage. It's therefore almost certainly going to be quite heavily second half weighted. So a good 80%-plus of the indicated spend is likely to be in H2 because we're in the -- deep in our planning phase at the moment. So the actual execution and spending phase is likely to be H2 weighted. But so far -- early days but so far on track.

Okay. Another question, if I may. As we're seeing these changes in the mix in terms of the contractor order book with ECM growing more quickly than non-ECM, are you seeing much change in working capital ratios?

Yes. So that mix does -- the ECM contractors are slightly more working capital consumptive. So I think we thought previously in the kind of the GBP 9,000 range for every new contractor that we add to our books. It's nearer to GBP 10,000 on the ECM contractors. So it does have a little bit of difference for every contractor. So as we swing more towards ECM, it does have a slightly more consumptive working capital profile. And that's -- and we've seen that a little bit in Q1.

And we have one more question. [Operator Instructions] And we'll go to Iain Daly at Radnor.

Just a quick one on productivity, if I may. I think you've been pretty consistent in your sort of messaging around productivity likely to normalize back towards historic levels but with an expectation that you've maintained some degree of capture of the productivity days over the time period. Given the comments you've given around products, especially in Q1, can you give us a bit more color on what's been driving that specifically in the quarter and whether that's kind of still you're very much in line with our expectations?

Yes. Thanks, Iain. So you're absolutely right, we had signaled previously that we'll expect that productivity to come back in line but absolutely capture some element of the prepandemic levels with the way that we're now operating slightly more efficient ways of working, candidate interviews, et cetera, remotely. The level of productivity that we delivered in Q1 was somewhere ahead of our expectations, a reflection of both of the elements of the productivity or the headcount, the head metric being -- net fees being marginally ahead of where we had expected and also our headcount being a little short of where we expected. So that level of productivity, which is 19% up on the quarter 1 last year, is a little ahead of where we expect it to be. So we're still expecting further normalization across the rest of the year. We're pretty much delivering headcount ahead in Q1 currently at the same rate as the whole of FY '21 average. It's actually down a little bit on Q4 FY '21, as we expected, but we weren't expecting it to be as high as the FY '21 average. So that will, we expect, continue to normalize as we continue to ramp up our headcount across the rest of the year and also with that growth rate, which we'd expect to slow a little in the coming quarters.

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

Yes. Thank you all. As we said, we remain positive about our growth prospects through 2022. And with that in mind, we will see us soon again at the Q2 trading update in June. Thank you very much.

Thank you.

Many thanks, Timo and Andrew and you all for joining. This is the end of the call.