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Edited Transcript of STHR.L earnings conference call or presentation 27-Jan-20 9:30am GMT

Full Year 2019 SThree PLC Earnings Call

London Jan 29, 2020 (Thomson StreetEvents) -- Edited Transcript of SThree PLC earnings conference call or presentation Monday, January 27, 2020 at 9:30:00am 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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* Alexander Christian deGroote

Radnor Capital Partners Ltd, Research Division - Consultant

* Andrew Charles Grobler

Crédit Suisse AG, Research Division - Analyst

* Chirag Vadhia

HSBC, Research Division - Research Analyst

* Kean Marden

Jefferies LLC, Research Division - Head of Business Services Equity Research

* Sanjay Kumar Vidyarthi

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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Mark Dorman, SThree plc - CEO & Executive Director [1]

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Okay. We good? Okay. Well, welcome, everyone, to SThree's full year update, the results for the year ended 30th November 2019. So I'm Mark Dorman, CEO of SThree, and I'm joined today with Alex Smith, our CFO. So today, we'll go through our results and give you a good update.

So I thought I'd start, first of all, with a little reminder about SThree, so who we are. We're all about STEM, so Science, Technology, Engineering, Mathematics, which means -- for us it means we're focused on Life Sciences, Technology, Energy and Engineering, Banking & Finance. We're 33 years young as an organization, and we're about 3,200 people globally.

You can see in our full year '19 results, we've grown to GBP 1.35 billion in revenue, our net fees are GBP 342 million and our operating profit is GBP 60 million, with operating cash flow at 91%. And below there, you can see our 2013 to 2019 annual growth rate, so impressive consolidated growth over that period.

And then for full year '19, on the far right there on that slide, you can see that we are a global organization with 86% of our net fees generated outside the U.K. And our focus is on flexible working, which we call Contract.

So all of that adds up to make us unique. We are the only global pure-play STEM specialist. So we are unique, and that places us in a really interesting space as we think about our results and our performance moving forward.

Our purpose, as you saw in the very -- in the cover slide, is to bring people together to build the future. And so we sit at the center of 2 long-term secular trends. One is in STEM and STEM recruitment, these roles are critical for the future of the world as we enter into the Fourth Industrial Revolution, and we sit at the center of that. You can see our diversity of the roles that we place along those sectors.

And the other secular trend is around flexible working. We happen to call it Contract, but that manifests itself in different ways in over the 70 jurisdictions where we place that key STEM talent. And we also have a unique global footprint that allows us to operate in the best end markets in the world.

All of that combined mean that for 2019, we had strong performance that underpins our record profits for the group. So our all-time record profit for the group of GBP 60 million of adjusted operating profit, up 11% year-over-year. As I said, 86% of our net fees are generated outside of the U.K. Our net cash was ahead of consensus at GBP 11 million. And I'm pleased to say that we're able to increase our dividend to 10.2p, which is a result of our strong performance.

So without any further ado, we'll get right to the performance, which I'm sure is what you've all been waiting for. So with that, Alex, do you want to walk us through the numbers?

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Alex Smith, SThree plc - CFO & Executive Director [2]

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Thank you very much, Mark. And good morning, ladies and gentlemen.

So we have a strong track record. As Mark said, a record set of results, record in terms of revenue, record in terms of net fees and record in terms of operating profit. And I know Mark has commented on these numbers, but I want to just dwell on this for a moment.

CAGR, 6-year CAGR, 2013 to 2019, net fees are up 10% per annum. Operating profit, 6-year CAGR, 19% growth. And EPS, 6-year CAGR, 24%. So a very strong performance. Indeed, a record financial performance in 2019.

Now the percentage movements I'm going to talk to here are on a constant currency basis. So I'll be talking through the kind of the right-hand column there in terms of that. So stripping out the impacts of FX. So revenue for the year, GBP 1.345 billion, up 6%. Net fees up 5%. And again, with a strong performance in terms of our Contract net fees, up 8%, with a slight decline in Perm, down 3%. But overall, net fees up 5%.

And it's pleasing to see operating profit up 9%, to see the operational gearing kicking through. Part of that is driven by the step-down in costs that we saw in the first half from the move to Glasgow and also from growing a scaled, more profitable business overall. So the conversion ratio, the ratio of operating profit to net fees has increased by 0.6 percentage points to 17.5%.

