SThree PLC

LSE:STEM

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to SThree Q1 2021 Trading Update Webinar. [Operator Instructions] This webinar is being recorded.I now hand over to Mark Dorman, CEO; and Alex Smith, CFO. Mark, over to you.

[Mark Dorman, CEO & Executive Director]

Thank you, Tenzon, and welcome, everyone, to SThree's Q1 2021 trading update. So the usual format for our trading update, I'll give a brief overview, and then I'll quickly hand to Alex, who will run us through the numbers, and then we'll do a quick review of the trends we're seeing in the market before we get to Q&A. So without any further ado -- trying to control my cursor there, you think after the -- I viewed if doing this remotely, I would be getting better, but there we go.Anyway, Q1, to begin with for 2021. I think -- look, a pleasing quarter where we're seeing continued good sequential performance improvement month-over-month, quarter-over-quarter, and that continued into the first quarter of 2021, the trend that we saw through the second half of 2020. And good momentum delivered by our focus and execution on our markets, and great to see growth in a number of our key regions, particularly our largest regions that Alex will highlight as we go through performance.I think it's a testament to the success of our strategy, but also the ability for SThree to continue to operate and execute regardless of the conditions around us because I think it's important to recognize, as we've laid out previously that we're still in the ongoing management phase of this crisis. And until we fully solve what is at the core, a global public health crisis, we won't be moving yet fully into recovery phase. As a result, we still believe, as we shared with you at our Q4 and full year trading update, that 2021 remains a very volatile situation that we'll have to navigate through with our focus on execution and remaining really focused on our strategy and our delivery and as a result, we won't be giving any guidance. But a great start to the year. And Alex, maybe over to you, and we can go through the numbers.

[Alex Smith, CFO & Executive Director]

Thank you very much, Mark. So as Mark kind of said, a strong quarter 1 with performance ahead of management expectations, group net fees down 1% on a constant currency basis, they were flat on adjusted for working days. There's 1 less working day in Q1 2021 than Q1 2020. And on a reported basis, actually up 1%. But I think the most important metric there is flat on a working day-adjusted basis. And of course, versus Q1 2020, i.e., ahead of the impact of the pandemic.The contractor order book, we saw a significant sequential improvement there, up 1% at the end of the quarter. That compares to down 9% at the end of Q4 2020. The contractor order book being the value of contracts written up to the contractual end date, assuming all hours worked. And that was driven by continued and sequential improvements in sales activity, so kind of new deal generation and improved contractor retention rates. So in the quarter, our contract's retention rates across the group were 2 percentage points higher at 90% this year compared to 88% last year. And just to give a bit of a flavor of the contract order book by geography, just thinking of our 4 biggest contract geographies. DACH contractor order book up 6%, and that was up 2% at the end of 2020. U.S. up 14%. That was down 1% at the end of Q4. Netherlands was down 1% at the end of Q1 versus down 17% at the end of Q4, so a significant shift there. And U.K. down 16% compared to down 20% at the end of Q4. So those are the kind of the biggest moving parts within that contractor order book, but very pleasing that we're now in a positive position there as we look into Q2.Strong performances, life sciences, up 14% year-on-year. Life Sciences represents 24% of group net fees. And tech, up 1%, and that represents 48% of group net fees. And the top 5 countries, representing now 85% of net fees, with Germany at 33% and the U.S. at 24%. But overall, a pleasing quarter down 1% compared to down 7% in Q4. So continued strong sequential progress.So moving on to regional performance and starting with DACH. So up 3% in the quarter, which is a strong performance, robust performance, and that's against Q1 2020, which was up 9%. So tough comps for the DACH region. And what we saw and driven really principally in DACH by demand in life sciences, which was up 7%, driven by clinical research and development and quality assurance roles, and technology which was up 14% in the DACH region year-on-year, driven by software development, cybersecurity and data science skills. EMEA, excluding DACH, was down 14% in Q1, that compares to down 20% in Q4 2020. And really 70% of that region is the U.K. and the Netherlands. We've seen some good progress in the Netherlands and call out here Dutch engineering. So that was up 16% year-on-year. That's about 40% of the Netherlands net fees. And in the U.K., we've seen a sequential improvement, but there is an impact as we that worked through quarter 1 of IR35 and the impact that's having on client and candidate behaviors. And a lot of contracts are not getting extended at the moment beyond the end of March as people work through the new regulations. U.S.A., a really strong performance, up 11% in Q4, up 19% in Q1 2021, driven by particularly strongly by Life Sciences and tech. So in Life Sciences, which was up 25% year-on-year and which is about 37%, 38% of net fees. Clinical operations driven by clinical operations and quality assurance and in tech, mobile applications continue to be in very high demand, tech up 43%. And then finally, in terms of the APAC region, so down 14% in Q1 compared to around 30% in Q4. We've seen some pleasing sequential performance from Singapore, but Japan, which is the largest country there, whilst it saw some significant improvement in new deal generation towards the end of the quarter, particularly in Tech and Life Sciences that sets us up well for the second quarter. So in summary, a continued strong positioning. We have a strong balance sheet, net cash of GBP 57 million at the end of the quarter. We have a fundamentally resilient contract business model. 75% of our net fees are from contract we have a well balanced business, both geographically and sectorally. The pie chart on the left-hand side there shows that 85% of our net fees come from our top 5 countries or kind of core 5 countries. And we have a strong and unique focus on STEM, which you can see from the right-hand side there in terms of the skills that we place, technology being 48% of net fees, Life Sciences, 24%, engineering 20%; and banking, which is largely banking tech 7%. So I'd like to now hand over to Mark. Thank you.

