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SThree: INTERIM RESULTS FOR THE HALF YEAR ENDED 31 MAY 2018

Released 07:00 23-Jul-2018

SThree (STHR)
SThree: INTERIM RESULTS FOR THE HALF YEAR ENDED 31 MAY 2018

23-Jul-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.


SThree plc

("SThree" or the "Group")

 

INTERIM RESULTS FOR THE HALF YEAR ENDED 31 MAY 2018

 

An Encouraging Start To The Year

 

 

FINANCIAL HIGHLIGHTS

 

 

 HY 2018

   HY 2017

 Variance (2)

 

Adjusted(1)

Reported

Reported

Actual

Movement

Constant

Currency

Movement

 

£m

£m

£m

%

%

Revenue

585.9

585.9

521.0

+12%

+14%

Contract gross profit

106.7

106.7

94.2

+13%

+14%

Permanent gross profit

41.7

41.7

40.2

+4%

+4%

Gross profit

148.4

148.4

134.4

+10%

+11%

Operating profit

20.4

18.0

19.3

+6%

+6%

OP Conversion ratio (%)

13.7%

12.1%

14.4%

-0.7%pts

-0.7%pts

Profit before taxation

20.3

17.8

19.2

+6%

+6%

Basic earnings per share

11.6

10.1

11.0p

+5%

+5%

Interim dividend per share

4.7p

4.7p

4.7p

-

-

Net (debt)/cash

(6.2)

(6.2)

5.2

-

-

 

 (1)  HY 2018 figures were adjusted for the impact of £2.4 million of exceptional strategic restructuring costs.

(2) All variances compare adjusted HY 2018 against reported HY 2017 to provide a like-for-like view. There were no adjustments to H1 2017.

 

 

 

OPERATIONAL HIGHLIGHTS 

 

*           

Encouraging first half performance; Group GP up 11%* year on year ('YoY') to £148.4m (HY 2017: £134.4m), with accelerated momentum in Q2 (up 13%*)

*           

Adjusted profit before tax up 6% YoY to £20.3 million (HY 2017: £19.2 million)

*           

Reported profit before tax down 7% YoY to £17.8 million

*           

Growth in GP driven by Continental Europe (up 18%*) with strong performances in DACH and the Netherlands (GP up by 18%* and up 25%* respectively; and by USA (up 9%*), whilst UK&I remained challenging (-2%*)

*           

82% of GP generated outside UK&I (HY 2017: 80%)

*           

Contract GP, which represented 72% of Group GP (HY 2017: 70%), ahead by 14%* YoY, with strong growth across Energy up 31%*, Engineering up 17%*, and Life Sciences up 11%* YoY

*           

Permanent GP up 4%* YoY, with productivity improved by 3%* YoY

*           

Group period-end sales headcount up 6% YoY. Average sales headcount up 10% YoY

*           

Move of London-based support functions to Glasgow progressing to plan. £2.4 million of exceptional strategic restructuring costs recognised in HY 2018

*           

Net debt** of £6.2 million (HY 2017: net cash £5.2 million)

 

* Variances at constant currency

** Net debt represents cash & cash equivalents less borrowings and bank overdrafts

 

 

Gary Elden, CEO, commented: "We have delivered an encouraging first half performance, driven by further strong growth in Contract, and our two biggest regions, Continental Europe and the USA.

"To build on this growth, we are continuing to invest in our highest performing teams, consistent with our vision to be the number one STEM talent provider in the best STEM markets. The Group is performing well and we are making good progress against our five-year growth plan. 

"Trading in the weeks since the period end has continued the positive trend, leaving the Group well-positioned as we enter our seasonally more significant second half."

 

 

 

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 or 0808 109 0700 (toll free)

Call passcode:       SThree

 

 

This event will also be simultaneously audio webcast, hosted on the SThree website at 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 issue its Q3 trading update on 14 September 2018.

 

Enquiries:

 

SThree plc                             020 7268 6000

 

Gary Elden, Chief Executive Officer

 

Alex Smith, Chief Financial Officer

 

Kirsty Mulholland, Company Secretariat

 

 

Citigate Dewe Rogerson      020 7638 9571

 

Kevin Smith/Jos Bieneman 

                         

 

 

 

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.

 

 

 

 

 

 

 

 

 

INTERIM MANAGEMENT REPORT

 

Chief Executive Officer's Review

 

Overview

We are encouraged by our first half performance with GP up 11%*, and a step up in growth achieved in Q2 (up 13%* YoY vs growth of 8%* YoY in Q1). The growing breadth and scale of our international operations, which now account for 82% of gross profit, underline how far the Group has grown from its UK roots. Market conditions are strong across our international business, especially the USA and Continental Europe, and we are maximising our opportunities with selective headcount growth in these markets. We continue to actively manage our business in the UK where Brexit continues to cast an uncertain political shadow. 

Our strategic focus on our Contract business continues to deliver good growth across all sectors and most regions, as well as providing greater resilience in more uncertain economic conditions. Contract GP was up 14%* in H1 YoY and up 16% in Q2, with Continental Europe and the USA both delivering double digit growth. Our focus in H2 is to prioritise investment in Contract in our fastest growing markets.

Our Permanent business has continued to increase its productivity and we remain focused on achieving further gains in the remainder of the year. Permanent GP was up 4%* in H1 YoY and up 7%* in Q2, driven primarily by Continental Europe, but also by our small and fast-growing business in Japan.

Adjusted Operating Profit was up 6%* YoY and we are well-positioned for the second half as our investment in headcount in the second half of 2017 continues to mature and we benefit from a strong Contract runner book.

The strategic project to restructure and relocate our London-based support functions to Glasgow is progressing well, with in excess of 70% of roles now hired at the new site. We expect to substantially complete this project during 2018, creating a new Centre of Excellence for the Group, with a clear objective of reducing costs, while improving operational capability.

Our investment in headcount, increased investment in innovation and strategic relocation and restructure of our support functions are driving us forward on our journey to become the number one STEM talent provider in the best STEM markets. We are making good progress against the five-year growth strategy outlined at the Capital Markets Day in November 2017.

 

Group 

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+11%

+2%

+8%

 

 

+17%

+4%

+12%

 

Q2 18

+16%

+7%

+13%

 

 

+14%

-1%

+9%

 

HY 18

+14%

+4%

+11%

72%

28%

+16%

+1%

+10%

   * Variances at constant currency

 

Breakdown of GP

HY 2018

%

HY 2017

%

FY 2017

%

Geographical Split

 

 

 

Continental Europe

56%

51%

52%

USA

20%

22%

22%

UK&I

18%

20%

19%

Asia Pac & Middle East

6%

7%

7%

 

100% 

100%

100%

Sector Split

 

 

 

ICT

45%

44%

43%

Life Sciences

21%

21%

22%

Banking & Finance

13%

15%

15%

Engineering

10%

9%

9%

Energy

9%

9%

9%

Other Sectors

2%

2%

2%

 

100%

100%

100%


Operating Review

Business Mix

Contract is well suited to our STEM market focus and geographical mix and it remained the key area of focus and growth throughout the period. Improving productivity per head was the prime focus in Permanent.

Our Contract business has continued to go from strength to strength. Contract GP was up 14%* YoY with average headcount up 16% YoY. Q2 was the 18th consecutive quarter of GP growth achieved by Contract since it was given greater strategic focus. We exited the period with runners of 10,292, up 11% YoY and 1% ahead of our 2017 seasonal year-end peak. As well as being an important driver of GP growth, our investment in Contract makes us more resilient in times of economic uncertainty and selective expansion of our Contract teams will be a key focus for the remainder of 2018.

Permanent GP grew 4%* YoY and we have been successful in implementing our strategy of growing Permanent productivity by focusing growth on our high yielding regions and reducing headcount where yields are weak. Yields have increased by 3%* YoY. Permanent GP now represents 28% of Group GP.

Permanent recruitment is more sensitive to overall market sentiment and has seen an improved performance during the first half of the year. Average Permanent fees were up 5%* YoY as we focus on niche recruitment and average sales headcount in our Permanent business was up 1% YoY. We expect to invest in Permanent in the remainder of 2018, predominantly in DACH ("Germany, Austria and Switzerland") and the USA, where there is clear evidence of improving candidate and client confidence.