Profit before tax then, up 9%. And if we think about our effective tax rate, our effective tax rate in 2019 increased by 1 percentage point to 27%, reflecting the geographical mix of profits. And we expect the ETR, the effective tax rate, to move up to 28% in 2020, again based upon our anticipated mix of geographical profits. So giving us a profit after tax, up 9%.

Our balance sheet, a robust balance sheet, I'd like to say. And actually, if you look at the balance sheet, 2 numbers I really want to drill into, net cash and net working capital.

So in terms of net cash, I'm very pleased to say that we delivered a net cash number ahead of consensus and up GBP 14 million or so year-on-year. We also have committed revolving credit facilities with HSBC and Citi, committed through to May 2023. We have uncommitted accordion facility of GBP 20 million, again, with HSBC and Citi, and a GBP 5 million uncommitted overdraft facility with HSBC. And at the year-end, we weren't drawing down on any of those facilities.

On this balance sheet, I've broken out the net working capital rather like we did at the Capital Markets Day. And what you can see is that the bulk of the net working capital relates to our Contract business. And if you think about it, in terms of the life cycle of a contractor, we have situations where we paid the contractor, where we've just taken somebody on. They've worked their first time -- their first period, we paid them, we've invoiced the client, but we've not yet received the money. All the way through to the other end where we paid the contractor the final payment and we're still awaiting the money from the client. So that Contract and that working capital reflects all the kind of life cycle of our Contract business. Think of it as deferred cash in another way.

So moving on to cash. We had an improved free cash flow conversion in 2019. Operating profit of GBP 60 million, adding back noncash items like depreciation, some LTIP charges. Allowing for the working capital outflow supporting the growing business, we get to an operating cash flow of GBP 54.8 million or an operating cash flow conversion ratio of 91%, and that's up 16 percentage points year-on-year.

We've also started talking more about working capital as a percentage of revenue. And our working capital as a percentage of revenue held rounded level at 7%. Actually, it was down on a -- from 7.3% to 7.2%. But we've held that working capital as a percentage of revenue and yet driven the business forwards.

Moving on from operating cash. Taking off the taxes that we paid in the year and our financing costs, we drive a free cash flow of GBP 41 million, and the free cash flow conversion ratio has increased by 20 percentage points year-on-year. And we've used that free cash, of course, to fund the operations of the business. So CapEx of the business; the final knockings of the restructuring, principally relating to the CEO changes and the last payments in respect of the move to Glasgow; the purchase of shares to fund LTIPs and tracker share schemes; and of course, dividends of GBP 19 million; as well, of course, as increasing our cash reserves.

So pleased to report a strong EPS growth. This slide, a little bit busy in nature, but just talking through, we present adjusted and reported numbers here.

So adjusted profit after tax, i.e., before the exceptional items that I've just talked about, up 8%. But if you look through the restructurings, i.e., look through the CEO change costs, look through the senior leadership change costs and the tail end of the move to Glasgow costs this year and last year, you have a -- as reported, profit after tax, up 20% year-on-year.

Weighted average number of shares for basic EPS, up 1%, so a slight increase. But the dilutive impact of share schemes has actually reduced. So that on a fully diluted basis, our weighted average number of shares has only increased very modestly. So giving then a basic EPS on an adjusted basis of an increase of 8%. On a diluted basis, we see the increase of 9%. And again, looking through the adjusting items, basic EPS at 31.8p, up 19%; or diluted at 30.9p, up 20%.

Moving on to the dividend. We were pleased to announce an increase in both the interim dividend, which we've previously announced, of 9%, and in the final dividend, an increase of 4%, taking us to an increase in the full year dividend of 6%, which is fractionally ahead of market consensus.

Of course, as we saw from Mark's opening slides, the business is very international in nature. So 86% of net fees come from international markets, and so we're sensitive to FX. In 2019, we had a modest FX tailwind. And this increased net fees versus the average rates for 2018 by GBP 4.3 million and the operating profit by GBP 1.2 million.

This slide shows the sensitivity of a one percentage -- 1% change in the euro and the dollar in terms of both net fees and operating profit. And you can see there that we're particularly sensitive to the euro. So a 1% change in the euro is roughly a GBP 2 million impact on net fees, GBP 600,000 on operating profit. And the dollar, more like GBP 0.75 million for a 1% move in terms of net fees and GBP 0.25 million in terms of operating profit. So we are sensitive to FX given our international nature.

