REG-SThree SThree: Final results for the year ended 30 November 2017 <Origin Href="QuoteRef">STHR.L</Origin>
29/01/2018 07:05
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SThree (STHR)
SThree: Final results for the year ended 30 November 2017
29-Jan-2018 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014
(MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
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29 January 2018
SThree plc
("SThree" or the "Group")
Final results for the year ended 30 November 2017
SThree, the international specialist staffing business, is today announcing its final results for the year ended 30
November 2017.
"Encouraging overall result for 2017, with Group business profile continuing to remix to Contract and international
markets. Entered 2018 in good shape and well-positioned for further growth."
FINANCIAL HIGHLIGHTS
2017 2016 Variance (3)
Constant
Actual
Adjusted (1) Reported Adjusted (2) Reported Currency
Movement
Movement
£m £m £m £m % %
Revenue 1,114.5 1,114.5 959.9 959.9 +16% +9%
Contract gross profit 203.5 203.5 173.3 173.3 +17% +10%
Permanent gross profit 84.2 84.2 85.4 85.4 -1% -8%
Gross profit 287.7 287.7 258.7 258.7 +11% +4%
Operating profit 44.9 38.2 41.3 37.8 +9% -3%
Conversion ratio 15.6% 13.3% 16.0% 14.6% -0.4% pts -1.2% pts
Profit before taxation 44.5 37.7 40.8 37.3 +9% -3%
Basic earnings per share 25.7p 21.5p 23.2p 21.2p +11% -1%
Proposed final dividend 9.3p 9.3p 9.3p 9.3p - -
Total dividend (interim and final) 14.0p 14.0p 14.0p 14.0p - -
Net cash 5.6 5.6 10.0 10.0 - -
(1) 2017 figures were adjusted for the impact of £6.7 million of exceptional strategic restructuring costs.
(2) 2016 figures were adjusted for the impact of £3.5 million of restructuring costs.
(3) All variances compare adjusted 2017 against adjusted 2016 to provide a like-for-like view.
(4) FX impacted positively on our results YoY on a reported basis
OPERATIONAL HIGHLIGHTS
* Encouraging full year performance with strong Q4 and exit rate into 2018
* Adjusted profit before tax up 9% to £44.5m
* GP up 4%* YoY (up 11% on an as reported basis) and up 8%* YoY in Q4
* Growth in GP driven by USA (up 18%*) and Continental Europe (up 9%*), whilst UK&I remains challenging
(-14%*)
* 81% of GP now generated outside UK&I (FY 2016: 75%)
* Contract GP up 10%* YoY, with growth across all sectors
* Contract now accounts for 71% of Group GP (FY 2016: 67%)
* Permanent GP down 8%* YoY but productivity improved by 3%* YoY
* Foreign exchange increased reported operating profit by circa £5.0m and GP by c£18.1m
* Move of London-based support functions to Glasgow underway
* Final dividend maintained
* Variances at constant currency
Gary Elden, CEO, commented: "We have delivered an encouraging overall result for the year, with a strong finish in
the final quarter. Pleasing performances in the USA and Continental Europe, particularly from our market-leading
businesses in the Netherlands and Germany, were key to this result. With 81% of our business now generated outside
the UK and 71% of our GP generated by our more resilient Contract business, our business profile has changed
significantly over recent years. After two years of turbulent political, market and economic conditions, we enter
2018 in good shape, with a clear vision to be the number one STEM talent provider in the best STEM markets.
"Looking ahead to 2018, the momentum of our Contract business and the strength of our performances in the USA and
Continental Europe leave us well-positioned for further growth."
SThree will host a live presentation and conference call for analysts at 0900 GMT today. The conference call
participant telephone details are as follows:
Dial in: +44 (0) 20 3003 2666
Call passcode: SThree
This event will also be simultaneously audio webcast, hosted on the SThree website at 1 www.sthree.com. Note that
this is a listen only facility and an archive of the presentation will be available via the same link later.
SThree will be announcing its Q1 Trading Update on Friday 16 March 2018.
Enquiries:
SThree plc 020 7268 6000
Gary Elden, Chief Executive Officer
Alex Smith, Chief Financial Officer
Sarah Anderson, Deputy Company Secretary/ Investor Relations
Citigate Dewe Rogerson 020 7638 9571
Kevin Smith / Jos Bieneman
Notes to editors
SThree is a leading international specialist staffing business, providing permanent and contract specialist staff to
a diverse client base of over 9,000 clients. From its well-established position as a major player in the Information
& Communications Technology ("ICT") sector the Group has broadened the base of its operations to include businesses
serving the Banking & Finance, Energy, Engineering and Life Sciences sectors.
Since launching its original business, Computer Futures, in 1986, the Group has adopted a multi-brand strategy,
establishing new operations to address growth opportunities. SThree brands include Computer Futures, Huxley
Associates, Progressive and The Real Staffing Group. The Group has c2,800 employees in sixteen countries.
SThree plc is quoted on the Official List of the UK Listing Authority under the ticker symbol STHR and also has a US
level one ADR facility, symbol SERTY.
Important notice
Certain statements in this announcement are forward looking statements. By their nature, forward looking statements
involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ
materially from those expressed or implied by those statements. Forward looking statements regarding past trends or
activities should not be taken as representation that such trends or activities will continue in the future. Data
from the announcement is sourced from unaudited internal management information. Accordingly, undue reliance should
not be placed on forward looking statements.
