SThree plc (STEM) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining us today at short notice. As usual, I'm joined by our CFO, Andy Beach. You will have seen that we published our FY '24 Trading Update earlier than planned alongside updated guidance for FY '25. I will provide an overview before Andy touches on performance, and then I will take us through the outlook. So looking at FY '24, as has been widely reported across our industry, the past year has been characterized by challenging market conditions, which has impacted new business activity. Nonetheless, we continue to see robust contract extensions through the year, and it is our specialism in STEM and contract, combined with careful cost management that has delivered a resilient performance with FY '24 expected to be in line with market consensus. Our technology improvement program is a core component of where we see our mid- to long-term opportunity and its implementation continues to progress to plan with the deployment in the Netherlands initiated this quarter. The nature of our business model has meant we have been able to withstand the external pressures until now. However, the anticipated easing of market conditions has not yet materialized with delayed decision-making continuing to impact new placement activity whilst contract extensions remain robust. I will explain the impact of that later, but first, I'll hand over to Andy, who will take us through the trading update for FY '24.

Thanks, Timo. Good morning, everyone. Given the nature of this morning's announcement, I'm going to provide slightly less detail than usual on the business highlights already reflected in the RNS announcement this morning. Now starting with net fees. For the full year, we're down 9% on a constant currency basis against a prolonged challenging backdrop for the sector. Our contract business, which represents over 80% of group net fees declined by 7% with ongoing softness in new placement activity, partially offset by continued robust extensions. Permanent net fees down 18%, continued to be impacted by tough market conditions across most of our regions. The contract order book closed the year 10% lower year-on-year at GBP 161 million, reflecting the prolonged soft new placement activity seen throughout the financial year, again, partially offset by our consistently strong contract extensions. Despite the tough trading conditions with careful cost management, I'm pleased to say that we currently expect our performance for FY '24 to be in line with market expectations. Finally, we have a robust balance sheet with net cash of GBP 70 million. We talked at the Q3 trading update about the timing of certain client payments, and I'm very pleased to say that we've made very good progress in this regard during the final quarter of the year, and we expect our net cash to continue to return towards normalized levels over the coming months. I'll now hand back to Timo, who will take us through the outlook.

Thank you, Andy. Looking into next year, we continue to expect contract extensions to remain robust, providing sector-leading visibility into FY '25. However, as we have consistently commented on throughout FY '24, our levels of new business activity have remained persistently soft, which has a knock-on effect on the anticipated net fee performance in FY '25. As a reminder, our contract order book provides a runway of contract net fees due to be recognized as they are earned on a month-by-month basis over the lifetime of a contract, notably different to permanent net fees, which are recognized almost immediately. Ultimately, any prolonged period of weaker new business provides a headwind for future periods of contract net fees recognition. Ideally, this should be outpacing the rate at which contracts are completing. The group's soft new placement activity has been driven by the prolonged challenging economic conditions, which has been well documented. The latter part of FY '24 saw increased political and macroeconomic uncertainty, particularly in Europe, which represents around 70% of group's net fees, further delaying decision-making and the anticipated easing of market conditions. The Board is now making the prudent assumption that these challenges will persist throughout FY '25, impacting net fees. However, following early efficiencies from the TIP program and insights into its full potential, we now have the confidence to accelerate the realization of further operational efficiencies to reduce the financial implication of these challenges. As a result of these dynamics, the Board now expects FY '25 profit before tax to be circa GBP 25 million, which includes up to GBP 7 million of one-off costs to deliver the additional operational efficiencies. Importantly, there's no change to our disciplined approach to sales headcount investment in the appropriate markets. While this does impact our PBT position, our priority is to ensure we are all well positioned to capitalize on the market recovery. The Board remains confident that the group's strategic focus on STEM and contract, the completed rollout of the TIP alongside the actions being taken will position the group for sustained profitable growth when markets recover. As Andy mentioned, we're returning to normalized levels of cash and in light of S3's track record of cash generation and strong balance sheet, the Board considers it prudent and timely to also announce today its intention to launch a share repurchase program of up to GBP 20 million to be completed over the next 6 months. This is in line with our stated capital allocation policy and demonstrates the Board's confidence in the group's strategy and outlook over the long term. Following completion of the repurchase program, the group expects to retain a net cash position, reflecting the overall capital needs of the business. We will be sharing further details in due course. So to summarize, our resilient performance in FY '24 has been underpinned by robust contract extensions and our STEM specialism. The technology improvement program remains on track with deployments across 4 of our group's largest markets; U.S. and U.K. are live, Germany is progressing as anticipated, and the Netherlands was initiated this quarter. We have announced today that we expect new business pressure to continue into FY '25. Nonetheless, we remain confident that we have the right strategy, an energized team and a robust technology platform which becomes more powerful as we roll out additional functionality, leaving us well placed for when the market condition improves. So thank you all once again for joining us this morning. We would like to wish everyone a restful break and overall, a good holiday season. You will hear from us again in the new year when we publish our full year results on the 28th of January. With that, thank you all.

Thank you.