And if we look at rates that were prevailing as at the end of last week, where we saw GBP 1.17 to the euro and GBP 1.30 to the dollar, that impact, if we were to retranslate 2019 at those rates prevailing at the end of last week, would be an GBP 11 million impact to net fees and an impact of GBP 3.2 million to operating profit.

So on that note, I will hand back to Mark.

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Mark Dorman, SThree plc - CEO & Executive Director [3]

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Thank you, Alex. So what I'd like to do now is just spend a little bit of time reiterating where we see the opportunity in the long term, and then take you through a little bit of a business update on each of our regions, which will be important to understand the makeup of our business moving forward.

So I think as we explained in our Capital Markets Day, we are a unique business and we are a scalable platform business. Not only that, we're focused on the most attractive STEM staffing markets.

So what you see here is a map. The red areas indicate markets that we operate in. The size of the bubble here is the size of the market opportunity. The gray markets are other attractive STEM markets that we don't operate in. And so you can see that given the size and scope of our global footprint, we do tend to be and we are in the most attractive markets.

We're also at some scale. We made 20,000 -- over 20,000 new placements in 2019 to over 6,000 customers. And whilst we only actually physically operate in 16 countries around the world, we actually place those candidates into over 70 unique jurisdictions where we need to understand the unique dynamics of those markets and the employment and labor laws that prevail. So we are a truly global business in the right markets driving our growth.

And as we think about moving forward to the long-term ambitions we shared in the Capital Markets Day, the opportunity for us is huge. On this chart, which is from the SIA, the independent analysts' association on staffing, shows you the size of the overall staffing market by revenues. And you can see that on the far left is the global number. And just to orient you on this chart -- on this stacked bar, the gray -- and the total represents the total staffing market, the gray is non-STEM, the orange is the STEM staffing market and the yellow at the bottom is SThree's revenue share.

So you can see that we have a modest global share of 2% of these markets. And these represent the largest markets for us and for the global STEM market: Germany, U.K., Netherlands, U.S. and Japan, in which we have scalable operations that we can believe we can grow and capture the opportunity. And you can see, given our scale, even in markets where we are the #1 STEM provider, such as the Netherlands, where we hold about 6%, 7% market share, there is still significant headroom and significant opportunity for us to grow the business dramatically over that longer-term period.

How we go to market is through individual brands that connect our value proposition both to the candidate communities that are in scarce supply as well as the companies that are looking to get that STEM talent: in Technology with Computer Futures, in Life Science with Real, in Engineering with Progressive and in Banking & Finance with Huxley, where no one is really understanding the niches that sit within STEM rather than a global provider. And we connect with our customers and the value proposition of connecting that really great talent with the challenges they have.

And so whether that's the 10,000 global candidates that are quality assurance specialists critical to the production of medical devices and new pharma drugs or whether it's solar technicians as the move to more renewables in Engineering, we understand the candidates, we understand the opportunity and the challenges to be solved, and we connect those 2 together through the brands that go to market.

So with that, I'll do a little bit of a business overview. We are a well-diversified business, as you can see with our global footprint. On the left there, in 2019, you can see that about 60% of our business is in Continental Europe, split between the DACH region, dominated by Germany and Benelux, which is dominated by our Dutch business driving the performance of the business. As you can see, between 2018 and 2019, there's a slight uptick as the U.S.A. becomes increasingly important as a core market for us and the impact marginally of Japan, a good market for us in Asia Pacific.

If I move on to some of the key performance indicators for the group in 2019, a busy slide here with lots of data on it for all of you keen eyed analysts. But you can see that our revenue grew, as Alex has pointed out, by 6% to GBP 1.345 billion, our net fees to GBP 342.4 million. And 2 key indicators for us is our headcount, up 7% through 2019 to just over 2,400. This is a key indicator of our future performance as we embed new sales force to give us new access to markets. And then importantly, as we focus on becoming more customer-centric, is an improvement in our Net Promoter Score, a good indication of how we're performing with our customers.

Below that line, you'll see 3 different metrics. On -- starting on going from right to left, rather than left to right, you'll see our sector diversification in Technology continues to be an important part of our portfolio. As you would imagine, in STEM, Technology is critical as software becomes more and more an important component of all industries and skills to help all companies grow and develop.