Chief Executive Officer's Review
We have delivered an encouraging overall result for the year, with a strong finish in the final quarter. Pleasing
performances in the USA and Continental Europe, particularly from our market-leading businesses in the Netherlands
and Germany, were key to this result. With 81% of our business now generated outside the UK and 71% of our GP
generated by our more resilient Contract business, our business profile has changed significantly over recent years.
After two years of turbulent political, market and economic pressure, we enter 2018 in good shape, with a clear
vision to be the number one STEM talent provider in the best STEM markets.
This year we also made some changes to SThree's leadership model which will help us to work in a more effective and
agile way in the future. With the creation of the new senior management roles of Chief Sales Officer and Chief
Operations Officer, we will be in a better position to align our sales and operational strategies and ensure we have
the right services, infrastructure and people to execute our global growth strategy and provide our customers with
the best possible experience.
Growing Contract, driving Permanent profitability
We invested for future growth, with year end sales headcount up 10% year on year and up 7% sequentially vs Q3 2017.
We continued to grow Contract headcount (+15%) faster than Permanent headcount (+3%), in line with our plan. The
shift in favour of Contract is creating a business that is much more resilient in times of uncertainty, providing
stronger and more sustainable profits. While in 2012 our business was evenly split between Contract and Permanent,
we now have 65% of our sales headcount working on Contract recruitment. We have also created separate management
structures for our Contract and Permanent business in almost all territories to drive accountability and focus.
Growing Contract
As I have been able to report every year since taking over as CEO, we enter our next financial year with a record
Contract book, passing a key milestone of 10,000 Contract runners to reach 10,197 at the end of the year, up 12%
from last year. Contract GP returned to double digit year over year (YoY) growth of 10%*, with a strong final
quarter up 14%*. Contract growth YoY was across all sectors and driven by Continental Europe, which was up 17%* and
by USA, up 21%*. Continental Europe and USA combined now represent nearly 70% of our Contract runners, up from 65%
in 2016.
Our traditional Personal Service Company/freelance model ("PSC") continues to perform well and we are also
generating increased business through our Employed Contractor Model ("ECM"). ECM is structured such that the Group
employs individuals directly and contracts them to clients. ECM is the established contracting model in a number of
countries, including the USA. With governments across the world examining new ways to raise tax revenues to address
budget deficits, our business model is expected to shift further towards ECM over time. A key focus for 2018 is the
expansion and strengthening of supporting processes of ECM within our Contract business to increase its market
opportunity.
Driving Permanent Profitability
Investment in Permanent continued to be made on a highly selective basis in the year as we focused on improving the
profitability of this division. Permanent GP was down 8%* YoY, with average sales headcount down 10%, reflecting a
3%* improvement in Permanent productivity per head over last year.
The USA posted a 12%* GP increase, driven by supportive Energy and Banking markets. This was offset by declines in
all other regions, with Continental Europe down 7%* and UK&I down 22%*.
Permanent recruitment is more sensitive to overall market sentiment and has been hit harder by the political, market
and economic uncertainty of recent years. In response, we have actively reduced Permanent headcount in certain
markets in order to improve overall profitability in our Permanent business. Over the years, this has meant
restructuring our UK, Benelux & France, USA, APAC and Middle East (APAC & ME), Oil & Gas and Banking & Finance
businesses. In markets with significant Permanent opportunity such as the USA and Germany we continue to maintain a
strong Permanent offering.
Improving customer experience
Last year we rolled-out a major customer experience programme globally, using Net Promoter Score (NPS) to capture
our clients and candidates feedback at every stage of the customer journey. Feedback has then been used to adapt our
systems, processes and behaviours and we have already seen significant improvements in our overall NPS results
(+3.6% points) as well as in the volume of data we capture.
From these findings, we have developed operating principles that place the customer at the heart of everything we do
- to build trust, to care and then act, to be clear and then to aim high. We rolled these principles out across the
business in the last quarter of 2017 and will continue to reinforce them in 2018.
Investing in new systems, processes and infrastructure
Our processes, systems and infrastructure are crucial to the delivery of our sales strategy and to providing the
best customer experience. We are currently finalising a structure which will provide us with a more holistic,
strategic view of our global operational requirements and help us to manage demand and resource for optimum
delivery.
We have announced some significant changes this year, including the strategic restructuring and relocation of our
London-based support functions to a new office in Glasgow, which will provide a more sustainable support structure
as we continue to grow our business. We expect to substantially complete the reorganisation and relocation during
2018, creating a centre of excellence with a clear objective to reduce costs, while improving operational
capability.
We have continued to transition our systems to a cloud-based marketing services structure and have invested in new
automation technology which gives us new and distinct ways to build a single customer view and to communicate in a
more personalised way.
We are also part way through a roll-out of a new customer/contractor portal and a new contract management system.
Both systems have been developed in response to contractor and customer feedback.
Generating new revenue streams
Innovation and entrepreneurship are a key focus for the Group as we aspire to build a more diverse portfolio of
products and services.
We have created an internal system of Innovation which gives us greater ability to identify promising new ideas and
to test them quickly. We have invested c.£3.2 million in the year in a number of external innovation start-ups (£1.2
million) and have created our own innovation incubator (£2.0 million). We expect to increase the amount spent on our
innovation incubator to c.£3 million in 2018.
