SThree plc (STEM) Earnings Call Transcript & Summary

Hi. I'm Timo Lehne, CEO of SThree, and I'm joined today by Andrew Beach, our CFO.

Hi, everyone.

We are delighted to bring you this investor briefing, the first of the series we will be hosting over the next few months. Today, we're focusing on our path to growth. So let's get going. Here is a usual disclaimer, which I shall let you read at your leisure. So turning to Slide 3. We are SThree. We are the global STEM-specialist talent partner, and we are unique. We are proud pioneers specializing in STEM before anyone else. We have led our industry for nearly 40 years. Our well-established strategy is positioned at the center of two long-term trends, STEM and Flexible Talent. Today, we will show you how our STEM focus underpins our resilient model and how our analytical approach means we are well positioned to fulfill structural demand through economic cycles. We also flex the talent solutions to our clients through a network of highly specialized brands. A recent report shed light on the high market value of our brands, which underpins our leading position in our chosen specialist markets and which continues to differentiate us from other status. Operating across 45 locations in 14 countries from the U.S. across Europe to Japan provides us a unique combination of global reach and expert local recruitment knowledge across specialist STEM candidate skills. Our deep STEM expertise and broad networks mean we can deliver quality at speed for both our clients and our candidates. In doing so, we deliver our purpose of bringing skilled people together to build the future, which underpins our vision to be the #1 STEM talent provider in the best STEM markets. Our unique model focusing on STEM and Flexible Talent underpins our success. By STEM, we are referring to specialist skills in science, technology, engineering and mathematics. The candidates we placed are highly scaled experts who are urgently required to help shape the future of business, and in many cases, the world. By Flexible Talent, we mean short to medium-term contracts that are well suited to be fit by highly skilled specialists in technology, life sciences and engineering. We proudly connect candidates and clients delivering STEM talent for now and the future. In the most important STEM market through our unique global footprint, whether it's scientists helping to develop life-changing medicine, tax specialists supporting digital transformation or engineers building clean energy solutions, specialist STEM talent plays a vital role in tackling the most complex issues facing our world. Today, we have over 12,000 STEM specialists actively working through us, up 20% since last year. And at SThree, we're proud to be where the world comes for flexible STEM talent. Andy, over to you.

Thanks, Timo. As you can see from the left-hand chart, we focus on STEM. We provide clients with access to a wealth of high-quality STEM specialists, predominantly in technology, life sciences and engineering. Just to clarify, by technology, we are referring to skills in technology such as software engineers and developers, cybersecurity, ERP consultants and data scientists across multiple sectors. This is not placing roles into the tech sector, and as such, should not be correlated to the fortune or misfortune of Big Tech or Silicon Valley hiring strategies. Turning to the right-hand chart, we use our expert knowledge and global network to connect the community of specialists. Our ability to offer a compliant end-to-end service across both permanent and contract means we're able to provide all clients and candidates the staffing solution that they are looking for. We consciously focus on contract as that is the best way to serve the demand for STEM skills. This is very different from other staffers, making us uniquely positioned to capitalize on long-term structural STEM growth trends. In short, STEM is the focus of where the opportunity lies and contract is the best way to take advantage of that opportunity. Here, you can see our medium-term ambitions for FY '24. Timo, myself, the Board and the wider leadership team are fully aligned on our strategic direction to deliver our vision and help our clients and candidates solve some of the toughest challenges of our time. This will enable us to deliver long-term value to all of our stakeholders. Today's focus is on those growth drivers, which underpin our ambitions to take market share and the path to deliver a long-term sustainable conversion ratio of 21% or more by FY '24 compared to the 17% we delivered in FY '21. Back to you, Timo.