You see there a split between our Contract and Permanent. The inside ring being 2018, the outside ring being 2019. You can see a slight move again to Contract versus Permanent, but we remain a full service provider but flexible -- being able to provide flexible working solutions overall.

And on the left-hand side, you'll see what we call our contractor order book. Now what this represents is the total of all work that's currently under contract, so think of it as a work in progress metric and a good indicator of the direction of travel for the business. And you can see that, that continues to improve year-over-year, and our 3-year CAGR of 15%.

Moving to the important regions, starting with our largest region, DACH, of which Germany is the biggest component. You can see the same breakdown of performance there, with revenues up 13%, net fees up 10% and we continue to invest in headcount there at 13%. And really impressive, a best-in-class NPS score of 51. And so anything above -- around 40 is considered really good, 51 is excellent in our German business. The order book for Germany -- or for DACH continues to increase, strong growth in our net fees, Contract up 14%, Permanent also up 5%, a standout in Technology continues to drive this region.

In Benelux and France, you can see our performance there, the Netherlands, comprising the largest part of this region. Continued growth in revenue, net fees and modest investment in headcount in a thoughtful way to core markets where we are. And despite a stellar year in 2018, continued growth even against a much more challenging macroeconomic environment, particularly in the Netherlands in that region. So good to see that we are outperforming the market markedly there.

And the order book, a little more muted there. So we've got work to do in terms of driving our new sales to continue that performance and growth. And really as a headline around that, more challenging macroeconomic environment. But Netherlands, as you can see, still performing very well, up 8%. And the 2 largest sectors, Technology and Engineering, up 9% and 10%, respectively.

Moving to the U.S. Another good year of growth in the U.S. Net fees up 9% and continued investment as we see the U.S. become an increasingly more important market for us, with headcount up 11%, and again, an impressive NPS score of above 40 points. Our order book in the U.S. continues to grow, and double-digit growth in our 2 largest sectors, Life Sciences and Energy and Engineering, continues to drive our performance in the U.S.A.

U.K. and Ireland, a challenging -- more challenging market for us. You can see we declined in net fees and saw muted investment in our headcount, focused much more on driving productivity and improvement in our key sectors. But you can see there that we still have a good Net Promoter Score, meaning that where we do add value and we do see opportunity, we are delivering in the U.K.

As a result of performance in '19, we made a management change in Q4 to refocus the strategy to get us back to growth in the U.K. and certainly moving us to flat moving forward. Our net fees declined over the year, but we did have robust growth in the Life Sciences sector with net fees over 4% -- up 4%. And so the focus for the management team there is to take the success that we've had in those key sectors and begin to translate that into the other sectors we operate in.

Our smallest region, but still important, is Asia Pacific and the Middle East, continued to grow there in some of those more emerging markets, the Middle East, in our office in Dubai. And Japan is key for us in terms of growth. So we have a small but growing order book there, really driven by Japan, our largest country in the region. So a net fee growth of 43% and good contract growth in Dubai, up 19%.

And so those are our regions with some of the key facts and figures. And you can see that in most of our regions, we're growing well. We still have work to do in the U.K. and Ireland. But long term, we believe our strategy is right.

So as we think about our strategy, 2019 was a bit of a milestone year with a new CEO coming in. And so what did we do in the year? Well, first of all, as you will have seen throughout the presentation today, it was about embedding our purpose. Bringing skilled people together to build the future is core to how we operate at SThree in everything we do.

Continuing to improve our teams and make sure we have the right blend of sales and other functional capabilities to help drive our strategy forward was also important. And development of our strategic process and our new strategic pillars to help guide the business along our journey towards our long-term ambitions.

Focusing on customer-centricity. I've talked about Net Promoter Score, but deeply understanding the articulated and unarticulated needs of our customers is critical as we think about how we add value to our customers or our candidates moving forward, how do we embed that throughout all of the organization. And then to support to all is how do we continue to build our global infrastructure so that we can maintain the improvement in our operational leverage as we grow in scale as a platform business.

And so to remind you of our strategic pillars, here is our new 4 strategic pillars that we unveiled at our Capital Markets Day. Leveraging our position at the center of STEM, Science, Technology, Engineering, Mathematics, to deliver sustainable value to both our candidates and our customers, so making sure that we're adding value to both of those important stakeholder groups for us. Creating a world-class operational platform through data, technology and infrastructure, an important underpin to make sure that we get that operational leverage as we scale and grow across the globe.