Key developments in 2017 included:
- Talent Deck, a new smart job board, focused on cultural fit and automated matching was launched in the UK
and has already attracted blue-chip technology brands. We expect to continue the roll-out of Talent Deck and to win
additional marquee clients in 2018.
- We prepared the ground for two other internally-developed initiatives to launch in 2018. Showcaser allows
a user to create and manage asynchronous video interviewsand is currently being trialled with one of our brands.
Hirestream combines a digital market platform with key human-centred touch points. A pilot is planned in mid-2018.
In addition to unlocking internal ideas, we have also engaged with a number of start-ups in the recruitment space,
to identify whether we should make strategic investments or find other ways to unlock the potential in these ideas.
We made additional small investments totalling c.£1 million in a number of HR technology start-ups:
- We supported the deployment of Right Staff by Ryalto Limited, a work scheduling app for healthcare
professionals in which we have invested, with a successful trial among shift workers in the UK's National Health
Service. This is currently being scaled up for a further roll-out.
- We signed a development agreement and invested in RoboRecruiter, a messaging bot specifically designed
for recruitment which engages with candidates without any human intervention.
- We invested in a HR vertical of The Sandpit Limited (HRecTech), an incubator with a successful track
record in marketing technology, which is now incubating HR technology businesses in the UK and USA.
We will continue to look at potential additional investments where we see a good strategic fit.
Identifying and developing great talent
SThree's success depends on having highly skilled and motivated employees. We aim to find great people and enable
them to build meaningful careers inside the organisation.
We provide on-the-job learning programmes as well as online and classroom-based courses to support our employee's
careers at all stages. Our career management platform is leading edge and helps our employees to develop their
careers within the group.
This year saw the launch of our revised organisational purpose 'Bringing skilled people together to build the
future' and with it, support for our managers and leaders to bring to life the true meaning of our work with our
candidates and clients.
In 2017, we introduced our quarterly Employee Net Promoter Score (eNPS), replacing our annual engagement survey, as
a more dynamic way to capture regular feedback from our people. Over 70% of our employees responded with feedback
about their experience of working at SThree, as well as how they view the services we offer our customers. eNPS will
help us make the right changes based on employee feedback and track what is working. Ultimately, it puts our people
at the centre of decisions that help to create a brilliant place to work.
As part of our ongoing commitment to creating an inclusive and diverse workforce, we have introduced a new Female
Leadership Development Programme: IdentiFy. Thirty high potential, future female leaders from across the Group have
been selected to participate in a 12-month development programme. The programme is designed to support them to
recognise and develop their leadership strengths through facilitated learning, stretch assignments and executive
sponsorship. Through IdentiFy we hope to improve the gender balance at a senior level.
Operating Review
Group GP up 4%*, with a strong finish to the year with GP up 8%* in Q4.
The growth in GP was driven by Contract up 10%*, with growth across all sectors and strong regional performances in
Continental Europe up 17%* and USA up 21%*. Permanent GP was down 8%*, with average sales headcount down 10%.
FY 2017 FY 2016
Breakdown of GP
% %
Contract/Permanent Split
Contract 71% 67%
Permanent 29% 33%
100% 100%
Geographical Split
UK&I 19% 25%
Continental Europe 52% 49%
USA 22% 20%
Asia Pacific & Middle East 7% 6%
100% 100%
Sector Split
ICT 43% 45%
Banking & Finance 15% 16%
Energy 9% 8%
Engineering 9% 9%
Life Sciences 22% 21%
Other 2% 1%
100% 100%
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
GROUP FY 17 +10% -8% +4% 71% 29% +5% -10% -1%
Regional Overview
Regionally, our GP growth was driven by a strong performance in the USA, up 18%*, and robust growth in Continental
Europe up 9%*, led by the Netherlands up 20%* YoY. The USA overtook the UK&I (19% of Group GP) to become our second
largest region (22% of Group GP) during the year behind Continental Europe (52% of Group GP). Although the UK&I
remains an important part of our business, uncertainty created by the EU Referendum and the relative maturity of the
recruitment market have led us to focus on growth opportunities in other regions and to be cautious with our
investment in the UK&I business. As part of our regional market penetration plans, we expanded our global footprint
by opening four new offices in Continental Europe. However, as we reviewed regional business performance, it became
clear that our return on investment in certain other regions was sub-optimal and we took action to restructure our
Hong Kong office.
We have continued to roll out ECM through the year, introducing new offerings in Germany, and improvements in our
operating model globally. With governments turning to new means to address their budget deficits, including the
IR35 Intermediaries Legislation in the UK and the Deregulering Beoordeling Arbeidsrelaties (DBA law) in the
Netherlands, there is an increasing risk to the traditional Personal Service Company contractor model. However, we
are in a position to provide service to clients that is highly compliant with the new legislation and we have a
growing footprint in the ECM market which offers a suitable alternative to our candidates and clients. A key focus
for 2018 is further growth in ECM and the further diversification of our Contract services.
Continental Europe
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
CONTINENTAL EUROPE FY 17 +17% -7% +9% 71% 29% +21% -5% +10%
Performance in 2017
Continental Europe is our largest region representing 52% of Group GP. It is split into two regions: Germany,
Austria & Switzerland (DACH) which is 28% of Group GP, and Belgium, Netherlands, Luxembourg, France and Spain
(Benelux, France & Spain), which is 24% of Group GP. Average headcount was up 10% in the year and period end
headcount was up 18% as we continued to invest for future growth in this market.
