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Welcome to the SThree Quarter 3 Trading Update Webinar. [Operator Instructions] This webinar is being recorded.I now hand over to Mark Dorman, CEO; and Alex Smith, CFO. Mark, over to you.
Thanks, Tamsen. Good morning all, and welcome to SThree's Q3 trading update for the period 1st June 2020 to the 31st of August 2020. I'm joined with by -- with Alex Smith, and we'll talk about our performance in the period. We'll also give you an update on the sentiments that we're seeing from our customers. And then following that, we'll open up for questions. But without further ado, why don't we get started?So first off, an overview of Q3. We had a resilient performance and the performance ahead of our initial management expectations. But I think it's worth being in mind to go back to where we are in the current environment. And at the bottom there, you'll see the 3 phases that we shared with you over our last trading update, and to give you an idea of how we see the pandemic play out.It was the initial response. We're now in a current phase called ongoing management with the high levels of volatility and ultimately, when we get a solution to the underlying health conditions, we'll go into the recovery phase and the next normal, whatever that is.But what we are seeing as we work hard as a business to operate in the current environment is that we're improving underlying sequential performance and continued resilience in the current phase. We remain focused on how to work best through this unpredictable and volatile situation, and I'm pleased to say that all aspects of the business continue to adapt well and improve performance sequentially.Our strategy is still absolutely the right strategy, and we'll talk a bit about that later. And therefore, we're making targeted investments and accelerating our strategic initiatives as all of the secular trends that we are at the center of are being accelerated by the current pandemic.But more about that later, and so now I'll hand off to Alex to go through our Q3 performance. Alex?
Thank you, Mark, and good morning. So group net fees in Q3 were down 14% year-on-year compared to down 12% in the second quarter. And as Mark said, that was ahead of management's expectations as we came into the quarter.Contracts, which represents 77% of net fees, was resilient in the quarter. Contract net fees down 12% in Q3 compared to down 11% in Q2. And our contractor order book sequentially stable. And that's the function of new sales activities, which were down 20% in Q3 compared to down 38% in Q2, a strong sequential improvement Q3 on Q2 of 26% and an improved contractor retention rate, up 1.7 percentage points year-on-year. And that resulted in the contractor order book being stable sequentially, down 15% year-on-year at the end of the quarter. And we ended the quarter with a strong net cash position of GBP 39 million.Next slide, please. Moving on to our regional performance, starting with DACH. DACH performed resiliently in the quarter, down 9% compared to down 9% in Q2. And the particular call out there being Life Sciences, where that business had a resilient performance, up 1%, driven by quality assurance and clinical research and development roles, in particular.EMEA, excluding DACH, was down 22% in the quarter compared to down 17% in Q2, largely reflecting more challenging performances in the U.K. down 28% year-on-year compared to down 19% in Q2.The Netherlands had a robust performance, down 13% in the quarter compared to down 12% in Q2. And the contractor order book in the Netherlands was sequentially stable. The U.S. was a particularly resilient performance, really the highlight performance in the quarter, driven by Life Sciences up 15% year-on-year in the quarter. That compares to up 13% in H1, driven by clinical operations roles, product developments and quality assurance specialisms. And the U.S. achieved not only sequential growth in the contractor order book, up 5%, but year-on-year growth to up 2% at the end of the quarter.APAC. Japan, within the APAC region, is a predominantly permanent business, and that continued to be impacted by the pandemic. We also announced our intention to cease trading and operations in Australia last week, and this is in line with our strategy to focus on the best STEM markets in which SThree has the best opportunity to take market share. Australia in 2019 represented approximately 2% of revenue and 1% of net fees for the group.Next slide, please. So a combination of the improved underlying performance and balance sheet strength is allowing a number of positive steps. So just to recap in terms of the improving underlying performance, that's in terms of the sales activity, we've seen improving sequentially and the decline year-on-year reducing Q3 versus Q2. Higher contractor retention rates up 1.7 percentage points year-on-year in the quarter, leading to that stabilization of the contractor book and the balance sheet strength means that we've welcome back staff from furlough in the quarter. We've announced our intention to repay furlough support to the U.K. government, circa GBP 600,000. We've repaid the revolving credit facility that we drew down at the start of the pandemic, which we didn't utilize but held on our balance sheet, and we have resumed a share buyback program to fund our employee benefits trust, which we suspended at the start of the pandemic.Finally, we continue to recognize the importance of dividends to our shareholders and are keeping future dividend payments under active review. Mark?
