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Edited Transcript of STHR.L earnings conference call or presentation 22-Jul-19 8:30am GMT

Half Year 2019 SThree PLC Earnings Call

London Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of SThree PLC earnings conference call or presentation Monday, July 22, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Smith

SThree plc - CFO & Executive Director

* Mark Dorman

SThree plc - CEO & Executive Director

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Conference Call Participants

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* Andrew Charles Grobler

Crédit Suisse AG, Research Division - Analyst

* Bilal Aziz

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Kean Marden

Jefferies LLC, Research Division - Equity Analyst

* Rahim Nizar Karim

Liberum Capital Limited, Research Division - Research Analyst

* Steven John Woolf

Numis Securities Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the SThree half year Results. (Operator Instructions) We'll now hand the call over to your speakers, Mark Dorman, CEO; and Alex Smith, CFO. Please begin.

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Mark Dorman, SThree plc - CEO & Executive Director [2]

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Hi there. Good morning, everyone, and I'm pleased to welcome you to our first half results for 2019 for SThree, and my first as CEO of SThree. I'm incredibly excited to be here and particularly, the opportunities ahead for us at SThree.

As you can see, we're a large global company focused on STEM and focused on Contract. And given the scale that we have and our geographic dispersion, we have a really great global platform for long-term sustainable growth moving forward. And I'll talk about that a little bit later on our strategy. But first of all, I'm going to hand over to Alex Smith, our CFO. He's going to talk us through our numbers and our performance in the first half of the year. Alex?

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Alex Smith, SThree plc - CFO & Executive Director [3]

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Thank you very much, Mark. Good morning, ladies and gentlemen.

So turning to Page 4 in the book, an overview for the first half. We had a very strong growth in net fees. We saw double-digit growth across 3 out of our 4 regions, and 86% of net fees are now generated from our international businesses.

We drove strong profitable growth in the period, so adjusted PBT was up 18% year-on-year to GBP 24 million.

Strategically, we continue to focus on Contract, and we saw a very good performance in terms of Contract net fees, up 12% year-on-year in the half, with standout growth in Energy, Engineering and Technology.

And the group continues to invest and continues to drive returns from that investment. We ended the first half with our sales headcount up 12% year-on-year, our average headcount up 7% in the first half. I'm pleased to confirm that we've realized now annualized savings from the move to Glasgow of GBP 5.5 million per annum. And that strong performance underpins an increase in the interim dividend of 0.4p, from 4.7p to 5.1p, and that was after a 0.5p increase in the dividend at the final.

So I just wanted to set the first half performance in a bit of kind of historical context. So looking at the 5-year CAGRs, H1 '14 to -- through to H1 '19. Our net fees have grown 10% per annum, our operating profit and basic EPS have both grown at 24% per annum over that period of time. So a strong and consistent performance and a decent performance in H1 2019.

Moving on to Slide 6, financial highlights. Revenue for the group, and I'm going to quote essentially on a constant-currency basis, so I'm going to be talking down the right-hand column. Revenue, up 10%. And that revenue grows at a slightly faster rate than net fees, up 9%, as we continue to remix in line with our strategy towards Contract. And as I mentioned, Contract net fees, up 12%. A modest decrease in perm net fees, down 1%, giving total net fees up 9%.

Operating profit, up 18% on an adjusted basis. Let me just pause for a moment on the adjusting items. So we have the final adjusting items in respect of the move to Glasgow, which was a small net GBP 0.1 million cost in the period. But we also had CEO change costs in the first half relating to the exit of Gary and the onboarding of Mark. So certain contractual payments, legal payments, double-running costs, relocation costs, et cetera, taken in the half.