Overall, we delivered strong growth in GP, up 9%*, supported by strong labour markets, a shortage of STEM
candidates, low unemployment and rising incomes. SThree is the market leader in STEM professional recruitment in the
Netherlands and once again our Dutch business delivered an excellent performance, with GP up 20%*.
Our performance across Continental Europe improved through the year with GP in the final quarter up +16%* YoY.
Strong growth was achieved in Contract across the region with GP up 17%*. Contract in Continental Europe provides a
significant growth opportunity and average headcount was up 21% YoY. The region had an excellent performance in the
final quarter with Contract GP up 24%*. The Netherlands Contract business grew GP by 27%* YoY, France by 16%* YoY
and Germany by 12%* YoY. We ended 2017 with our Contract runners up 21%, our GP Day Rates ("GPDR") up 1%* and our
sales headcount up 26% YoY, providing a strong pipeline for growth in 2018.
Permanent declined by 7%*, with average sales headcount down 5% in the year. Average salaries were up 1%* and fees
were up 2%*. GP yields declined 2%*, however, improvements were noted in Benelux & France where our Permanent
businesses had been restructured in prior years. Period end headcount was up 5% YoY as we invested selectively in
opportunities in Germany where SThree is the largest Permanent, professional services recruitment business.
We delivered GP growth across every sector in Continental Europe, with double digit growth in Contract across the
board. Contract ICT, our largest sector, grew 18%* YoY, Life Sciences 12%*, Engineering 19%* and Banking & Finance
20%*.
We opened new offices in Toulouse, Lyon, Vienna and Barcelona in the year in order to better service our client
base.
Expectations for 2018
Continental Europe exited 2017 with a strong pipeline for growth in 2018, focused and capable management and a
highly engaged team with the lowest churn in the Group.
In line with our Group strategy, we will continue to invest in Contract throughout 2018 where we see market
opportunity. Labour laws create momentum for demand in the Contract business and our increased offering of ECM
services is expected to help drive further growth. Our ECM offering in Germany has completed a pilot phase
successfully with full roll out anticipated in 2018.
This year, we will focus on improving Permanent productivity, with selective headcount investments, especially in
Germany.
We expect to open new satellite offices in Lille and Eindhoven in 2018.
UK&I
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
UK&I FY 17 -11% -22% -14% 79% 21% -10% -17% -12%
Performance in 2017
The UK&I business, which is 19% of Group GP, experienced a challenging year in 2017, in an environment dominated by
further uncertainty. The ongoing 'Brexit' negotiations and the UK's snap general election affected market confidence
leading to a decline in both our divisions. Average headcount was down 12% YoY with a decline across both Contract
and Permanent. Period end headcount was down 3% YoY.
Contract GP in UK&I was down 11%* YoY. The Contract division is more resilient in tough market conditions, but these
were exacerbated by pricing pressures and IR35 Intermediaries Regulation in the Public Sector in the year. We have
successfully navigated these new regulations, demonstrating our ability to provide a high quality and compliant
service. Average headcount was down 10% YoY, however, period end headcount was down 1%. Contract runners closed at
2,616, down 2% with our GPDR down 1%*. However, the Contract business showed signs of improvement with runners and
GPDR both growing sequentially in H2.
After a significant restructuring of the Permanent business in 2016, we expected GP to be down in the year, but it
fell further than anticipated as a result of the continuing political uncertainty through the year and was down 22%*
YoY. Average sales headcount was down 17% with period end sales headcount down 9%. Whilst Permanent GP yields were
down 6%* YoY, we have been actively working to increase our focus on higher salary placements and our average fees
and average salaries were both up 4%* YoY.
ICT, which includes Public Sector and represents 58% of GP, declined 18%* YoY, with Contract down 17%* and Permanent
down 22%*. Banking & Finance, our second largest market in the region, reported a decline of 22%* YoY. The Banking &
Finance sector, which is 14% of UK&I, remains subject to further uncertainty arising from the UK's negotiations with
the EU. However, we saw improvements in our Engineering GP which grew 8%*, with growth achieved in all four quarters
of the year. Performance in Engineering was driven by Contract up 12%*, in part as the sector benefited from
increased demand resulting from the depreciation of sterling. Life Sciences also showed promise with growth from Q2
onwards and FY growth of 3%* YoY.
The UK&I business is focussed on maintaining profitability and measures were taken through the year to streamline
the business. We rationalised the management structure and increased the relative number of candidate resourcing
roles in our Glasgow Resource Centre, which benefits from a lower cost base.
Expectations for 2018
In the UK, we enter 2018 against a background of continued uncertainty. Increasing inflation and supressed GDP
growth rates for the UK being in the forefront of our minds, we expect to hold UK&I headcount broadly flat this year
and to focus on maximising the profitability of the business.
We expect to retain a flexible approach to resource allocation to maximise the opportunities available in certain
sectors and to adapt to all legislative changes in the region as required, including a proposed expansion of changes
to the IR35 Intermediaries Legislation to the private sector in 2019.
