SThree plc (STEM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to SThree's Q3 Trading Update for FY '24. I'm joined by our CFO, Andy Beach, and as usual, we will give you an overview of the quarter. Once again, we have delivered a resilient performance driven by our focus on contract despite the ongoing challenging backdrop. We are pleased to have achieved a performance near historic highs, driven by our unique STEM contract business model and our disciplined investment approach over the recent years. The challenging conditions in the market have extended beyond our industry's expectations. Against this, we are pleased with our sector-leading trading performance, while at the same time, executing on our strategy and implementing a sizable transformation of the organization. We continue to believe that our transition to a 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 and are delighted with the progress we are making. The technology improvement program remains on track with U.S. and U.K. live and the deployment well underway in Germany. I've just came back from the U.S. and have seen firsthand the positive feedback we are receiving. It is great to hear the team speaking about the early benefits it brings to them and their belief in the opportunity going forward. Of course, the wider benefits around efficiency and scaling will become evident with the time as the program progresses and the platform develops richer functionality. With that, I will now hand over to Andy, who will take us through the numbers.

Thank you very much, Timo, and good morning, everyone. Against a prolonged challenging backdrop for the sector, net fee remained in line with the previous quarter's performance, down 8% year-on-year on a constant currency basis. Our contract business declined by 8%, with ongoing softness in new placement activity, partially offset by continuing robust extensions. Net fees down 9%, continued to be impacted by tough market conditions, [indiscernible] softening. This is the second quarter of sequential year-on-year improvement. So let's take a closer look at what's driving the performance in Q3, starting with the skill mix. Technology, our largest discipline, saw sequential improvement in performance, down 7% year-on-year, benefiting from a lower rate of decline in demand for candidates with tech skills in Germany. Engineering declined by 7% versus record prior year highs across our major markets and Life Sciences declined 14%, primarily driven by the global market conditions in that sector. I'll now go through each region in turn and call out any different trends. Within DACH, Germany, our largest country in the region, delivered a sequential improvement. Contract also improved sequentially with net fees flat year-on-year, benefiting from growth in engineering and a lower rate of decline in demand for technology skills. In the Netherlands region, the Netherlands itself after delivering an impressive 13 consecutive quarters of growth was down year-on-year with contract declining 14%, reflecting lower levels of demand for engineering and technology skills versus record levels in the prior year. For perspective, the net fee performance from the Netherlands this quarter is still 33% higher than pre-COVID levels. Spain, although currently a small part of the group, saw strong year-on-year growth of 52%, driven by technology and engineering. In the rest of Europe, Contract, which represents nearly all of the net fees for the region declined 13%. The U.K., our largest country in the region, saw contract down 17%, reflecting lower levels of demand across all skill verticals. In the U.S., the sequential improvement this quarter is largely driven by growth in perm against a soft prior year performance. Contract net fees, which now account for around 90% of the U.S. total, delivered a similar rate of decline as seen in Q2, down 13% year-on-year, driven by lower demand for life science and technology roles. 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 around 2/3 of the region's net fees this quarter, delivered an impressive performance, reflecting growth across the 3 main skill verticals, while the UAE declined, driven by reduced demand for roles in engineering and finance, partially offset by continued demand for life science skills. Moving on to headcount. We continue to closely monitor and take the evolving market conditions into account. Period-end headcount was down only 1% compared to the end of FY '23 as we remain focused on managing our business prudently, but also ensuring that we are well positioned to take advantage when the market improves. The contract order book of GBP 167 million is down 6% year-on-year, reflecting the protracted soft new placement activity, partially offset by our ongoing strong contract extensions, and this continues to offer sector-leading visibility. When the FY '24 portion of the contract order book is combined with the net fees delivered year-to-date, we have visibility of close to 90% of full year market consensus net fees. And finally, we have a robust balance sheet with net cash of GBP 45 million. This is lower than in previous quarter end, reflecting the timing of certain client payments this quarter, and we expect to return towards normalized levels over the coming months. With that, I'll hand back to Timo.

Thank you, Andy. To summarize, once again, we have delivered a resilient performance this quarter within challenging market conditions. Our contract extensions continue to be robust, demonstrating our clients' need to retain critical STEM skills and flexible talent. Our business model remains a source of strength aligned to the strategic priorities of our clients and providing sizable growth opportunities across all our key markets. None of us can miss the headlines of the macro environment and the impact this has on our customers and our industry. Nevertheless, with careful cost management, we currently expect performance for FY '24 to be in line with market expectations. As a reminder, our unique contract business model provides resilience. In practice, this means that when markdown and new placement activities increases in net fees tends to be smoother and from a higher overall level, resulting in a more even through-the-cycle net fees profile. As an organization, we are always striving to improve. As such, while the market has been challenging, we have continued to invest. We are confident that we're in a position of strength and will emerge a much stronger version of ourselves. Thank you all once again for joining us this morning. You will hear from us again on the 17th of December, we will be issuing our full year trading update. Thank you very much, and speak soon. Bye-bye.