Thank you, Alex. And so you can see there that we are at a resilient Q3 performance, which gives us the opportunity to position ourselves for the future. We have a strong financial position and the liquidity to see us through the period ahead and beyond. And as a result of the pandemic, we're seeing acceleration of the trends that we talked about -- talked with you about at the Capital Markets Day.So in combination, that allows us to push ahead with the implementation of our strategy with a view towards achieving our long-term ambitions, while continuing to perform well within the current environment.We also spent continued amounts of time with our candidates and customers and are actively engaging with them to get a sense of the sentiment in the marketplace, what future trends look like and how our customers view the current environment and where they're focused on positioning for the future.You will recall from our Q2 and half year trading update that we shared with you 3 emerging themes that we saw coming from our customers, and those broad 3 themes remain the same, but our customers' priorities are shifting from one of focusing on stabilization to that of business growth and innovation as they look to the future.Those 3 trends -- just these 3 trends, just as a reminder, were: management of a more flexible and resilient workforce, rebuilding of global supply chains with a focus on resilience and perhaps slightly obvious, acceleration of digital transformation. Those 3 trends remain the same, but the focus has shifted slightly on finding a resilient workforce, the importance and difficulty of finding the right people has come to the fore as companies look to build opportunities and grow in the future, focus on planning for the future and embracing innovative technology solutions to solve global supply chain challenges and now the focus is company's shift from stability into growth, and the focus on specific talent to help accelerate digital transformation is key, specifically in AI and machine learning, data science and engaging with their -- with customers through new e-customer channels.Also within our sentiment survey, we've seen encouraging indicators from our clients. Almost 80% say they're actively hiring in some way to get that critical talent to support their growth ambitions for the future. 42% -- just over 40% say that hiring levels are coming back to normal pre-COVID levels, and 26% say the demand in their markets over the past 3 months have increased and encouragingly, 9% increase in job postings is what we are seeing in the marketplace in July versus May. And all this is highlighted by over 50% of our customers and clients saying that their #1 focus is finding the right talent is a challenge and the need for companies like SThree remains critical.So in conclusion, our purpose of bringing skilled people together to build the future has never seemed more relevant, and we still sit at the center of 2 long-term secular trends: the need for critical STEM talent and the move towards more flexible working.It's clear that this strategy and our focus on STEM and flexible working has again served us well in this quarter, and we're pleased that we have recorded a resilient performance thanks to disciplined and well-planned execution and the incredible hard work of our teams.Looking further ahead, we continue to make targeted investments that are pushing forward with our strategic initiatives to drive the group forward towards its long-term ambitions, building on this resilient performance and our ability to do so.So with that, we're now happy to take your questions. Tamsen?
[Operator Instructions] And Sanjay Vidyarthi from Liberum asks, could you talk about the likely direction of headcount in Q4? And if there are specific criteria that you would use for headcount growth to resume?
Thanks, Sanjay. I'll maybe do the general direction. And Alex, if you would build on it a bit.
Yes.
So as we shared in the half year, we've been very discretionary in the focus on headcount -- both in terms of the headcount we reduced. So you'll see that your headcount is down in markets we're not focused on. And we'll do the same as we look towards the future in Q4 is think about the key markets where we see growth and are having the most opportunity, so primarily in the DACH region and the U.S., and that's our general approach to thinking about headcount. We review on a very regular basis, on a monthly basis at the moment to make sure that we understand how conditions are changing almost on a week-by-week basis. I don't know, Alex, if you got anything more specific.
No. I mean I think in terms of looking forwards, we wouldn't be really commenting on our future plans, but expecting to be broadly level sequentially, I would imagine, versus where we are now. But with -- as Mark said, a greater emphasis and priority on a number of key geographies over others. So probably broadly level from where we are for the next 3 months.
And we have a question from Steve Woolf from Numis.
Just 2 really on -- one on the U.S., obviously, very strong. You outlined a couple of areas there. But it's really the end markets beyond that type of companies that resumed hiring that side? And then secondly, on the U.K., a few more bits of detail on that. Clearly, a very challenging market at this point. But just trying to get your thoughts on that, the headcount reductions, whether you feel you've reached a level now?
Yes. So just, Steve, just to clarify on the first question on the U.S. is you want to see what the customer is in the end markets, is that right?
Yes. It wasn't, again, the types of industries that are starting to rehire, whether that was in the likes of an AI, who are those companies that are looking to rehire? Is it purely just on a tech basis or the end industries beyond that, that are hiring tech into, if that makes sense?
Got it. So in the U.S., so the 2 areas that are particularly strong in the U.S. were Life Sciences and Technology. So within Life Sciences, it's pharma and medical device providers are the key end customers within that space. And that's a combination of trying to solve the problems right ahead of us all, plus actually a bit of the restarting of the health care industry more broadly in the U.S. is driving that activity.And then within Technology in the U.S., we tend to focus in 2 specific areas where we're seeing growth. So in mobile development and that's -- companies looking to engage with our customers, primarily on mobile devices. And then also in ERP and enterprise. And so we're seeing some strength in sales force. So companies broadly agnostic of sector looking to upgrade their ERP and infrastructure as we're trying to engage with customers and get different customer insight. So pretty consistent with the broader themes that we shared in the presentation.And on the U.K., look, it's -- as I think I've shared in other forums as well as our trading updates, you've got health crisis, you've then got government response to that health crisis, and there's a third derivative, you've got the economic impacts in the marketplace. And so the U.K. happens to be in a pretty tough spot as we look at the markets relative to other European and certainly the U.S. markets.In terms of SThree specifically, there's a big component of that decline is relatively related to headcount. So we took a lot of heads out of the U.K. to rebalance the size of the business to rightsize it for the opportunities ahead. And so I think we're doing the right things there.I think what we are seeing, however, in the U.K. is improving sequential sales productivity numbers over time. So I think we've certainly got the right team focused on the right things there, just a challenging environment.