In terms of the conversion ratio. Conversion ratio, up 1.2 percentage points, so -- and we've seen a strong improvement in adjusted profit. And that's driven by 2 principal factors. The contribution from Glasgow in the half was just under GBP 3 million worth of operating profit. We had GBP 2.6 million last year, GBP 2.9 million in the first half of this year. That gets you to the lower cost base of GBP 5.5 million saving that we talked about. And also in the first half, our average consultant productivity grew by 1%, and that has attractive financial gearing characteristics, too. So those are the 2 of the big call-outs really in terms of the move in terms of operating profit.

So driving our profit before tax up 16%, adjusted. And then in terms of the effective tax rate, we've indicated an effective tax rate up on prior year by 1 percentage point to 27%, reflecting principally geographical mix, driving a profit after-tax on an actual adjusted basis up 17%.

Moving on to the balance sheet on Page 7. So a couple of call-outs really here. Net working capital, a slight increase due to seasonal phasing of receipts and payments. But pleased to confirm that we've enjoyed a 1 day reduction in DSOs, days sales outstanding, between the end of 2018 and where we ended the half year. So a move in the right direction, which I'm pleased about.

And also worth calling out that we have a small amount of net debt on the balance sheet. We have significant facilities provided by our bankers, Citibank and HSBC, GBP 50 million RCF committed through to May 2023 with an accordion and an overdraw facility as well, so we've got good liquidity lines there.

Moving on to Slide 8, the cash flow bridge. So we started the year with a net debt of just over GBP 4 million. If we add back the operating profit before exceptional items, non-cash items such as depreciation, amortization, share award charges, there's a slight FX tailwind in the cash flow statement of GBP 0.5 million. And we then spend our cash. We spent on treasury shares, so we spent just under GBP 1 million buying treasury shares. Just over GBP 1 million on H1 CapEx. We have GBP 1.6 million worth of restructuring costs, so cash costs relating to the move to Glasgow and some of the CEO change costs. Dividends. So this was the interim dividend 2018, which we paid in the first half. Taxes, of course. And then the working capital, the movement that I've touched on. So that's the net asset -- a seasonal movement with a day improvement in DSOs. And that took us to a closing net debt position of GBP 8 million.

I just wanted to kind of reflect on the London-based support relocation to Glasgow. We announced our intentions to do this on the 1st of November 2017. We then talked about it at our Capital Market Day later that month, and I look back to see what we've set out there. And back in November 2017, we talked about looking at relocating 250 roles; looking for a cash payback of 2.5 to 3 years; savings annualized to GBP 4 million to GBP 5 million, of which we expected about GBP 1 million in 2018; and an all-in cash cost of between GBP 12 million and GBP 14 million. And I'm pleased to say, in terms of what we've delivered, we've really delivered ahead of those expectations. So number of roles relocated, 240 roles; financials, though, stronger. So cash payback of about 2 years on a simple basis. We realized benefits of GBP 2.6 million in 2018, and I've talked about the GBP 2.9 million in the first half of 2019. And the total net cash cost actually towards the kind of the middle of that range, and that's after receiving about GBP 1.5 million worth of grants.

So that projects -- complicated projects successfully delivered, and key to driving up our conversion ratio of net fees to operating profit. But also very importantly, it gives us a great platform for this to help the scaling of the business going forward and has brought in new skills to the organization that, again, will help us mature and grow.

So Slide 10 is more of a technical slide I suppose. So in terms of profit after-tax, on an adjusted basis, up 17%; and on a reported basis, up 27%.

In terms of the weighted average number of shares, both for basic and then fully diluted, broadly level year-on-year, which gives a basic adjusted EPS of 13.5p, up 16%; or a basic reported EPS of 12.7p, up 26%. And on a diluted basis, adjusted at 13p per share, up 17%; and diluted reported, up 27% at 12.2p. So a barrage of numbers there. Apologies. And as I've already mentioned, the dividend, interim dividend up by 0.4p.

FX essentially has been a modest tailwind in the half, so if we'd retranslate it at H1 2018 rates, our net fees would have been GBP 1.6 million lower, and our operating profit GBP 0.4 million lower. We've got a tailwind from the dollar and a slight headwind currently from the euro.

