SThree Regulatory News (STEM)

14 September 2020

SThree plc

Q3 Trading Update

PERFORMANCE AHEAD OF MANAGEMENT EXPECTATIONS, DRIVEN BY A UNIQUE FOCUS ON STEM AND FLEXIBLE WORKING

SThree plc ("SThree" or the "Group"), the only global pure-play specialist staffing business focused on roles in Science, Technology, Engineering and Mathematics ('STEM'), today issues a trading update(1) covering the period 1 June 2020 to 31 August 2020.

Highlights

Mark Dorman, Chief Executive, commented:

"Our strategy and focus on STEM and flexible working has again served us well in this quarter. We are pleased to have recorded a resilient performance thanks to the disciplined execution and hard work of our teams.

Whilst the YoY decline in net fees was marginally greater in Q3 than Q2, there has been an improving underlying sequential performance in the business since the half year. We have seen a significant uptick in general sales activity levels across most regions, improving contractor retention levels and thus a stabilisation of the contractor order book. These performance indicators, together with our strong balance sheet, have allowed us to take a number of positive steps in the period, including the return of some staff from furlough and the return of the money provided to us as part of the UK Government's job retention scheme.

Encouragingly, feedback from our clients is becoming more positive, with 78% of responses from our latest client sentiment survey stating they are actively hiring, with SThree job postings also steadily increasing. Nevertheless, the outlook in the short term is still uncertain as the COVID-19 pandemic continues to affect our markets, clients and teams. As a result of this, our guidance remains suspended.

Our purpose - bringing skilled people together to build the future - has never been more relevant and we are confident in our core strategy, positioned between the accelerating secular trends of STEM and flexible working. Looking further ahead we continue to make targeted investments and are pushing forwards with our strategic initiatives to drive the Group towards its long term ambitions. We thank all our teams who are working so hard to capitalise on current opportunities and building our success."

Business Performance

Group net fees in Q3 declined 14% in the year as performance continues to be impacted by declines in aggregate demand as a result of the COVID-19 pandemic across all of our territories and sectors. Our Contract business has shown resilience with net fees down 12% in the quarter, representing 77% of Group net fees. The contractor order book has grown 1% since the half year as the Group sees increased sales activity levels along with increased contractor retention levels.

DACH net fees were down 9% in the quarter, a good performance in the circumstances despite strong prior year comparatives. Our Life Sciences business has shown resilience with net fees down only 1% with increased demand in Quality Assurance and Clinical Research & Development. All other sectors declined in the quarter. Germany, our largest country in the region, saw net fees decline 10% but has seen its contractor order book grow 6% since the half year.

EMEA excl DACH saw net fees decline 22% in the quarter, primarily driven by the UK's challenging performance. The Netherlands, our largest country in the region, saw net fees decline 13%. Our Technology business in the Netherlands had a challenging period in line with the overall Netherlands STEM market, but continued to deliver ahead of the market (7). Our Dutch Engineering business saw a strong performance with net fees up 27% driven by demand in Health and Safety, Life Sciences was up 1% and Banking & Finance up 2%. There has been an increase in sales activity levels in the Netherlands and we have seen an improvement in the contractor order book, up 1% since the half year.

The USA is the world's largest STEM staffing market and our USA business has proven to be particularly resilient with net fees down just 3% in the quarter, following a decline of only 2% in Q2. This region continues to demonstrate the benefits of investing in the right vertical niches and understanding customer needs. Life Sciences continues its strong performance with net fees up 15% (H1 up 13%) driven by increased placements in Clinical Operations, Product Development and Quality Assurance. Technology was up 4% driven by Mobile Applications and Salesforce placements with Engineering down 1%. Encouragingly, the USA grew its contractor order book both YoY and since the half year, up 2% and 5% respectively. As a key area of focus for the Group we continue to make targeted investments in the region, aligning our resources with the best long-term opportunities.

Our APAC region continues to be impacted strongly from the Covid-19 pandemic with net fees down 33% in the quarter. Japan net fees are down 27% with Technology, our largest sector, down 11%.

In line with one of the Group's strategic pillars, 'to be a leader in the markets it chooses to serve', the Management team has recently been engaged in an assessment of which regions represent the best STEM markets in which SThree has the best possible opportunity to grow and take market share. Following this assessment, the Group intends to cease trading and operations in Australia by the end of November, whilst maintaining its other APAC operations as a key strategic region for the Group.

