SThree H2 2024 Earnings Report

SThree EPS Results

• Actual EPS: GBX 37.40
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

SThree Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

SThree Announcement Details

• Quarter: H2 2024
• Date: 1/28/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, January 28, 2025
• Conference Call Time: 3:30AM ET

SThree (LON:STEM) brings skilled people together to build the future. We are the global STEM workforce consultancy, placing highly skilled, STEM specialist workers in the industries where they are needed most. We advise businesses, build expert teams, and deliver project solutions for our clients. With more than 38 years of experience in pure-play STEM and a global team of 2,700+ people each with local expertise across 11 countries, we cover high-demand skills across Engineering, Life Sciences and Technology roles. We provide permanent and flexible contract talent to a diverse base of around 6,000 clients. By combining advanced technology with expertise, we push beyond traditional boundaries to deliver tailored solutions, leveraging data and insight from our world-class operating platform. Outpace tomorrow, together Our leadership is: Timo Lehne, CEO 1/2022 – present Andrew Beach, CFO 7/2021 – present Kate Danson, Chief Legal Officer and Company Secretary 3/2021 – present Nick Folkes, Chief Operating Officer 9/2023 – present Jelte Hacquebord, Chief Commercial Officer 8/2023 – present Sarah Mason, Chief People Officer 4/2023 - present Our Board comprises: James Bilefield, Chair Timo Lehne, CEO (Executive Director) Andrew Beach, CFO (Executive Director) Denise Collis, SINED Imogen Joss, NED Elaine O’Donnell, NED Sanjeevan Bala, INED

SThree H2 2024 Earnings Call Transcript

Presentation

[Timo Lehne, CEO & Executive Director at SThree]

Good morning, and welcome, everyone. Thank you for joining us today for full year results briefing. I'm Jonker Andy Beach, our CFO. Together, we will be walking you through the full year's numbers, our strategic progress and taking a little on outlook sorry, talking a little on outlook. As a reminder of who we are, we are the only global STEM specialist talent partner, which is a unique offering in the market.

[Timo Lehne, CEO & Executive Director at SThree]

We're purely focused on STEM talent. This means we place people with skills in science, technology, engineering or mathematics into roles across a diverse range of industries and geographies. We place people into STEM roles every day, including engineers to build wind turbines and data scientists to help business harness new technologies. As many of you know, the chart on this page show how our well established strategy is positioned at the center of 2 long term trends, STEM and FlexWare talent. This is where we see our opportunity fulfilling the structural demand for STEM, which is underpinned by megatrends and well aligned to the contractor model.

[Timo Lehne, CEO & Executive Director at SThree]

As a result of this focus, our contract business now represents 84% of group total, up from 82% a year ago. Our bias toward contract provides us with a more profitable and predictable revenue stream and is a powerful differentiator in the market. Next, I wanted to give you a quick overview of the period. So looking at FY 'twenty four, as has been widely reported across our industry, the past year has been characterized by prolonged 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 good performance for the year in spite of market conditions.

[Timo Lehne, CEO & Executive Director at SThree]

And as a quick reminder, FY 'twenty four is well ahead of pre COVID levels. Our technology improvement program remains on track with 80% of our business now on the new platform. This is a core enabler of the mid- to long term opportunity for our business. We will talk through some of the early proof points we are seeing later on in the presentation. As we set out in December, we continue to expect contract extensions to remain robust, providing sector leading visibility into FY 'twenty five.

[Timo Lehne, CEO & Executive Director at SThree]

However, as we consistently said throughout FY 'twenty four, our levels of new business activity remain persistently soft, and the lack of market recovery, which the industry had been expecting, has a knock on effect on the anticipated net fee performance in FY 'twenty five. As a result of these dynamics, the Board took a prudent view of the outlook, and we announced in December that we expect FY 'twenty five profit before tax to be circa £25,000,000 which includes up to £7,000,000 of one off cost to deliver the additional operational efficiencies. Notwithstanding challenging conditions, we have come out of the year as a stronger, smarter and more unified business. We believe we're in the right sectors, the right markets with the right teams, and we continue to be bold in our ambition. We thought it would be useful to spend a bit of time going through what we have been facing from an external point of view with a prolonged and numerous macroeconomic challenges and how we have remained focused on positioning ourselves for the mid- to long term during this time, ensuring that we don't waste the crisis.

