SThree PLC

LSE:STEM

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the SThree Full Year Trading Update. [Operator Instructions] There's PDF of the slides on the right-hand side, and this webinar is being recorded. I now hand over to Mark Dorman, CEO; and Andrew Beach, CFO. Mark, over to you.

[Mark Dorman, CEO & Executive Director]

Thank you, Tamzen, and welcome, everyone, to our full year 2021 Trading Update. I'm joined with -- by -- with Andy Beach, our CFO. And as usual, the normal format, I'll do a little bit of intro, Andy will take us through the numbers, and then we'll do a Q&A at the end. So why do we get going. There we go. And so -- it's been an incredible year, and we end the year with a record net fee performance, which is terrific. Before I go through the details, I think it's probably and worth starting at the bottom of this slide, given current events and the pandemic, again, raising its head. But I think worth noting that at SThree, we laid out very early on in the pandemic, our structure for actually managing the business through this period. I was going to lay out in 3 specific phases. So the initial response back in the early days in 2020 would then be this ongoing management phase, which we're currently in right now that has high levels of volatility between various strains of the virus impacting life, things drifting away and then coming back, and it won't be until we get to solution to the underlying health crisis, which ultimately this is a public health crisis that we'll get to the full recovery mode and back into whatever the next normal is. What's been incredible for SThree is that we've been able to continue to be resilient and adapt through this ongoing management phase. We see that in the resilience of our people who have done an incredible job over the last year. And as we focus on executing our strategy, their ability to execute and adapt within the current environment regardless of the volatility has been quite frankly, outstanding. That, combined with having the right strategy of being focused at the center of 2 long-term secular trends that of increasing demand for STEM talent and the move towards more flexible ways of working, really of underpinning the performance of the business. And we can see that as we exit the 2021, the momentum has continued through the fourth quarter and we've generated a record net fee performance and actually in the fourth quarter, achieving SThree's first-ever GBP 100 million net fee quarter, which is quite incredible and eclipses a record year or last record year in 2019. So really terrific performance by all of the team and really highlighting the strength of the performance of the business overall. So with that, I will pass on to Andy, who will take us through the numbers. So Andy?

[Andrew William Beach, CFO & Executive Director]

Great. Well, thank you, Mark, and good morning, everyone. So let me start with the highlights. We've delivered another strong quarter with group net fees for Q4, up 25% on a constant currency basis. For the full year, we've delivered year-on-year growth of 19%. 2020 was significantly impacted by the pandemic. And for that reason, we have chosen to also present our performance versus 2019, which was before the pandemic. Compared to full year 2019, net fees are up 9%. Note that 2019 was a record year for the group, so to deliver the performance ahead of that year is particularly pleasing. The contract business, which represents 75% of net fees saw a growth of 17% year-on-year and was up 9% compared to 2019. The permanent business which represents 25% of net fees, grew by 24% year-on-year and 8% versus 2019. Turning now to the regional and sector split for the year. We have a well-balanced business, both geographically and by sector. On the 2 charts you see here, the outer ring represents full year 2021, inner ring represents 2020. The chart on the left shows that 97% of our net fees come from our top 3 regions, DACH represents 36% of the group, up from 34% last year, and this growth was largely driven by Germany. EMEA, excluding DACH, represents 36% of the group, down from 38% last year despite a 9% increase in net fees. The growth here is largely driven by the Netherlands. And the U.S. represents 25% of the group, consistent with last year, but with a 24% growth in net fees. The chart on the right shows our strong and unique position providing STEM skills. Technology is our largest sector, and it grew by 23% with strong performance across all markets. It represents 47% of our net fees for the year. And Life Sciences grew by 25%, driven largely by the U.S. and Germany, it represents 24% of net fees. So turning now to each region in turn. Starting with DACH. The region grew 24% year-on-year and 20% when compared to 2019. Germany, which represents over 90% of the region, grew by 23% year-on-year and 18% versus 2019. The growth is driven by 2 main sectors, technology with increased demand for infrastructure and open source software development roles and life sciences with increased demand for laboratory staff and quality assurance roles. The EMEA excluding DACH region grew 9% year-on-year, but was down 9% when compared to 2019. The Netherlands, which represents nearly half of the region, grew by 19% year-on-year and 7% 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 4 consecutive quarters, the rates of decline in the U.K. versus 2019 has reduced. Q4 was only 1% behind the same quarter in 2019. The U.S. grew 24% year-on-year and 26% versus 2019. The year-on-year growth in the region is driven by 2 main sectors: technology, with increased demand for software development, sales force and mobile application skills and life sciences, with increased demand for quality assurance, biometric and clinical operation skills. And finally, the APAC region, which grew by 34% year-on-year, but was 1% lower than 2019. Japan, which represents over 2/3 of the region, grew by 27% year-on-year but was 5% lower than 2019. This decline versus 2019 was simply due to a particularly strong third quarter in 2019 from our permanent business in Japan. The year-on-year growth is driven by the same 2 sectors as for the other regions, technology and life sciences. Finally, a look at our future visibility of the 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 that all contracted hours are worked. We've seen further growth in the order book, up 43% versus the same time last year and up 30% on the same time in 2019. Looking at the contract order book by region, DACH was up 34% versus last year, the U.S. up 53%; and EMEA, excluding DACH, up 44%. Within the order book, the employed contractor model, ECM, was the main driver of that growth. We also have a strong balance sheet with net cash at the end of the year of GBP 58 million, up since Q3 and an GBP 8 million improvement since the same time last year. So to sum up, we are reporting a record trading performance for the year. We delivered strong growth in net fees across all our 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'll now hand back to Mark.