 

 

Regional Growth

We are encouraged by the improvement across the business in the period. We have seen strong growth in Contract across most regions and Permanent continues to benefit from improved productivity. Although the UK&I remains an important part of our business, the relative maturity of the recruitment market has led us to focus on growth opportunities in other regions and to be cautious with our investment in the UK&I business. We now have 82% of our Group GP generated from outside the UK. We have continued to expand our global footprint with the opening of two new offices in Eindhoven (Netherlands) and Washington (USA) in the period.

 

 

Continental Europe (56% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+19%

+6%

+15%

 

 

+26%

+10%

+20%

 

Q2 18

+23%

+13%

+20%

 

 

+21%

+9%

+17%

 

HY 18

+21%

+9%

+18%

72%

28%

+23%

+9%

+18%

 

    * Variances at constant currency

 

Continental Europe is our largest region comprising businesses in Germany, Switzerland, Austria, Netherlands, Belgium, France, Luxembourg & Spain. These regional markets vary significantly in their level of maturity and competition, with Germany remaining the most significant structural growth opportunity.

The region delivered strong growth in the period, up 18%* YoY, with growth across all main country markets. Netherlands performed particularly well, with GP ahead by 25%* YoY and average sales headcount up 17%. DACH, our largest territory in the region was up 18%* YoY and we continued to invest with average headcount up 23%.

We saw double digit growth in contract runners, up 23% YoY, creating strong growth opportunities for H2, with Gross Profit per Day Rate ('GPDR') down by 1%*. Contract GP has posted double digit growth in this region over the last ten consecutive quarters. Contract growth in all sectors remain robust with Energy also showing improvement.

Permanent was up 9% YoY, driven by DACH and Netherlands. Permanent average fees were up 4%* YoY, with average salaries up 3%*, demonstrating strength and confidence in the market.

 

 

 

 

 

 

 

 

USA (20% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+10%

-18%

+1%

 

 

+16%

+16%

+16%

 

Q2 18

+21%

+6%

+16%

 

 

+18%

+2%

+12%

 

HY 18

+16%

-5%

+9%

72%

28%

+17%

+9%

+14%

 

    * Variances at constant currency

 

The USA is the world's largest specialist STEM staffing market and is our second largest region representing 20% of our Group GP. After a slow start to the year, the region showed strong recovery in Q2 against a backdrop of strong comparatives in the prior year.

We saw growth across all sectors except Banking & Finance. Life Sciences, our largest sector in the region, grew 6%* YoY against strong comparatives of 18%* growth YoY in H1 2017. Energy continued to improve in the region with our investment in Power Generation paying off and an increase in the oil price towards the end of the period supporting an improved performance in our Upstream Oil & Gas teams.

Contract GP in the USA was up 16%* YoY with growth across all sectors except Banking & Finance. Energy showed strong growth with GP up 54%* YoY against strong prior year comparatives of 36%* growth YoY. We have invested in our Contract business with average sales headcount growing 17% YoY. Runners increased 1% YoY with GPDR up 14%* YoY, as we focus on higher margin and higher salary roles.

Although Permanent GP was down 5%* in H1 YoY, performance improved in Q2 with GP up 6%* YoY. We are seeing exciting growth in Permanent Engineering with GP up 77%* YoY. Permanent average headcount is up 9% YoY, with average fees up 9%* and average salaries up 8%*.

 

 

 

UK&I (18% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

-1%

-11%

-3%

 

 

+1%

-9%

-2%

 

Q2 18

+3%

-17%

-2%

 

 

-1%

-22%

-8%

 

HY 18

+1%

-15%

-2%

81%

19%

-

-16%

-5%

 

    * Variances at constant currency

 

The UK&I is our longest established region and the business is increasingly Contract focused as we invest in opportunities in the STEM market. GP in the region is down 2%* YoY, despite a 5% YoY reduction in headcount.

Our more resilient Contract business saw an overall improvement in performance with GP up 1%* YoY. We saw good growth in the Life Sciences, Engineering and Energy sectors. This was offset by a decline in ICT, particularly driven by changes in the Public Sector that was impacted by IR35 and rate caps. Average sales headcount in Contract also remained flat YoY. Runners for the region are down 2% YoY, but we saw robust growth in our GPDR, up 4%*.

Our Permanent business is more sensitive to market conditions and declined 15%* YoY. In response we restructured our UK&I Permanent business in the period to service our clients from hubs in Bristol, London, Birmingham and Dublin and average sales headcount was down 16%* YoY. The decline in this division is across all sectors, except Engineering, which was up 30%* YoY. Average salaries for placements appear to be improving, up 2% YoY.

 

 

 

Asia Pacific & Middle East (6% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

-12%

+44%

+15%

 

 

+22%

-10%

+2%

 

Q2 18

-14%

+18%

+1%

 

 

+6%

-8%

-3%

 

HY 18

-13%

+30%

+8%

43%

57%

+14%

-9%

-1%

 

    * Variances at constant currency

 

Our Asia Pacific & Middle East business principally includes Australia, Singapore, Japan and Dubai. Growth in the region was across all sectors with Banking & Finance, the largest sector in the region, up 10%* YoY. Growth in Permanent in the region was primarily driven by Japan, which was up 70% YoY, with average Permanent fees up 11%* and average salaries up 5%* YoY.

Contract performance was soft in the period with GP down 13%* YoY, as our Australian business underperformed in a competitive market place. However, Dubai Contract was up 15%* YoY, with growth in Energy being driven by a rising oil price. Contract runners have grown 2% YoY in the region, with GPDR down 2%* YoY. Average headcount was down 1% YoY with Contract up 14% YoY and Permanent down 9% YoY. The decrease in average headcount was largely due to a restructuring of our Hong Kong business at the end of FY17. We invested in Permanent headcount in Japan where average sales headcount was up 54%. Our Dubai contract and Japan Permanent businesses are expected to grow, while the rest of the region is being managed to maximise profitability.

 

Sector Highlights

The Group saw growth across all sectors in the period. ICT, our largest sector, grew 9%* YoY, with double digit growth in our second largest sector, Life Sciences, which was up 11%* YoY. Growth in Energy picked up in H1, with GP up 31%* YoY, driven by the USA up 47%* YoY. Strong growth was also seen from Engineering, up 17%* YoY.

 

ICT (45% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+6%

-1%

+5%

 

 

+16%

+2%

+12%

 

Q2 18

+13%

+11%

+13%

 

 

+11%

+3%

+9%

 

HY 18

+10%

+5%

+9%

75%

25%

+14%

+3%

+10%

    * Variances at constant currency

 

ICT is our largest and most established sector representing, 45% of the Group GP and 46% of the Group average sales headcount, with the majority of its business in the more mature UK&I and European markets. GP for the period was up 9%* YoY and the sector has delivered 17 consecutive quarters of growth. However, the rate of growth was impacted by the relatively soft performance of ICT in the UK&I, which includes our Public Sector businesses where changes to the IR35 tax legislation reduced GP. Average headcount in ICT was up 10% YoY, with Contract growing 14% YoY and Permanent up 3% YoY. The mix in headcount is weighted towards Contract which accounts for 70% of total ICT headcount.

 

Life Sciences (21% of GP)

 

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+10%

+7%

+9%

 

 

+25%

+15%

+21%

 

Q2 18

+18%

+2%

+12%

 

 

+19%

-

+11%

 

HY 18

+14%

+5%

+11%

65%

35%

+22%

+8%

+16%

 

  * Variances at constant currency

Life Sciences represented 21% of Group GP and is our second largest sector after ICT. Total GP grew by 11%* YoY with both divisions showing strong growth. Contract performance was particularly pleasing, up 14%* YoY against strong comparatives of 15%* YoY in 2017. Contract runners increased 19% YoY and average sales headcount was up 16% YoY, with growth across all regions and both divisions. The emergence of new technology and data analytics in this sector is enhancing the ability of our highly skilled people to find the best candidates to support the business and capitalise on the market opportunity.