[Timo Lehne, CEO & Executive Director at SThree]

We have been navigating an unprecedented environment with a cocktail of factors, including geopolitical uncertainty, high inflation and interest rates and the cost of living crisis. We have also seen a rise in status quo bias on the part of decision makers, resulting in delayed decision making in the short term. On the right hand side of this slide, you can see some data from the European Commission Economic Sentiment Survey, which shows that the past few years has seen the most sustained period of uncertainty since 2,008. Through this extended period of uncertainty, we have not deviated from our plan. I'm truly excited about the strategic advancements we have made.

[Timo Lehne, CEO & Executive Director at SThree]

We proactively took the important step over 2 years ago to initiate a journey to become a digital enabled business through our TIP. And we're well on our path to becoming a fitter, more scalable organization. It is giving our people cutting edge technology AI enhanced tools to boost productivity and performance. These factors, alongside our STEM and contract focus, means that we will be well positioned to capitalize once the status quo buys, subsides and turns to tailwinds over the medium term as investment demand is unleashed. We are not shaping our thinking and decision making around this cycle.

[Timo Lehne, CEO & Executive Director at SThree]

We maintain our forward looking view, focusing on the right markets with the right people and the right strategy over the mid to long term. Despite the short term challenges we are faced with, there remain structural growth opportunities and clear market drivers for us to capitalize on. We have highlighted the megatrends we see previously. This has been supported by some of the data in the recent Future of York's report published by the World Economic Forum. They see numerous trends that will impact the world of work over the next 5 years.

[Timo Lehne, CEO & Executive Director at SThree]

On this slide, we have highlighted several of these trends and shown how each one aligns with S3's areas of expertise. For example, growth in digital access and technology adoption is expected to drive net growth of over 50% in specific technology related roles over the next 5 years, which aligns with our largest scale vertical. We believe we are well placed within each of these structural opportunities, whether it be servicing, growing demand, for instance, in clean energy or helping our clients overcome the sales gap. It is clear that whilst we are facing some tough times, our focus on STEM and contract alongside the clear market drivers, there's optimism for the future.

[Timo Lehne, CEO & Executive Director at SThree]

I will now pass over to Andy to talk us through the financials.

[Andrew Beach, CFO & Executive Director at SThree]

Thanks very much, Timo. Despite the prolonged period of market uncertainty throughout FY 'twenty four, we are pleased to have delivered our 3rd highest net fee and operating profit performance on record, up 13% 14%, respectively, on our pre COVID performance. We also delivered a stable and set the leading operating profit conversion ratio of 17.9%, even after the strategic investments we continue to make in our people and platform. This performance reflects the relative resilience of our net fees through this prolonged cycle combined with tight cost management.

[Andrew Beach, CFO & Executive Director at SThree]

We continue to index 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. As the chart shows, we are less cyclical, which we believe is due to our strategic focus on flexible talent and STEM. We clearly outperformed the market through COVID and over the last 3 years, we have sustained our outperformance over the extended cycle with the gap consistently maintained. This shows that we are more resilient and less volatile through periods of market disruption with our contract order book providing a runway of contract net fees due to be recognized as they are earned on a month by month basis over the life of a contract. As we have seen historically, when markets recover and new placement activity increases, the recovery in net fees tends to be smoother and from a higher overall level, resulting in a more even through the cycle net fee profile compared to permanent dominant businesses where net fees are recognized almost immediately.

