29 January 2018

SThree plc

("SThree" or the "Group")

 

Final results for the year ended 30 November 2017

 

SThree, the international specialist staffing business, is today announcing its final results for the year ended 30 November 2017.

 

"Encouraging overall result for 2017, with Group business profile continuing to remix to Contract and international markets. Entered 2018 in good shape and well-positioned for further growth."

 

FINANCIAL HIGHLIGHTS

 

(1)  2017 figures were adjusted for the impact of £6.7 million of exceptional strategic restructuring costs.

(2)  2016 figures were adjusted for the impact of £3.5 million of restructuring costs.

 (3) All variances compare adjusted 2017 against adjusted 2016 to provide a like-for-like view.

(4) FX impacted positively on our results YoY on a reported basis

 

 

OPERATIONAL HIGHLIGHTS 

 

*          Encouraging full year performance with strong Q4 and exit rate into 2018

*          Adjusted profit before tax up 9% to £44.5m

*          GP up 4%* YoY (up 11% on an as reported basis) and up 8%* YoY in Q4

*          Growth in GP driven by USA (up 18%*) and Continental Europe (up 9%*), whilst UK&I remains challenging (-14%*)

*          81% of GP now generated outside UK&I (FY 2016: 75%)

*          Contract GP up 10%* YoY, with growth across all sectors

*          Contract now accounts for 71% of Group GP (FY 2016: 67%)

*          Permanent GP down 8%* YoY but productivity improved by 3%* YoY

*          Foreign exchange increased reported operating profit by circa £5.0m and GP by c£18.1m

*          Move of London-based support functions to Glasgow underway

*          Final dividend maintained

 

* Variances at constant currency

 

Gary Elden, CEO, commented: "We have delivered an encouraging overall result for the year, with a strong finish in the final quarter. Pleasing performances in the USA and Continental Europe, particularly from our market-leading businesses in the Netherlands and Germany, were key to this result. With 81% of our business now generated outside the UK and 71% of our GP generated by our more resilient Contract business, our business profile has changed significantly over recent years. After two years of turbulent political, market and economic conditions, we enter 2018 in good shape, with a clear vision to be the number one STEM talent provider in the best STEM markets.

 

"Looking ahead to 2018, the momentum of our Contract business and the strength of our performances in the USA and Continental Europe leave us well-positioned for further growth."

 

 

 

 

 

 

 

SThree will host a live presentation and conference call for analysts at 0900 GMT today. The conference call participant telephone details are as follows:

 

 

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 be announcing its Q1 Trading Update on Friday 16 March 2018.

 

Enquiries:

 

 

Notes to editors

 

SThree is a leading international specialist staffing business, providing permanent and contract specialist staff to a diverse client base of over 9,000 clients. From its well-established position as a major player in the Information & Communications Technology ("ICT") sector the Group has broadened the base of its operations to include businesses serving the Banking & Finance, Energy, Engineering and Life Sciences sectors.

 

Since launching its original business, Computer Futures, in 1986, the Group has adopted a multi-brand strategy, establishing new operations to address growth opportunities. SThree brands include Computer Futures, Huxley Associates, Progressive and The Real Staffing Group. The Group has c2,800 employees in sixteen countries.

 

SThree plc is quoted on the Official List of the UK Listing Authority under the ticker symbol STHR and also has a US level one ADR facility, symbol SERTY.

 

Important notice

 

Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Data from the announcement is sourced from unaudited internal management information. Accordingly, undue reliance should not be placed on forward looking statements.

 

Chief Executive Officer's Review

 

We have delivered an encouraging overall result for the year, with a strong finish in the final quarter. Pleasing performances in the USA and Continental Europe, particularly from our market-leading businesses in the Netherlands and Germany, were key to this result. With 81% of our business now generated outside the UK and 71% of our GP generated by our more resilient Contract business, our business profile has changed significantly over recent years. After two years of turbulent political, market and economic pressure, we enter 2018 in good shape, with a clear vision to be the number one STEM talent provider in the best STEM markets.

 

This year we also made some changes to SThree's leadership model which will help us to work in a more effective and agile way in the future. With the creation of the new senior management roles of Chief Sales Officer and Chief Operations Officer, we will be in a better position to align our sales and operational strategies and ensure we have the right services, infrastructure and people to execute our global growth strategy and provide our customers with the best possible experience.