[Mark Dorman, CEO & Executive Director]

Thank you, Alex and -- for running through that. What I thought we'd do is -- and now we've gone through the numbers, is give a view of what's driving those numbers, both in terms of what we're seeing in the market from trends as well as a little bit about our strategy in action to give you a flavor of what actually drives that numbers, the resilient performance and the ability for us to deliver long term sustainable, profitable growth.I think 1 of the things that we focused on as a result of working in the current conditions with the pandemic was to spend a significant amount of time more than we probably have had before with our clients in deeply understanding their changing needs moving forward. And as we shared previously from that structured quantitative survey work as well as qualitative interviews that we've done with our clients across the world, 3 broad trends emerged coming out of that, that remain true today. Focus on a more flexible and resilient workforce of the future and questions around lessons that we learned from operating in the pandemic from all of our clients, as to how companies think about their talent for the future and how they manage the workforce in a much more flexible and potentially semi remote way for the future. Rebuilding global supply chains with a focus much more on resilience and sustainability moving from that just-in-time to just in case and a notion of building back better, particularly with sustainability in ESG at the top of mind. And lastly and certainly not surprisingly, digital transformation acceleration and the acceleration of automation in all aspects of business, whether that be advanced robotics, data and data science or digital connections with our customers and both internal and external. But what we saw was different flavors as the year developed through 2020. And as we focus to the future, in terms of how companies were responding inside those 3 trends. So not surprising in Q2 last year, there was a real focus on crisis management, in terms of focus on business continuity, supporting their people and understanding the logistical challenges and solving them as well as rethinking what customer journeys were going to look like, now people were operating in a very different environment. Once it was stabilization, there was then a shift towards future growth and innovation, which all started with finding the right people. Investigating alternative markets to find talent and then planning for the future. And with that talent, thinking about how to create innovative solutions and it was clear that there was a need for those specials, particularly within Life Sciences, Technology and Engineering, those skills becoming clearly more and more important as people were thinking about the future. And as we look forward in terms of Q4, Q1 and into the bulk of '21, it's much more around how do we navigate this new environment we find ourselves in. Our real focus on skills over sector and so we'll talk a little bit about that in a minute, a broadened ecosystem of talent and how does that work with both permanent and contingent labor to solve that flexible management of talent to deliver projects, and programs and projects being time-bound and the high-impact nature of those all drive a need for agility in thinking about the talent and skills that companies need to help them move forward.And what does that mean for SThree? Well, it means that we're well positioned as we shared before, we sit at the center of 2 long-term secular trends, and we're really seeing the acceleration of those trends come to the fore as a result of the impacts of the global pandemic. The demand for STEM talent continues to increase and the nature of how people employ that talent on those time-bound high-impact programs and has accelerated the need for agility for companies. The intersection of that is investing to ensure resilience as people look to use those specialist key roles in a flexible way to deliver their future. Now what I thought would be interesting to do as we think about technology as 1 of our biggest segments, as Alex shared, is 48% of our net fees. Part of our strategy is not to look at technology generally. And part of the key value of SThree is really understanding not just STEM or Life Science, Technology and Engineering, specifically, but the niches that sit within that. And so here, we took a snapshot of our U.S. technology business to show some of the niches that fit within that and some of the demand patterns we saw through Q1 and into -- through 2020 into Q1 2021. And what you can see here on this chart that not all skills are created equally in terms of demand. And so you've got -- whilst all demand is up generally in terms of technology, infrastructure delivery and software development is more muted than things like Adobe Experience manager, which is an e-commerce site, BI and data and data science as well as mobile application development. And so there's real focus for us on deeply understanding the niches that sit inside Life Sciences, Technology and Engineering really drives our competitive differentiation as well as understanding the environment in which to place that talent to have the biggest impact. So our focus is on niche specialization, nurturing the key candidates to those high-quality specialists that can really make an impact day 1 when they go to meet our client, all of that combined has really driven that performance moving forward. So I think it's important to understand that we don't think of these things as macro trends. It's really deeply embedded in understanding the niches that sit inside those broad sectors that drives our performance. And so -- but just before we take questions in summing up, we've had a strong quarter in Q1 as we've navigated through a pretty extraordinary year in 2020. We do think there's going to be volatility moving forward, but SThree is certainly positioned strategically at the center of those 2 long-term secular trends, understanding the niches within that STEM talent as well as how do we place that talent within a much more flexible working environment. And so we look forward to 2021. And given the execution and our ability to execute through 2020, gives us confidence that whilst 2021 will continue to be volatile, we'll be able to navigate through that well. So with that, Tenzon, maybe we can open it up for questions.