 

 

Banking & Finance (13% of GP)

 

 

GP

 

 

 

Average Sales Headcount

 

 

Growth* YoY

 

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

 

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+8%

-10%

-

 

 

 

-4%

-9%

-7%

 

Q2 18

+7%

-5%

+1%

 

 

 

+1%

-13%

-6%

 

HY 18

+7%

-7%

+1%

59%

 

41%

-2%

-11%

-7%

 

        * Variances at constant currency

 

Banking & Finance represented 13% of Group GP, making it the third largest sector for the Group. Overall GP for the sector grew 1%* YoY which was driven by Contract, up 7%*. We saw mixed results across our regions with Continental Europe showing strong growth. The UK&I business performance continues to be hampered by Brexit uncertainty leading to cautious hiring decisions. Average headcount for the sector was down 7% YoY.

 

 

Engineering (10% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+3%

+42%

+14%

 

 

+15%

+8%

+12%

 

Q2 18

+20%

+22%

+20%

 

 

+8%

+2%

+6%

 

HY 18

+12%

+32%

+17%

70%

30%

+11%

+5%

+9%

 

  * Variances at constant currency

 

Engineering represented 10% of Group GP and has grown very strongly, with GP up by 17%* YoY. The sector is heavily weighted towards Contract which accounts for 70% of GP and showed growth of 12%* YoY with runners up 15% YoY. The majority of our Engineering business is in Continental Europe and the UK&I, which grew across both Contract and Permanent YoY. USA Permanent is a relatively new addition to our Engineering portfolio and was successful in the period, growing 77%* YoY. Average sales headcount is up 9% YoY with growth in Contract, up 11% YoY and Permanent, up 5% YoY.

 

 

Energy (9% of GP)

 

 

GP

 

 

Average Sales Headcount

 

 

Growth* YoY

HY 2018 Mix

Growth YoY

 

 

Cont

Perm

Total

Cont

Perm

Cont

Perm

Total

 

 

 

 

 

 

 

 

 

 

 

Q1 18

+46%

-45%

+35%

 

 

+32%

-26%

+27%

 

Q2 18

+27%

+59%

+28%

 

 

+31%

-25%

+26%

 

HY 18

+35%

-11%

+31%

94%

6%

+31%

-26%

+27%

 

    * Variances at constant currency

 

Energy represented 9% of our overall Group GP and the sector has shown signs of improvement. GP in the sector was up 31%* YoY. Contract which represents 94% of our Energy GP grew 35%* YoY. We strategically supported our Contract business with headcount up 31% YoY. We continue to grow our runners in the sector, up 11% YoY and have exceeded our 2017 year end peak. GPDR for the region also showed strong growth, up 13%* YoY, due to the success we have seen in higher fee Power business and improving oil prices. Continental Europe and USA account for 81% of our total GP in the sector and showed good growth in the period, up 24%* YoY and 47* YoY, respectively. Growth in these regions is predominantly driven by more stable Renewable and Power business. Average sales headcount was up 27% YoY and we will continue to review the Energy business and selectively invest where we can maximise market opportunities given the increasing oil price.

 

 

Outlook

We have delivered an encouraging first half performance, driven by further strong growth in Contract, and our two biggest regions, Continental Europe and the USA.

We are continuing to invest in our highest performing teams, to build on this growth and consistent with our vision to be the number one STEM talent provider in the best STEM markets. The Group is performing well and we are making good progress against our five-year growth plan. 

Trading in the weeks since the period end has continued the positive trend, leaving the Group well-positioned as we enter our seasonally more significant second half.

 

* Variances at constant currency

 

 

 

CHIEF FINANCIAL OFFICER'S REVIEW  

 

Operating profit

Revenue for the year was up 14% on a constant currency basis to £585.9 million (HY 2017: reported £521.0 million) and up 12% on a reported basis. On a constant currency basis, Gross Profit ('GP') increased by 11%, and on a reported basis by 10% to £148.4 million (HY 2017: £134.4 million). Growth in revenue exceeded the growth in GP as the business continued to shift towards Contract. Contract represented 72% of the Group GP in the period (HY 2017: 70%). This change in mix resulted in a decrease in the overall GP margin to 25.3% (HY 2017: 25.8%), 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 stable at 19.6% (HY 2017: 19.6%).

The reported profit before tax was £17.8 million, down 7%. The adjusted profit before tax ('PBT') was £20.3 million up 6% YoY (HY 2017: adjusted and reported £19.2 million). The 'adjusted' PBT excludes restructuring costs of £2.4 million that were incurred in the current period in respect of the relocation of our support function to Glasgow (HY 2017: £nil). The operating profit conversion ratio was down 0.7 percentage points on an adjusted basis and down 2.3 percentage points on a reported basis to 12.1% (HY 2017: adjusted and reported 14.4%). The fall in the conversion ratio was largely driven by a significant investment in headcount at the end of FY17 (average headcount up 10% YoY) and an increased investment in internal innovation to £1.3 million (HY 2017: £0.6 million) in the period. New consultants hired take time to become productive and benefit profitability.

 

Restructuring costs ('Adjusting items')

In November 2017, we announced that we were commencing a strategic restructuring and relocation of support functions away from our London headquarters to a new facility located in Glasgow. The transition to a Glasgow Centre of Excellence is progressing to plan and we anticipate that this restructuring will realise cost savings of approximately £4 million to £5 million per annum.

The restructuring is resulting in certain material one-off costs that are anticipated to be in the region of £15 million, of which an estimated £14 million is operating expenses and approximately £1 million relates to property fit out costs (to be capitalised). The costs are mainly related to people, property and professional advisor fees. The project will be partially funded by a grant receivable from Scottish Enterprise of c£2 million which is receivable and recognisable over several years, subject to the terms of the grant being met within a fixed timeframe.

Exceptional costs for the restructuring of £2.4 million have been recognised in the Income Statement bringing the total costs recognised to date to £9.1 million. The exceptional charge in the period included people costs of £1.5m and other costs (primarily professional fees) of £0.9 million. The additional exceptional cost to complete the set-up of the centre of excellence in Glasgow in 2018 is expected to be between £5 million and £6 million.

The strategic nature and material cost of the restructuring of support functions announced in 2017 continues to be of sufficient magnitude to warrant separate disclosure as an exceptional item on the face of the Consolidated Income Statement, in line with our accounting policies.

A reconciliation of 'Adjusting items' is provided below:

 

£'000

HY 2018

HY 2017

Reported profit before tax after exceptional items

17,842

19,156

    Exceptional strategic restructuring costs

  2,434

-

Reported profit before tax and exceptional items ('Adjusted')

20,276

19,156

 

Investments

During the period, we continued to invest in a number of our in-house innovation incubators with £1.3 million spent on our 'build' programme. By the end of the current financial year, we plan to invest an additional £2 million, bringing our investment in the year to c.£3 million (2017: £2 million). No costs are capitalised on development costs in our new wholly-owned innovation businesses until there are clear indications that the businesses will be profit generating.

 

Taxation

The tax charge on pre-exceptional statutory profit before tax for the period was £5.3 million (HY 2017: £5.0 million), representing an effective tax rate ('ETR') of 26% (HY 2017: 26%). The ETR on post-exceptional statutory profit before tax was 27% (HY 2017: 26%).

The ETR primarily reflects our geographical mix of profits and a cautious approach to recognising deferred tax assets on tax losses. The ETR was also influenced by US Tax Reform legislation passed in December 2017 which saw a reduction in the federal corporate tax rate from 35% to 21%. The full benefit of this will be largely offset in the first year by a reduction in US deferred tax assets.

 

Earnings per share ('EPS')

On an adjusted basis, EPS was up by 0.6 pence at 11.6 pence (HY 2017: adjusted and reported 11.0 pence), due to an increase in the adjusted profit before tax. On a reported basis, EPS declined to 10.1 pence, down 0.9 pence, attributable mainly to an increase in restructuring costs as explained above. The weighted average number of shares used for basic EPS remained broadly stable at 128.7 million (HY 2017: 128.7 million). Reported diluted EPS was 9.6 pence (HY 2017: 10.6 pence), down 1.0 pence. Share dilution mainly results from various share options in place and expected future settlement of certain tracker shares. The dilutive effect on EPS from tracker shares will vary in future periods depending on the profitability of the underlying tracker businesses, the volume of new tracker arrangements created and the settlement of vested arrangements.

