SThree reveal gross profit up 10% as it publishes its half year results
· Permanent GP up 2%* YoY and Permanent deal pipeline volume up 5% YoY
· Period end Group sales headcount up 12% versus the year end position and up 20% YoY
· 70% of Group GP now generated in markets outside the UK & Ireland (H1 2013: 69%)
· Excellent performance in the Americas (up 62%* YoY), which now represents 14%* of Group GP (H1 2013: 10%)
· Continued sector diversification with non-ICT disciplines now representing 60% (H1 2013: 55%)
· Encouraging performance from Banking & Finance up 20%* YoY
· Strong performances from our less mature global sectors - Energy up 52%* YoY, Life Sciences up 43%* YoY
* at constant currency
The prior period reported figures include the results of the IT Job Board business ("ITJB") which was sold in the second half of 2013. For comparison purposes, the results of the ITJB have been removed from the prior period to show Like for Like ("LFL") figures.
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26 May 2013
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Profit before taxation
Basic earnings per share
Interim dividend per share
Gary Elden, Chief Executive Officer, commented: "As expected, the Group performance improved during the first half as the economic recovery gained momentum in a number of our markets.
"Contract made further progress in all territories as it continued to benefit from a greater strategic focus and increasing exposure to new global high growth markets, particularly Energy and Life Sciences. Contract gross profit increased by 22%* year-on-year and now accounts for 60% of Group gross profit.
"The Americas had a very strong first half, growing 62%* year-on-year and we are doubling our office space in San Francisco and Houston to accommodate our expansion plans.
"During the second half, we are focusing on driving up the productivity of new hires, particularly in Permanent, with headcount growth moderating.
"As we look forward, the strength of our Contract book, investment in headcount and benefits of the restructuring in the second half of last year will provide the Group with a solid platform for growth and operational gearing into recovery. Our seasoned home-grown management team and strong financial position give us confidence in the medium term prospects for the business."
Against a more encouraging macroeconomic backdrop, we delivered an improved first half performance, with business confidence and trading momentum picking up through the period. This resulted in 13%* YoY growth in Group gross profit ("GP") largely driven by Contract and growth in our newer businesses, especially the Americas. We also saw strong performances from our Energy and Life Sciences businesses across most of our geographies and they are making an increasingly important contribution to the Group result.
Period end Group sales headcount was up 20% YoY which leaves us well positioned for the future. No new offices were opened in the period as we focus on driving the productivity of existing teams across the Group, with future investment in new territories in the second half of the year only likely where it is necessary to meet specific client requirements.
The Group operates in the specialist recruitment market and is strategically focused on rolling out the SThree model to an increasing number of geographies and across a range of disciplines. In implementing this strategy we are building on a combination of our pure play STEM positioning, multi brand approach, entrepreneurial culture, and mix of Contract and Permanent exposure, whilst also growing our global database of candidates and clients.
We had noticeable success in many of these areas during the first half. With a greater weighting towards Contract, the Group is increasingly engaging with larger global clients and driving higher volumes of business, whilst still targeting higher value, niche specialist roles.
Breakdown of GP
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Asia Pac & Middle East
Contract was again a key area of focus in the first half. After successful launches in the USA and Australia, the Group is in the process of rolling out an employed contractor model and enhancing its contractor service offerings in other regions. The investment in headcount combined with increasing exposure to new high growth global markets, particularly Energy and Life Sciences, resulted in a 22%* YoY increase in Contract GP.
The Contract exit growth rate in Q2 2014 was pleasing, with period end runners up 26% to 6,493 (H1 2013: 5,171). The Group experienced the usual seasonal reduction and rebuild in runners from the end of the previous financial year. We ended the period with 12% more runners than at the 2013 year end, the traditional peak (YE 2013: 5,791), giving the Group a strong platform to build from in the second half of the year.
The Group made 3,057 Permanent placements in the first half of the year, a 1% reduction YoY (H1 2013: 3,093) but an increase in average fees (on a constant currency basis) led to a modest improvement in GP (up 2%* YoY). Period end headcount in our Permanent teams is up 19% YoY and we expect to see an improved performance in this business as this newer headcount matures and productivity increases. The Permanent pipeline at period end was up 5% on a volume basis.