[Andrew Beach, CFO & Executive Director at SThree]

Overall, this demonstrates that we have the right strategy and that our business is high quality through the cycle. Looking in more detail at the FY 'twenty four performance, net fees are down 9% on a constant currency basis. Contracts, which now represents 84% of net fees, declined 7%, reflecting ongoing softness in new business, but partially offset by continued strong contract extensions. Permanent, which is a smaller part of our business, declined 18% and continues to be impacted by tough market conditions across most of our regions despite comps now softening and our targeted investment towards contract with average permanent headcount down 7% year on year. Operating profit for the year was £66,200,000 which is down 9% on a constant currency basis, driven primarily by the decline in net fees, partially offset by lower personnel costs with average headcount down 6%, along with tight management of other costs.

[Andrew Beach, CFO & Executive Director at SThree]

This has enabled us to maintain a sector leading conversion ratio, the ratio of operating profit to net fees of just under 18%. Profit before tax is £67,600,000 down 9% year on year, reflecting the lower operating profit offset with some benefit from higher net interest income on our cash. Looking at the regional and skill mix for the period, we have critical mass and a well diversified business in the key growth markets and skill verticals. The first chart shows the split by region with DACH remaining the largest region in the group, representing 35% of net fees. Looking to the right, you can see net fees were lower across most regions with a partial offset from the growth delivered in the Middle East and Asia.

[Andrew Beach, CFO & Executive Director at SThree]

The second ring chart shows our strong and unique position in providing STEM skills. Technology continues to be our largest skill and it represents 48% of net fees. The resilience of engineering means it is our 2nd largest skill, driven by energy and particularly our clean energy business, which is up 5% year on year and now represents 11% of group net fees. This was offset by softer demand for skills in technology and life sciences, reflecting the ongoing challenging trading environment throughout the year. We continue to benefit from the ongoing trend towards flexible working.

[Andrew Beach, CFO & Executive Director at SThree]

This slide looks at our net fees by service. Our contract business can be split between independent contractors and employed contractors. The most notable shift over the last few years has been the trend towards the employed contractor model or ECM, which has grown from 23% of net fees in FY 'nineteen to 39% of net fees in FY 'twenty four. As a reminder, ECM generates net fee margins around 30% to 40% higher than those generated by independent contractors as our clients are willing to pay for the risk and complexity that we assume on their behalf. With our new system, there will be fewer manual touch points, eliminating the need to constantly increase headcount to service our contractors, thereby helping us to achieve higher profit margins and scale more efficiently.

[Andrew Beach, CFO & Executive Director at SThree]

ECM was the focus of our most recent investor briefing in July, which is available to view on our Investor Center landing page. Looking now at the future visibility of our contract business. The contractor order book represents the value of contracts written up to the contractual end date assuming that all contracted hours are worked. The book was down 10% year on year as a robust extensions performance was only able to partially offset the slowdown in new placements from the prolonged market uncertainty. However, even with the decline, the order book continues to provide us with sector leading forward visibility compared to permanent focused staffing businesses with the equivalent of around 4 months' worth of future net fees already booked.

[Andrew Beach, CFO & Executive Director at SThree]

The resilience of the contractor order book demonstrates that whilst new placement activity continues to be soft this year, all other underlying metrics around our contract business are strong. We've seen excellent extension rates over the last year and this has resulted in average contract lengths increasing by 11% compared to the prior year to 54 weeks. To sustain contract margins at 21.7 percent, we've managed tight pricing control, especially with extensions and the average salary of the contract roles that we've placed is up 5% year on year, now reaching £104,000 Productivity was moderately lower year on year as the rate of net fee decline was a little faster than average headcount decline, reflecting careful management of natural churn. We are consciously maintaining headcount ahead of the rate of net fee performance to be ready for when the market returns, given the time it takes for our junior consultants to become productive. Near term, we expect productivity to continue to moderate until market conditions improve.

[Andrew Beach, CFO & Executive Director at SThree]

But over the midterm, we do expect to deliver sustainable increased levels of productivity as our strategic investments in digital infrastructure start to deliver benefits. The TIP remains on budget and the overall timeline remains on track with the TIP rollout initiated across 4 of our group's largest markets, which represents around 80% of our business. The U. S. And UK are live and the deployment in Germany and the Netherlands are progressing as anticipated.