Turning to Slide 12. As you know, over the last 5 years, we've had a strategic refocus towards Contract. Why? Because Contract is particularly well suited to the STEM roles that we place. Why? Because we make more money out of placing a Contract candidate than the equivalent Permanent candidate. We've talked to you before about lifetime values. Why? Because it's more predictable, it's more resilient and it's a massive secular trend that we're following. And here, I set out the Contract volumes and net fees per day rate over the last 5 years. Reflecting on H1 2019, a particularly strong performance in terms of Contracts in Continental Europe and the U.S., offsetting some weakness in the U.K.

Our focus on perm in the last 4 or 5 years has been more to drive productivity and profitability. And when we focus on the performance in the first half, we had particularly strong performances from Germany and Japan, which was up 9% in Germany, 53% in Japan, but offsetting some weaknesses, particularly in the U.K. But overall, perm now represents 26% of the group, and Contract represents 74% of net fees.

Now I'd like to hand over to Mark, who will talk through the strategy and the business overview.

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Mark Dorman, SThree plc - CEO & Executive Director [4]

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Thank you, Alex. So I thought I'd begin just sort to review for everyone and really a reaffirmation of why I'm excited and why I'm here at SThree as the new Chief Executive. First of all is our purpose, bringing skilled people together to build the future. I'm purpose-driven. My colleagues in the business are passionate about doing this. As I think about what we do as a business, we provide the single most valuable asset to any business: its people. And that's a really exciting thing for us to do every day.

And if I think of our vision, to be the #1 STEM talent provider in the best end markets, that really, as Alex indicated, is focused on key secular trends in the marketplace, in areas that are changing all of our lives moving forward that is both good for society and the economy generally but also good growth trends for the business.

So as we think of STEM, Science, Technology, Engineering and Mathematics, this is the first of a long-term secular trend that we focus on. So we think about the fourth industrial revolution, which is upon us, thus changing every aspect of the economy and the way we live our lives. In Life Sciences and how medical technology, not just exciting new things, like genetic editing, but also medical devices. Demographically, people are getting older and want to have longer, more active lives, and medical technology is going to help them get there. Long-term secular trend for us.

Technology, I think everyone understands that every single industry is being impacted by the use of new technologies. And even in engineering, where we see shifts from traditional mechanical engineering into electrical engineering in all aspects of rebuilding smart grids to renewables. All of those 3 components of STEM are driving our growth. So the opportunity ahead of us long term is enormous. There's a rapid pace of change. And in those markets, there's skill shortages. And so most of the markets we operate are supply-constrained. And so SThree, as experts in understanding talent and STEM talent, it places us really at the center of future growth for the long term.

As Alex mentioned Contract, we call it Contract. It manifests itself in very different ways in the different geographic areas we operate, but this is really around our second long-term secular trend of flexible working. From millennials that are now holding jobs for less than 2 years, and that's declining over time, to the growth in the gig economy, project-based work that aligns very well with STEM disciplines, this is another long-term secular trend that we're seeing play out, and SThree is very well positioned and has been, over a long period of time, building expertise in delivering not only flexible workers to the marketplace in STEM disciplines but also understanding the requirements around compliance in new areas of value, like IR35, new regulation coming into the U.K. but similar regulations happening around the world.

And so as we see the rise of both STEM and as -- the growth in STEM roles and the rise of flexible working, SThree, long term is positioned incredibly well to capture those opportunities.

And so those are really the 3 components that drives growth: we're specialists in STEM, our focus on Contract and our geographic dispersion in footprint really allow us to capture the growth in the market globally and become a global platform for growth.

Underpinning that is our management on portfolio discipline, being in the right place at the right time with the right offerings. Our platform scale and efficiency. So building on the capabilities that we've started in Glasgow. And then having that purpose at the center of everything we do, bringing skilled people together to help companies build the future.