Thanks, Andy. So how will we achieve these ambitions? Through seizing the market opportunity, through discipline and focus and through our technology improvement program. As previously announced, we are moving forward with planned strategic investments in our systems through which we are fundamentally reengineering, simplifying and automating some of our most manual and complex processes. The cost and phasing of which have already been announced and are baked into consensus. We believe these investments will underpin our long-term success as they will increase efficiencies and support sustainable margin improvement in FY '24 and beyond. Our technology improvement program will be the focus of our next investor briefing. But today, we will focus on the first two. To achieve our ambitions, we will seize the market opportunity through which we will deliver market share gains in our chosen markets and therefore drive scale. The global STEM market is enormous with annual revenue of over GBP 100 billion. Today, we operate in the world's best STEM markets where we are well positioned. The top 5 markets, namely U.S., Germany, Netherlands, Japan and the U.K. represent 75% of the global STEM market. We have market-leading standings in our chosen markets. For example, we are #1 in the Netherlands and #2 in Germany. However, these markets are highly fragmented. Despite our market-leading positions, reaching 6% in some markets, we have relatively small market shares. Across our top 5 markets we have on average, 2% of the potential STEM market providing scope for huge upside. We have made good progress, having gained market share in our top 5 countries in recent years. Increasing market share further in our target markets will strengthen our position as a provider of choice in STEM talent and drive economies of scale. We will leverage our operations to ensure that top line growth exceeds associated cost growth, allowing favorable incremental drop-through, driving improvement in our conversion ratio. There is significant scope for substantial growth in our markets and to take market share gains. Underpinning the structured demand for STEM scales are a few key global mega trends, all of which you will be very familiar with. Trends that you hear and read about each and every day. So what are these mega trends? And why do we think it's so important to be at the heart of them. These are powerful transformative forces that change the global economy, business and society unfolding over the case. These mega trends, notwithstanding macroeconomics and political uncertainties, provide enormous opportunity for SThree. Each drives an increasing demand for STEM talent. We are in the right place at the heart of placing talent necessary to address these challenges, which supports our vision to be the #1 STEM talent provider in the best STEM markets. So let's look at each in turn. Digitalization has transformed business models, leading them toward leaner ways of working with software-driven production, allowing more capacity for innovation. it's enabling businesses to implement complex change to become more sustainable, improve their resilience, introduce cost efficiencies and strengthen business continuity. The pandemic significantly accelerated the pace of technological change. It's been argued that 10 years of e-commerce growth happened in the first 6 months of the pandemic. Today, the drive to automate and digitize shows no sign of waning. Direct investment in digital transformation is expected to be $6.3 trillion over the 3 years to 2024. And this rate of investment is accelerating with a 16% 5-year CAGR, reaching $3.4 trillion by 2026. Coupled with changing customer demands, increased technological complexity and the adoption of innovative digital technologies, artificial intelligence and machine learning are driving an explosion in demand for specialist technology skills. In fact, it is forecast that 149 million new digital jobs will be required by 2025. We see this every day as we help clients deliver on their digital transformation journeys, placing high-value tech talent in areas such as software development, artificial intelligence, cloud computing and big data accompanied by a significant rise in encryption and cybersecurity, reflecting the greater demand for data analytics and protection against vulnerabilities of our digital age. Over the past 3 years, so against pre-pandemic levels, we have seen a 38% growth in our net fees in tech talent, our largest discipline. We are where the world comes for high-value scarce tech talent. So let's now turn to a short clip to bring this to life. [Presentation]