As a result of the stronger Contract performance, we saw a further re-mixing of the business in favour of Contract, with Contract GP representing 60% of Group GP, up from 55% in H1 2013 (FY 2013: 56%). The further evolution of this metric in the near term will be at least somewhat dictated by the macroeconomic backdrop in the remainder of 2014 and in 2015. In a more challenging environment Contract tends to be more resilient but when sentiment changes for the better, Permanent can recover very quickly. However, both Permanent and Contract benefit from improving sentiment - Permanent being more driven by candidate confidence impacting on churn and Contract being more impacted by client confidence. We are therefore pleased to have a balanced business with a significant presence in both Contract and Permanent markets.
International diversification and expansion
The Group saw growth across its international footprint, especially in Contract. The Group's geographical business mix saw a further shift in favour of our international operations with overall GP generated outside of the UK&I increasing to 70% (H1 2013: 69%). We expect this trend to continue, with the Group becoming increasingly internationally diverse. That said, we retain full confidence in the long term potential of our highly profitable UK&I business and expect to see a strong return to growth as sentiment continues to improve in these markets.
UK&I overall GP at £30.6m was up 6%* YoY (H1 2013: £28.8m) as the market continued to improve and the benefits of our recent investment in headcount began to come through. The business mix has continued to move towards Contract. Period end contractors were up 15% YoY, with GP per day rate ("GPDR") up 4%* YoY. Although Permanent placements were down 9% YoY, average fees increased by 6%* YoY.
Continental Europe GP was up 7%* YoY at £47.8m (H1 2013: £45.2m). Period end contractors were up 17% YoY and GPDR grew by 9%* YoY. Permanent placements were down 13% and average fees decreased by 1%* YoY.
Americas overall GP was up 62%* YoY at £13.6m (H1 2013: £9.0m) and it now represents 14% of Group GP (H1 2013: 10%), with the USA being the main driver in the region. The major contributors to growth were the Energy, Life Sciences and Banking & Finance sectors, which were up 73%*, 64%* and 44%* YoY, respectively. Americas Contract GP was up 95%* YoY and Contract now accounts for 55% of total GP (H1 2013: 46%). Contract runners increased by 130% YoY and GPDR increased by 4%* YoY. Permanent placements increased by 46% YoY, while average fees fell by 7%* YoY, mainly due to sector mix. Our performance in the USA has been highly encouraging and we see significant opportunities to maintain these high levels of growth. Office space in San Francisco and Houston is being doubled to accommodate our expansion plans.
Asia Pac & Middle East GP was up 19%* at £8.8m (H1 2013: £8.5m), with notable contributions from Energy and Life Sciences, up 27%* and 127%* YoY, respectively. Permanent placements increased by 24% YoY, while average fees fell by 7%* YoY. Asia Pac & Middle East Contract GP was up 32%* YoY. Contract runners increased by 64% YoY, while GPDR fell 5%* YoY.
Of the Group's 52 offices in 21 countries, 38 are outside of the UK. Much of the Group's international growth in the second half will come from achieving scale in locations and sectors in which we already have a presence as we continue our focus on driving up the returns from our existing office portfolio.
Sector Diversification and Expansion
SThree is focused on five core sectors Information & Communications Technology ("ICT"), Energy, Engineering, Life Sciences and Banking & Finance. In line with its strategic objective, the Group has made significant progress growing its newer sectors.
ICT represented 40% of GP during the year (H1 2013: 45%). ICT is our longest and most established sector and consequently the majority of ICT business is in the more mature UK and European markets and its performance reflected this geographical bias. We see an exciting opportunity to roll out ICT beyond the UK and Europe, with promising early results seen from Computer Futures in the highly fragmented ICT recruitment market in the USA.
Non-ICT enjoyed very strong growth, particularly Energy and Life Sciences which were up 52%* and 43%* YoY, respectively. Banking & Finance continues to face challenging conditions but has had an encouraging performance up 20%* YoY.
High Value and Niche
Over the years we have consistently pursued a "High Margin High Value" approach to ensure that the Group maintains a focus on the quality of the business it transacts. As the Group expands into new sectors where it is increasingly engaging with larger global clients which offer higher volumes of business, this approach is being maintained to ensure we are still able to target higher value, niche specialist roles without sacrificing business quality.
The Group's overall gross margin declined to 29.5%* (H1 2013: 31.6%) due to the re-mixing towards Contract. The Contract margin has remained robust at 20.1% (H1 2013: 20.4%) while the average contractor GPDR increased by 7%* during the first half, reflecting geographical and sector mix benefits. The Group's average Permanent fee in H1 was broadly stable at £12.5k (H1 2013: £12.7k).