[Andrew Beach, CFO & Executive Director at SThree]

By the end of FY 'twenty four, we have spent a total of £24,000,000 OpEx this year of around £3,000,000 was in the middle of the expected range and weighted to the second half due to the phasing of rollout activities with around £2,000,000 incurred in H2. In addition to the OpEx, we incurred €7,000,000 of CapEx at the lower end of our expected range for the year, again weighted to the second half with around €4,000,000 incurred. As I mentioned at our half year results, we have further refined our forecast for delivery and brought additional functionality into the scope of the program, which means the phasing of OpEx and CapEx has pushed into FY 'twenty five. Overall, we are pleased to continue forecasting spend to be comfortably within the original £30,000,000 to £35,000,000 budget. Turning to the year on year operating profit bridge.

[Andrew Beach, CFO & Executive Director at SThree]

You can see the decrease in both contract and permanent net fees is partially offset by people costs being down year on year. This is primarily due to the 6% average decrease in headcount compared to last year with lower salaries and employer tax contributing around half of the reduction and lower commission and bonus costs due to the net fees being down year on year contributing most of the balance. Also included is the €1,200,000 year on year decline of OpEx costs for the tip and £16,800,000 year on year decline of other operating costs due to very careful management of expenditure across the business in light of top line performance. This leaves profit for the year at £66,200,000 euros Looking at our net cash position, after our usual outflows, a share purchase for the employee benefit trust and lease principal payments and CapEx, including around £7,000,000 incurred on the tip, we also saw a net decrease in our working capital, primarily driven by an increase in trade debtors resulting from a temporary increase in our DSO, which meant we ended the year with cash of £70,000,000 down 16%. We talked at the Q3 trading update about the timing of certain client payments related to a small number of clients and I'm pleased to say that we have made very good progress in this regard during the final quarter of the year.

[Andrew Beach, CFO & Executive Director at SThree]

We expect our net cash to continue to return towards normalized levels over the coming months. Before talking about EPS and dividends, I wanted to share with you a brief reminder of our capital allocation policy. Our overarching intention is to always maximize value for our shareholders. We look to maintain a strong balance sheet to provide flexibility at all times whilst also providing shareholders with a sustainable through the cycle dividend with long term earnings growth. We then prioritize our deployment of capital in the order shown.

[Andrew Beach, CFO & Executive Director at SThree]

I would like to emphasize that while there are no immediate M and A plans on the horizon, it does remain an important part of our mid- to long term strategy. In line with this policy and in light of S3's track record of cash generation and strong balance sheet, in December, we launched a share buyback program of up to £20,000,000 To date, we have repurchased over £3,000,000 of shares and are on track to complete the program no later than our FY 'twenty five half year results. Moving to EPS, our profit after tax is down 7% year on year on a constant currency basis, reflecting the lower profit before tax and a small increase in the number of shares, partially offset by a lower ETR, resulting in an earnings per share decrease of 8% to 37.4p. To reflect our performance this year and long term confidence in the business, I'm pleased to confirm that we'll be paying a final dividend of 9.2p. In addition to the interim dividend of 5.1p, this brings our full year dividend to 14.3p and is in line with our dividend policy.

[Andrew Beach, CFO & Executive Director at SThree]

So to sum up, we are reporting a resilient in line trading performance. Even with total net fees down 9% whilst the challenging conditions persist, this was still our 3rd highest performance on record. Contract was down by slightly less for the year, supported by strong extensions and continues to demonstrate the benefit of our strategic focus on STEM and flexible talent. Even after the investment in the Technology Improvement Program, we delivered our 3rd highest operating profit performance, which has enabled us to maintain a sector leading conversion ratio, reflecting effective management of costs. The contract order book continues to give us good forward visibility of future net fees, and we have a robust balance sheet, which will fund our future ambitions.