With a well-diversified business, so we've got a good balance between Contract and Permanent, still maintaining our Permanent end markets, where there's good growth. And we've got a terrific growing business in Japan, albeit of a small base, but that's the dynamic of that market, and we understand how do maintain enterprise-wide relationships with talent. We've got a good balance geographically with strength 58% of our net fees coming from Continental Europe, and big growth in key markets like The Netherlands and particularly in Germany. A growing business in the United States, the single largest STEM market in the world, growing double digit. And then through the sector focus that we have, 45% of our net fees coming from technology, 21% from engineering and 19% from Life Sciences. We have a well-balanced, well-diversified portfolio to build on.

And so we're also making good progress against the strategy that we updated you all at the end of 2018. Increasing our office capacity in Germany and Japan, investing and increasing our headcount to grow and extend our regions, sectors and services. We've seen good performance in improving our retention of our customers, increasing both our candidate and our client NPS scores, Net Promoter Score, an indicator of future performance, from 42 to 46, so a big improvement there.

Our focus on Contract. So our contractors, up 4% and net fees, with our day rate up at 5% as well. And our U.S. contract net fees, up 22% year-over-year, so -- in the world's largest STEM market. So real improvement and real performance growth there.

We're generating incremental revenue through investments in new technology, new things. HireFirst, our internal startup is now market testing and getting good feedback in the market in France. Small way of us really understanding new ways of engaging with talent using technology. And as we build infrastructure for leverage growth, Alex talked about our move to Glasgow being incredibly complex but successful, and we pulled that off on time, ahead of budget and delivering real results.

And lastly, what's center to everything we do with our people business in all centers of the world, but investing in our people function, both in terms of increasing our retention of our people over time, but also investing in new leadership and development programs, and we've hired a new Chief People Officer, Matthew Blake, that joined us in the half. So making good progress there.

And so as I think about the outlook, I thought it would be handy just to give you a flavor of our resilience against some of the challenges that we may be thinking about for the future. If we think of some of the macroeconomic risks, STEM's -- our STEM specialization and our weight towards Contract means that whilst there may be headwinds in front of us, we're in sectors of the market that continue to have long-term secular growth that suits our model particularly well.

We also have good visibility of earnings. So just recurring nature of Contracts gives us a better visibility in what's happening with our business moving forward. We're globally diversified, so it gives us our balance across multiple geographic markets from Japan to Continental Europe to the USA. And we have a flexible cost base that we can adjust accordingly depending on what the business environment throws at us.

I thought I'd leave it to the third from last slide before I mention the B word, but since everyone will probably want to know about the B word. We also focused on maintaining a hedge against there. 86% of our net fees come from outside of the U.K. and Ireland, so we're well placed. Even within the U.K., we're actually well placed in some key markets that are growing, notably public service -- public sector and Life Sciences. And internally, like many companies, we've been living with the B word for 3 years now and have a program and a Board to manage through what our plans would be in the case of a Brexit.

So our outlook. I think given our strong first half performance, we are well positioned to continue to benefit from the growth and opportunities in the best end markets. Our focus there gives us a real opportunity. We will continue to focus on execution. Our expectations for the full year remain unchanged. And our continued resilience through diversification both by sector, by geography and most importantly, with our experienced management team really help us see out the future.

Our top 30 sales leaders driving our business in the region, have, on average, between 15 and 20 years' experience, both SThree and in the recruitment industry more generally. So we're really well positioned as we enter the second half to capture the opportunities ahead of us.

So a quick look at the financial calendar, I know it's only July, but we'll be together again shortly for our Q3 trading update on the 13th of September. On the 21st of November, we'll update you at our Capital Markets Day with the details that sit below our high-level strategy. And on the 13th of December, our trading update for the year ended 30th November. And then next year in January, our annual results.

So with that, we should take questions. We'll start in the room, and then we'll go to the phone.