USA
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
USA FY 17 +21% +12% +18% 69% 31% -8% -9% -8%
Performance in 2017
The USA is now our second largest region, representing 22% of Group GP. USA was our fastest growing region in 2017,
with GP up 18%*. Our strong performance in 2017 was across both Contract up 21%* and Permanent up 12%*. This
reflected a significant improvement in GP yields, primarily driven by a recovery in the Energy and Banking markets
from the weaker conditions experienced in 2016. Average headcount declined by 8% YoY with both Contract and
Permanent headcount reducing following a restructuring in 2016 and a pause on recruitment as potential impacts of
the US presidential election result were assessed. However, we made significant investment in headcount in the
second half of the year. Period end headcount was up 15% YoY with both Contract and Permanent growing sequentially
in Q3 and Q4.
Contract GP was up 21%* YoY with growth across all quarters. Average headcount declined by 8% and as a result yields
were up 31%*. An improved performance in Contract GP was evident across all sectors with our largest sector, Life
Sciences, which represents 45% of the division, up 18%* YoY. Energy GP was up 68%* as we expanded our services to
key clients. Contract runners were up 14% YoY with GPDR down 3%*, however, GPDR grew sequentially in Q3 and Q4.
Average headcount was down 8% YoY, however, period end headcount was up 11% YoY providing a solid platform for
growth in 2018.
Our Permanent division in the region performed well in the year, with GP up +12%* and excellent yields, up +23%*
YoY. Permanent growth was across all sectors, with strong growth in Banking & Finance, up 9%*. Permanent Life
Sciences was up 3%* YoY. Average Permanent fees and average salaries declined YoY, down 7%* and 6%*, respectively,
driven by Banking & Finance and Energy. However, Life Sciences, our largest sector in the division, delivered an
increase in both average fees and average salaries. Average headcount was down 9% YoY, however with increased
business confidence in the region, headcount build resumed in the second half of the year. Period end sales
headcount was up 23% YoY.
Life Sciences which represents 46% of USA GP, grew 13%* YoY with growth across both Contract and Permanent. Banking
& Finance, the second largest sector in the region, grew 2%* YoY with strong performance in Permanent, up 9%* YoY,
offset by a decline in Contract, down 6%* YoY. The Energy market in the region showed an encouraging recovery in the
year, up 71%* YoY with growth across both Contract and Permanent.
Expectations for 2018
With a good exit rate on Contract runners, up 14%, especially in Energy, and excellent permanent yields, we expect
to continue our strong growth into 2018. We will continue to invest in headcount in high yielding markets as
opportunities are identified. We opened a new office in Washington D.C. in December 2017 to service the needs of our
clients in this region.
In the USA, we are confident that we have the right team and structure to deliver a high quality service to our
clients and continue to penetrate the largest recruitment market in the world.
APAC & ME
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
APAC & ME FY 17 +24% -22% -4% 51% 49% -6% -17% -14%
Performance in 2017
APAC and Middle East (APAC & ME) is our smallest region representing 7% of Group GP. The business is split into two
regions: Australia, Japan, Hong Kong and Singapore (APAC) which represent 5% of Group GP and Dubai (Middle East)
which represents 2% of Group GP. The region has struggled since the drop in the oil price in mid-2014. The upstream
Energy business, which historically had been the backbone of the operation, has not recovered due to the relatively
high break-even price of oil extraction in the region. This has been compounded by weak Banking & Finance markets
in 2016 and a slow-down in the rate of growth in China, which has impacted much of APAC. In 2017, the region
reported an overall GP decline of 4%* YoY. Despite a significant improvement in Contract GP, the Permanent business
deteriorated through the year. Australia, our largest country in the region representing 34% of GP, declined 2%*.
In response to the continuing decline in the performance of the region, we announced that the Hong Kong office would
be downsized, reducing it to a satellite office. Average headcount for the region was down 11% YoY and period end
headcount was down 1% YoY.
Contract GP grew by 24%* YoY, with average headcount down 6% YoY. Energy and Banking & Finance Contract GP were up
22%* and 41%* YoY, respectively. The recovery in Contract was generated from a strong pipeline at the start of the
year across the region. The period end Contract runner book at year end (up 3%) was supported by an increased focus
on Contract in the Middle East. GPDR declined 11%* YoY and was down across the region. Australia, which represents
53% of regional Contract GP, saw good growth of 20%* YoY, driven by ICT and Banking & Finance. However, we note a
slowdown in our performance in the ICT market as we exit this year. Dubai, which is our second largest Contract
business in the region, saw a significant improvement, with Contract GP ahead by 49%* YoY. The growth in Dubai was
largely due to the Energy market, where we focus on large international service companies. Banking in Dubai also
showed modest growth in the year.
2017 was a challenging year for Permanent with GP declining 22%* YoY. Average headcount for Permanent was down 17%
YoY with yields down 5%*. We increased our focus in the year on the penetration of markets with higher fees and
stronger structural growth opportunities, notably Japan, the second largest recruitment market in the world. Our
Japanese Permanent business increased GP by 30%* YoY and now represents 32% of Permanent GP for the region. Average
Permanent fees for Japan were up 2%* YoY with average salaries also growing.
Banking & Finance, our largest sector for the region, remained relatively flat YoY. Energy saw strong growth, up
10%* YoY, driven by Dubai Contract. Permanent GP was down across all sectors.
Expectations for 2018
Our Chief Operating Officer ("COO"), Justin Hughes, led APAC & ME from Hong Kong until September 2017 when he
returned to London to take on the role of COO full time. Japan and Middle East Contract are being managed for
growth, while the rest of the region is being managed to maximise profitability.