 

Dividends

The Board proposes to pay an interim dividend of 4.7 pence (HY 2017: 4.7 pence), amounting to approximately £6.0 million in total. This will be paid on 7 December 2018 to shareholders on record at 2 November 2018. The Board will review the appropriate level of the final dividend in due course, taking into account, inter alia, achieved and expected trading of the Group, together with its balance sheet position. As previously stated, the Board is targeting a dividend cover of between 2.0x and 2.5x, based on underlying EPS, over the short to medium term.

 

Cash Flow

On an adjusted basis, we generated lower cash from operations of £7.5 million (HY 2017: £11.9 million on a reported basis) due to continued growth of the contract runner book increasing our working capital and an increase in Days Sales Outstanding (from 39 at HY 2017 to 41 at HY 2018). This resulted in a lower cash conversion ratio of 22% on an adjusted basis or 13% on a reported basis (HY 2017: 48%). The cash outflow from exceptional restructuring items was £2.1 million (HY 2017: £0.1 million).

Capital expenditure increased to £3.1 million (HY 2017: £2.6 million) including infrastructure investment in offices in Switzerland, the Netherlands, Germany and UK, and investment in the Contractor Timesheet Portal ('Workflow') of £0.5 million. We expect capital expenditure will decrease in the second half of the current financial year.

Income tax paid increased to £7.4 million (HY 2017: £3.4 million) and dividends remained unchanged at £6.0m (HY 2017: £6.0 million). During the period, the Group also paid £1.0 million (HY 2017: £3.4 million) for the purchase of its own shares to satisfy employee share schemes in future periods.

Foreign exchange had an immaterial positive impact of £0.2 million (HY 2017: negative impact of £0.3 million).

We started the period with net cash of £5.6 million and closed the period with net debt of £6.2 million (HY 2017: net cash £5.2 million). The decrease since the year end primarily reflected increased cash absorbed in working capital as the Contract business continued to grow and also the cash cost of the restructuring of the Support functions in the UK.

 

Treasury management

We finance the Group's operations through equity and bank borrowings. The Group's cash management policy is to minimise interest payments by closely managing Group cash balances and external borrowings. We intend to continue this strategy while maintaining a strong balance sheet position.

We maintain a committed Revolving Credit Facility ('RCF') of £50 million, along with an uncommitted £20 million accordion facility, with Citibank and HSBC, giving the Group an option to increase its total borrowings to £70 million. This facility was successfully renegotiated in the period and extended to May 2023, on similar terms and conditions to the previous facility. At the half year, £22.5 million (HY 2017: £2.5m) was drawn down on these facilities. The RCF is subject to financial covenants and the funds borrowed under this facility bear interest at a minimum annual rate of 1.3% above 3 month Sterling LIBOR, giving an average interest rate of 1.8% during the period (HY 2017: 1.6%). The finance costs for the half-year amounted to £0.3 million (HY 2017: £0.2 million).

The Group also has an uncommitted £5 million overdraft facility with NatWest and a £5 million overdraft facility with HSBC.

 

Foreign exchange

Foreign exchange volatility continues to be a significant factor in the reporting of the overall performance of the business with the main functional currencies of the Group entities being Sterling, the Euro and the US Dollar.

For HY 2018, currency movements versus Sterling had only a moderate impact on the reported performance of the Group with the highest impact coming from the Euro and US Dollar. Over the course of the period, the GBP/USD exchange rate fluctuated from lows of 1.35 to highs of around 1.42, while the GBP/EUR exchange rate experienced less volatile movements from lows of 1.13 to highs of 1.14. As such, the exchange rate movements decreased our reported HY 2018 GP by approximately £0.7 million and operating profit by circa £0.1 million.

Exchange rate movements remain a material sensitivity. By way of illustration, each one per cent movement in annual exchange rates of the Euro and the US Dollar against Sterling impacted our HY 2018 GP by £0.8 million and £0.3 million, respectively, and operating profit by £0.2 million and £0.1m, respectively.

The Board considers it appropriate in certain cases to use derivative financial instruments as part of its day-to-day cash management to provide the Group with protection against adverse movements in the Euro and the US dollar during the settlement period. The Group does not use derivatives to hedge translational foreign exchange exposure in its balance sheet and income statement.

 

Principal Risks and Uncertainties

Principal risks and uncertainties affecting the business activities of the Group are detailed within the Strategic Report section of the Group's 2017 Annual Report, a copy of which is available on the Group's website www.sthree.com.

In terms of macroeconomic environment risks, our strategy is to continue to grow the size of our international business and newer sectors, in both financial terms and geographical coverage. This will help reduce our exposure or reliance on any one specific economy, although a downturn in a particular market could adversely affect the Group's key risk factors.

In the view of the Board, there is no material change expected to the Group's key risk factors in the foreseeable future.

 

* Variances at constant currency

 

 

DIRECTORS' RESPONSIBILITY STATEMENT

 

The Directors confirm that to the best of their knowledge:

 

(a)

the condensed consolidated Interim Financial Information (unaudited) has been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the European Union; and

(b)

 

the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules ('DTR') paragraph 4.2.7R (an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed financial information, and description of principal risks and uncertainties for the remaining six months of the financial year); and

(c)

the interim management report includes a fair review of the information required by DTR paragraph 4.2.8R (disclosure of material related parties' transactions and changes therein during the first six months of the financial year).

 

Approved by the Board on 20 July 2018 and signed on its behalf by:

 

Gary Elden

Alex Smith

Chief Executive Officer

Chief Financial Officer

www.sthree.com/investors

 

Interim Financial Information

 

 

 

Condensed consolidated income statement - unaudited

For the half year ended 31 May 2018

 

 

 

31 May 2018

31 May 2017

 

Before exceptional items

Exceptional items

Reported

Total

Reported

 

  Note

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

2

585,940

-

585,940

520,961

Cost of sales

 

 

(437,545)

-

(437,545)

    (386,611)

 

 

 

 

 

 

 

Gross profit

 

2

148,395

-

148,395

    134,350

 

 

 

 

 

 

 

Administrative expenses

3

(127,998)

(2,434)

   (130,432)

    (115,007)

 

 

 

 

 

 

 

Operating profit

 

 

20,397

(2,434)

17,963

        19,343

 

 

 

 

 

 

 

Finance income

 

 

46

-

46

               30

Finance costs

 

 

(313)

-

           (313)

           (217)

Gain on disposal of associate

 

10

146

-

146

-

 

 

 

 

 

 

 

Profit before taxation

 

20,276

(2,434)

17,842       

        19,156

 

 

 

 

 

 

 

Taxation

 

4

(5,320)

462

      (4,858)

      (4,981)

 

 

 

 

 

 

 

Profit for the year attributable

to owners of the Company

14,956

(1,972)

12,984

           14,175

 

 

 

 

 

 

 

Earnings per share

6

pence

pence

pence

pence

Basic

 

 

11.6

(1.5)

 
 10.1
          

            11.0

Diluted

 

 

11.1

(1.5)

9.6

            10.6

 

 

 

 

 

 

 

                     

 

The accompanying notes form an integral part of this Interim Financial Information.

Condensed consolidated statement of comprehensive income - unaudited

For the half year ended 31 May 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 May

31 May

 

 

 

 

2018

2017

 

 

 

 

 £'000

 £'000

 

 

 

 

 

 

Profit for the period

 

 

 

12,984

          14,175

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Items that may be subsequently reclassified to profit or loss:

 

 

 

 

Exchange differences on retranslation of foreign operations

 

 

 

680

          337

 

 

 

 

 

 

Other comprehensive income for the period (net of tax)

 

 

680

         337

 

 

 

 

 

 

Total comprehensive income for the period attributable to owners of the Company

13,664

          14,152

             

 

The accompanying notes form an integral part of this Interim Financial Information.