[Andrew Beach, CFO & Executive Director at SThree]

Thank you. I'd now like to hand back to Timo.

[Timo Lehne, CEO & Executive Director at SThree]

Thank you, Andy. We will now turn to look at what we have achieved strategically throughout the year. Turning to our operational progress, we have our 4 strategic pillars, which we consistently report against, being our places, platform, people and position. I will now touch on each pillar in turn with an emphasis on our platform pillar this time around, given the focus on our technology improvement program rollout during the year. A key component of our growth ambition is ensuring our market coverage remains aligned to the best STEM markets and scale verticals through continuous evaluation and our market investment tool.

[Timo Lehne, CEO & Executive Director at SThree]

Our simplified structure has enabled us to channel all of our efforts during FY 'twenty four in strengthening our operations in each of our core markets for long term success. For example, in the U. S, we're now running business as usual on our technology platform, having been the first reason to roll it out. We have also reorganized the business to focus on a more balanced skills portfolio and evolved our go to market strategy. These actions mean we enter the new year with a clear focus on the growth opportunities there, which stands us in good stead, particularly given that we expect the region to rebound faster than other markets.

[Timo Lehne, CEO & Executive Director at SThree]

More broadly, other areas of focus in the year have been investing in our technology and capacity to embed data driven insights throughout our operations, both to enhance the services we provide to clients and to also inform our pricing and scale vertical investments in each market. We have also evolved our global client approach to emphasize greater client collaboration and service. These initiatives leave us with stronger foundations to grow both organically and through selective M and A at the appropriate time, positioning us well to capitalize when markets recover. Turning to our platform. This year has marked a considerable step change in our transition to a digitally enabled organization with the TIP rollout now initiated across 4 of our 5 largest global markets and 80% of our business now onboarded and using the new platform.

[Timo Lehne, CEO & Executive Director at SThree]

We are delighted with the progress we have made. As a reminder, we are replacing our legacy systems with a cutting edge end to end technology platform built on Microsoft that will enable us to drive scale and is key to delivering sustainably higher margins over the mid to long term. Each deployment improves as we take forward learnings, while we are continually introducing enhancements and automations. We now have 5 AI enabled processes in operation, eliminating previously manual processes in placement support, payroll and the IT help desks, with further AI to drive enhanced productivity across our sales teams scheduled for FY 'twenty five. It is still very early days, but we are pleased to already be seeing early signs of proof points from the new platform.

[Timo Lehne, CEO & Executive Director at SThree]

The AI enabled automations rolled out to date have already delivered around £2,000,000 of annualized savings in the U. S, where over the past 12 months, we've reduced the manual interventions on over 4,000 new placement onboardings and contract extensions, while removing the need for manual management and approval of around 43,000 timesheets. While we have not yet delivered Tech Enablers into our sales processes, we are seeing some evidence that even the basic tools are delivering productivity improvements. We have highlighted on this slide a key metric to illustrate this point, which is the change in contract placements per heads between the period just before we rolled out into the U. S.

[Timo Lehne, CEO & Executive Director at SThree]

And over the past 12 months. Given the challenging trading environment, we are overall seeing a decline in placement activity across the group since the first half of FY 'twenty three. However, the data shows a superior performance in both the U. S. And Germany, which were the first markets to go live and have had access to the new platform the longest.

[Timo Lehne, CEO & Executive Director at SThree]

In fact, we have seen an improvement in the performance of our most junior sales consultants in the U. S. And Germany with contract placements ahead up 8% in both markets for this cohort. As a reminder, shortening the time to productivity of this cohort was a major proof point of the business case for the TIC. Unfortunately, it is impossible to fully attribute changes in placements per head, particularly given the effect of market conditions.

[Timo Lehne, CEO & Executive Director at SThree]

But historically, we have seen much less market driven volatility in the performance of our most junior cohorts. This improvement in their performance in both the U. S. And Germany, even before we have delivered the enhanced functionality, is a very encouraging early indication that our new systems will deliver the expected benefits. We have bold ambitions to be a digital first innovator in our industry, and we see huge scope to drive scale and margin by leveraging the power of modern technology.