 

Growing Contract, driving Permanent profitability

We invested for future growth, with year end sales headcount up 10% year on year and up 7% sequentially vs Q3 2017. We continued to grow Contract headcount (+15%) faster than Permanent headcount (+3%), in line with our plan. The shift in favour of Contract is creating a business that is much more resilient in times of uncertainty, providing stronger and more sustainable profits. While in 2012 our business was evenly split between Contract and Permanent, we now have 65% of our sales headcount working on Contract recruitment. We have also created separate management structures for our Contract and Permanent business in almost all territories to drive accountability and focus.

 

 

 

Growing Contract

As I have been able to report every year since taking over as CEO, we enter our next financial year with a record Contract book, passing a key milestone of 10,000 Contract runners to reach 10,197 at the end of the year, up 12% from last year. Contract GP returned to double digit year over year (YoY) growth of 10%*, with a strong final quarter up 14%*. Contract growth YoY was across all sectors and driven by Continental Europe, which was up 17%* and by USA, up 21%*. Continental Europe and USA combined now represent nearly 70% of our Contract runners, up from 65% in 2016. 

 

Our traditional Personal Service Company/freelance model ("PSC") continues to perform well and we are also generating increased business through our Employed Contractor Model ("ECM").  ECM is structured such that the Group employs individuals directly and contracts them to clients.  ECM is the established contracting model in a number of countries, including the USA.  With governments across the world examining new ways to raise tax revenues to address budget deficits, our business model is expected to shift further towards ECM over time.  A key focus for 2018 is the expansion and strengthening of supporting processes of ECM within our Contract business to increase its market opportunity. 

 

Driving Permanent Profitability

Investment in Permanent continued to be made on a highly selective basis in the year as we focused on improving the profitability of this division. Permanent GP was down 8%* YoY, with average sales headcount down 10%, reflecting a 3%* improvement in Permanent productivity per head over last year.

 

The USA posted a 12%* GP increase, driven by supportive Energy and Banking markets. This was offset by declines in all other regions, with Continental Europe down 7%* and UK&I down 22%*.

 

Permanent recruitment is more sensitive to overall market sentiment and has been hit harder by the political, market and economic uncertainty of recent years. In response, we have actively reduced Permanent headcount in certain markets in order to improve overall profitability in our Permanent business.  Over the years, this has meant restructuring our UK, Benelux & France, USA, APAC and Middle East (APAC & ME), Oil & Gas and Banking & Finance businesses.  In markets with significant Permanent opportunity such as the USA and Germany we continue to maintain a strong Permanent offering.

Improving customer experience

Last year we rolled-out a major customer experience programme globally, using Net Promoter Score (NPS) to capture our clients and candidates feedback at every stage of the customer journey. Feedback has then been used to adapt our systems, processes and behaviours and we have already seen significant improvements in our overall NPS results (+3.6% points) as well as in the volume of data we capture.

 

From these findings, we have developed operating principles that place the customer at the heart of everything we do - to build trust, to care and then act, to be clear and then to aim high. We rolled these principles out across the business in the last quarter of 2017 and will continue to reinforce them in 2018.

 

Investing in new systems, processes and infrastructure

Our processes, systems and infrastructure are crucial to the delivery of our sales strategy and to providing the best customer experience. We are currently finalising a structure which will provide us with a more holistic, strategic view of our global operational requirements and help us to manage demand and resource for optimum delivery.

We have announced some significant changes this year, including the strategic restructuring and relocation of our London-based support functions to a new office in Glasgow, which will provide a more sustainable support structure as we continue to grow our business. We expect to substantially complete the reorganisation and relocation during 2018, creating a centre of excellence with a clear objective to reduce costs, while improving operational capability.

We have continued to transition our systems to a cloud-based marketing services structure and have invested in new automation technology which gives us new and distinct ways to build a single customer view and to communicate in a more personalised way.

 

We are also part way through a roll-out of a new customer/contractor portal and a new contract management system. Both systems have been developed in response to contractor and customer feedback.  

 

Generating new revenue streams

 

Innovation and entrepreneurship are a key focus for the Group as we aspire to build a more diverse portfolio of products and services.

We have created an internal system of Innovation which gives us greater ability to identify promising new ideas and to test them quickly. We have invested c.£3.2 million in the year in a number of external innovation start-ups (£1.2 million) and have created our own innovation incubator (£2.0 million). We expect to increase the amount spent on our innovation incubator to c.£3 million in 2018.

Key developments in 2017 included:

-          Talent Deck, a new smart job board, focused on cultural fit and automated matching was launched in the UK and has already attracted blue-chip technology brands. We expect to continue the roll-out of Talent Deck and to win additional marquee clients in 2018.