Condensed consolidated statement of financial position

as at 31 May 2018

 
   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited

Audited

 

 

Note

 

31 May

30 November

 

 

 

 

2018

2017

 

 

 

 

 £'000

 £'000

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Non-current assets

 

 

 

 

 

Property, plant and equipment

 

 

 

7,076

6,746

Intangible assets

 

 

 

10,566

11,386

Investment in associate

 

10

 

-

655

Other investments

 

10

 

1,940

1,110

Deferred tax assets

 

 

 

3,602

              4,199

 

 

 

 

         23,184

            24,096

 

 

 

 

 

 

Current assets

 

 

 

 

 

Trade and other receivables

 

 

 

234,876

          226,558

Current tax assets

 

 

 

1,961

              1,534

Cash and cash equivalents

 

7

 

31,848

            21,338

 

 

 

 

268,685

          249,430

 

 

 

 

 

 

Total assets

 

 

 

291,869

          273,526

 

 

 

 

 

 

EQUITY AND LIABILITIES

 

 

 

 

 

Equity attributable to owners of the Company

 

 

 

 

 

Share capital

 

8

 

1,319

              1,317

Share premium

 

 

 

29,155

            28,806

Other reserves

 

 

 

(8,744)

             (8,556)

Retained earnings

 

 

 

55,470

            59,138

Total equity

 

 

 

77,200

            80,705

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Provisions for liabilities and charges

 

 

 

1,464

                2,172

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Borrowings

 

9

 

22,453

12,000

Bank overdraft

 

 

 

15,621

              3,717

Provisions for liabilities and charges

 

 

 

12,141

              12,352

Trade and other payables

 

 

 

162,990

          159,556

Current tax liabilities

 

 

 

-

              3,024

 

 

 

 

213,205

          190,649

 

 

 

 

 

 

Total liabilities

 

 

 

214,669

          192,821

 

 

 

 

 

 

Total equity and liabilities

 

 

 

291,869

          273,526

 

 

 

 

 

 

The accompanying notes form an integral part of this Interim Financial Information.

 

 

 

Condensed consolidated statement of changes in equity - unaudited

 

 for the half year ended 31 May 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Share
capital

 Share
premium

 Capital
redemption
reserve

 Capital
reserve

 Treasury reserve

 Currency
translation
reserve

 Retained
earnings

 Total equity attributable to owners of the Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 £'000

 £'000

 £'000

 £'000

 £'000

 £'000

 £'000

 £'000

Audited balance at 30 November 2016

       1,312

     27,406

          168

          878

    (6,443)

            16

     52,333

        75,670

 

 

 

 

 

 

 

 

 

Profit for the half year ended 31 May 2017

            -  

            -  

            -  

            -  

            -  

            -  

     14,175

        14,175

Other comprehensive income for the period

            -  

            -  

            -  

            -  

            -  

          337

            -  

             337

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

            -  

            -  

            -  

            -  

            -  

          337

     14,175

        14,512

Dividends paid to equity holders (Note 5)

            -  

            -  

            -  

            -  

            -  

            -  

(6,046)

         (6,046)

Dividends payable to equity holders (Note 5)

            -  

            -  

            -  

            -  

            -  

            -  

(11,951)

       (11,951)

Settlement of vested tracker shares

            -  

            3  

            -  

            -  

-

            -

(12)

(9)

Settlement of share-based payments

             1

          151

            -  

            -  

       2,959

            -  

(2,959)      (2,959)

             152

Purchase of own shares (Note 8)

            -  

            -  

            -  

            -  

     (3,409)

            -  

-

       (3,409)

Credit to equity for equity-settled share-based payments

            -  

            -  

            -  

            -  

            -  

            -  

       1,385

          1,385

Total movements in equity

             1

          154

            -  

            -  

       (450)

          337

    (5,408)

         (5,366)

Unaudited balance at 31 May 2017

       1,313

     27,560

          168

          878

    (6,893)

          353

     46,925

        70,304

 

 

 

 

 

 

 

 

 

Audited balance at 30 November 2017

       1,317

     28,806

          168

          878

    (8,535)

 (1,067)   (1,083)

     59,138

        80,705

 

 

 

 

 

 

 

 

 

Profit for the half year ended 31 May 2018

            -  

            -  

            -  

            -  

            -  

            -  

    12,984

        12,984

Other comprehensive income for the period

            -  

            -  

            -  

            -  

            -  

          680

            -  

             680

 

Total comprehensive income for the period

            -  

            -  

            -  

            -  

            -  

          680

     12,984

       13,664

Dividends paid to equity holders (Note 5)

            -  

            -  

            -  

            -  

            -  

            -  

(6,041)

         (6,041)

Dividends payable to equity holders (Note 5)

            -  

            -  

            -  

            -  

            -  

            -  

(11,976)

       (11,976)

Settlement of vested tracker shares

-

-

-

-

121

-

(212)

(91)

Settlement of share-based payments

             2

          349

            -  

            -  

       -

            -  

-      (2,959)

351

Purchase of own shares by Employee Benefit Trust (Note 8)

            -  

            -  

            -  

            -  

(989)

            -  

-

(989)

Credit to equity for equity-settled share-based payments

            -  

            -  

            -  

            -  

            -  

            -  

       1,577

          1,577

Total movements in equity

       
2
  

          349

            -  

            -  

       (868)

          680

    (3,668)

         (3,505)

 

 

 

 

 

 

 

 

 

Unaudited balance at 31 May 2018

       1,319

     29,155

          168

          878

    (9,403)

          (387)

     55,470

        77,200

 

 

 

 

 

 

 

 

 

The accompanying notes form an integral part of this Interim Financial Information.

 

                   
 

 

 

 

 

Condensed consolidated statement of cash flows - unaudited

For the half year ended 31 May 2018

 

 

31 May

2018

31 May

2017

 

Note

£'000

£'000

 

 

 

 

Cash flows from operating activities

 

 

 

Profit before taxation after exceptional items

 

17,842

       19,156

Adjustments for:

 

 

 

Depreciation and amortisation charge

 

3,511

         2,898

Finance income

 

(46)

             (30)

Finance cost

 

313

            217

Loss on disposal of property, plant and equipment

 

8

            95

Loss on disposal of subsidiaries

 

70

-

Profit on disposal of associate

10

(146)

-

FX revaluation gain on other investments

 

(29)

-

Non-cash charge for share-based payments

 

1,577

1,385

Operating cash flows before changes in working capital and provisions

 

 

23,100

23,721

Increase in receivables

 

(7,960)

 (2,709)

Decrease in payables

 

(8,916)

 (8,672)

Decrease in provisions

 

(777)

(464)

 

 

 

 

Cash generated from operations

 

5,447

       11,876

Finance income

 

25

              30

Income tax paid - net

 

(7,445)

        (3,391)

 

 

 

 

Net cash (used in)/generated from operating activities

(1,973)      

8,515

 

 

 

 

Cash generated from operating activities before exceptional items

127

8,593

Cash outflow from exceptional items

(2,100)

        (78)

Net cash (used in)/generated from operating activities

(1,973)

8,515

 

 

 

 

Cash flows from investing activities

 

 

 

Purchase of property, plant and equipment

 

(1,718)

        (947)

Purchase of intangible assets

 

(1,380)

        (1,667)

Prepaid investment

 

-

(802)

 

 

 

 

Net cash used in investing activities

(3,098)       

        (3,416)

 

 

 

 

Cash flows from financing activities

 

 

 

Proceeds from borrowings

9

10,453

2,500

Finance cost

 

(313)

           (217)

Employee subscription for tracker shares

 

-

            13

Proceeds from exercise of share options

 

342

            106

Purchase of own shares

 

(989)

        (3,409)

Dividends paid to equity holders

5

(6,041)

      (6,046)

 

 

 

 

Net cash generated from/(used in) financing activities

 

3,452

      (7,053)

 

 

 

 

Net decrease in cash and cash equivalents

(1,619)

(1,954)

Cash and cash equivalents at beginning of the year

17,621

       10,022

Effect of exchange rate changes

 

225

         (340)

 

 

 

 

Net cash and cash equivalents at end of the year

7

16,227

7,728

 

The accompanying notes form an integral part of this Interim Financial Information.