Make sure when we choose to operate in a key market, a, select the right markets, and we are in the right markets; but make sure we actively choose to be the leader there, and how do we operate within the sectors to drive our growth moving forward. And then last but certainly not least, the thing that drives all of us as a people business, is find, develop and retain the best people in the marketplace.

And so just to remind you, what's that all building to is our group ambition that we unveiled in November, is to increase our global market share by 50%, so from 2% to 3% of the global STEM market; to improve our conversion ratio from 17.5%, as we just announced in full year 2019, to a range between 21% and 24%; to improve our free cash flow from 68%, it's where it is now, to 75% by 2024.

And then importantly, measures that we unveiled at our Capital Markets Day, continuing to invest in our people by making sure that we spend at least 5% of our operating profit on their development, and make sure that we look to reduce our carbon emission, our absolute CO2 emissions, by 20% over the period, which is on a business that will be 50% larger. So a pretty ambitious goal to make sure that we keep all of our stakeholder groups in balance and we provide a good target to deliver for our societal responsibilities.

As we look specifically, maybe shorter-term on 2020. Starting down at the bottom right here, I'll go on a little bit of reverse order, which is we are committed to our vision of being the #1 STEM provider in the best STEM markets, which is why we have our ambitions -- group ambitions to 2024. We'll continue on our journey in 2020 on execution to make sure that we get the right people. We continue to build our infrastructure and move forward and invest in data and technology. And make sure that we're well positioned in our key markets to be more resilient.

That being said, it's clear that the broader economic and political uncertainties will persist, whether that's coronavirus or many other uncertainties that we see today. And what we're seeing is a trading environment that's very similar to Q4 last year. We have the right strategy, and the right Contract focus will really drive us forward in 2020 towards those longer-term group ambitions.

So with that, here's our financial calendar. We'll see you very shortly in a couple of months for our Q1 trading update. The time does fly very quick. But with that, I think we'll be happy to take questions. I think we'll take questions first in the room and then we'll go to the phone.

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Questions and Answers

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Sanjay Kumar Vidyarthi, Liberum Capital Limited, Research Division - Research Analyst [1]

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Sanjay Vidyarthi from Liberum. A question on productivity and how we should think about any level of improvement in the year ahead. Thinking about the headcount investment that you've made in various markets, but also what are you seeing in terms of staff churn and how that might come through. Any improvements there?

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

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So that was a 3-part question there. But thanks, Sanjay. So I think, first of all, on churn, so we continued to focus on retention, particularly on our sales force, because we know there's a direct correlation between tenure and productivity. So making sure not only do we get the right people in the right spots, but we continue to improve their productivity, churn and keeping them for longer is improvement. And we're seeing churn at least the same or slightly improved by a few points. I don't know if you have the specific number.

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

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Yes. So churn 2019 was 2 percentage points lower year-on-year. And it's really pleasing to say -- to see continued good progress in Germany. So Germany saw a 3-point improvement. U.K. saw a very significant improvement actually. U.S. is stable. So overall, the churn level has improved in 2019. As Mark said, there's this kind of very clear correlation, more than 12 months, 2.1 times more productive in less than 12 months. So you've got that churn and tenure tailwind that we should be able to reap the benefits of.

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

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So you got that. And as you think about productivity, so markets like the Netherlands will be much more focused on productivity than adding heads; whereas markets where we continue to see new growth, like Germany and the U.S., we'll continue to invest in those markets.

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Steven John Woolf, Numis Securities Limited, Research Division - Analyst [5]

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Steve Woolf from Numis, a couple from me. Firstly, what is that retention level or churn, whichever way you want to look at it, that's improved by 2%? Secondly, in terms of the expansion in headcount, does that involve any more new offices you see particularly in those growth markets that you flagged? And then thirdly, just in terms of the U.K. and IR35 now for the private sector, just thoughts, impact around there. Because obviously, we've shrunk the U.K. business by a lot with IR35 in the public sector, and now obviously, Brexit. So just thoughts on that and the impact there, please.

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Mark Dorman, SThree plc - CEO & Executive Director [6]

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Okay. So maybe I'll take the U.K. question first, and then, Alex, you want to do the specifics on the numbers. So starting with IR35, there's no doubt there's some uncertainty in the market as to what that -- how that's all going to play out. I'd say that we are actually very well positioned for IR35. We spent a lot of time in terms of consultation and briefing our customers and are really seen as a thought leader, quite frankly, in that space.