 

-          We prepared the ground for two other internally-developed initiatives to launch in 2018. Showcaser allows a user to create and manage asynchronous video interviewsand is currently being trialled with one of our brands. Hirestream combines a digital market platform with key human-centred touch points. A pilot is planned in mid-2018.

 

In addition to unlocking internal ideas, we have also engaged with a number of start-ups in the recruitment space, to identify whether we should make strategic investments or find other ways to unlock the potential in these ideas. We made additional small investments totalling c.£1 million in a number of HR technology start-ups: 

-          We supported the deployment of Right Staff by Ryalto Limited, a work scheduling app for healthcare professionals in which we have invested, with a successful trial among shift workers in the UK's National Health Service. This is currently being scaled up for a further roll-out.

-          We signed a development agreement and invested in RoboRecruiter, a messaging bot specifically designed for recruitment which engages with candidates without any human intervention. 

-          We invested in a HR vertical of The Sandpit Limited (HRecTech), an incubator with a successful track record in marketing technology, which is now incubating HR technology businesses in the UK and USA. 

We will continue to look at potential additional investments where we see a good strategic fit. 

 

Identifying and developing great talent

 

SThree's success depends on having highly skilled and motivated employees. We aim to find great people and enable them to build meaningful careers inside the organisation.

 

We provide on-the-job learning programmes as well as online and classroom-based courses to support our employee's careers at all stages. Our career management platform is leading edge and helps our employees to develop their careers within the group.

 

This year saw the launch of our revised organisational purpose 'Bringing skilled people together to build the future' and with it, support for our managers and leaders to bring to life the true meaning of our work with our candidates and clients.

 

In 2017, we introduced our quarterly Employee Net Promoter Score (eNPS), replacing our annual engagement survey, as a more dynamic way to capture regular feedback from our people. Over 70% of our employees responded with feedback about their experience of working at SThree, as well as how they view the services we offer our customers. eNPS will help us make the right changes based on employee feedback and track what is working. Ultimately, it puts our people at the centre of decisions that help to create a brilliant place to work. 

 

As part of our ongoing commitment to creating an inclusive and diverse workforce, we have introduced a new Female Leadership Development Programme: IdentiFy. Thirty high potential, future female leaders from across the Group have been selected to participate in a 12-month development programme. The programme is designed to support them to recognise and develop their leadership strengths through facilitated learning, stretch assignments and executive sponsorship. Through IdentiFy we hope to improve the gender balance at a senior level.

 

Operating Review

Group GP up 4%*, with a strong finish to the year with GP up 8%* in Q4.

 

The growth in GP was driven by Contract up 10%*, with growth across all sectors and strong regional performances in Continental Europe up 17%* and USA up 21%*.  Permanent GP was down 8%*, with average sales headcount down 10%.

 

 

 

 

 

 

 

 

 

 

 

 

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
GROUP	FY 17	+10%	-8%	+4%	71%	29%	+5%	-10%	-1%

 

 

Regional Overview

 

Regionally, our GP growth was driven by a strong performance in the USA, up 18%*, and robust growth in Continental Europe up 9%*, led by the Netherlands up 20%* YoY.  The USA overtook the UK&I (19% of Group GP) to become our second largest region (22% of Group GP) during the year behind Continental Europe (52% of Group GP). Although the UK&I remains an important part of our business, uncertainty created by the EU Referendum and the relative maturity of the recruitment market have led us to focus on growth opportunities in other regions and to be cautious with our investment in the UK&I business.  As part of our regional market penetration plans, we expanded our global footprint by opening four new offices in Continental Europe. However, as we reviewed regional business performance, it became clear that our return on investment in certain other regions was sub-optimal and we took action to restructure our Hong Kong office.

 

We have continued to roll out ECM through the year, introducing new offerings in Germany, and improvements in our operating model globally.  With governments turning to new means to address their budget deficits, including the IR35 Intermediaries Legislation in the UK and the Deregulering Beoordeling Arbeidsrelaties (DBA law) in the Netherlands, there is an increasing risk to the traditional Personal Service Company contractor model. However, we are in a position to provide service to clients that is highly compliant with the new legislation and we have a growing footprint in the ECM market which offers a suitable alternative to our candidates and clients. A key focus for 2018 is further growth in ECM and the further diversification of our Contract services.