Sector Overview
On a sector basis, Group GP benefited from a continued recovery in Energy, up 25%*, and solid growth in Life
Sciences up 7%*. After a significant restructuring in 2016, Banking & Finance GP was down 2%* with average
headcount down 11% YoY. ICT and Engineering grew, with GP up 1%* and 5%*, respectively. ICT suffered from a weak
UK&I performance.
ICT
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
ICT FY 17 +4% -6% +1% 75% 25% +4% -10% -1%
ICT, which accounted for 43% of Group GP in 2017, continues to be our largest and most established sector. GP in
this sector showed YoY growth for the fifteenth consecutive quarter, and provides opportunities across all regions.
We saw modest growth in GP in the year of 1%*, but against a strong comparative in 2016, when GP was up 12%* YoY.
The rate of growth slowed in this sector due to a deterioration in the performance of the UK&I. Although average
headcount in this sector was down 1% YoY, period end headcount was up 8%. The mix of headcount shifted further in
favour of Contract and Continental Europe.
Contract, which was 75% of ICT, was up 4%* YoY. Runners in the sector were up 6% YoY, with GPDR growth of 2%* YoY.
Permanent was down 6%* YoY, but saw a growth in average permanent fees, up +2%* YoY and yields increased 4%*.
Continental Europe, which constitutes 63% of our ICT business, was up 12%* YoY, against a strong prior year growth
of 17%*. Contract GP in this region had an exceptional performance, up 18%* YoY. Permanent, however, remained flat
across the region. DACH, which is our largest Permanent ICT business, saw growth of 7%* YoY and will remain a key
area of investment in 2018.
UK&I, our second largest ICT region remained challenging. ICT in the UK&I includes Public Sector, which was 33% of
ICT GP in the region. Public Sector employment reforms and a general slowdown in activity in the UK had an adverse
impact which resulted in Contract being down 17%* YoY and Permanent being down 22%* YoY.
Our USA business grew 12%* YoY. Although in 2017 USA is a small proportion of our total ICT business, we are
confident that our knowledge and expertise in this sector will enable us to maximise the market opportunity in this
region, the largest ICT market in the world, over time.
Banking & Finance
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
BANKING & FINANCE FY 17 +6% -10% -2% 55% 45% -7% -15% -11%
Banking & Finance represented 15% of Group GP in 2017, making it the third largest sector for the Group. We faced
mixed trading conditions in this sector across our geographies, with GP declining by 2%* YoY. Average headcount in
this sector in the year declined by 11% following a restructuring implemented in 2016 in response to difficult
conditions in the global Banking market. Period end headcount was down 5%.
Contract, which was 55% of Banking & Finance, is more resilient and has had considerable success, up 6%*, despite a
7% drop in headcount. Contract GP yields were up 13%*. Runners at the end of the year were up 8%, with GPDR up 4%*
YoY. Permanent GP declined, as expected, following a significant reduction in headcount in 2016. GP was down 10%*,
with headcount down 15%. Permanent yields therefore improved 6%*. Average Permanent fees were down by 1%* YoY.
Continental Europe, which was our largest region in this sector was up 7%* YoY. The growth was heavily supported by
Contract, which was up 20%*, with DACH, Benelux & France all showing good growth. Contract Runners for the region
were up 25% YoY, which leaves us with a strong pipeline for 2018. Permanent GP in the region, declined by 9%* YoY
and there was a moderate decline in Permanent average fee down 1%* YoY.
The UK&I business performance was hampered by uncertainty around the EU referendum leading to cautious hiring
decisions. The reduced market confidence was reflected in GP being down 22%*, with Contract GP down 10%* YoY and
Permanent GP down 45%*.
The USA, which was our second largest Banking & Finance market, saw growth of 2%* YoY, driven mainly from Permanent
which was up 9%* YoY. Contract in this region declined 6%* YoY, but was showing signs of improvement as we exited
the year.
While the Banking sector has remained subdued over the last few years, we will continue to monitor performance in
this sector and invest as opportunities arise. We see a strong opportunity for Contract in Continental Europe and
Permanent in the USA.
Global Energy
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
GLOBAL ENERGY FY 17 +26% +15% +25% 93% 7% +4% -19% +2%
Energy now represents 9% of Group GP. Overall conditions in the Oil & Gas market have stabilised this year and this
supported strong growth in GP, up 25%* YoY (2016: down 29%* YoY). Although, we have seen growth in this sector in
2017, we remain significantly below our peak performance in 2014. Our average headcount in the sector was up 2%* YoY
and with measured investment in Contract through the year in key markets, our period end headcount was up 17% YoY.
Contract which is 93% of our Energy GP, was up 26%* YoY, with growth across all our geographies, excluding UK&I.
Average Contract headcount was up 4% YoY, with period end headcount up 19%. Contract yields in the sector were up
21%* YoY, while GPDR remained flat* YoY. Contract Runners at the end of the year were up 35%, providing a strong
platform for 2018. Permanent, although a small part of Energy GP, was up 15%* YoY, with yields up 43%* and average
Permanent fees down 16%* YoY.
Continental Europe, which is 41% of Energy GP, was up 11%* YoY, with growth in both the Contract and Permanent
divisions, up 11%* and 8%* respectively. The growth in Contract was across all countries in the region, whereas
Permanent growth was concentrated on the Netherlands.
USA, which accounts for 41% of Energy GP, picked up significant upstream and power business though the year. This
lead to GP being up 71%* YoY, with Contract, which is the larger part of Energy USA, up 68%* and Permanent up 117%*
YoY.