IR35 for the private sector is due to be implemented from April moving forwards, and I suspect there'll be some pause and uncertainty for that period until it all shakes out. But we actually see it as an opportunity. Because we've had the experience of doing it in the public sector where IR35 is already in force, we've actually seen growth in our public sector market as a result because you'll see a flight to quality of the larger players that actually have the capabilities to deliver. And we are certainly can't be any more ready in terms of understanding which contractor should be in, which should be out of IR35 and advising our clients moving forward. So I think some uncertainty in the short term; much longer term though, I think, it's actually an opportunity for us in the U.K.

Do you want to do the churn numbers?

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Alex Smith, SThree plc - CFO & Executive Director [7]

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Yes. So in terms of the actual churn numbers, so 37%, 2019, versus 39% in 2018, that sales churn. The non-sales churn is much lower, but we've particularly focused on sales churn. In terms of new offices, there's a couple of offices where we are at the point of wanting to find larger premises. But it's not a year of significant new office openings, it's much more about making the best of the space we've got.

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Mark Dorman, SThree plc - CEO & Executive Director [8]

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Yes.

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Unidentified Analyst, [9]

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ECM, in the statement, there was a good number of stats sort of talking about the growth within ECM. Could you perhaps sort of give an indication about where you are in the different territories in terms of the penetration, both in terms of the top end but also where the rollout is still a couple of years in?

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

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Yes. So [in terms of] ECM, employed contractor, where we actually have the employees and do a back-to-back contract is what ECM is. That's driven very differently in different jurisdictions as to where we operate in, and so there's a very different flavor around the world. So it's not really -- it's always hard to put it into one bucket.

So in the U.S., I'd say over 90% of our contractors are employed contractors, or W-2 as it's called in the U.S. And in the Netherlands and Germany, I'd say we're more nascent in terms of our operations there. We do operate AUG in Germany, which is the model in Germany for employed contractor; and data sharing, which is the model in the Netherlands. So we think there's actually significant upside in those 2 markets as we begin to expand that opportunity beyond the traditional freelance model that we've operated there.

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Unidentified Company Representative, [11]

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Okay. There are some questions on the phone, so we hand over to the queue.

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

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Okay.

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Operator [13]

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(Operator Instructions) And we first go to Kean Marden at Jefferies.

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Kean Marden, Jefferies LLC, Research Division - Head of Business Services Equity Research [14]

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I have 3, if I could. Just turning back to Slide 27, and we look at the reduction in the contractor order book in the U.K. Could you perhaps just help us understand the relative contributions from the economy, the IR35 uncertainty and maybe some sort of SThree-specific factors as well, given that you changed management? Or maybe will we be picking up there the fact that, I think, activity preelection might have dipped, and therefore, measuring it at the end of November last year maybe sort of captured some of that weakness? Then secondly, would you mind providing an update, please, on the credit management system and the RPA pilots that you put in place last year? And then thirdly, can you provide some background on the increase in the bad debt provision, which almost doubled during the year?

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Mark Dorman, SThree plc - CEO & Executive Director [15]

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All right. Thanks, Kean. So I'll -- why don't I take the first one and then Alex can do the cash questions. So on the U.K., I'm not sure there are specific numbers on the association of external versus internal factors on performance. But I think it would be fair to say that it's -- there are certainly SThree performance issues that are a significant component of the lack of performance in the U.K. and Ireland that we're looking to address with that management change.

That being said, you are doing it in an environment with significant uncertainty running up to an election and then you've got IR35 right on the back of that in Q1. So there's certainly dampening of the overall market. But given that we sit inside the STEM market and where we do perform well in the U.K. so Life Sciences and public sector, for example, we want to replicate that in Technology, where we've not performed well relative to the market. And so we've got performance improvement in the Technology sector in the U.K. that we need to get our arms around, and then, quite frankly, take advantage of the IR35 opportunity as that plays out over the balance of the year. Alex?

