SThree plc (STEM) Earnings Call Transcript & Summary

Thank you, and good morning, everyone, and welcome to SThree's Q1 Trading Update of FY '24. I'm joined, as usual, by our CFO, Andy Beach, and we will give you an overview of the performance before taking any questions. Once again, we have delivered a good performance against the record prior Q1 result and a continued challenging macroeconomic backdrop. The sentiment we are reporting is much the same as the prior period, with strong Contract extensions continuing to largely offset the ongoing softness in new business. The strength of our Contract extensions demonstrates our clients' need to retain critical STEM skills and flexible talent. We continue to believe that the transition to a digital-first approach is key to delivering a higher value proposition for SThree. We've made good progress with our Technology Improvement Program with our new end-to-end integrated platform fully deployed in the U.S. now and initiated in Germany, providing our teams with the digital tools, which will be key to driving both scale and higher margins over the mid- to long term. We're already realizing some early positive results in terms of process improvements. But as we have said before, the wider benefits around efficiencies and scaling will become evident with time as the program progresses and the platform develops richer functionality. Overall, we believe we are uniquely positioned to win in a changing world with global mega trends supporting long-term growth drivers. With that, I will hand over to Andy, who will take us through the numbers.

Thanks, Timo, and good morning, everyone. Net fees for the quarter were down 6% on a constant currency basis against a record prior year Q1 comparator and a challenging global macroeconomic environment. This performance includes the impact of our restructured businesses. Excluding these, our underlying net fees would have been down 5%. Our Contract business declined by 2% year-on-year, which is in line with the Q4 performance and reflects strong Contract extensions, offset by ongoing softness in new business. Permanent net fees continue to be impacted by tough market conditions and our targeted investment towards Contract. Average Permanent head count was down 18% year-on-year. So let's take a closer look at what's driven the performance in the quarter, starting with the skill mix. Engineering grew by 16% with continued strong demand across all regions, driven by Energy and particularly renewables, which were up 30% year-on-year and represent 12% of group net fees for the quarter. Technology, our largest discipline, declined by 9% year-on-year, although it's worth noting that on the Contract side of our business, net fees from tech skills were down only 4%. As a reminder, when we talk about Technology, we're referring to placing people with skills in technology across multiple industries. Life Sciences declined 19%, primarily driven by the global market conditions in the sector, although it's worth noting that we're still trading above pre-COVID levels. Now looking at the regional perspective. Within DACH, Germany, our largest country in the region, saw Contract down 5%, with the overall performance driven by growth in Engineering and Life Sciences, outweighed by the decline in Technology. As a reminder, in Germany, we have a greater exposure to SMEs who are more sensitive to the macro environment than our enterprise clients. In the Netherlands region, the Netherlands itself saw good growth, which included Contract growth of 3%, driven by Engineering and Technology. Spain, although currently a small part of the group, saw strong year-on-year growth of 64%, driven by Technology and Engineering. In the Rest of Europe, net fees were down 10%. However, this performance includes the impact of restructured markets. Excluding these, our net fees for the region would have been down 6%. Contract, which represents nearly all of the net fees for the region, that declined 6%. So excluding the restructured markets, it would have been down just 3%. The U.K., our largest country in the region, saw contracts down 4%, with growth in Engineering outweighed by declines in Technology and Life Sciences. In the U.S., we delivered our second quarter of sequential improvement as comps started to soften. Contract net fees, which now account for over 90% of the total, were down only 2%, driven by strong growth in Engineering, offset by Technology and Life Sciences. As a reminder, our U.S. business is more heavily weighted to Life Sciences than the rest of the group. And finally, in the Middle East and Asia, Japan, which represents 44% of the region's net fees, delivered an exceptional performance for the quarter, driven by growth across the 3 main skill verticals. While the UAE had a strong performance with net fees growing 26%, driven by roles in Finance and Life Sciences. Moving on to head count. We continue to closely monitor and take the evolving market conditions into account. Average head count for the quarter was down 12% year-on-year, reflecting careful management of natural churn. Period-end head count was flat compared to the end of FY '23 as we remain focused on being ready to respond as the market changes. We are maintaining our disciplined and focused head count investments in the markets and skill verticals that provide the best growth opportunities and where we can generate the strongest returns as the market recovers. The Contract order book of GBP 184 million is down only 1% year-on-year, offering sector-leading visibility and reflects a sequential improvement on the year-end position, which was down 3% year-on-year. When combined with the net fees delivered in Q1, we have visibility of over 55% of full year market consensus net fees. And finally, we have a strong balance sheet with net cash of GBP 97 million, comfortably up year-on-year as we continue to benefit from the anti-cyclical nature of our working capital model. With that, I'll hand back to Timo.

Thank you, Andy. To summarize, once again, we have delivered a good performance against a strong comparative and a challenging market environment. Our Contract extensions continue to be a particular highlight, demonstrating our clients' need to retain critical STEM skills and flexible talent. Conditions remain difficult from a new business perspective, but it does remain early in the year. And as things currently stand, we anticipate the full year to be in line with market expectations. Despite this near-term context, we have embarked on a significant transformation of how our business operates. Our end-to-end integrated Technology Improvement Program remains on budget and on plan with half of our cities in Germany initiated since we last spoke. This is positioning us as a game-changer in the market and demonstrates our ambition to be digital-first innovators. We are delighted to be moving forward on this journey, aligned as one team. And I, again, would like to thank our teams for their continued hard work. Whilst we look forward to see easing of the macro environment, our strategic focus, exposure to long-term mega trends and TIP progress to date gives us a robust foundation to execute our growth strategy. Thank you all once again for joining us this morning, and you will hear from us again on the 18th of June, where we'll be issuing our half year trading update. Thank you for being here, and have a great week.

Thank you.