 

Notes to the Interim Financial Information - unaudited

For the half year ended 31 May 2018

 

 

1.                   Accounting policies

 

General Information

SThree plc ('the Company') and its subsidiaries (together 'the Group') operate predominantly in the United Kingdom & Ireland, Continental Europe, the USA and Asia Pacific & Middle East. The Group consists of different brands and provides both Permanent and Contract specialist staffing services, primarily in the ICT, Banking & Finance, Energy, Engineering and Life Sciences sectors.

The Company is a public limited company listed on the London Stock Exchange and incorporated and domiciled in the United Kingdom and registered in England and Wales. Its registered office is 1st Floor, 75 King William Street, London, EC4N 7BE.

The condensed consolidated Interim Financial Information ('Interim Financial Information') of the Group as at and for the half year ended 31 May 2018 comprises that of the Company and all its subsidiaries. The Interim Financial Information is unaudited and has not been reviewed by external auditors. It does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 November 2017 were approved by the Board of Directors on 26 January 2018 and a copy was delivered to the Registrar of Companies. The auditors reported on those accounts, their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The Interim Financial Information of the Group was approved by the Board for issue on 20 July 2018.

 

Basis of preparation

The Interim Financial Information has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting' as adopted by the European Union. The Interim Financial Information is presented on a condensed basis as permitted by IAS 34 and therefore does not include all disclosures that would otherwise be required in a full set of financial statements and should be read in conjunction with the Group's 2017 annual financial statements, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted and endorsed by the European Union.

 

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the accompanying Interim Management Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are shown in other sections of this Interim Financial Information.

Having considered the Group's resources and available banking facilities, the Directors are satisfied that the Group has sufficient resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing this Interim Financial Information.

 

Significant Accounting Policies

The accounting policies adopted are consistent with those applied in the preparation of the Group's 2017 annual financial statements except as described below.

Taxes on income in the interim period are accrued using the effective tax rate that would be applicable to the Group's expected total annual earnings.

 

New Standards and Interpretations

There are no new or amended IFRSs or IFRS Interpretations Committee interpretations adopted during the period that have a significant impact on this interim financial information.

As at the date of authorisation of this interim financial information, the following key standards and amendments to standards were in issue but not yet effective. The Group has not applied these standards and interpretations in the preparation of this Interim Financial Information.

  • IFRS 2 (amendments) 'Share Based Payments'
  • IFRS 9 'Financial instruments'
  • IFRS 15 'Revenue from Contracts with Customers'
  • IFRS 16 'Leases'
  • IFRIC 22 'Foreign Currency Transactions and Advance Consideration'
  • IFRIC 23 'Uncertainty over Income Tax Treatments'

 

The impact of IFRS 9, IFRS 15 and IFRS 16 is set out below. The Directors are currently evaluating the impact of the adoption of all other standards, amendments and interpretations but do not expect them to have a material impact on Group operations or results.

 

IFRS 9 Financial Instruments (unaudited)

The standard is effective for annual periods beginning on or after 1 January 2018. It introduces new classification and impairment models for financial assets. Whilst financial assets will be reclassified into the categories required by IFRS 9, the Directors have not identified any significant impacts on the measurement of its financial assets as a result of the classification and measurement requirements of the new standard.

IFRS 9 also requires all investments in equity instruments, including those issued by an unlisted entity, to be measured at fair value. The Directors elected to apply the market approach, under which a price generated by a market transaction for an identical or similar instrument will be used to value the equity instrument from the date of initial application of IFRS 9. The new policy of fair valuing equity instruments is expected to increase the value of equity investments by an immaterial amount once IFRS 9 becomes effective. The Directors intend to recognise fair value gains and losses for existing equity instruments classified as available for sale financial assets under IAS 39 in other comprehensive income. Prospectively, fair value gains and losses on new equity instruments may be recognised either in the income statement or in other comprehensive income as an election on an instrument-by-instrument basis on initial recognition.

The impact of the financial asset impairment requirements of IFRS 9 is immaterial due to the short-term nature of SThree's financial assets and strict treasury policy that stipulates a list of approved counterparties, with reference to their high credit standing.

The Group will adopt IFRS 9 in the financial reporting period commencing 1 December 2018 and has elected to apply the 'fully prospective' transition approach to the implementation.

 

IFRS 15 Revenue from Contracts with Customers (unaudited)

The standard is effective for annual periods beginning on or after 1 January 2018. It introduces the concept of distinct performance obligations. Revenue is recognised once performance obligations are satisfied and a customer starts benefiting from the transferred goods or service.

Under IFRS 15 revenue from permanent placements will continue to be recognised on the day when a recruited employee starts their job and will be based on a percentage of the candidate's remuneration package. Contract revenue, which represents amounts billed or accrued for the ongoing services of temporary staff, will continue to be recognised when the service has been provided.

The Group also earns revenue from retained assignments, where it principally satisfies its performance obligations over time. The amount of retainer revenue recognised to date depicts the amount of retained search service performed to date by the Group on behalf of its client, towards complete satisfaction of the bundled retained search service.

Certain immaterial changes in accounting arising from the implementation of IFRS 15 may be identified for the product and service proposition offered by four new Innovation entities launched in 2017. Their aim is to win additional marquee clients by offering a diverse portfolio of products and services within the technology recruitment field. These newly established entities are in the early stages of their development, hence an insignificant amount of sales has been recognised in the current period. Any potential changes in accounting for revenue generated by Innovation start-ups under IFRS 15 will have no material effect on the Group's net assets as at 1 December 2018 and only an immaterial transition adjustment will be presented.

Accounting for revenue under IFRS 15 does not, therefore, represent a substantive change from the Group's current practice for recognising revenue from sales to clients.

SThree will adopt IFRS 15 in the financial reporting period commencing 1 December 2018 and has elected to apply the 'modified retrospective' transition approach to implementation.

 

IFRS 16 Leases (unaudited)

The new leasing standard is effective for the annual periods beginning on or after 1 January 2019.

IFRS 16 requires lessees to account for all leases under a single on-balance sheet model similar to accounting for finance leases under IAS 17. For every lease brought onto the balance sheet, lessees will recognise a right-of-use asset and a lease liability.

Within the income statement, operating lease rental payment will be replaced by depreciation and interest expense. This will result in an increase in operating profit and an increase in finance costs.

SThree will adopt IFRS 16 in the financial reporting period commencing 1 December 2019. At present there is no plan for the Group to adopt this standard early. The Directors expect to be able to provide an indication of the impact on the Group's results in the 31 May 2019 Interim Results.

Estimates

The preparation of the Interim Financial Information requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the end of the reporting period, and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on the Directors' best knowledge of the amounts, the actual results may ultimately differ from these estimates.

 

In preparing the Interim Financial Information, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied in the Group's 2017 annual financial statements, with the exception of changes in estimates that are required in determining the provision for income taxes.

 

Seasonality of Operations

Due to the seasonal nature of the recruitment business, higher revenues and operating profits are usually expected in the second half of the year compared to the first half. In the financial year ended 30 November 2017, 46% of gross profits were earned in the first half of the year, with 54% earned in the second half.

 

 

2.              Segmental analysis

 

IFRS 8 'Segmental Reporting' requires operating segments to be identified on the basis of internal results about components of the Group that are regularly reviewed by the entity's chief operating decision maker to make strategic decisions and assess segment performance.             

Management has determined the chief operating decision maker to be the Executive Committee made up of the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Chief Sales Officer and the Chief People Officer, with other senior management attending via invitation. Operating segments have been identified based on reports reviewed by the Executive Committee, which consider the business primarily from a geographical perspective. The Group segments the business into four regions: the United Kingdom & Ireland ('UK&I'), Continental Europe, the USA and Asia Pacific & Middle East ('APAC & ME').

