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Hello, and welcome to the SThree Q3 update. [Operator Instructions] Just to remind you, this is being recorded. So today, I'm pleased to present Mark Dorman, CEO; and Alex Smith, CFO. Please begin.
Thank you very much. And good morning, everyone, and thank you for joining us for our Q3 call. With me, I have Alex Smith, our CFO. First, we'll start with a summary, and then we'll take your questions.Since we last spoke in the summer, global political and macroeconomic uncertainties have only increased and no company is immune from this. As a global company with the majority of our net fees coming from international markets, we monitor these impacts very carefully. But our focus on Science, Technology, Engineering and Mathematics, our contract focus on flexible working and our geographic diversity has given us the confidence in our ability to grow, and this was demonstrated again by our Q3 results.We delivered a good performance in the quarter with net fees up 6% on an adjusted basis and growth in net fees across all our international markets. Our specialism and focus on key geographies is paying off, and in the period, 3 of our 4 regions delivering good growth. Of the sectors we focus on, Life Sciences, Technology, Energy and Engineering delivered growth in the quarter.And with that, I'll hand over to Alex who will take you through our key financials. Alex?
Thanks, Mark, and good morning. You will see we have adjusted group net fees to account for 1 less working day across the group and 1 additional public holiday in Continental Europe compared with the prior year. This is significant for the group primarily focused on Contract, taking group net fees from 4% to 6% in the quarter.On to the figures. For the avoidance of doubt, the following figures are unadjusted for working days and holidays. Contracts, which increased to 75% for the group has continued to deliver with 7% year-on-year growth. The U.S. and Continental Europe, together representing 80% of Contract net fees, were up 16% and 9%, respectively. And within Continental Europe, DACH grew 12%.Permanent net fees were down 5%, partly due to strong comps in Continental Europe as well as the decline in the U.S.A. However, our largest Perm region, which is DACH, was level year-on-year.As we mentioned in the half year, our UK&I region is stabilizing and was down 7% in the quarter against a 12% decline seen in Q2. The UK&I is relatively small now with level of net fees generated outside this region increasing to 86%.Group period-end sales head count is up 8% year-on-year with Q3 headcounts down 1% versus Q2 as we have actively managed the balance between our investment regions of the U.S., Germany and Japan, which were collectively up 4% in the quarter; and U.K. and Benelux, which were collectively down 6% in the quarter.Last but not least, the group continues to be highly cash generative with net debt having decreased by GBP 15 million year-on-year with a high in-quarter cash conversion ratio of circa 90%.I'll now hand back to Mark to wrap up.
Thank you, Alex. So looking ahead, there is strong demand across our key regions for those STEM rules and we're confident with our well-tenured senior sales leadership that will execute well in those markets and offers us huge scale and opportunity. As such, whilst being aware of the macro picture, our expectations for the full year remain unchanged. And now, we'll be happy to take your questions.
[Operator Instructions] Our first question is over to the line of Rahim Karim at Liberum.
Two questions from me, if I may. Just the first is on the U.S. Contract business that was very strong in the quarter. Useful to get some color from you guys in terms of which disciplines really drove that. And then just in terms of Life Sciences, momentum there seems to have fallen, perhaps in the last few months most markedly. Any specific comments that you would give there, that would be helpful.
Okay. So in terms of U.S. Contracts, Rahim, so we were up 16% in the quarter, as I mentioned. And now, strong performance really. IT, which is relatively small for us in the U.S. still, but up 9%; Energy, up and Engineering, up 32%; Life Sciences up 26%. And not surprisingly, Banking was down -- so the Banking was down by just under 40% year-on-year on Contract giving us 16% growth year-on-year in the quarter.In terms of Life Sciences more generally, the Life Sciences Contracts business grew actually faster in Q3 than Q2, is up 16% in Q3. It was up 11% in Q2. We had a slowdown in our Perm Life Sciences business year-on-year in Q3, and that was driven principally by our U.S. business where we saw impacts on that business kind of very much in line with what we've seen more broadly in terms of that Perm business. So where we've made the change a year or so ago from a regional focus to a brand focus. We lost some leadership within those Perm Life Sciences teams, which had an impact. But really pleased to note that in terms of the Contract performance, up strongly. And it's also worth commenting on Perm comps on Life Sciences really, really strong. So in the U.S, it was up 54% in Q3 2018. So you've got really strong comps combined with the slight disruption in that Perm team in the U.S. having the impact in the quarter.