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Questions and Answers

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Bilal Aziz, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [1]

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Bilal Aziz from UBS. Just 2 questions from my side, please. Clearly, a very strong performance on conversion margins. Can you talk us through the building blocks in the second half, in what's likely to be a more subdued and uncertain environment for the top line? And secondly, some of your peers have suggested that contract extensions have started to slow down. Any comment there on more recent trends would be helpful.

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Mark Dorman, SThree plc - CEO & Executive Director [2]

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Yes. Maybe I'll do the high level. And do you want to do the detail, Alex?

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Alex Smith, SThree plc - CFO & Executive Director [3]

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Yes.

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Mark Dorman, SThree plc - CEO & Executive Director [4]

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So I think, there's no doubt, there's those macroeconomic clouds ahead of us. In the markets that we serve, I think our focus on STEM is really in supply-constrained markets. So as yet, we haven't seen anything, but obviously, we're keeping it -- keeping an eye on it, speaking to our regional leaders. I think it depends where you are, but there's certainly -- these employers are looking for STEM talent, and that's one of their biggest concerns, is how do they get the right talent in place for the future.

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Alex Smith, SThree plc - CFO & Executive Director [5]

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Yes. In terms of the H2 building blocks. Given the performance we've delivered in H1 and looking at the consensus for the full year, it does imply a softening in terms of profit drop through, which we expect because as I mentioned, we did have a big benefit in H1 from Glasgow, the final kicker of that, if you like. So in terms -- we see continued positive momentum across Continental Europe, in the U.S., in particular. So it's continued top line performance. I suppose a couple of points, our headcount, we enter the second half with double-digit growth in headcount, which is very much skewed towards our key regions, number one. Number two is our churn rates have come down year-on-year. So we've got a, if you like, a tenure tailwind as we come into the second half of the year, which is potentially quite significant. And a stat that I enjoy throwing around is that a consultant with more than 12 months' experience is roughly 2.3x more productive than less than 12 months' experience. So we're kind of very well set up as we move into the second half whilst mindful of the fact that some lead indicators are starting to soften.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [6]

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It's Andy Grobler from Crédit Suisse. Just a couple, if I may. I know you saw only 3.5 months sort of the role. But having looked at the business, what do you think needs changing? And I guess, specifically in the U.K. which has had a very difficult time over the last several years? And then secondly, Contract gross margin was up in the first half. Could you just talk through the drivers of that change, please?

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Mark Dorman, SThree plc - CEO & Executive Director [7]

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Sure. Why don't I do the first part? Alex can take you through the Contract margin drivers.

So the U.K. has been disappointing for some time. I think we are seeing the green shoots in some areas. So I talked about public sector specifically as well as Life Sciences seeing some growth. I think as Alex indicated more broadly on our headcount, retention rates of our salespeople have increased and improved significantly in the U.K. I think that, combined with more strategic focus on our headcount, is -- gives us some confidence that we want to improve that performance over the next 6 to 12 months moving forward.

In terms of what needs to change, I mean, the way I'd frame that rather than the premise would be how do we continue to build on the success that SThree has had. So I can't take credit for the strategy thus far, but focusing on STEM, focusing on flexible ways of working and make sure that we have the right portfolio and the right markets and execute well, I think that's where the focus is going to be.

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Alex Smith, SThree plc - CFO & Executive Director [8]

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Yes. And in terms of the Contract gross margin percentage. We've had strong performances -- particularly strong performances in the U.S. and Germany. And outstanding in the U.S., strong in Germany. Not only are they significantly up year-on-year, but they're also grossing the group average, so that flows through nicely in terms of the overall group Contract gross margin percentage.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [9]

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And sorry, just to follow up on the U.K. because it has been mentioned before that it's on the cusp of improving and hasn't really got there. And given the macro backdrop is probably going to get harder rather than easier, why do you think now is the time to a, have the headcount up; and b, the -- we're really on that point of change?