UK&I, which is 6% of Energy GP, declined 22%* YoY. APAC & ME grew 10%* YoY.
We have noted significant YoY improvements in both Continental Europe and USA this year in both Contract and
Permanent. We will continue to remain agile, but cautious, with our future investments in the Energy sector.
Life Sciences
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
LIFE SCIENCES FY 17 +15% -4% +7% 64% 36% +9% -3% +3%
We pride ourselves on being one of the largest global professional recruiters in the Life Sciences market, with
growth opportunities across all our geographies and both our divisions. Life Sciences is now 22% of Group GP and was
up 7%* YoY, with average headcount up 3%.
Contract, which represents 64% of Life Sciences GP, was up 15%* YoY, with growth across all geographies. Contract
Runners were up 16% YoY, but GPDR declined 5%*. Average headcount was up 9% YoY with our two largest regions,
Continental Europe and Americas growing 13% and 8%, respectively. Permanent GP, was down 4%* YoY, with Permanent
average fee up 4%* YoY and Permanent yields down 1%* YoY. Permanent average headcount declined 3% YoY, however,
period end headcount grew 16%.
USA, our largest Life Sciences business, which accounts for 48% of GP, grew strongly, up 13%* YoY. The growth was
driven by a strong Contract performance, up 18%* YoY, while Permanent grew 3%* YoY. We continue to invest in Life
Sciences in the USA, which is a key growth market for the Group, Period end headcount was up 24% YoY.
Continental Europe accounts for 38% of Life Sciences GP. GP was up 4%* YoY, against tough comparatives of 13%* in
2016. Contract GP in the region was up 12%* YoY, with excellent growth in Benelux & France, up 59%* YoY. Permanent
GP, was down 8%* YoY, against a tough prior year comparative of an increase of 23%* YoY.
UK&I, which was 11% of our Life Sciences GP, recorded moderate growth of 3%*. The growth was driven by Contract,
which grew +8%* YoY, while Permanent declined by 7%* YoY.
Engineering
GP Average Sales Headcount
Growth YoY* FY 2017 Mix Growth YoY
Cont Perm Total Cont Perm Cont Perm Total
ENGINEERING FY 17 +17% -18% +5% 72% 28% +21% -11% +7%
Engineering, which was 9% of our Group GP, is primarily focused on Continental Europe and UK&I. USA Permanent, a
fairly new addition to our Engineering portfolio, has had some initial success, with GP quadrupling YoY. Our average
headcount in this sector was up 7% YoY, with most of the headcount increase in Contract. Period end sales headcount
was up 26% YoY. We expect further opportunities in this sector as we enter 2018.
Contract, which represents 72% of Engineering GP, was up 17%* YoY with growth in both UK&I and Continental Europe.
Contract Runners are up 17% YoY with GPDR being flat*. In comparison, Permanent GP was weaker, down 18%* YoY, with
only USA seeing significant growth. Permanent average fees and yields in the sector declined 2%* and 8%*,
respectively.
Continental Europe, which represents 71% of Engineering GP, was up 2%* YoY with Contract up 19%*, offset by a
decline in Permanent down 25%* YoY. Contract Runners at year end were up 25%, providing a strong pipeline for growth
as we enter 2018.
Engineering in the UK&I was up 8%* YoY, with Contract up 12%* and Permanent down 5%* YoY.
OUTLOOK
Looking ahead to 2018, the momentum of our Contract business and the strength of our performances in the USA and
Continental Europe leave us well-positioned for further growth.
We have been encouraged by our performance in 2017, particularly in the last quarter, which has provided us with a
strong platform to deliver further growth in the coming year. We will continue to focus our headcount investment to
maximise our returns and to pay close attention to productivity in Permanent and in the UK&I. The benefit of the
restructuring and relocation of our support service function in the UK is expected to be fully realised during 2019.
Our focus on customers, services and our people, underpinned by investment in technology and innovation, gives us
confidence that we are set up for success as we continue on our journey to become the number one STEM talent
provider in our markets.
*In constant currency
CHIEF FINANCIAL OFFICER'S REVIEW
In 2017, we delivered a robust financial performance ahead of market expectations. Our improved operational
performance was further supported by currency appreciation against the pound, which enhanced growth in our Revenue,
Gross Profit and Profit Before Tax.
Income statement
Revenue for the year was up 9% on a constant currency basis to £1.1 billion (2016: £959.9 million) and up 16% on a
reported basis. On a constant currency basis, Gross Profit ('GP') increased by 4%, and on a reported basis by 11% to
£287.7 million (2016: £258.7 million) supported by foreign exchange tailwinds of c.£18.1 million. Growth in revenue
exceeded the growth in GP as the business continued to remix towards Contract. Contract represented 71% of the Group
GP in the year (2016: 67%). This change in mix resulted in a decrease in the overall GP margin to 25.8% (2016:
26.9%) as Permanent revenue has no cost of sale, whereas the cost of paying the contractor is deducted to derive
Contract GP. The Contract margin remained robust at 19.8% (2016: 19.9%).
Reported profit before tax was broadly flat at £37.7 million. Restructuring costs have been incurred in the current
and prior year. We have reported certain KPIs on an "Adjusted" basis to provide a more like-for-like view of
performance. Adjusted profit before tax was up 9% at £44.5 million (2016: £40.8 million) supported by foreign
exchange tailwinds of c.£5.0 million. On a constant currency basis, our adjusted profit before tax was down 3%. This
is reflected in a decline in our operating profit conversion ratio of 0.4 percentage points to 15.6% (2016: 16.0%).