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Alex Smith, SThree plc - CFO & Executive Director [16]

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Yes. So in terms of some of the pilots we've been doing to improve our working capital management. I mean the one that has probably been most successful for us is automating the upload of invoices on to some of the portals. So that's, I think, what you're referring to there, which we did successfully conclude for a major client group with the portal trade shift. And we've got plans to further roll out to other clients who use that portal kind of in the first half of this year. And the benefit of doing that is that you can start to get your invoices uploaded a number of working days sooner. And that, over a significant proportion of business through that portal, can have quite a good impact. So yes, steps -- plans to do more, and it's a good first step at least for us.

In terms of the bad debt provision, that reflects the -- our assessment of the risks within our receivables book. We did see a slight increase in aging in a number of areas, and we take a prudent approach to that. But the fact that we've got provisions driven by aging kind of formula doesn't mean that we necessarily expect to be realizing that, and so the challenge for us is to make sure that we collect and don't utilize those provisions.

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Kean Marden, Jefferies LLC, Research Division - Head of Business Services Equity Research [17]

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Presumably, the aging is most prevalent in areas of the business where the net fee growth has been under more pressure?

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

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Yes. I would say that, so that's probably right. And we've taken perhaps a more prudent view on our U.K. business as well.

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Operator [19]

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We now go to the line of Chirag Vadhia at HSBC.

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Chirag Vadhia, HSBC, Research Division - Research Analyst [20]

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Just a few from me. On DACH, you mentioned that you have the largest ECM order book today. Could we have some color on this? And what's -- what you're seeing within the order book? And secondly, on Germany, could you give some details into which sectors you're seeing the shortage of specialized labor in? And finally, given the tightening labor markets in some of the economies you're operating in, what levers do you think you have to pull to price the labor scarcity?

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Mark Dorman, SThree plc - CEO & Executive Director [21]

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Yes. Thanks, Chirag. Maybe I'll do that in reverse order or maybe combine the last 2 questions. Because Germany -- so you start with Germany. I think, broadly speaking, the good opportunity for us with being in STEM is that across Life Sciences, Engineering, particularly electrical engineering as well as Technology, particularly software, so anything that touches software, data, AI that's driven by front-end or back-end development is in scarce supply globally. In Germany, that's particularly acute as they look to move from being driven by mechanical engineering to electronic engineering and software driving more of the economy.

If you look in Mittelstand, which is where we tend to focus, so in the SME market there, they're -- or rebadging the talent there or getting better talent to drive the business is very much focused on that software development. And so that's where we see opportunity. And you see that across the globe.

In terms of how we price that scarce talent, it's varies market by market, as you would imagine, and so we take a very good -- very market-driven view as to how that scarcity of talent matches up with the opportunity and make sure we hit some pricing discipline as we go to market overall. So I think we feel pretty good about how we're providing value to our customers.

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Alex Smith, SThree plc - CFO & Executive Director [22]

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And answering at a group level, not at a DACH-specific level, but it is pleasing to see that our average run of weekly net fees. So the amount of money which are -- the amount of net fees we're making per contractor per day across the group increased by 4% year-on-year in 2019. And our Contract margin percentage grew by 0.4 percentage points to 20.7%. So Germany or DACH being 32% of that mix is a significant contributor to that, too.

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Operator [23]

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So before going to the next line, which is Andy Grobler at Crédit Suisse (Operator Instructions).

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [24]

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Just 3 from me, if I may. Firstly, your consultant yield was slightly down in the year, I mean only very slightly. What was the driver of that? Secondly, depreciation is still running quite a long way ahead of CapEx. Would you expect that to normalize over the next couple of years? And thirdly, and forgive me if you said this before, in terms of your 2024 targets of going from 2% to 3% of the global STEM markets, what are your expectations for growth in those STEM markets kind of embedded in those forecasts or at all targets?

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Mark Dorman, SThree plc - CEO & Executive Director [25]

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So maybe I'll take the last one first, Andy, and then Alex can pick up the other 2. So essentially, the growth target to 2024, the slide I showed about the amount of headroom with -- in each of those markets, we haven't actually assumed any inherent growth within the markets themselves. Most of it is around how do we take market share within the markets we operate in. And then within the markets where we're growing, we performed significantly above the market rate. And so we continue to take market share within those targets.

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Alex Smith, SThree plc - CFO & Executive Director [26]

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Yes. And...

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [27]

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Presumably -- sorry, Alex. Presumably, you would expect those markets to be growing through time given your -- the positivity around the STEM markets themselves?