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Mark Dorman, SThree plc - CEO & Executive Director [10]

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So I think it's the -- as Alex said, the tenure of the headcount there, we've improved, and so we should see a productivity increase. I think some of the areas that we're focusing, we are seeing some growth. I mean, public sector and Life Sciences, in particular, seeing some growth. I think that, plus the weighting of coming of -- we used to be heavily weighted in financial services in the U.K. That's a lot of the history of SThree. And as we de-weight on that and look to other sectors that are still supply-constrained for STEM talent, technology talent, in particular, I think there's opportunities for us. But there's no doubt that in the U.K., we're in a more challenging environment.

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Steven John Woolf, Numis Securities Limited, Research Division - Analyst [11]

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Steve Woolf from Numis. A couple of insight. Following up on that U.S. performance, just the driving factors between that contractor rate being up 22%, just maybe about mix and the volume side of things, where you think there are acute shortages there? And then to follow up perhaps on what you've just said, Mark, where do you think you're lagging and leading in terms of those markets and wishing to be #1? And then almost a follow on to that is do you think you're in all the geographic markets you should be where the opportunities lie or whether you feel a need to sort of expand outside of the existing base?

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Mark Dorman, SThree plc - CEO & Executive Director [12]

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Sure. Well, to the last one first. And so in terms of the geographic markets, I think for SThree, we're broadly in the right geographic markets. I think we're in 5 of the top 7 staffing markets globally. And in the industrialized markets that have the biggest growth opportunities, I think we're in the right markets there.

In terms of leading, we're certainly outperforming and have continued to outperform the market growth in Germany, the Netherlands and the U.S. And I think those are the areas that we'll continue to really focus on in terms obviously our growth moving forward.

In Japan, which has got a slightly different dynamic, it's off a small base and we're in permanent ex-pat market. That's essentially where we focus. There's certainly good opportunity there as that market tries to get the same advantages from technology, particularly software technology into Japan. And do you want to answer the...

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Alex Smith, SThree plc - CFO & Executive Director [13]

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Yes. And so in terms of the Contract performance in the U.S., I mean, we've had double-digit growth in all our sectors apart from banking, but we were up 14% in IT, 73% in Energy and 16% in Life Sciences, and the heads work -- the headcount investment that you quoted there, Steve, has broadly followed that shape.

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Steven John Woolf, Numis Securities Limited, Research Division - Analyst [14]

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And just in terms of -- a follow-up on that. What's the price point on that? Is that the 22% in terms of wage growth? You'd have said there [both] fee rates your side.

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Alex Smith, SThree plc - CFO & Executive Director [15]

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Right. So in terms of wage growth in the U.S. For Contract, we saw a 14% growth in wage inflation. So for our contractors, driven by Life Sciences, up 7%; and Energy, up 33%. So Energy has been -- we've had a big shift there in terms of placing higher-value roles, particularly around power transmission, renewables, so clearly, a quite big mix change there. And in terms of the U.S. fees then, so the U.S. average net fee per day rate was up 28%, and yes.

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Unidentified Analyst, [16]

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Tom [Cali], Investec . Just a couple from me on the Contract side of the business. So you talked about your exposure to the public sector and private sector. Can you maybe give us a flavor as to the impact or potential impact of the IR35 coming in next April on the private sector? And also just to follow up on something that Alex mentioned on the lifetime value piece. Can you just remind us what that is and sort of how that's potentially changed over the last few years?

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Mark Dorman, SThree plc - CEO & Executive Director [17]

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Sure. So on IR35, as I'm sure everyone knows, IR35 has already been in place in public sector. And we were one of the early leaders in both understanding and consulting with the government in terms of what the impacts would be and how we would play it. We are actually seen within the industry as a bit of a thought leader in terms of what IR35 means to contractors and to companies as well as the public sector and employing temporary staffing. And so we actually see it as possibly more of a positive than a negative because it could be a new value-add service that actually we -- companies are looking for advice on as well as just the type of talent they need, what's the best way and how do they employ them in the most compliant way and obviously, we can help them with that.

