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This webinar is being recorded. I now hand over to Mark Dorman, CEO and Andrew Beach, CFO. .
Thanks. Welcome, everyone, to SThree's Q3 2021 trading update. And as Tamzen said, I'm joined with our CFO, Andy Beach, who will be taking us through the numbers shortly. But what I thought I'd do is do a quick summary of our Q3 performance, which as it says on the top of the slide here, another strong quarter for the group, and a great momentum in our performance from the start of the year and all of the hard work of all of our people continues into the third quarter. Clearly, great execution of our strategy. We're positioned, and if you recall, at the center of 2 long-term secular trends, that of the need of great STEM talent and the move towards more flexible working combined with strength that continuing in the staffing market in our key markets. A reminder, however, that our people have had to operate in the continuation of what we are calling our ongoing management phase of our COVID-19 crisis response. If you recall, this is in 3 phases. We started off with the initial response. We're now in this long period of volatility has multiple waves of different variants in different stages come in. And it really shows the resilience and great performance of our people to be able to navigate through this and continue to accelerate our performance gives us confidence as we move forward that we'll be able to deliver the right strategy in the right markets regardless of the external environment. But with that, I will hand over to Andy, who will take us through the numbers for the third quarter. Andy, over to you.
Great. Well, thank you, Mark, and good morning, everyone. Let me start with the headlines. We've delivered another strong quarter with group net fees for Q3, up 29% on a constant currency basis. It is worth pointing out that the comparative quarter, the 3 months to August 2020 was the hardest hit by the pandemic. And for that reason, we have chosen to also present our performance versus 2019, which was before the pandemic. Compared to Q3 2019, net fees are up 11%. Note that 2019 was a record year for the group. So to be trading ahead of that year is particularly pleasing. The contract business, which represents 76% of net fees saw growth of 27% year-on-year and was up 11% compared to 2019. The permanent business, which represents 24% of net fees, grew by 36% year-on-year and 10% versus 2019. Turning now to the regional and sector split for the quarter. We have a well-balanced business, both geographically and by sector. On the 2 charts you see here, the outer ring represents Q3 2021, and the inner ring represents the same quarter in 2020. The chart on the left shows that 97% of our net fees come from our top 3 regions. That represents 26% of the -- sorry, 36% of the quarter, up from 34% in the same quarter last year, and this growth was largely driven by Germany. In the exclude DACH, represents 35% of the group, down from 37% last year despite a 21% increase in net fees, it was largely driven by the Netherlands and the U.S. represents 26% of the group, consistent with last year, but with a 31% growth in net fees. The chart on the right shows that our strong and unique position in providing STEM skills. Technology is our largest sector, and it grew by 33%, with strong performance across all markets. It represents 46% of net fees in the quarter. And Life Sciences grew by 30%, driven largely by the U.S. and Germany, and it represents 24% of the quarter. Turning now to each of the regions in turn, starting with DACH. The region grew 35% year-on-year and 23% when compared to the same quarter in 2019. Germany, which represents over 90% of the region, grew by 35% year-on-year and 22% versus 2019. The growth is driven by 2 main sectors, technology with increased demand for software development, infrastructure and ERP implementation skills and life sciences with increased demand for quality assurance and clinical research and operation skills. The EMEA excluding DACH region grew 21% year-on-year, but was down 6% compared to the same quarter in 2019. The Netherlands, which represents nearly half of the region, grew by 24% year-on-year and 8% versus 2019. The region as a whole is down compared to 2019 due to the U.K. performance, which despite showing strong year-on-year growth is not yet back to 2019 levels. However, for 3 consecutive quarters, the rate of decline in the U.K. versus 2019 has reduced. During the pandemic, we took the opportunity to rightsize the business. And so its recent performance relative to its size is very good. The U.S. grew 31% year-on-year and 28% versus 2019. The year-on-year growth in the region is driven by 2 main sectors: technology, with increased demand for Adobe, mobile application and sales force skills and life sciences with increased demand for quality assurance and clinic corporation skills. And finally, the APAC region, which grew by 33% year-on-year, but was 2% lower than the same quarter in 2019. Japan, which represents 2/3 of the region, grew by 23% year-on-year, but was 11% lower than 2019. The decline versus 2019 is simply due to a particularly strong third quarter in 2019, mostly from our permanent business in Japan. The year-on-year growth is driven by the same 2 sectors as for the other regions, both Technology and Life Sciences. Finally, looking at future visibility of our contract business and the strength of our balance sheet. The contractor order book represents the value of contracts written up to the contractual end date assuming all contracted hours are worked. We have seen further growth in the order book, up 41% versus the same time last year and up 20% on the same time in 2019. Looking at the order book by region, DACH was up 46%. EMEA excluding DACH was up 41% and the U.S. was up 35%. Within the order book, the employed contractor model, or ECM, was the main driver of that growth. We also have a strong balance sheet with net cash at the end of the quarter of GBP 51 million up since the half year and a GBP 12 million improvement since the same time last year. So to sum up, we're reporting a very positive trading performance. We delivered strong growth in net fees across all geographies. The contract order book continues to grow, giving us increased visibility of future revenues, and we have a healthy balance sheet position. Thank you. I'd now like to hand back to Mark.