The Group ended the period with total headcount of 2,579 (YE 2013: 2,327), an increase on prior year end of 11% and building on a significant increase in headcount in the latter months of 2013. Relative to the 2013 year end position, UK&I sales headcount grew by 11%, Continental Europe was up 13%, Americas up 21% and Asia Pac and Middle East up 3%.
Overall, average sales headcount was up 17% YoY, with Contract consultant average headcount up 25% YoY and Permanent consultant average headcount up 11% YoY. Consultant headcount continued to remix towards Contract during the half year, with Contract consultant numbers up 12% and Permanent consultant headcount up 11% since the year end. At the end of the period, Contract consultant headcount represented 50% of total consultant headcount for the first time in the Group's history. This investment in headcount puts us in a strong position to take advantage of improving market conditions.
Operating profit increased by 23.5% to £8.4m (H1 2013: £6.8m). Despite the increase in GP, our investment in headcount inevitably meant that we were carrying some additional costs in the period before these new hires become fully productive.
At the start of the period the Group had net cash of £8.7m. During the period, the Group used £5.5m of cash in operations (H1 2013: £3.2m) mainly due to higher working capital from an increase in the Contract business. Whilst the cash outflow on capital expenditure reduced to £2.3m (H1 2013: £3.7m), income taxes paid increased to £4.8m (H1 2013: £1.9m) and dividend payments to ordinary shareholders were steady at £5.7m (H1 2013: £5.7m). The effect of exchange rate changes was to reduce net cash by £1.3m (H1 2013: increase net cash by £2.9m). Other net cash inflow movements of £0.8m (H1 2013: net cash outflow of £1.2m) resulted in the Group having net debt of £10.1m at 1 June 2014.
The tax charge for the six months amounted to £2.5m (H1 2013: £2.1m) at an effective rate of 30% (H1 2013: 32%).
Earnings per Share
Basic earnings per share were up 27% to 4.7p (H1 2013: 3.7p). Diluted earnings per share grew by 26% to 4.3p (H1 2013: 3.4p).
The Board proposes to pay an interim dividend of 4.7p (H1 2013: 4.7p) per share. The interim dividend will be paid on 5 December 2014, to the shareholders on record at 6 November 2014. The total payment to shareholders on this date will be approximately £6m.
Treasury Management and Currency Risk
On 27 May 2014, the Group signed a committed revolving credit facility of £50m with RBS and HSBC which expires in May 2019. Borrowed funds bear interest at a minimum annual rate of 1.3% above relevant Sterling LIBOR.
The main functional currencies of the Group are Sterling, the Euro and the US Dollar. The Group has significant operations outside the United Kingdom and as such is exposed to movements in exchange rates.
The Board periodically reviews its hedging strategy to ensure that it remains appropriate. The Group does not engage in speculative trading. The impact of foreign exchange is significant for the Group, with the international business now accounting for 70% of GP in H1 2014 (H1 2013: 69%). The Group will continue to monitor its policies in this area.
Other principal risks and uncertainties
Other principal risks and uncertainties affecting the business activities of the Group, are as detailed within the Strategic Report section of the Annual Report for the year ended 1 December 2013, a copy of which is available on the Group's website at www.sthree.com.
In terms of macroeconomic environment risks, our strategy is to continue to grow the size of our international business and newer sectors, in both financial terms and geographical coverage. This will help reduce the Group's exposure or dependence on any one specific economy, although a downturn in a particular market could adversely affect the Group's key risk factors. In the view of the Board, there is no material change expected to the Group's other key risk factors in the foreseeable future.
The Group is well diversified, both geographically and by sector and, as a result, is trading in markets with varied characteristics. While the specialist staffing market does not need high levels of GDP growth to perform robustly, a sustained and wide-ranging recovery in candidate and client confidence is key.
During the second half, we will be focusing on driving up the productivity of new hires, particularly in Permanent, with headcount growth expected to moderate.
As we look forward, the strength of our Contract book, investment in headcount and benefits of the restructuring in the second half of last year will provide the Group with a solid platform for growth and operational gearing into recovery. Our seasoned home-grown management team and strong financial position give us confidence in the medium term prospects for the business.
* in constant currency
SThree will be announcing its Q3 Interim Management Statement on Friday 12 September 2014.