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Alex Smith, SThree plc - CFO & Executive Director [18]

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Yes. And I think particularly given our experience in the public sector. So in terms of lifetime value. So what we're talking about there is if you think of a -- for example, an IT skill in the U.K., looking at the Contract lifetime value versus the equivalent Permanent fee. So we look at the life that, that -- the length of how many months that runs, how many weeks that runs for. We look at the net fees, the cost attached to that, compare it to the perm equivalent fee. And what we see is a premium across the group. On average in the first half, it was just over 40%. And we cannot typically -- it fluctuates between probably 40% and 50% over time. So it's a significant premium. But also as Mark mentioned, that's one of the reasons we like Contract. But there's plenty of other reasons why we like it. And perhaps one reason that we didn't highlight was the cash characteristics of Contract. When you're in strong growth, there's a working capital of cost to that as we have to prefund the contractors, pay the contractors before the (inaudible) pay us, cash outflow roughly GBP 10,000 per contractor. As growth levels off for us and kind of steady state growth, we become very cash generative. In the event that we see a decline in our Contract business, like we did in 2009, for example, we have a significant working capital release. And again that comes obviously at a time where other financial metrics are looking more distressed. So it's a good cash counter-balance when earnings are less predictable and underpins the dividend, which is a key part of proposition.

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Rahim Nizar Karim, Liberum Capital Limited, Research Division - Research Analyst [19]

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It's Rahim Karim from Liberum. A couple of questions, if I may. You guys both talked a lot about the importance of Contract, and there's not a major departure, but perhaps the emphasis is being slightly more than under Gary. Is there a point at which the perm business becomes such a small portion of the group that it becomes unimportant and perhaps your focus could become entirely Contract? Or is there a rationale for having both -- and a strong enough rationale for having both? And then the second question is just on Germany. We obviously had some updates from your peers a couple of weeks ago. It will be helpful if you could just remind us on where you stand relative to perhaps, a, why your outlook is -- you haven't seen such a strong sharp retracement there? And perhaps the outlook for the second half?

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Mark Dorman, SThree plc - CEO & Executive Director [20]

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Okay. So on Permanent, I think we'll always have a Permanent business in the right markets and for a couple of reasons. So number one, it could be the structural nature of the market. So think of Japan, for example. That is a Permanent market in the space for STEM right now in terms of where we operate. I think it's also important, if you -- whilst we see it as a business model shift and an offering shift, if I'm a customer, I don't tend to think of things in that -- those stark terms. I think of it as I have a piece of work that I need to get done and I need to staff accordingly. There'll be a blend of some Permanent and some Contract. Their weight is moving towards Contract, but to have a really good customer relationship and be really focused on our customers, we need to have a foot in both camps to be able to do that. But the weighting is clearly towards Contract because that's the long-term secular trend, as I've said.

In terms of Germany, I can't speak for anyone else. They have to speak for themselves. But if we think of our business and where we are focused on in Mittelstand, in STEM, in technology and engineering specifically, there's a real skill shortage, and that's the #1 concern of companies as relayed by the German Chamber of Commerce. And I don't know if you want to add anything else?

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Alex Smith, SThree plc - CFO & Executive Director [21]

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Yes. I mean I think in Germany, as Mark says, we're very Mittelstand-orientated. And what we're seeing there is still characterized by our MD there as a good market. Perhaps some of the froth is coming off, but it's still a great market with great opportunities. We've got -- we're seeing hot skills in tech, so kind of embedded, cloud, cyber and business risks. These are some of the examples of really in demand skills that we're placing. Mark mentioned in his opening preamble of brand, mechanical engineering and electrical engineering. Well, kind of the blend actually of those in Germany is, particularly, again, in demand as our guess is thinking about electronic transmission systems, things like that. And lots around pharma and construction. So we're seeing kind of very positive demand for our niche skills really across all our principal sectors in Germany.