 

The Group's management reporting and controlling systems use accounting policies that are the same as those described in note 1 in the summary of significant accounting policies in the Group's 2017 annual financial statements.

 

Revenue and Gross Profit by reportable segment

The Group measures the performance of its operating segments through a measure of segment profit or loss which is referred to as "Gross Profit" in the management reporting and controlling systems. Gross profit is the primary measure of segment profit comprising revenue less cost of sales.

 

Intersegment revenue is recorded at values which approximate third party selling prices and is not significant.

 

 

 

 

                          REVENUE

                         GROSS PROFIT

 

 

 

31 May

2018

31 May

2017

31 May

2018

31 May

2017

 

 

 

£'000

£'000

£'000

£'000

Continental Europe

328,804

      262,990

83,934

        69,069

UK&I

 

131,721

      129,896

26,501

      27,039

USA

 

98,443

      100,237

29,465

        29,729

APAC & ME

26,972

        27,838

8,495

        8,513

 

 

 

 

 

 

 

 

 

 

585,940

      520,961

148,395     

   134,350

 

Continental Europe primarily includes Austria, Belgium, France, Germany, Luxembourg, Netherlands, Spain and Switzerland.

APAC & ME mainly includes Australia, Dubai, Hong Kong, Japan, Malaysia and Singapore.

 

Other information

The Group's revenue from external customers, its gross profit and information about its segment assets (non-current assets excluding deferred tax assets) by key location are detailed below:                                         

 

 

 

 

                       REVENUE

                        GROSS PROFIT

 

 

 

31 May

2018

31 May

2017

31 May

2018

31 May

2017

 

 

 

£'000

£'000

£'000

£'000

Germany

 

142,005

117,684

42,811

36,014

UK

 

126,025

124,887       

24,414

25,320

Netherlands

 

109,015

      81,061

22,371

        17,319

USA

 

98,443

100,237 

29,465

29,739

Other

 

110,452

97,092 

29,334

25,958

 

 

 

 

 

 

 

 

 

 

585,940

      520,961

148,395

      134,350

 

 

 

 

 

 

 

 

 

 

 

 

                NON-CURRENT ASSETS

 

 

 

 

 

31 May

Audited

30 November

 

 

 

 

 

2018

2017

 

 

 

 

 

£'000

£'000

UK

 

 

 

 

15,071

        15,702

USA

 

 

 

1,440

          1,608

Germany

 

 

 

1,250

             1,131

Netherlands

 

 

 

676

             431

Other

 

 

 

1,145

             1,024

 

 

 

 

 

 

 

 

 

 

 

 

19,582

        19,897

 

The following segmental analysis by brands, recruitment classification and sectors (being the profession of candidates placed) have been included as additional disclosure to the requirements of IFRS 8.

 

 

 

 

         REVENUE

   GROSS PROFIT

 

 

 

31 May

2018

31 May

2017

31 May

2018

31 May

2017

 

 

 

£'000

£'000

£'000

£'000

Brands

 

 

 

 

 

Progressive

 

182,092

157,806

40,580

        35,105

Computer Futures

 

168,141

      147,653

44,991

        39,774

Huxley Associates

 

122,942

105,280

29,306

26,474

Real Staffing Group

 

112,765

110,222

33,518

32,997

 

 

 

 

 

 

 

 

 

 

585,940

      520,961

148,395

134,350

 

Other brands including Global Enterprise Partners, Hyden, JP Gray, Madison Black, Newington International and Orgtel are rolled into the above brands.

 

 

 

Recruitment classification

 

 

 

Contract

 

544,062

480,819

106,705

94,208

Permanent

 

41,878

        40,142

41,690

        40,142

 

 

 

585,940

      520,961

148,395

      134,350

 

 

 

 

 

 

 

               

 

 

 

 

 

REVENUE

GROSS PROFIT

 

 

 

31 May

2018

31 May

2017

31 May

2018

31 May

2017

 

 

 

£'000

£'000

£'000

£'000

Sectors

 

 

 

 

 

Information & Communication Technology

 

270,691

239,007

66,488

59,701

Life Sciences

 

90,748

82,245

30,594

28,779

Banking & Finance

 

87,597

85,238

20,066

20,520

Energy

 

75,976

63,429

14,013

11,363

Engineering

 

51,516

44,488

14,292

11,800

Other

 

9,412

6,554

2,942

2,187

 

 

 

 

 

 

 

 

 

 

585,940

      520,961

148,395

134,350


 

Other includes Procurement & Supply Chain and Sales & Marketing.

 

 

 

3.                   Administrative expenses - Exceptional items

 

A strategic relocation of the majority of our central support functions away from our London headquarters to a new facility located within Glasgow was announced on 1 November 2017. The transition to a Glasgow Centre of Excellence is progressing to plan and we anticipate that this restructuring will realise cost savings of approximately £4 million to £5 million per annum.

The restructuring will incur significant costs including people, property and professional advisor fees that are anticipated to be in the region of £15 million, with c£14 million of operating expenses and c£1 million of capital expenditure. The project will be partially funded by a grant receivable from Scottish Enterprise of c£2 million which is receivable and recognisable over several years, subject to the terms of the grant being met within a fixed timeframe.  Exceptional costs of £2.4 million have been charged to the Consolidated Income Statement in the period bringing the total costs recognised to date to £9.1 million. The exceptional charge in the period included people costs of £1.5 million and other costs (primarily professional fees) of £0.9 million. The additional exceptional cost expected in 2018 is between £5 million and £6 million with potential for some grant income to be recognised too. The timing of the grant recognition will match against the costs that it is intended to compensate. All capital expenditure is expected to be incurred in this financial year.

A restructuring provision can only include the direct expenditure arising from the announced strategic restructuring, which are costs that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. Restructuring items related to the transition, design and set up of the new support function or for which there is no constructive obligation at period end have not been included within the restructuring provision and will be recognised as incurred. The provision for associated redundancy costs amounted to £5.8 million at period end (2017 Year End: £5.7 million), with other costs either incurred or accrued.

Due to the material size and non-recurring nature of this strategic restructuring project, the associated costs have been separately disclosed as exceptional items in the Consolidated Income Statement in line with their treatment in FY 2017. Disclosure of items as exceptional, highlights them and provides a clearer, comparable view of underlying earnings.

 

Items classified as exceptional were as follows:

 

 

 

 

 

31 May

2018

31 May

2017

 

 

 

 

 

£'000

£'000

Exceptional items - charged to operating profit

 

 

 

 

 

Personnel costs - redundancy

 

 

 

1,494

            -

Property costs

 

 

 

147

-

Other

 

 

 

793

-

Total exceptional costs

2,434

              -

 

 

 

4.                   Taxation

 

Income tax for the half year is accrued based on management's best estimate of the average annual effective tax rate for the financial year. The tax charge for the half year amounted to £4.9 million (2017: £5.0 million) at an effective rate of 27% (HY 2017: 26%).  The effective tax rate on the pre-exceptional trading profits arising in the period is 26% (2017: 26%). 

 

 

5.                   Dividends

 

 

 

 

 

31 May

2018

31 May

2017

 

 

 

 

£'000

£'000

Amounts recognised as distributions to equity holders in the period

 

Interim dividend of 4.7p (2016: 4.7p) per share (i)

6,041

6,046

Final dividend of 9.3p (2016: 9.3p) per share (ii)

 

11,976

        11,951

 

 

 

 

18,017

        17,997

 

2017 interim dividend of 4.7 pence (2016: 4.7 pence) per share was paid on 8 December 2017 to shareholders on record at 3 November 2017.

2017 final dividend of 9.3 pence (2016: 9.3 pence) per share, per share was approved by shareholders at the AGM on 26 April 2018 and has been included as a liability in this interim financial information. The dividend was paid on 8 June 2018 to shareholders on record at 27 April 2018.

2018 interim dividend of 4.7 pence per share was proposed and approved by the Board on 19 July 2018 and has not been included as a liability as at 31 May 2018. It will be paid on 7 December 2018 to shareholders on record at 2 November 2018.