Achieving net zero by 2050 requires nothing short of a complete transformation of the global energy system and will only be achieved through the development and widespread adoption deployment of innovative technologies and engineering skills. The trend to decarbonization through renewable energy and carbon capture utilization and storage compounded by the world's heightened focus on energy security makes the 2020 the decade of massive clean energy expansion and investment. This part to net zero requires major innovation. In 2022, annual clean energy investment worldwide is forecast to be $1.4 trillion. However, to keep climate goes on track by 2030, this level of investment is expected to nearly quadruple. Most of the reductions in CO2 emissions to 2030 come from technologies already on the market today. But in 2050, almost half the reductions will need to come from technologies that are currently at a demonstration or prototype phase. Major clean energy innovation efforts must take place this decade in order to bring these new technologies to market in time. This will create millions of new jobs, driving an exponential growth in demand for engineering and green tech talent. According to the IEA, by 2030, there will be 14 million new jobs created in global energy supply and a further 16 million in clean energy end-users such as more efficient appliances, electric and fuel-cell vehicles, building retrofits and energy-efficient construction. We, too, have seen this growth in demand for engineering and construction expertise. Over the past 3 years, net fees in our renewable business has grown 79%, supporting our ambition to double the share of our global renewables business by FY '24. As the place the world comes for green and clean engineering and tech talent, we are well positioned to help our clients and candidates realize their path to net zero. Turning to health care, research-led health care. While COVID introduced many global challenges in the life science industry, it's also accelerated much investment in the sector and triggered faster regulatory approvals of newly researched technologies. Regulators and life science companies work together at previously unseen pace, aiding the development of products and accelerating their introduction to the market. Consequently, this stimulated investment in the sector with biotech investment up 94% by 2021 versus 2016. This urgency continues as the industry seeks to replicate the COVID-inspired approaches to corporate globally in developing solutions to scientific problems, leaving the talent pipeline as an increasingly prevalent issue. From the industry science-driven R&D engines to the commercial and compliance expertise needed to bring products to market and the executive skill sets needed to navigate a complex and shifting business landscape, life science clients require a constant supply of scarce niche talent. In the pharma sector, industry analysts expect a 48% growth in R&D spend by 2028, adding to the scarcity of skilled talent in the sector. Consequently, we see overall continued pressure on the demand for STEM professionals. In the U.S. the life science industry is competing for skills with other industries with an expectation that demand for STEM professionals will increase by 24% by 2030, notwithstanding the fact that STEM salaries are already 50% higher than average non-STEM salaries. Focusing on the right skills, we are where the world comes for life science talent. Timo, over to you.