Thank you, Andy, and thanks for that update. And as you can see, Q3 really represents another period of very strong trading, a result of continued great execution by the team as well as strong markets aligned with the right strategy that we have. As a result of that, our full year profit performance is expected to be significantly ahead of consensus as we move forward and continue to perform well in our markets. We've also seen the timing of some previously communicated planned increase in investing -- investments rather shifting from H2 of financial year '21 into full year '22 and beyond. And we do that continual investment in our people, in technology and our go-to-market strategy so that we can continue to focus on our execution of our strategy, which is not wavered, despite the challenging and continued volatile conditions externally as we navigate through this ongoing management phase of the global pandemic. That being said, we remain fully committed to the ongoing delivery of our long-term ambitions for all of our stakeholders and given our performance and we are confident that we'll be able to perform regardless of the external circumstances. So with that, I'd like to move us on to questions. So Tamzen, back to you, and we'll take some questions now.
[Operator Instructions] And we've got a question from Sanjay Vidyarthi at Liberum.
Just a question in terms of headcount -- that planned headcount increase. What kind of visibility do you have going into Q4 beyond in terms of the pipeline of potential new recruits. And can you talk about maybe some of the challenges in the target labor market that SThree itself is facing in terms of getting the right caliber of candidate?
Thank you, Sanjay. Why don't I take that. Look, I think we've got good momentum going into the fourth quarter. And yes, I mean, no surprise, it's certainly a tight labor market for everyone. I think that's unusual. And we also remain committed to making sure that we get the right people into the organization and get them at the right pace, we can train them well and get them ready for a great career at SThree. What we're certainly finding is that our value proposition as an employer of choice is certainly resonant given our focus on the right STEM markets with a purpose-led organization with bringing skilled people together to build a future really resonating and our focus on ESG being an additional valuable component of our overall value proposition to employees as well as the consistent theme of having a great career. And so we've seen good momentum coming into Q3 and Q4 in terms of hiring people in, but it's probably shifted more to us getting back on -- back to our expected rate by the end of Q4 and into 2022. So you'll see the impact of that in our numbers as we move from fourth quarter into '22. But we feel good. We're getting the right people coming in, but it is a challenge out there to make sure we got the right people and the right momentum moving forward.
Okay. A follow-up question, if I may. Just in terms of the pattern that you potentially anticipated of contractors taking more time off as we -- as lockdown restrictions eased. And obviously, that didn't really materialize. To be honest, it feels a bit surprising that we didn't see that happen to any degree. Do you have any insights as to why not?
So we didn't see it. Certainly, the margins you see more people taking vacation. But I think in terms of the length of contracts that we're seeing, and the value of the contracts that we're seeing is certainly offsetting the bulk of any holidays that people might be taking. And I think that's probably -- and I'm just my speculation here, no facts to back this up. That's probably just because of the demand for the type of talent we have is in -- is so high that we're able to deliver those high-quality contracts moving forward. And the needs of our clients in terms of the projects that are being delivered that continue to be priority #1 as our clients look through to the coming years and know that they need that kind of talent to deliver value for them. So we haven't seen it. I think it's early right now and to be able to just understand where it is. But as we stand at the end of Q3, we haven't seen the impact yet.
And we'll go to Andy Grobler at Credit Suisse.
A few from me, if I may. Firstly, just following up on the previous question in terms of delays to hiring. Is there any thought about shifting the focus to getting experienced hires. I know some of the others in the market have done that? Secondly, productivity gains through the quarter were fantastic. And you've said some of that will moderate, but not all of it. Well, how do you view that on a kind of in the medium term about where that productivity settles down? Third, just on wage inflation, what are you seeing? And how does that vary across various markets? I'll leave it there for now.
Thank you, Andy. Good questions. What I take the 1 in pretty and we'll see if Andy wants to pick up on the productivity gains. So in terms of the shift in hiring, we have already adjusted in terms of thinking through who we want to bring into the organization. And if I think of part of the change in how we've operated as a business, we are thinking in certain markets we should be bringing on more experienced people, and we're seeing that working quite well. And that's where you need the domain expertise, for example, or experience in recruiting is much more important than getting some new person into the organization. That being said, the vast majority of the new hires for new consultants that we're going to be bringing in are still going to be our traditional model of people coming out of university or first or second jobs coming in. And we have a holistic way of being able to bring them in, train them particularly well and then put them into the right segments moving forward. So we are doing it. But we're doing it very thoughtfully when it makes more sense to do that. I think on the wage inflation piece, we'll probably defer that to our full year results as we look at it. I look like the holidays. It's a little early to be able to do the analysis looking backwards now. But we're certainly watching that and trying to understand what the dynamics are there. Of course, wage inflation mix is actually beneficial for us financially, given that our rates are related to wages. And Andy, do you want to have a go at the productivity gains and how many will hold on to? I'm much hold on to.
Yes. Yes, of course, yes. Thanks, Andy. I mean clearly, the productivity is a function of the net fees per the number of heads. That has clearly increased by around 30% over the last 1 to 2 years. It's very hard to put a specific number on it. However, we have seen improved ways of working. People are more productive as we work probably more permanently towards a hybrid operating model for our staff. We do expect to hold on to some of those gains and be more efficient with how we deal with our contractors for example. So it's -- I'm afraid, Andy, I can't give you a very specific answer of how much that will revert, it will certainly revert over the next year or so back towards those previous levels. But the challenge is how much we can hang on to. So I think it will move more closely back to where it was, but not as far as we were historically, I think I would say.
And that's the end of questions. Mark, do you have any closing remarks?
Well, thank you, everyone. As Andy and I have another strong quarter of performance. And I think really a reflection of the right strategy, being in the right markets and the team continuing to perform well in a hybrid in an ever-changing environment. But a great testament to our execution, and we continue to stay focused on those long-term ambitions. So with that, I would also say thank you to you all, and we'll see you all again on December 13 for our full year trading update. So thank you, everyone.
Thank you.
Many thanks, Mark and Andy, and to you all for joining. This is the end of the webinar.