[Operator]

[Operator Instructions] We'll go to Sanjay Vidyarthi from Liberum.

[Sanjay Kumar Vidyarthi, Research Analyst]

A couple of questions for me. One is on productivity, which I think has improved very strongly in this quarter. Can we talk a little bit about how you expect that to evolve through through the year, particularly any thoughts around headcount reinvestments during the year in particular markets where that might happen? Second question is, it looks like you've probably taken market share. And I know it's difficult to come by the data, but if you could talk a little bit about in the context of your longer-term ambitions, how you think you've done in terms of market share?

[Mark Dorman, CEO & Executive Director]

Great. Thank you, Sanjay. Why don't I have a crack at the second question and give you some view, and Alex can maybe fill in on the productivity question. So look, I think at all of our key markets, what we've seen is our performance has been from the data that we have locally ahead of the market. A little bit like, as you said, the data is hard to come by because you're always looking backwards on the market share, but we are confident that we continue to take market share in the core markets we're focused on. So in the U.S., U.K., despite the negative performance for less negative than everyone else. In the Netherlands, certainly, we can see from the ABU survey that we look at we're ahead there. And in Germany, with some local data that we have, we continue to make good progress there and moving up say #3 tech talent provider staffing company in Germany is a big move from where we were before in #5. So we continue to move well on that ambition to take market share moving forward. On productivity, yes, we've got headcount down and net fees at a dividend rate. So we do have productivity gains there. What I'd say is the productivity gains are over and above just that mathematical piece in terms of our ability to deliver our talent for our clients. And as we think about selective investment in our headcount moving forward in '21, we want to make sure that we hold on to as much of that productivity that we've gained moving forward largely as a result of just learning to operate a little differently. Our clients learning to operate a little differently, the application of technology, in certain aspects of the workflow that's been broadly adopted now, things like video interviews, for example, on the client side, would be an example of how we're doing it. We're accessing, spending a lot of time with our candidate communities and how we access that. So I think there's a lot of that is built into that productivity, not just to kind of arithmetic view of net fees to number of heads. And Alex, I don't know if you've got anything else specifically to?

[Alex Smith, CFO & Executive Director]

Well, I think I'd say, just to build on that, it's not just arithmetic. The fact is that our new deal generation and retention rates are sequentially improving with -- as we can see from the statement, 17% lower average headcount in the quarter. So I think that's pleasing. It's not just cutting our way to greatness. It's growing that top line sequentially, which we've been doing really during the second half and into the first quarter. I think in terms of the sequential investment, it will be very much focused on the U.S., Germany. And within those geographies, the niche skill areas but not just limited to those. So there'll be attractive sectors in other of our core geographies too but probably the principal focus there. But as mark says, kind of holding on to as much of that productivity as possible, and therefore, that profitability is profitable. Whilst kind of judiciously, in a measured way, sequentially investing to make sure we got the scale opportunities going forward.

[Operator]

We'll go to Adrian Kearsey from Panmure Gordon.

[Adrian Mark Kearsey, Support Services Analyst]

The slide showed the different niche skill sets within the U.S. tech, and it was really interesting. To what extent can you look at sort of 1 territory and see similar transit in another territory? And then how is that then it over your thinking in terms of where you will be investing headcount? And do those trend is with 1 of the questions is, do those trends typically happen simultaneously across all territories or do you find that you have different trends across the territories?