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

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Yes. So look, STEM -- the STEM markets or staffing markets are growing -- or STEM staffing is growing about double the rate of normal employment. And so if you think, within the normal GDP, you've got market employment growing somewhere between 2% and 3%, depending on which market you're in, you're growing at minimum double that within a STEM -- within STEM roles. And obviously, the most STEM -- the most niche scarce STEM talent in AI or in a specific area of engineering is growing significantly faster than that.

It's hard to predict that 5 years out. So when we made our assumption to get that market share growth, we took that out. So we were only looking at can we perform at taking market share at the rate at which we're currently taking market share that gets us to that number. That makes sense?

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [29]

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Yes.

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Alex Smith, SThree plc - CFO & Executive Director [30]

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All right. So then in terms of depreciation and Capex, you're right, Andy. Certainly for the last couple of years, depreciation has been greater than CapEx, and we would expect that to kind of come more in line in 2020 and beyond as we invest more in the scaling up of the business and creating the scalable platform for growth. So I think we've had the kind of the last of that kind of cash flow benefit -- short-term cash flow benefit.

In terms of the consultant yields, productivity per average salesperson, in 2019, we were down 2% across the piece, with -- Continental Europe was down 1%, Americas was down 2%. But I guess Continental Europe and Americas would have been impacted by the very significant headcount investment we made in the year. But yes, it's overall down 2% for the year, with a greater dilution in the second half, which is when we brought in quite a lot of those heads.

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Mark Dorman, SThree plc - CEO & Executive Director [31]

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Okay. Well, I think that's -- one more in the room.

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Alexander Christian deGroote, Radnor Capital Partners Ltd, Research Division - Consultant [32]

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It's Alex deGroote at Radnor Capital. Yes. Turning to Slide 25, on the U.S.A., some very striking market fundamentals there in terms of growth in net fee per day and also lifetime value. Are they step-change factors this year? Or do you expect similar rates of growth in that marketplace going forward? Or maybe just drill down for us a little bit on that. That's question one. Question two, on the balance sheet, strong year of cash generation. If you were to have an equivalent strong year or 2 strong years, you're going to end up with net cash of GBP 25 million, GBP 40 million on the balance sheet. And at what stage do you begin to think about what you do with that surplus cash?

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Mark Dorman, SThree plc - CEO & Executive Director [33]

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Thank you very much, Alex. So on the first -- I'll take the first question, maybe do the second one, and I'll do a follow-up. So in terms of the change, I think what you're seeing in the U.S. is a shift in quality of our focus on higher-value contract work with the markets. You've got a bit of a product mix there that you're seeing. We'll continue to focus on that high level of quality, particularly in Engineering and Energy. We were much more focused on infrastructure in our Energy and power business. And so I think we still see good performance and good growth in that market, but much more focused on that higher quality business. Do you want to do net cash?

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Alex Smith, SThree plc - CFO & Executive Director [34]

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Yes. Look, in terms of cash, at the Capital Markets Day, we set out our approach to cash and we talked about 3 priorities, so funding the organic growth of the business being the #1 priority as we look to scale our platform and grow towards our 2024 ambitions. That investment, that's a CapEx type investment. I referenced that at Andy Grobler's question about CapEx depreciation. There's a working capital investment in terms of growing the Contract to book and growing the broader business. So funding the organic growth of the business.

The maintenance of a strong balance sheet, and we have tried to be clear about how working capital on our balance sheet, essentially is deferred cash. Pleased to have net cash, but we've also kind of got this working capital item, deferred cash, which, again, turns into cash very quickly. So that strong balance sheet, which gives us options and flexibility that's important, and the importance of the dividend.

So combining all that, in the future, we could be in a position where we have significantly more cash. Alternatively, we could be looking to deploy our cash to accelerate the rate of growth to get to our 2024 ambitions. In some of the markets -- again, we talked about at the Capital Markets Day, some of the markets, such as the U.S., such as Germany, which have very, very positive net present values and internal rates of return on new contract business. So look, it's a combination of a number of things. But at the moment, we're happy with our balance sheet, with a moderate amount of net cash on it.

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Mark Dorman, SThree plc - CEO & Executive Director [35]

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Yes. So focus really is on how do we invest to grow the business.

Okay. With that, I think we've finalized our questions. So thank you, everyone. Thank you.

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Alex Smith, SThree plc - CFO & Executive Director [36]

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Thank you.