So we have one more question. [Operator Instructions] And we have a question written in by Alex deGroote of Radnor. And he says, Mark, the U.S. continues to greatly impress. How quickly can this scale? And what would be the long-term profit potential? STEM is a huge opportunity.
Thanks, Alex. As quickly as we can in a reasonable fashion, and look, I think the pleasing thing about the U.S. performance is the discipline and the execution of the team. And I think we've got to maintain that level of discipline and good execution as we scale the business. What we don't want to do is get too far over our skis. But certainly, the opportunity is really huge. And we're seeing the benefit of our strategy in terms of being focused on specific niches within sectors. So I talked about technology. We're not technology everywhere. We're specifically focused in some key areas. And understanding the talent there, understanding the niche of the domain really is the key that differentiates us in the marketplace and allows us to grow. So we'll certainly continue to focus there. As I've highlighted, certainly with headcount, there's a focus on how do we build that in over time and look for more opportunities there.As to the profit, we're -- our U.S. business is very attractive, not just from a growth standpoint, but also from a margin perspective and has some of the strongest margins in the group. So all in all, we're very pleased with the U.S. performance, and it continues to be one of the key markets we'll continue to invest in.
We'll now go to Andy Grobler at Crédit Suisse.
Just a couple from me, if I may? On Australia, where you've decided to stop trading, what was the tipping point which you said, right, we're going to move on from here? And I guess a follow-on from that, are there other countries that are in the same area as Australia was pre that decision?And then secondly, and a bit broader. When you talked about clients moving to the kind of planning and innovation stage as far as you can tell us, as those clients are shifting towards new innovation, new plans, is that on top of what they've already got or instead of what they've already got, i.e., are you -- are the clients you're talking to becoming more tech-focused in their longer-term thinking? I know that's a broad and difficult question, but just any thought will be interested.
Well, I'll start -- thanks, Andy. I'll maybe start with the second one, and Alex can maybe dive in on the first one.
Yes.
So look, I think what you saw is the initial response to the pandemic. And depending on -- it is very company-specific in terms of the state of their infrastructure, their global supply chain, their engagement with customers, where they were on their strategy, really impacted companies taking stock in terms of where they are. And if you think about then every company now has digital transformation at #1 priority in the organization.And so I think what you're seeing and many commentators have highlighted this is an acceleration of the use of technology to enable business strategy in a way that we probably haven't seen as a result of the pandemic. And it may be on top of a strategy for some, but I think for most, it's just a reprioritization of their strategic intent or their activities that they were focused on, particularly around how do you use data to inform decision-making? How do you engage with your customers through e-channels?And that's not just companies are B2C because that's also companies are B2B in terms of how do we really use technology in new and interesting ways because now we've been essentially forced to do so as well as think about our supply -- our global supply chain and how do we use technology if you're manufacturing to aid with social distancing and other things that have now become critically important. And the only way to do that is to innovate moving forward.So just a greater focus on technology. And a personal editorial point for me, maybe, is I don't think it's tech companies versus nontech companies. I think every company is going to have to be tech-enabled in order for them to survive moving forward.Alex, I know you want to talk about our portfolio review.
Yes. Sure. Yes. So I suppose, really thinking back to our Capital Markets Day and the emphasis on the top 5 regions for SThree, we have been assessing -- or assessing our portfolio. And the key thing really is focusing on those regions which offer the best STEM markets and the best opportunity for SThree to grow and take share.So we have looked across the portfolio. We've used the same criteria. And kind of summary level, we look at market attractiveness, market size or scale in those regions. Looking at our internal data, of course as well as external data, our performance data and trends over time. So that's the process we've been through. We've informed the staff of our intention to close the offices in Australia last week. Currently, we have no other plans to close any other geographies.
And we have a question from Poppy Skepper of Raymond James, who asks, what percentage of your profits from the U.K.?
So we don't disclose our operating profit by geography, Poppy. And this is trading update, we're really just looking at talking about net fees and some of the top level activity drivers. So we can perhaps pick up at another time to talk through the kind of the broad shape. But I suppose the U.K. is still an important profit contributor for the group, albeit now only represents 10% of the overall group in terms of net fees.
Great. That's the end of the questions. Mark, do you have any closing remarks?
So well, thank you, Tamsen, and thank you all for joining us on our Q3 update. And we look forward to updating you at the time of the year for our next trading update, which is on the 14th of December. So thanks all for joining, and we'll see you all in December.
Many thanks, Mark and Alex, and thank you to you all for joining. This is the end of the webinar.