 

 

 

 

 

 

 

 

 

 

Continental Europe

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
CONTINENTAL EUROPE	FY 17	+17%	-7%	+9%	71%	29%	+21%	-5%	+10%

 

Performance in 2017

Continental Europe is our largest region representing 52% of Group GP. It is split into two regions: Germany, Austria & Switzerland (DACH) which is 28% of Group GP, and Belgium, Netherlands, Luxembourg, France and Spain (Benelux, France & Spain), which is 24% of Group GP. Average headcount was up 10% in the year and period end headcount was up 18% as we continued to invest for future growth in this market.

 

Overall, we delivered strong growth in GP, up 9%*, supported by strong labour markets, a shortage of STEM candidates, low unemployment and rising incomes. SThree is the market leader in STEM professional recruitment in the Netherlands and once again our Dutch business delivered an excellent performance, with GP up 20%*.

 

Our performance across Continental Europe improved through the year with GP in the final quarter up +16%* YoY.

 

Strong growth was achieved in Contract across the region with GP up 17%*. Contract in Continental Europe provides a significant growth opportunity and average headcount was up 21% YoY.  The region had an excellent performance in the final quarter with Contract GP up 24%*. The Netherlands Contract business grew GP by 27%* YoY, France by 16%* YoY and Germany by 12%* YoY. We ended 2017 with our Contract runners up 21%, our GP Day Rates ("GPDR") up 1%* and our sales headcount up 26% YoY, providing a strong pipeline for growth in 2018.

 

Permanent declined by 7%*, with average sales headcount down 5% in the year. Average salaries were up 1%* and fees were up 2%*. GP yields declined 2%*, however, improvements were noted in Benelux & France where our Permanent businesses had been restructured in prior years. Period end headcount was up 5% YoY as we invested selectively in opportunities in Germany where SThree is the largest Permanent, professional services recruitment business.

 

We delivered GP growth across every sector in Continental Europe, with double digit growth in Contract across the board. Contract ICT, our largest sector, grew 18%* YoY, Life Sciences 12%*, Engineering 19%* and Banking & Finance 20%*. 

 

We opened new offices in Toulouse, Lyon, Vienna and Barcelona in the year in order to better service our client base.

 

 

 

Expectations for 2018

Continental Europe exited 2017 with a strong pipeline for growth in 2018, focused and capable management and a highly engaged team with the lowest churn in the Group.

 

In line with our Group strategy, we will continue to invest in Contract throughout 2018 where we see market opportunity. Labour laws create momentum for demand in the Contract business and our increased offering of ECM services is expected to help drive further growth. Our ECM offering in Germany has completed a pilot phase successfully with full roll out anticipated in 2018. 

 

This year, we will focus on improving Permanent productivity, with selective headcount investments, especially in Germany.

 

We expect to open new satellite offices in Lille and Eindhoven in 2018. 

 

 

 

 

 

 

 

 

 

UK&I

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
UK&I	FY 17	-11%	-22%	-14%	79%	21%	-10%	-17%	-12%

 

Performance in 2017

The UK&I business, which is 19% of Group GP, experienced a challenging year in 2017, in an environment dominated by further uncertainty. The ongoing 'Brexit' negotiations and the UK's snap general election affected market confidence leading to a decline in both our divisions. Average headcount was down 12% YoY with a decline across both Contract and Permanent. Period end headcount was down 3% YoY.

 

Contract GP in UK&I was down 11%* YoY. The Contract division is more resilient in tough market conditions, but these were exacerbated by pricing pressures and IR35 Intermediaries Regulation in the Public Sector in the year. We have successfully navigated these new regulations, demonstrating our ability to provide a high quality and compliant service. Average headcount was down 10% YoY, however, period end headcount was down 1%. Contract runners closed at 2,616, down 2% with our GPDR down 1%*. However, the Contract business showed signs of improvement with runners and GPDR both growing sequentially in H2.

 

After a significant restructuring of the Permanent business in 2016, we expected GP to be down in the year, but it fell further than anticipated as a result of the continuing political uncertainty through the year and was down 22%* YoY. Average sales headcount was down 17% with period end sales headcount down 9%. Whilst Permanent GP yields were down 6%* YoY, we have been actively working to increase our focus on higher salary placements and our average fees and average salaries were both up 4%* YoY.