We're now over to the line of Steve Woolf at Numis.
Just a couple for me, one in terms of head count. Do you feel like there's more work to do in certain countries, taking sort of Benelux and Netherlands? And also perhaps where you also might have your eye on in case the market softens? Secondly, on the temp/perm mix, do you feel generally you've got the balance about right across the bordering countries or do you feel there's other markets where you might have to redress that balance? And then, finally, just in terms of the competitive pressures in some of those markets where you've been sort of less successful with the numbers this time. Just could you sort of just outline the environment as to whether there's a squeeze happening as people try and get a little bit out of those markets?
Okay. Should I comment on head count then. So in terms of what we saw in Q2 then, so continued investment in our kind of strategically important geographies and that's where we're seeing good growth is still. So as we mentioned, Germany, the U.S. and Japan. And the kind of managed reduction across Benelux and the U.K. And I would expect to see something kind of broadly similar in the fourth quarter, to be honest.In terms of the temp/perm mix, there are a number of factors influencing that. So geographical mix, for example. Our Japan business is actually very perm-orientated. So strong growth in Japan will kind of push against at least the greater mix towards Contract, but our strong growth in the U.S. is very much putting that mix towards Contracts. So I don't think we've got any particular target for that, but it will evolve probably more towards Contracts as we move towards, at least that is our particular strategic focus.
Yes. Good questions. I'll take the competitive one and just follow up with Alex on the Perm/Contract mix. I think as we stated and we've laid out in our strategy, focusing on flexible working which we call Contract, is a long-term secular trend we have a lot of experience in and we expect that to continue to grow and places us in a really good position. But Permanent, as part of our overall portfolio and product mix, is also important. As Alex said, depending on which geographic market we're in, structural components of that market require us to be Permanent. And also to deliver the full service to our customers and deliver that value, we also have to have that Permanent mix. And so those things will fluctuate depending on what the nature of the cycle is and what value we can add to those customers. And so then it's very hard to have a precise number on what the right mix is. It's going to be what the right market conditions dictate. In terms of the competitive environment, look, what we see is where we focus on our strength in STEM roles and it's not broad STEM roles. We're placing high-end technical specialist in niches within Life Sciences, Technology, Energy and Engineering. And where we focus on those niches, we see that we have significant competitive differentiation regardless of which market we happen to be in. So we feel very comfortable with our competitive positioning and our ability to be in all those markets. And I think you can see, if I take the Netherlands, for example, we're #1 there in the markets we serve. And despite challenges in the marketplace, we're performing well given the macroeconomic conditions there.
Okay. Just as a follow-up in terms of the -- to the head count question. I get where you're investing selectively in those sort of 3 markets. It was really more of a focus on where you will take head count out if the market continues to weaken. So Netherlands and the U.K. have been a feature for this quarter. Are there any other markets where you feel -- perhaps now the U.K. has been cut as far as it can go. Do you have some of the other areas where maybe Benelux and Netherlands, in particular, where you believe there could still be further cuts if necessary? Or you have your own to make?
Look, Steve, I think it's a great question. The key work here, which is where I started our update, is uncertainty. And so we have a pretty close handle on this as a management team and look at the 16 markets that we operate in globally on a very regular basis as a management team, and we make essentially game time calls on what that is actually going -- how we actually manage that head count pretty dynamically. And so those things are constantly evolving, particularly as the market is more volatile. But we have good management control. We have a very senior, well-tenured team that have been through multiple cycles that know what happens here. So I think as the quarters develop, we'll adjust accordingly given market conditions and focus on the best opportunities.