Thanks, Andy. The world is facing a demographic challenge driven by aging population. By 2030, 1.4 billion or 1 in 6 people in the world will be aged 60 years or over, and this is expected to double to over 2 billion people by 2050. The proportion of people of working age globally is shrinking while the relative number of those retired is expanding, resulting in a declining participation rate, which is driving acute labor shortages everywhere across every sector. This is further compounded by existing STEM talent retiring an insufficient young people entering STEM roads. Together, we see 2 potentially conflicting forces. A huge demand for specialist STEM talent driven by each of the mega trends, namely digitalization, decarbonization and research-led health care, compounded by acute STEM skill shortages. You may think that this is bad for us, it is quite the opposite. We are where the world comes for scale STEM talent. This is where we successfully operate. With our focus on STEM and deep knowledge of our candidate specialisms and client segmentation, it makes our work for our clients and candidates even more important, enabling us to maintain our pricing. Our focus on contract positions us as a trusted talent partner of choice with candidates who returned to us time after time. Our contractor order book has grown 53% over the past 3 years, reaffirming our reputation as the place the world comes for STEM talent. We have seen this societal shift in the attitude to work. As a result, working habits have changed forever. With many no longer constrained by traditional worker models driven by recent technological advances, we see a relentless shift in how people approach working. One thing is clear, the future of work is changing and the opportunities are endless. According to McKinsey, over 1/3 of the U.S. workforce identified as independent workers while 62% of global executives polled think that freelancers will substantially replace full-time employees within the next 5 years. The move towards greater flexibility is a trend that is consistent with other shifts that have transformed the world of work since the pandemic struck and one which aligns with our recent How the STEM World Works research, where 55% of respondents stated flexible working as one of the top 3 criteria when considering the next role. And that's where we come in. We are where the world comes for high-value, flexible talent. We excel in bringing people together. The demand for reliable and secure green energy, greater connectivity and the rapid adaptation of health care is at the forefront of the global agenda and is driving the worldwide need for expertise in STEM at a time when many leading nations are losing that expertise to retirement. This is our area of expertise, and we're proud to replacing experts into new roles every day. We are at the heart of this global demand delivering the essential STEM scale required to solve these challenges. Flexible talent is at the heart of our strategy. Flexible talent is not about hybrid working or working from home or temporary staff. To be clear, by flexible talent, we mean the short- to medium-term contracts that often suit highly skilled specialists in technology, life sciences and engineering. While we remain a full service business for our clients, the biggest part of our business is helping our clients with highly skilled, flexible contract workers. Under ECM, the employed contractor model, contractors are directly employed by SThree for the duration of the contract. We are able to offer this more complex service and a flexible fixed-term engagements. To be clear, under this model, we focus on back-to-back contracts, therefore, negating the issue of bench risk. ECM continues to be the predominant model in the U.S. and is fast growing across Europe. We expect the shift to contract to continue and for growth in ECM to be strong. So why do we focus on contract? Our flexible talent product is a model that is particularly well suited to the STEM staffing market, and it delivers a more predictable and visible revenue stream and a higher value across the length of the engagement. We build a trusted relationship with our candidates with them returning to us time and time again, creating a lasting stickiness or barrier to entry. It's important to note that the nature of our contract business results in a counter cyclical cash dynamic. Bringing each new contractor onto our books results in a pre-funding of roughly GBP 10,000 to GBP 12,000 with a corresponding working capital outflow. If we enter a downturn and contract the numbers decline, contracted payments stop, but we will continue to receive client monies for a period. So conversely, short-term downturns result in improving cash flows. Our focus on contract offers resilience in uncertain markets and strong recovery as markets recover. We have grown our internal focus on flexible talent with contract net fees, representing over 3/4 of our total. This is unique about our business and continues to differentiate us. The contract order book represents the value of contracts written up to the contractual end date, assuming that all contracted hours are worked. As you can see from the chart on the right, the contractor order book, which stood at GBP 182 million at the end of May, represented growth of 35% year-on-year and 53% since pre-pandemic levels with strong growth across both ECM and independent contractors. We have an order book of this size due to the high exposure to contract business, and this gives us excellent forward visibility compared to permanent-focused staffing businesses and underpins our continued confidence. As the go-to partner for hard-to-find STEM skills, flexible talent is at the center of our strategy and at the heart of solving the toughest challenges of our time. We believe that by focusing on STEM and contract, we are more resilient. So let's hear from Andreas with whom we've been working with for many years.

It was SThree who placed me at AkzoNobel in this very senior program manager, and that's been really a fruitful relationship now for over 7 years. In this role, there's also needs to build project teams. So it's a quite large program around data governance, which is quite a key topic for a lot of big corporations. SThree have really been able to supply the skills and resources I needed to run these projects. And it's been a really -- I would say, a good source of good people. Data governance is, let's say, a niche area and there's a lot of -- large groups are focusing on this. They see the advantage of having good quality data to assets. We've had to put some projects potentially on hold by not just having the right people. Good candidates are hard to get. We had a really, let's say, complicated profile we were looking for. Nearly nonexisting and nevertheless than we got proposals from SThree. They really made a difference and really coming up with good profiles, good candidates and even where a company like AkzoNobel tends to reach out to large consulting companies. They failed many times, and it was SThree who could really find a good person for us. Domain, I'm focusing on. It's usually very global, many initiatives in parallel. Your company will be the first on it because we might not even have the full requirements defined, but it's -- so you can see that there's a lot of pro-activeness. And yes, that's definitely something I see different than other companies. I see difference for -- with SThree is that they also really invest to build a long-term relationship. I think it's easier for a company like yours who works with independent contractors in many industries and have this global reach to respond quicker. So from my career, yes, it made a quite important difference because I had a consulting career for over 15 years, leading large transformational programs. And I wanted to do this all over again, different customers for different large organizations, but for myself, one advantage of becoming a CEO. Independence was to have flexibility, to be with your family, spend really quality time, and I just wanted to experience that and also have the flexibility. So if between 2 missions, I take 2 months off, I take 2 months off and that's it. I hope then, let's say, my move to a next company will be together with SThree, and I would definitely use them as a source. I assume I would take again management role and will meet capable resources. And over the last years, the most trustful relationship I have is really with SThree.

