SThree plc (STEM) Earnings Call Transcript & Summary

Good morning, everyone and welcome to SThree's Half Year Trading Update of FY '24. Once again, we have delivered a resilient performance despite the ongoing challenging backdrop and against the strong prior year comparator. We are pleased to have maintained performance in the historic post-COVID highs, driven by our unique STEM contract business model and our disciplined investment approach. Against the challenges experienced by the sector, we're pleased with our trading, in line with what we said at our Q1 update. We continue to see strong contract extensions, partially offsetting weaker new business activities, once again demonstrating our clients' need to retain critical STEM and flexible talent. We believe that our transition to digital first approach through our technology improvement program is fundamental to delivering a higher value proposition for SThree. We're excited about the significant enhancements this will bring across our group, positioning us at the forefront of our industry. Following our successful deployment in the U.S., our rollout in Germany is well underway. We are already realizing some early positive results in terms of process improvements in the U.S. 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're uniquely positioned to win in a changing world with global megatrends supporting long-term growth drivers. With that, I will hand over to Andrew, who will take us through the numbers.

Thank you, Timo and good morning, everyone. Now the first half of the year has started with a resilient performance, considering the macro environment, with group net fees down 7% on a constant currency basis. It's worth noting that this is still the third highest H1 net fee performance on record, up 18% on pre-COVID performance. Our contract business declined by 4% year-on-year, reflecting ongoing softness in new business but partially offset by continued strong contract extensions. Permanent net fees down 18%, continued to be impacted by tough market conditions and our targeted investment towards contract with average permanent headcount down 13% year-on-year. Our comps have started to soften and so we saw a sequential improvement in Q2. Now let's take a closer look at what's driven the performance in the first half, starting with the skill mix. Engineering grew by 8% with continued strong demand across most regions driven by energy and particularly renewables, which were up 15% year-on-year and now represent 11% of group net fees for the half. Technology, our largest discipline, declined by 9% year-on-year. As a reminder, when we talk about technology, we're referring to placing people with skills in technology across multiple industries. Life Sciences declined 16%, primarily driven by the global market conditions in the sector, although it's worth noting that we're still trading broadly in line with pre-COVID levels. This overall skills pattern is generally what we're seeing across most regions. I'll now go through each region in turn and call out any different trends. Within DACH, Germany, our largest country in the region, saw contracts down 7%, reflecting levels of demand for technology skills. Pleasingly, we saw a sequential improvement in performance for Germany, underpinned by a lower rate of decline in the demand for technology roles. In the Netherlands region, the Netherlands itself delivered robust year-on-year growth for the half, which saw contract up 1%. Spain, although currently a small part of the group, saw strong year-on-year growth of 73%, 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 7%. Contract, which represents nearly all of the net fees for the region declined 7%, though excluding the restructured markets, would have been down 5%. The U.K., our largest country in the region, saw contract down 7%. In the U.S., contract net fees, which now account for over 90% of the total, were down 8%. Now 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 47% of the region's net fees, delivered an exceptional performance for the first half, driven by growth across the 3 main skill verticals. While the UAE had a strong performance with net fees growing 9%, driven by roles in finance and life sciences. Moving on to headcount. We continue to closely monitor and take the evolving market conditions into account. Period-end headcount was down 2% compared to the end of FY '23 as we remain focused on managing our business prudently but also ensuring we are well positioned to take advantage when the market improves. Productivity in the first half was up modestly year-on-year as average headcount was down by a little more than the rate of net decline in fees, reflecting careful management of natural churn. The contract order book of GBP 182 million is down only 2% year-on-year and continues to offer sector-leading visibility. When the FY '24 portion of the contract order book is combined with the net fee delivered in the first half, we have visibility of around 75% of full year market consensus net fees. And finally, we have a strong balance sheet with net cash of GBP 90 million 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 resilient first half performance within challenging market conditions. Our contract expansions continue to be robust, demonstrating our clients' need to retain critical STEM skills and flexible talent. Our business model continues to be a source of strength, aligned to the strategic priorities of our clients and providing sizable growth opportunities across all our key markets. The business continues to be challenging but we currently expect performance for FY '24 to be in line with market expectations. Despite this near-term context, we have embarked on a significant transformation of our business, which will position us at the forefront of our industry. While we look forward to the easing of the macro environment, our strategic focus, exposure to long-term megatrends and the TIP program to date will give us the foundation to execute our growth strategy. Thank you all once again for joining us this morning. You will hear from us again on the 23rd of July, where we'll be issuing our half year results and delivering our third investor briefing, which will focus on the employed contractor model. So something we have talked a lot about. I think, very interesting for many to hear more about it, some of the backgrounds of how we're seeing this market and the trends across the globe. So don't miss that and join that as well. Thank you.

Thanks.