[Mark Dorman, CEO & Executive Director]

Thank you, Andy. So as you can see, a really strong set of results there. And as we look forward, our full year performance is expected to be in line with recently upgraded consensus. As we said, our strategy is absolutely the right one, and we see demand for STEM skills, particularly those in life sciences, technology and engineering, continue to grow as we head into the new economic future, certainly into next year and beyond, which sets us up for long-term sustainable growth. As Andy highlighted, our contractor order book, which is a good forward-looking indicator, is up 43% year-over-year and provides us with excellent visibility into the future. And we expect to maintain the current levels of profitability whilst we still continue to focus on our infrastructure, talent acquisition and our go-to-market propositions to make sure that we're serving both our clients and our candidates well and maximizing our opportunities for growth. And whilst the external environment continues to be volatile, as I said right at the outset, what we've done in SThree is make sure that we can operate our business regardless of the environment and serve our clients well through this incredible time. So good set of results, and we'd be happy now to move on to take some questions. So Tamzen, over to you.

[Operator]

[Operator Instructions] And we've got a question from Adrian Kearsey from Panmure Gordon.

[Adrian Mark Kearsey, Support Services Analyst]

Number of people in the sector have talked about consultant acquisition and how actually in certain regions, it's been quite difficult to hire the right kind of consultants in this business. Could you guys perhaps just talk about your experiences by geography and how that's evolving over time?

[Mark Dorman, CEO & Executive Director]

Thank you, Adrian. Look, I think it's no surprise. It's a pretty hot labor market out there, which is really good for us on 1 side. But obviously, that provides some challenges in terms of making sure we get the right people into the business. We made good progress actually in terms of increasing our consultant headcount and being able to do that. But there's no doubt we've got to make sure that we've got the right set of conditions, both in terms of the right kind of reward package. But even more so, it's about the kind of company we are as a purpose-led organization. We've got the right kind of career for the right kind of people. And as we laid out at our Capital Markets Day ambitions, we've got a commitment to continue to invest in learning and development. So all of those things combined really make it a pretty compelling place for us to be as an employer. And you can see that in the likes in Germany, we've won for I think the third or fourth year on the row, the best employer in Mittelstand, for example, is a good highlight of how attractive we are. So we've increased our headcount year-over-year, and we've increased it throughout this year, and we'll continue to invest there. But certainly, within our core markets, we're having to work hard. And we're being kept honest by other opportunities, largely outside of the industry for the same kind of really exciting talent we want to come and have at SThree. But we are making progress.

[Operator]

And we'll go to Andrew Grobler, Credit Suisse.

[Andrew Charles Grobler, Analyst]

3 from me, if I may. Firstly, kind of sticking with headcount. What are your expectations in terms of growth for fiscal '22? Secondly, what are you seeing in terms of wage inflation, both, I guess, internally and also externally with your candidates? And thirdly, just in terms of guidance, I know you mentioned this before, but your guidance, if I use consensus gross profit for next year suggest kind of drop-through rate to about 20%. So that's roughly half of what is being generated by all of your larger quoted competitors. Why is that? Can you just talk through why there's a bit more isn't falling through to the bottom line, please?