We're now over to the line of Kean Marden at Jefferies.
I'd like to ask some questions on free cash flow, please. You mentioned over 90% -- I'm sorry, circa 90% operating free cash flow conversion rate for the third quarter. So was that boosted by the receipt of the Scottish grant related to the Glasgow relocation, first of all? Also can you put that into context of debtor days as well. Obviously, you improved debtor days by 1 in the first half. Can you maybe give us an indication of how that's improved in the third quarter as well. And can you touch on some of the initiatives that you mentioned at the interims? So the current management system and the robotic process automation pilot as well, just where we currently sit with those?
Sure. So in terms of the grant income, it's fairly small so far this year. And in terms of that cash conversion ratio, I don't believe it's in there. I think we would have treated that as an exceptional credit. So what I'm commenting on there is the, if you like, the adjusted cash conversion ratio. In terms of the DSOs, we reported a one-day improvement sequentially at the half year and we're still at that sort of level. So we do need to drop further DSO reductions in the fourth quarter. So our cash conversion ratio was particularly impacted by the trading shape of the business and a more modest growth rate in Contract meaning that we were, if you like, investing so much working capital upfront, so that's more of a business mix shape rather than a sequential improvement in DSOs.In terms of the focus on cash, we have a continued and elevated our focus on cash as we move into the fourth quarter. We have, since we last spoke, upgraded the capability of the team in a number of key areas. We brought in additional resource on a temporary basis, too, to focus across a number of key areas in terms of making sure that our billings are up-to-date and we haven't got any backlogs, focusing on breaking down the collections by key region. We've got aligned incentives between the credit control teams and the managing directors with that particular kicker in the fourth quarter. We've been really clear on escalation process and to make sure that, in terms of responsibilities and accountabilities, those are crystal clear and any confusion has been eradicated. There were weekly meetings for the key regions between credit control, the head of the Centre of Excellence in Glasgow and the managing directors.In terms of the RPA pilot, I've got an update earlier in the week from our CIO and it's progressing well but early stages. So there were 2 particular areas. There was the uploading of timesheets and automating that, which will get us -- enable us to build more promptly. And there was also a portal initiative, I'm not so aware on that one. The tone from the pilot feedback was positive but we're still in pilot so that won't impact the year-end, but there are plenty of other activities that are. So I suppose to reassure you that we've got very strong focus on delivering this, and we've got the resources to put there, we believe.
We are now over to the line of Alex deGroote at Radnor Capital Partners.
Two quick questions, please. So it is very reassuring that you've underpinned full year expectations, but can you just recap what those expectations are either in terms of earnings per share or profit, please? That's question one. Question 2, just some commentary, please, around the Energy vertical where there's been some volatility through the course of the year and your current thoughts on that vertical.
Sure. Yes. So in terms of consensus for the year, in terms of net fees, it's around GBP 3 million, GBP 4 million, GBP 5 million; and EBIT, GBP 59 million, something like that. Sorry, and your second question was around Energy?
Yes, performance in the quarter and your thoughts about what's going on there underlying terms?
So look, I think we're pleased with our focus on Energy and Energy is a broad charge now, so it's not just upstream energy extraction where we're placing engineers, we're doing much more in terms of downstream activity as well as we're seeing big growth albeit from a small base in renewables because those are pretty transferable skills. So we have a good handle on those markets in Continental Europe, MENA and in the U.S. And so look, I think the outlook for that as those skills begin to shift will be our focus on making sure we get the right skills in the right spots as that market continues to evolve.
Yes. And in terms of the -- just in terms of the overall shape, we've come up in the third quarter, again, some very strong comps, particularly in the U.S. So the U.S. really stepped up in Q3 2018. So we've got tough comps now, which we're annualizing against. So I think that's part of why you've got a headline reduction in the growth rates from 29% in Q2 to 8% in Q3. That U.S. business still grew 30% in Q3, but it was up 65% in Q2. So you've got that annualization, too.