Group average headcount was down 3% YoY, reflecting a 5% increase in Q1 in line with our growth strategy, followed by a decline in Q2 and Q3 in response to the crisis. Sequentially Group period end headcount is down 9% vs Q2 with USA down 7%, DACH down 8%, EMEA excl DACH down 12% and APAC down 12%. Group period end headcount was down 14% YoY. We will invest in line with our previously stated strategy to focus on specific niches within sectors and markets where we can gain valuable market share and cement our position.

Operational Update

The Group tracks a number of indicators as to the underlying strength of the market and demand for our services and is pleased to have recorded an increase in sales activity levels, in particular in Contract. Group Contract sales activity in Q3 has improved both sequentially (up 26% vs Q2) and showing an improving trend YoY (Q3: -20% vs Q2 - 38%), and the Group has also seen an improvement in contractor retention rates.

These factors, together with the strength of the balance sheet, have enabled the Group to implement a number of initiatives as the global economic picture improves. This includes the return of staff from furlough, with all previously claimed furlough support from UK Government of £600k to be repaid, and the repayment of the RCF of £50m which was drawn down at the beginning of the lockdown period but not utilised. The Group also resumed a modest share buy-back programme to satisfy employee ownership plans.

In its most recent client sentiment survey there were clear signals of an increase in recruitment activity levels. For example, 78% of responses state that they are actively hiring in some way, a significant shift from an earlier consultant survey, and with 42% saying that hiring levels are back to pre-COVID levels which we see as another encouraging sign. Despite all the economic challenges resulting from the pandemic, approximately 50% of responses to our client survey still stated that "finding the right talent" is a significant challenge, one that we are well positioned to address.

Liquidity and dividends

SThree remains in a strong financial position, with net cash at 31 August 2020 of £39m (31 August 2019: Net debt £12m). The Group has a £50m revolving credit facility ("RCF") with HSBC and Citibank, which is committed to 2023. The Group is also eligible to funding under the Bank of England's Covid Corporate Financing Facility ("CCFF") of £50m.

As at 31 August 2020 the Group has total accessible liquidity of £144m. This is made up of £39m net cash, a £50m revolving credit facility ("RCF"), a £5m overdraft and £50m from the CCFF (RCF, overdraft and CCFF not drawn down). In addition, SThree has a £20m accordion facility as well as a substantial working capital position reflecting net cash due to SThree for placements already undertaken.

We continue to recognise the importance of dividends to our shareholders and are keeping future dividend payments under active review.

Analyst conference call

SThree is hosting a webinar for analysts and institutional investors today at 0830 BST to discuss the Q3 Trading Update and to present the Group's STEM staffing market pulse check.

If you would like to listen to the webinar please contact SThree@almapr.co.uk

The Group plans to issue a trading update for the year ended 30 November 2020 on 14 December 2020.

(1) All YoY financial growth rates in this announcement are expressed at constant currency

(2) International represents our businesses outside the UK

(3) DACH - Germany, Austria and Switzerland

(4) EMEA excl DACH - UK, Ireland, Belgium, Netherlands, Luxembourg, France, Spain and Dubai

(5) ROW - All other countries we operate in excluding Germany, Netherlands, UK, USA and Japan

(6) Engineering now includes Energy, which was previously reported separately. Up-stream oil and gas comprises approximately 6% of the new Engineering sector

(7) Netherlands temporary technical sector market turnover (ABU data P6 to P8 2020)

- Ends -

Notes to editors

SThree plc brings skilled people together to build the future. It is the only global pure-play specialist staffing business focused on roles in Science, Technology, Engineering and Mathematics ('STEM'), providing permanent and flexible contract talent to a diverse base of over 9,000 clients in 16 countries.

The Group's c.2,700 staff cover the Technology, Life Sciences, Engineering and Banking & Finance sectors.

SThree plc is quoted on the Official List of the UK Listing Authority under the ticker symbol STEM 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. Certain data from the announcement is sourced from unaudited internal management information and is before any exceptional items. Accordingly, undue reliance should not be placed on forward looking statements.