For those of you who regularly follow us, this chart will be familiar. We have indexed our calendar quarter net fee performance since 2019, the last full year before the pandemic to show more clearly our performance compared to other staffing businesses who focus more on the permanent market. As you can see, our dip in net fees during the pandemic were shallow. We recovered quickly in 2021, helped by market recovery and returned to year-on-year growth from Q2 that year. We have delivered 5 consecutive quarters of more than 20% growth, and we're now 33% above that pre-pandemic performance. Therefore, we are much less cyclical, which we believe is due to our strategic focus on STEM and flexible talent. This focus positions us well to weather macro storms as evidenced by our outperformance during the pandemic whilst also benefiting from growth trends in the medium and long term. This shows our greater resilience during periods of market disruption and our quicker recovery as we come out of tough economic periods. We are cognizant that many businesses are affected by economic conditions, and we are not immune. But as you can see, over the medium term, we're a business that is rightly positioned. We are geographically diverse, operating in attractive and growing markets, and therefore, our medium-term impact should be less. Timo?

Thanks, Andy. We are dedicated to building a business that can deliver sustainable margins at 21% or above for the long term. While scale is a key driver, scale alone will not deliver this. We believe in our unique model and remain committed to focusing on STEM and flexible talent. We have spent the last 6 months analyzing our market investment model to underpin our decision-making and to ensure that we invest where we can achieve the greatest returns. We know our markets, it's not by accident that our business has outperformed. We now take a much more data-driven analytical approach to ensure our decision-making is disciplined and focused. We have taken time to understand where our market priorities and biggest opportunities lie and how to make the best returns. Let's talk about our geographical footprint. We have looked at all of the geographies we operate in and have clustered these regions into 2 major themes: large improved markets such as the U.S. and small and high-margin markets such as Switzerland. We have looked at all of our candidate specialisms or STEM scale verticals to focus on our most promising high-value disciplines in our most promising markets to understand which are the hot scales in each of our specialist areas, how many candidates are available in each of our regions within each specialism, how many candidates we have available in our own network, those new scales or markets with higher average salaries or higher margins and those where we can deliver most cost effectively. This analysis means we understand the profitability of each niche. And through our discipline and focus, we can invest into specific segments. Then we go to the client segment where we have undertaken a deep dive to understand and analyze all of our clients, enabling us to segment each client with 2 major objectives: firstly, understanding the service level they require from us to be able to successfully deal with them; and secondly, to understand the financial returns of each of these client segments. Within our geographical footprint, candidate specialism and client segmentation, we understand what opportunities are out there which are our priorities and how the financial returns can be optimized by investing more wisely into specific segments. This approach ensures that our resource allocation is analytically driven and means we know where to play and play where we win. Our ability to analyze and use this data will be further enhanced by our technology investment program, which will also help liberate our people to focus on more value-enhancing activities. This program will be the subject of our next briefing. We are uniquely positioned to win in a changing world focused on STEM and flexible talent. We see significant market growth potential supported by these global mega trends, each driving an increasing demand for specialist STEM skills. As a place, the world comes for STEM talent, we are well positioned to capitalize the structural growth drivers across all of our markets skill sets. We have a great business whilst we remain mindful of the wider macroeconomic uncertainties. Our business is high quality, resilient and delivering outperformance. We have a clear strategy. By seizing the market opportunities to build scale, by being disciplined and focused and by delivering our planned technology improvement program, we will deliver long-term sustainable growth. So let me remind you who we are. [Presentation]

Looking ahead, here are some dates for your diaries. We will host our Q4 trading update on December 14, following our November 30 event. And our full year 2022 results presentation will be held virtually on the morning of January 30. And we look forward, obviously, speaking with you again. So all that remains is to thank you for your time today, and we wish you enjoyed it and was really insightful for you. And we wish you a good afternoon. Thank you very much.

Thank you.