Our operating performance in the period has been strong with increased sales team yields driving our GP growth, but
our cost base has increased as we invest in innovation, to secure the future of our business, and incurred other
non-exceptional restructuring costs in the year.
Restructuring costs ('Adjusting items')
On 1 November 2017, as part of a strategic reassessment of our UK operations, we announced that we were commencing a
consultation with employees on the proposed relocation of support functions away from our London headquarters to a
new facility located in Glasgow, along with a restructuring of the marketing department. The purpose of this
strategic restructuring is to realise cost savings of approximately £4 million - £5 million per annum.
The restructuring is expected to result in certain material one-off costs totalling approximately £14 million to £16
million, of which an estimated £15 million is operating expenses and approximately £0.5 million is property fit out
costs (to be capitalised), less approximately £2 million of grants receivable from Scottish Enterprise. The costs
are mainly related to people, property and professional advisor fees.
Exceptional costs of £6.7 million have been recognised and separately disclosed in the Income Statement in 2017,
including £1.1 million of restructuring costs incurred or accrued, mainly for professional fees, and £5.6 million as
a provision for redundancy costs. The additional exceptional cost to set up a centre of excellence in Glasgow in
2018 is expected to be between £8 million and £9 million, with a grant of up to approximately £2 million potentially
receivable over several years.
In the prior year, we carried out a restructuring of certain sales businesses and central support functions in
response to the adverse market conditions in certain sectors and regions. These actions resulted in one-off
redundancy costs of £3.5 million.
Due to their nature and magnitude, the restructuring costs in the 2017 and 2016 financial years have been separately
highlighted to help readers understand the Group's underlying results for the year ('Adjusted'). The Group's
adjusted profit KPIs for the year are presented in various sections of this Annual Report. The strategic nature and
material cost of the restructuring of support functions announced in 2017 is of sufficient magnitude to warrant
separate disclosure as an exceptional item on the face of the Consolidated Income Statement, in line with our
accounting policy.
A reconciliation of 'Adjusting items' is provided below:
£'million 2017 2016
Reported profit before tax after exceptional items 37.7 37.3
Exceptional strategic restructuring costs 6.7 -
Reported profit before tax and exceptional items 44.5 37.3
Non-exceptional restructuring costs(1) - 3.5
Adjusted profit before tax 44.5 40.8
(1) 2016 figures were adjusted for the restructuring of certain sales businesses and central support functions.
Operating costs
Adjusted operating costs, excluding one-off restructuring costs of £6.7 million (2016: £3.5 million), increased by
12% to £242.8 million (2016: £217.4 million). The increase was mainly driven by an adverse foreign exchange impact
of c.£13 million, focused expenditure on innovation (c.£2 million), management delayering (c.£1.2 million) and a
restructure of our Hong Kong business (c.£0.4 million).
Payroll costs represent 79% of our cost base. Average total headcount was flat at 2,668, with total sales headcount
down 1%. The drop in average sales headcount is attributable to a restructuring of our Permanent business, in which
headcount was significantly reduced in the second half of 2016 in response to market conditions. Selective headcount
build continued throughout 2017. Improvements in consultant productivity and the strength of market activity
provided management with the confidence to invest in headcount in the USA and Continental Europe in the second half
of the year. Year-end headcount was up 11% at 2,866.
Year-end sales headcount represented 79% of the total Group headcount.
The full benefits of the restructure of our UK Support function on personnel and property costs are expected to be
realised from the financial year 2019 onwards.
Investments
During the year, we invested in a number of innovation start-ups (£1.2 million), created our own innovation
incubator (c.£2 million) and invested in new technology to serve the needs of our customers (£3.4 million, of which
£1.9 million in the year was spent on developing a new contract management system and a contractor timesheet
application).
Our most significant investment in innovation start-ups was a 30% non-controlling interest in the share capital of
HRecTech Sandpit Limited ('HRecTech') for a total consideration of £0.8 million. The Sandpit Limited is a privately
owned group that specialises in developing early stage start-up companies within defined markets.
We continued to support Ryalto in which we have an 18% investment, purchasing convertible bonds for a total
consideration of $0.5 million (£0.4 million) in October 2017.
The bulk of our investment in our own innovation incubator was focused on Talent Deck, a recruitment platform
focused on cultural fit and automated matching that is now in the initial stages of its roll-out. We expect to
increase the amount spent on the creation of innovative products to c.£3 million in the current financial year.
We expect to reduce our investment in non-innovation technology spend in the current financial year as we relocate
our IT function.
Impairment of investment in subsidiaries (Company only)
During the year, we reviewed the recoverable amount of the Company's own portfolio of investments, including SThree
UK Holdings, which in turn owns SThree Partnership LLP, and determined that an impairment loss of £88 million needs
to be recognised due to the significant downturn in the trading performance and prospects of the UK business. This
was the result of several factors, including: the unfavourable impact of the ongoing political uncertainties
following the EU referendum on trading in the Permanent division and Banking sector; changes in working practices in
the Public Sector, namely IR35 and framework agreements, and reduced margins impacting the profitability of the UK
region. After booking this impairment, the distributable retained earnings were £179.9 million (£2016: £267.3
million).
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