[Mark Dorman, CEO & Executive Director]

Thanks, Adrian. I think the -- the rather unhelpful answer is going to be, it depends. And so I think there are some trends that are relatively consistent globally. So if you think of BI, data, data science or cybersecurity was the 1 that we saw in Germany, for example, that Alex highlighted, those are broad trends that are -- you can see across many of our markets that we can do that as well as ERP implementation. What's different in some instances when you get down to specific applications, so Salesforce versus SAP or Adobe Experience manager for e-commerce versus some other e-commerce platform that's when it becomes very market specific, and we need to keep a handle on what's going on in that market. So part of the investment beyond headcount that we're focused on is on data and technology to give us those insights. And so as we shared before, we've got this tool that we use in Germany called our Market Intelligence Tool that really looks at some of the demand patterns within the market to understand the differences in some of those niches. So there are some trends that are consistent that we can learn from 1 area and go to the other. There's others that are very specific to local market conditions that we need to stay close to our clients and our candidates.

[Operator]

And we'll go to Steve Woolf at Numis.

[Steven John Woolf, Analyst]

A couple from me. Just in terms of the engineering trends you're seeing, there seems to be a pickup in a couple of markets there. So if you could sort of talk about what type of roles end market that were perhaps coming through? Any areas that you would point to country wise, where you think the day rates are starting to pick up as sort of an indication then of skill shortages already? And then thirdly, just as you think to invest in headcount, not particularly volumes and bodies necessarily to just build these sort of niche roles. Where do you think the hardest area be us to recruit consultants into that they need the experience to create to create jobs in find bringing sort of candidates from that side, if that makes sense as a long-winded way of saying for your consultant skill shortages as it were?

[Mark Dorman, CEO & Executive Director]

So why don't I take the last 1 first. So part of our model of bringing consultants on is to get them to really understand the domain or space that they operate in as a core part of the training. So understanding the dynamics of the market, the skills that are in there, the candidate pools that are around there and get to know who those candidates are, who are the best candidates to drive it. And that domain expertise within those niches is part of that competitive advantage that we have moving forward. And that's always been part of the scale that we've had moving forward. Staying close to those candidates, those high-quality specialist candidates actually is our best indicator of what's going to happen moving forward as those skills begin to develop. And so whilst candidates may have been working on 1 type of activity in engineering, let's say, offshore project engineers that used to work in oil and gas, now they're working on renewable energy in terms of offshore substations for wind farms. And so that would be following the candidate and understanding what's going on in the marketplace. And so that's always been our focus at SThree with our consultants. And that's really part of our secret sauce, if you like, of understanding what's going on in the market, and that remains the focus today, which is why it's not just about putting a new medical number of heads in FTEs and it's really doing that judiciously, not just across geographic market, but then within the specific niches within that market to match. And then, Alex, I don't know if you've got -- you want to talk about which sectors we're seeing in engineering that are attractive, and we've got some of the Netherlands and other places that performed particularly well.

[Alex Smith, CFO & Executive Director]

Yes. So definitely, the Netherlands being a strong performance and also the U.S. So U.S. which is a significant part of that business was also resilient. And I guess, within there, a lot of that was around the power transmission and renewables within the U.S. but yes, it'll be the U.S. and the Netherlands that I think are probably particularly strong.

[Mark Dorman, CEO & Executive Director]

Yes. And look, I think the broad trend, as Alex said, we think that there are skills within broader macro trends that you see. So reinvesting in power transmission infrastructure is where we're heavily exposed to in the U.S. And then I think we shared last quarter or the quarter before, our move from upstream E&P to renewables, largely solar and wind in the U.S., and you're seeing that come through in our strong performance there.

[Alex Smith, CFO & Executive Director]

And Steve, you had a question around day rates more broadly in terms of contract day rates. Yes. So look, we're seeing particular kind of strength, I guess, across it, engineering and life sciences globally, just looking at the global picture, that's where we're seeing some increases based upon data from the first quarter. So it's early into the year, but those are the areas where we're seeing some attractive characteristics coming through in terms of those rates and the demand.

[Operator]

And that's the end of questions. Mark, do you have any closing remarks?

[Mark Dorman, CEO & Executive Director]

No. Well, thank you, everyone, for our Q1 trading update. Good to be matching Q1 2020 and in thinking about continuing our sequential performance improvements moving forward. I think it's pretty clear that we're positioned well within the trends that we're seeing moving forward. And with our ability to execute has really supported us. That, combined with our business model that's got high level of recurring revenue type characteristics in terms of where the economics are. I think that sets us up well for long term, sustain profitable growth, which is what we're focused on. But with that, I will bid you good morning, and we'll look forward to seeing you when we do our next trading update for the 6 months ended 31st of May on the 14th of June. So we see you all that, and have a good day. Thanks, everyone.

[Alex Smith, CFO & Executive Director]

Cheers. Bye.

[Operator]

Many thanks, Mark and Alex, and to you all for joining. This is the end of the webinar.