6.                   Earnings per share

 

The calculation of the basic and diluted earnings per share ('EPS') is set out below:

Basic EPS is calculated by dividing the earnings attributable to owners of the Company by the weighted average number of shares in issue during the period excluding shares held as treasury shares and those held in the Employee Benefit Trust which are treated as cancelled.

For diluted EPS, the weighted average number of shares in issue is adjusted to assume conversion of dilutive potential shares. Potential dilution resulting from tracker shares takes into account profitability of the underlying tracker businesses and SThree plc's earnings per share. Therefore, the dilutive effect on EPS will vary in future periods depending on any changes in these factors.             

 

 

 

 

 

 

 

31 May

31 May

 

 

 

 

 

2018

2017

 

 

 

 

 

£'000

£'000

Earnings

 

 

 

 

 

Profit for the period after tax before exceptional items

14,956

14,175

Exceptional items net of tax

(1,972)

-

Profit for the period attributable to owners of the Company

12,984

14,175

 

 

 

 

 

 

 

 

 

 

 

 

million

million

 

 

 

 

 

 

 

Number of shares

 

 

 

 

 

Weighted average number of shares used for basic EPS

128.7

  128.7

Dilutive effect of share plans 

 

5.9

       4.7

Diluted weighted average number of shares used for diluted EPS

134.6

133.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 May

31 May

 

 

 

 

 

2018

2017

 

 

 

 

 

pence

pence

Basic

 

 

 

 

 

Basic EPS before exceptional items

11.6

11.0

Impact of exceptional items

(1.5)

-

Basic EPS after exceptional items

10.1

11.0

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

Diluted EPS before exceptional items

11.1

          10.6

Impact of exceptional items

(1.5)

-

Diluted EPS after exceptional items

9.6

10.6

               

 

 

 

7.                   Cash and cash equivalents

 

 

 

 

 

 

31 May

Audited

30 November

 

 

 

 

 

2018

2017

 

 

 

 

 

£'000

£'000

Cash at bank

 

 

 

31,848

          21,338

Bank overdraft

 

 

 

(15,621)

         (3,717)

 

 

 

 

 

 

 

Net cash and cash equivalents per the consolidated statement of cash flow

16,227

            17,621

 

 

 

 

 

 

 

 

Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less, net of outstanding bank overdrafts. The carrying amount of these assets is approximately equal to their fair values.

The Group has cash pooling arrangements in place which allow any one account to be overdrawn up to £50m, so long as the overall pool of accounts do not exceed a net overdrawn position of £5m.

 

 

8.                   SHARE CAPITAL

 

During the period 123,633 (HY 2017: 56,440) new ordinary shares were issued, resulting in a share premium of £0.3 million (HY 2017: £0.2 million). These shares were issued pursuant to the exercise of share awards under the Save As You Earn scheme.

 

Treasury Reserve

During the period, SThree plc did not purchase any of its own shares to be held as treasury shares (HY 2017: 1,078,788 shares, with the average price paid per share 316 pence and total consideration amounting to £3.4 million). During the period, nil shares (HY 2017: 1,000,000) were transferred from treasury for LTIP exercises. At the half year end, 1,724,673 (HY 2017: 2,265,868) shares were held in treasury. The average price paid per share was 302 pence (HY 2017: 305 pence) with a total consideration amounting to £5.2 million (HY 2017: £6.9 million).

For accounting purposes shares held in the EBT to meet the future requirements of the employee share-based payment plans are treated in the same manner as shares held in the treasury reserve by SThree plc and are, therefore, included in the financial statements as part of the treasury reserve for the Group.

During the period, the EBT was funded entirely by the Company. All SThree plc shares purchased directly by the EBT are shown as a reduction in shareholders' equity. The average price paid by the EBT per share was 314 pence (HY 2017: nil) with total consideration amounting to £1 million (HY 2017: nil).

At the half year end, 1,419,407 (HY 2017: 774,294) shares were held in the Group's EBT.

 

 

9.                   Borrowings 

 

The Group has access to a committed RCF of £50 million along with an uncommitted £20 million accordion facility in place with HSBC and Citibank, giving the Group an option to increase its total borrowings under the facility to £70 million. The funds borrowed under the facility bear interest at a minimum annual rate of 1.3% (HY 2017: 1.3%) above the appropriate Sterling LIBOR. The average interest rate paid on the RCF during the half year was 1.8% (HY 2017: 1.6%). The Group also has an uncommitted £5 million overdraft facility with NatWest and a £5 million overdraft facility with HSBC.

At the half year end, £22.5 million (HY 2017: £2.5 million) was drawn down on these facilities.

The RCF is subject to certain covenants requiring the Group to maintain financial ratios over interest cover, leverage and guarantor cover. The covenants ratios are disclosed in the Group's 2017 annual financial statements. The Group has been in compliance with these covenants throughout the current period.

In May 2018, the Directors successfully renegotiated the RCF with its key terms and conditions (including the total amount available under the facility and interest margin) remaining unchanged and the term of the facility having been extended until 2023.

Since there was no substantial modification to the underlying terms and conditions, the refinancing of the existing facility did not qualify for derecognition, hence no modification gain/loss was recognised in the consolidated income statement.

Minor changes to the agreement were made on two of the covenants:

*Interest cover: the definition of Interest now excludes Dividends; the minimum cover has changed from 1.2:1 to 4:1.

*Leverage ratio changes from 2:1 to 3:1.

The third covenant: Guarantor cover, remains unchanged at 85% of EBITDA and gross assets.

Movements in borrowings are analysed as follows:

Six months ended 31 May 2018

£'000

Opening amount as at 1 December 2017

12,000

Net drawings during the period

11,089

Changes to carrying amount due to RCF refinancing*

(636)

Closing amount as at 31 May 2018

22,453

 

*£636k represents the unamortised amount of transaction costs including those incurred on renegotiating the facility.

 

 

 

10.               INVESTMENTS

 

Sandpit (conversion of shareholding)

During the period, the Directors reached an agreement with Sandpit Limited to convert its shareholding in HRecTech into a minority shareholding in Sandpit Limited. The conversion was an asset swap transacted between SThree Overseas Holdings Limited (one of SThree Group's subsidiaries) and Sandpit Limited. Consequently, SThree's share of the associate was derecognised at its carrying amount of £0.6 million and a new minority shareholding in Sandpit Limited (with no significant influence) was recognised at a fair value of £0.8 million, resulting in a net gain in other income of £0.1 million. The fair value of the minority shareholding was determined as 1,077 ordinary shares in Sandpit Limited valued at £744.60 per share, giving a total fair value of investment of £0.8 million. A value of £744.60 per share represented a price paid by multiple other investors for identical shares in Sandpit Limited.

 

 

11.               Contingent liabilities

 

The Group has contingent liabilities in respect of legal claims arising in the ordinary course of business. Legal advice obtained indicates that it is unlikely that any significant liability will arise.

The Directors are of the view that no material losses will arise in respect of legal claims that have not been provided against at the date of these interim financial statements.

 

 

12.               RELATED PARTY DISCLOSURES

 

The Group's significant related parties are as disclosed in the Group's 2017 annual financial statements. There were no other material differences in related parties or related party transactions in the period compared to the prior period.

 

13.               Shareholder communications

 

SThree plc has taken advantage of regulations which provide an exemption from sending copies of its interim report to shareholders. Accordingly, the 2018 interim report will not be sent to shareholders but will be available on the Company's website www.sthree.com or can be inspected at the registered office of the Company.

 

 

 

 

 

 

Financial Calendar

 

 

2018

 

14 September

Q3 Trading update

1 November

Ex-dividend date for 2018 interim dividend

30 November

2018 Financial Year end

7 December

2018 Interim dividend paid

14 December

Trading update for the year ended 30 November 2018

 

 

 

 

2019

 

28 January

Annual results for the year ended 30 November 2018

 



ISIN: GB00B0KM9T71
Category Code: IR
LSE Ticker: STHR
LEI Code: 2138003NEBX5VRP3EX50
Sequence No.: 5771
EQS News ID: 706737

 
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SThree: INTERIM RESULTS FOR THE HALF YEAR ENDED 31 MAY 2018 - RNS