It's also worth reminding people that Germany is still a relatively immature market from a staffing point of view. In 2009, our German net fees remained level, even though Germany, as an economy, had a bigger peak-to-trough contraction than the U.K. So we're very positive about what we're seeing in Germany.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [22]

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It's Kean Marden from Jefferies. First of all, Alex, could you possibly run through what steps are required in Glasgow to improve DSO further in the second half? Or is it just a case of letting that new facility bed in a little bit? Then secondly, you've obviously started increasing the dividend over the last 12 months. Is there maybe a case for reviewing the timing of the payments now as well? You're obviously quite unusual in paying the dividends about 12 months after announcing them. And then thirdly, could you possibly share with us some examples of the operating and leadership principles that you reference on the bottom of Slide 18?

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Alex Smith, SThree plc - CFO & Executive Director [23]

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Yes. Okay, in terms of DSOs. So I mentioned that we're pleased that we've made an improvement the half year versus full year. We plan to and expect to make further improvements in the second half. It's driven by a number of different factors. So the teams are becoming more experienced in terms of the SThree systems, processes and clients. But we're also investing in tools to assist the teams. So we're in final shortlist for new credit management system that we'll -- we think have a good impact for us. Probably only marginal for full year 2019, but set us up very well looking forward. We are in the process of piloting robotic process automation to upload information into client portals, which will drive efficiency. It essentially means we can get free cash flowing in more quickly. And even, would you believe, some clients still insist on paper invoices. And one of the initiatives -- we've got a whole raft of initiatives to get us to where we need to go to, but it's to have a local printing because at the moment, a lot of stuff gets posted from Glasgow overseas.

So those are some of the kind of practical steps we're taking. We're also always looking at how we incentivize the team and making sure that we're managing the team and incentivizing the team as effectively as possible. And looking at other process opportunities, so how we onboard clients is massively important to make sure we get the master data accurate so that we can get the invoices raised in an accurate way and don't end up with a credit note reissue cycle because of inaccuracies in master data. And looking at PO processes and things like that. So kind of quite detailed process improvement-type stuff. But as I look at the work we need to do and look into, if you like, the third quarter, which we're now in the middle of and look forward, I think we are on the right trajectory to seeing a further good improvement in the second half.

In terms of the dividend point. It's not 12 months, it's 6 months and a day or so. So yes, we do. It's something that we've been doing for a long time and I guess, we can look at that in due course. Mark, do you want to...

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Mark Dorman, SThree plc - CEO & Executive Director [24]

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Yes. So on the leadership principles. So we have our leadership principles of build, trust, care then act and then aim high. And really the focus there is around how do we build trust and deliver for our customers, how do we think about caring and developing our people and then how do we focus on being very goal-oriented and ambitious in our goals. And so really, it's customer-focused, taking care of our people and making sure we're delivering.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [25]

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And so on the operating principles?

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Mark Dorman, SThree plc - CEO & Executive Director [26]

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So those are the operating principles.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [27]

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Sorry. I thought you said those were the management principles -- sorry, the leadership principles.

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Mark Dorman, SThree plc - CEO & Executive Director [28]

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Yes.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [29]

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Or they're both basically? Yes.

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Mark Dorman, SThree plc - CEO & Executive Director [30]

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Yes. They're one and the same.

Okay. Take some questions from the phone now.

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Operator [31]

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(Operator Instructions) Currently, no questions registered on the telephone line, so I hand the call back to the speakers. Please go ahead.

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Mark Dorman, SThree plc - CEO & Executive Director [32]

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Okay. Well, thank you, everyone. Good to see you all, and we shall see you all back again on the 13th of September. Thank you.

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Operator [33]

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This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.