[Mark Dorman, CEO & Executive Director]

Well, thanks, Andy. What do I take the number 2 wage inflation and then and I'll pass to Andy for number 1 and and number 3. So I think on wage inflation, certainly, it's different in different parts of the market internally in terms of where we are. So in different parts of the world that's impacting us differently. It's -- we're able to keep up with that in terms of where we are. In terms of externally for the people that we place, and of course, we know where that is, and it's pretty low single digit, I would say, in terms of the people we place. And of course, broadly, wage inflation is actually good for us. But of course, we are not a good reflection of the whole of the market because, obviously, we choose to operate in supply-constrained markets. And the talent that we place is pretty much in demand. So where we operate, we are certainly seeing wage inflation and on the home, it's low single digits, but in certain spots and in certain skill sectors, it's pretty high. And Andrew, do you want to take the growth '22 and the drop-through as this number 3 question?

[Andrew William Beach, CFO & Executive Director]

Yes, of course, yes. So first question was headcount into '22, and we would certainly expect it to be double digit, Andy. So at least 10% growth from where we are at the end of FY '21. And then in terms of drop-through in '22, you're quite right, the drop-through is anticipated to be lower in FY '22. We do signal it in the outlook comments. We are looking to invest some of that drop-through into the business to help us deliver sustainable growth and help us towards our ambition for a stated in the Capital Markets Day a couple of years ago through to FY '24. At the moment, we're saying that's infrastructure, it's a technology to support our consultants and back office, and it's largely on a go-to-market strategies. I expect that we'll give you a little more color on those areas at our full year results in January.

[Andrew Charles Grobler, Analyst]

So just on that kind of incremental profitability that the others are saying, you at this stage are investing that into infrastructure and technology that still is a little bit. Is that just that is needed?

[Mark Dorman, CEO & Executive Director]

Yes. It's part of the strategy from our FY '19 Capital Markets Day. So it's kind of planned back then. But during COVID, it is delayed it somewhat. So we're now going to be doing that across FY '22 and '23.

[Operator]

And we'll go to Steve Woolf at Numis.

[Steven John Woolf, Analyst]

I have 1 left. Just in terms of when you are hiring now the consultants out in the market and perhaps for your own existing consultants. Are you finding you're having to change any of the sort of the incentive packages in terms of fees for your guys or higher salaries? Or is it sort of broadly the same as where you've been given the sort of the tougher hiring market. And obviously, we're all aware that there's a couple of recruiters trying to get consultants quite aggressively in terms of experience levels out there in the market?

[Mark Dorman, CEO & Executive Director]

Steve, thanks for that. Look, I think we've got a very competitive package. And as I said, it's the full package. And if we think of the bulk of the people that we hire are still graduates generally in their first or second role and we train them. And they're looking for a complete set of offerings. So it's both its reward, it's what's the career development going to be like, what's the broader opportunity? What kind of company am I going to work for? And also, what are the conditions working within that organization. So we have a hybrid policy that allows us to be flexible to meet the market conditions. We've got a great career for people. We invest in the learning development and our reward package is certainly competitive broadly across the markets that we operate in. We keep under review on a constant basis, as you would imagine, and getting the right people into the organization and making sure we develop them is critical for the success of the business. And so we're very focused on that, and we see ourselves as a very competitive and very attractive employer in the marketplace. So we're comfortable with where we are moving forward.

[Steven John Woolf, Analyst]

And that's obviously on the new recruit side, are you finding -- I know you mentioned wage inflation on consultant levels depends on the region. I'm thinking more so about the guys who are 2, 3, 4 years in. Have you found yourself trying to sort of tinker with that structure at all? Or you're pretty confident to keep the same model moving forward?

[Mark Dorman, CEO & Executive Director]

So we're pretty -- as I said, we're pretty confident on the reward structure. It's always under review. So it's not like it's -- we set it once and that we don't look at it. So we do look at on a regular basis to make sure we're matching what makes sense in the market and what's attractive for people. But it's also about the other conditions and other benefits and the type of environment people are working in as well is important for those people, what their career progression is going to look like, particularly the longer they are in the organization. It's more about what's next to come, and where is my career going as much as it is, what does the award look like. So yes, we are very focused on making sure that not only are we attracting the right people, but we retain them for the long term. And I think if you look at the tenure of our senior leaders in the organization, we have a pretty good track record to be able to do that. That's 1 of the strengths of SThree quite frankly.

[Operator]

We've got a question from Iain Dale at Radnor.

[Unknown Analyst]

2 quick questions for me, if I may. Firstly, on engineering. Obviously, there's been a focus on the performance of Tech and Life Sciences. I'm wondering if you might be able to give us a bit more color as to what you've seen for the engineering side of the business and how that sort of varies across markets and what's been driving that? The second 1 is just a quick 1 on the balance sheet. Obviously, you've seen an increase in your net cash position, which suggests, given the net fee momentum in the business, quite an interesting outcome as far as working capital is concerned and the management of books wondering would be able to give us a bit more color on that, please.