[Timo Lehne, CEO & Executive Director at SThree]

Now turning to our Peter pillar, the engine of our business. During the year, we have seen early positive impact from enhanced processes to improve employee retention, including a reduction in sales consultant churn this year. In addition, we have dedicated considerable efforts through our change program with a focus on upskilling, ensuring that our teams have been prepared for the demands of a new system as we progress the global rollout of our new technology infrastructure. This has been a big change for our teams, and we continue to adapt and take learnings as we move forward, listening to feedback and refining our approach. There have also been big investments in leadership development, and we successfully activated and embedded new company values.

[Timo Lehne, CEO & Executive Director at SThree]

In November, we hosted a 2 day senior leadership conference where it was clear that we are strategically placed to lead this industry, not just because of our expertise, but because we focus on what truly matters: innovation, building strong partnerships and staying ahead of the trends shaping the future of work. I left the event energized and inspired by the incredible conversations and insights. We can hear, feel and see how, as a company, we are all aligned on our clear vision. Together, we're strategically well placed to continue leading the industry, thanks to the commitment and passion of our people and our strong client relationships. In terms of our position through a more unified brand portfolio, we are working to tie our brands closer together to elevate the collective power of the group and enhance our position within our markets and skill verticals.

[Timo Lehne, CEO & Executive Director at SThree]

We are already seeing evidence that our proposition as a stem partner is gaining increased momentum with larger enterprise clients evidenced by 8% year on year net fee growth with our top client cohort. To support our efforts, we launched the latest of our thought leadership initiatives with our Global STEM Survey Report, How the STEM World Works, Navigating the New Era of AI and Trust. The report provides insights for our clients looking to create the right environment and workforce to embrace AI and digital transformation. Findings such as the fact STEM professionals are losing nearly 6 hours each week due to insufficient AI support. And the prevalence of digital illiteracy in leadership are just some findings and advice that our clients seek to help them make the right workforce decisions.

[Timo Lehne, CEO & Executive Director at SThree]

At our Capital Markets Day in FY 'nineteen, we announced our 2024 ambitions, which were refreshed in FY 'twenty two and have guided our actions and strategic initiatives in our journey to become the number one stem talent provider in the best global stem markets. We have made good progress against the vicious targets that were set. Based on the market data available to us at the end of Q3 FY 'twenty four, we've outperformed our local peer group on a net fee basis versus FY 'nineteen. The current macroeconomic headwinds have negatively impacted net fees and dampened the overall margin progression. However, the group has continued to invest in its people and platform.

[Timo Lehne, CEO & Executive Director at SThree]

While 21% could have been achieved, we have prioritized investing in our longer term ambitions while still maintaining a sector leading conversion ratio of around 18% in FY 'twenty four, despite the difficult market conditions. We have reached our goal of having an EMPS in the upper quartile of the professional service industry with an average score for the full year within that upper cohort. Lastly, I'm pleased to say that our carbons emissions target was surpassed in FY 'twenty two with a 44% reduction. However, we fell slightly short of the target in FY 'twenty four, achieving a reduction of 21% compared to FY 'nineteen. So to sum up, our resilient performance in FY 'twenty four has been underpinned by robust contract extensions and our STEM specialism.

[Timo Lehne, CEO & Executive Director at SThree]

The technology improvement program remains on track with the deployment across 4 of the group's largest markets. We now have 80% of the group on the platform. We have taken a prudent view on our outlook for FY 'twenty five, given that we expect new business pressures to continue. Nonetheless, we remain confident that we have the right strategy and energized team and a robust technology platform, which becomes more powerful as we roll out additional functionality, leaving us well placed for the future.

Participants

Executives

• Timo Lehne, CEO & Executive Director
• Andrew Beach, CFO & Executive Director