We are now over to the line of Bilal Aziz at UBS.
Just one from my side, please. Just in the U.K, clearly you've carried out some restructuring over the past year to improve cost base, which has been working. But just regarding the top line, I appreciate clearly the uncertain environment. But what sort of plans are you thinking perhaps to address the level of underperformance you've seen over the past few years in that business?
Yes. So I think it's a good question. And look, if I put our U.K. and Ireland business into context, there's a number of factors going on. So if I look at the negative component first, clearly, there's the macroeconomic environment in certainly specifically in the U.K. that is impacting us just as anyone. I do think we've got some execution issues that we're working through with very specific plans around where our focus should be, how do we get to the right kind of balance and focus in the right sectors. Remember, historically, we've been very weighted towards Banking & Finance and so how do we refocus that on areas that offer us good opportunities for growth in Technology, Life Sciences and Engineering. And so I think that is where we're working through those plans right now to address the underperformance. And what I would see green shoots of good performance in the U.K., we are seeing growth in Life Sciences and we are seeing continued good, stable performance in public sector as well. And so I think on balance, it's work that we've got work underway, more work to do in execution but we are beginning to see green shoots where we focus in the right sectors.
Okay. Before we go to the next line, which is Sanjay Vidyarthi at Liberum [Operator Instructions]
I saw the appointment of Kate Holden in August and interested to understand, I guess the focus will be more on long view rather than react to the short-term uncertainty. So what's your initial remit? Is she looking at areas of market focus as you're kind of suggesting in the U.K., is she kind of looking at that more broadly? Is she looking at operational best practice across the group? What kind of things is she initially looking at, please?
Yes, Sanjay, very pleased to have Kate join the team. She has a lot of experience in multiple different industry sectors and is a really good addition to the senior executive team to give us a new set of skills as we develop as a broad global operating company. And her initial remit, so we've just gone through our normal strategy process and out of that have come a series of global strategic initiatives that really underpin both the operations and operating model of the business to support and underpin our growth as well as new initiatives in terms of which sectors, which markets we want to operate and how do we get good specificity on the plans. And just as I talked about the U.K. and Ireland, making sure that we get the right data and the right assets in the right place for those sectors and niches that offer us growth, being able to see that early, get the right assets and resources in there is really key to our future growth. So glad she's here. She's got a lot of work and exciting things to do to help us grow the business.
We have a final question and that's over to the line of Adrian Kearsey at Panmure Gordon.
We've seen some guidance elsewhere in the sector for consultant productivity to decline. In the quarter, it would appear that consultant productivity has actually expanded. Would you be able to give some guidance in terms of where you've seen strength in this regard, where you've perhaps seen some weakness? And perhaps also sort of where you think productivity is going to go over the next few quarters?
Adrian, so look, I think for us, we're always -- the single biggest lever of performance improvement we can have is improving consultant productivity, so it's something we focus on and the management team focuses on a lot and that's everything from making sure we have the right consultants in the right sectors to investing in the right tools and capabilities to support their work in doing that. And so we've worked really hard over the past 18 months or so in making sure that we do both of those things and that will continue to be a focus for us moving forward. And like all these things with productivity improvements of consultants, we are always looking and always can be optimized, but I'm not sure we're ever going to be fully optimized. So it's something that -- it's very hard to pin a specific number that we're working on, but continual improvement is the goal in that area.
Okay, as that was the final question on this quarter's call, can I please pass it back to you for any closing comment at this stage?
Well, thanks. Thank you, everyone, for joining us for our third quarter call. We look forward to seeing you at our Capital Markets Day on the 21st of November. Thank you, everyone.
This now concludes today's call. Thank you all very much for attending, and you can now disconnect your lines.