[Mark Dorman, CEO & Executive Director]

Good. Well, I'll take one, and then Andy can take the number 2, if that's okay. So look, I think we've seen good strength in engineering across the board. In the U.S. really increased in renewables as a core part of our business. So you're seeing the energy complex change slightly in terms of where we're seeing a new engineering talent particularly in the expansion of wind and solar farms has driven a lot of our performance and continued good performance in the U.S. in power utilities. In the Netherlands, we're also seeing good performance in engineering and largely in process and manufacturing engineering, driving a lot of the growth there. And that's both in life sciences and food and beverage, which use very similar skills across those 2 sectors. And we're looking at good performance or stabilization construction in other markets as well. So engineering is a core part of our offering across STEM and we see real opportunity there, particularly in the energy complex more broadly as a lot of investment in infrastructure they're coming in in the coming years. Andy, do you want to take the question number 2?

[Andrew William Beach, CFO & Executive Director]

Yes. Question there is on cash and probably the pleasant surprise that cash has increased by GBP 8 million when you would naturally expect on a business that's so heavily weighted towards contracts that would have quite a significant negative working capital outflow to service those new contractors. So that's a very good observation. Within that GBP 8 million increase actually is a circa GBP 20 million or so negative working capital outflow for exactly that reason on the contract, so it is in there. So we have seen quite an increase in our working capital. However, due to the underlying profitability of the business dropping through and also careful management of the remaining of our working capital. So in terms of better cash collection has been really strong and also management of our outflows and creditor payments as well. So we've managed our other working capital flows very well and the underlying profitability of the business has obscured, positively obscured the negative outflow from the contractor working capital consumptive profile.

[Operator]

And we'll go to Sanjay Vidyarthi from Liberum.

[Sanjay Kumar Vidyarthi, Research Analyst]

Yes. Just a couple of quick questions. One, in terms of the contract order book. Is there anything to say in terms of new business wins versus contract renewals, but I'm assuming both equally strong, but anything you can add? And second, in terms of the exit rate on perm. Is there anything to say on that? Does it continue to be strong as well?

[Mark Dorman, CEO & Executive Director]

I don't know, Andy, do you want to take -- do you want to take this?

[Andrew William Beach, CFO & Executive Director]

I can take that. Yes. So on the contractor order book, Sanjay, yes, it's quite simple. It's all factors. So it's new business run rates are up, rebook is up, shrinkage is down and renewals are up. So actually, a content point specifically I won't pinpoint specifically every single reason. But actually, all metrics are really positive driving that contract order book. As I said earlier, it's largely driven by the ECM side of the business. And there's a fair mix between value and length as well. So we're actually seeing an increase in the length of the average contract in that contract order book as well. So every single metric then help contribute to that growing is in a positive direction. You asked about permanent exit rate actually, for a couple of months, we've had exceptional new bids on the permanent part of the business, some of the highest months we've had for the last 2 or 3 years. So the exit rate on perm is much shorter term, of course, because it comes and lands in a short set of time, unlike our contract business, which obviously lasts for several months. But actually, new business on perm has been very strong including November.

[Operator]

And finally, at this stage, a question from Matthew Lloyd at HSBC. Could you give us some color on exit growth rates, please? And he also adds will be very sorry to see you go, Mark.

[Mark Dorman, CEO & Executive Director]

Well, that's very kind of Matthew. And in terms of exit growth rates, I think the good, the best indicator of what that looks like for our net fees is certainly the contracted order book being up 43% is the best forward-looking indicator that it's not a direct correlation of 1 to the other, because of the value of all contracts written up to that point in time, but it gives you a good sense of the momentum going into next year, but we're certainly set up very well in FY '22. And as Andy just said about the exit rates per perm, we're still seeing good strength in our permanent business as well, albeit that's a smaller part of our business is certainly very important as we think about the overall health. So I think on both sides, both contract and permanent, we've got good momentum going into 2022 that sets us up particularly well, which makes sense given the sectors we're in and the demand for the talent that we have. So really, it's up to us and the team to continue to execute they way they have done over the last few years.

[Operator]

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

[Mark Dorman, CEO & Executive Director]

Well, thanks, everyone, for our Q4, and a terrific year. Again, I just want to thank the team at SThree for an incredible performance in 2021. As Andy noted, a record year beating 2019, which was, in fact, a record year at pre the current environment. And so really a great performance. I'm sure the team in SThree will be looking forward to seeing you all again for a full year earnings update on Monday, 31st of January. But with that, thank you, everyone, and have a good day.

[Andrew William Beach, CFO & Executive Director]

Thank you. Good bye.

[Operator]

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