 

ICT, which includes Public Sector and represents 58% of GP, declined 18%* YoY, with Contract down 17%* and Permanent down 22%*. Banking & Finance, our second largest market in the region, reported a decline of 22%* YoY. The Banking & Finance sector, which is 14% of UK&I, remains subject to further uncertainty arising from the UK's negotiations with the EU. However, we saw improvements in our Engineering GP which grew 8%*, with growth achieved in all four quarters of the year. Performance in Engineering was driven by Contract up 12%*, in part as the sector benefited from increased demand resulting from the depreciation of sterling. Life Sciences also showed promise with growth from Q2 onwards and FY growth of 3%* YoY.

 

The UK&I business is focussed on maintaining profitability and measures were taken through the year to streamline the business. We rationalised the management structure and increased the relative number of candidate resourcing roles in our Glasgow Resource Centre, which benefits from a lower cost base.

 

Expectations for 2018

In the UK, we enter 2018 against a background of continued uncertainty. Increasing inflation and supressed GDP growth rates for the UK being in the forefront of our minds, we expect to hold UK&I headcount broadly flat this year and to focus on maximising the profitability of the business.

 

We expect to retain a flexible approach to resource allocation to maximise the opportunities available in certain sectors and to adapt to all legislative changes in the region as required, including a proposed expansion of changes to the IR35 Intermediaries Legislation to the private sector in 2019.

 

 

 

USA

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
USA	FY 17	+21%	+12%	+18%	69%	31%	-8%	-9%	-8%

 

Performance in 2017

The USA is now our second largest region, representing 22% of Group GP. USA was our fastest growing region in 2017, with GP up 18%*. Our strong performance in 2017 was across both Contract up 21%* and Permanent up 12%*. This reflected a significant improvement in GP yields, primarily driven by a recovery in the Energy and Banking markets from the weaker conditions experienced in 2016. Average headcount declined by 8% YoY with both Contract and Permanent headcount reducing following a restructuring in 2016 and a pause on recruitment as potential impacts of the US presidential election result were assessed. However, we made significant investment in headcount in the second half of the year. Period end headcount was up 15% YoY with both Contract and Permanent growing sequentially in Q3 and Q4.

 

Contract GP was up 21%* YoY with growth across all quarters. Average headcount declined by 8% and as a result yields were up 31%*. An improved performance in Contract GP was evident across all sectors with our largest sector, Life Sciences, which represents 45% of the division, up 18%* YoY. Energy GP was up 68%* as we expanded our services to key clients. Contract runners were up 14% YoY with GPDR down 3%*, however, GPDR grew sequentially in Q3 and Q4. Average headcount was down 8% YoY, however, period end headcount was up 11% YoY providing a solid platform for growth in 2018.

 

Our Permanent division in the region performed well in the year, with GP up +12%* and excellent yields, up +23%* YoY. Permanent growth was across all sectors, with strong growth in Banking & Finance, up 9%*.  Permanent Life Sciences was up 3%* YoY. Average Permanent fees and average salaries declined YoY, down 7%* and 6%*, respectively, driven by Banking & Finance and Energy. However, Life Sciences, our largest sector in the division, delivered an increase in both average fees and average salaries. Average headcount was down 9% YoY, however with increased business confidence in the region, headcount build resumed in the second half of the year. Period end sales headcount was up 23% YoY.

 

Life Sciences which represents 46% of USA GP, grew 13%* YoY with growth across both Contract and Permanent. Banking & Finance, the second largest sector in the region, grew 2%* YoY with strong performance in Permanent, up 9%* YoY, offset by a decline in Contract, down 6%* YoY. The Energy market in the region showed an encouraging recovery in the year, up 71%* YoY with growth across both Contract and Permanent.

 

Expectations for 2018

With a good exit rate on Contract runners, up 14%, especially in Energy, and excellent permanent yields, we expect to continue our strong growth into 2018. We will continue to invest in headcount in high yielding markets as opportunities are identified. We opened a new office in Washington D.C. in December 2017 to service the needs of our clients in this region.

 

In the USA, we are confident that we have the right team and structure to deliver a high quality service to our clients and continue to penetrate the largest recruitment market in the world.

 

APAC & ME

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
APAC & ME	FY 17	+24%	-22%	-4%	51%	49%	-6%	-17%	-14%

 

Performance in 2017

APAC and Middle East (APAC & ME) is our smallest region representing 7% of Group GP. The business is split into two regions: Australia, Japan, Hong Kong and Singapore (APAC) which represent 5% of Group GP and Dubai (Middle East) which represents 2% of Group GP. The region has struggled since the drop in the oil price in mid-2014.  The upstream Energy business, which historically had been the backbone of the operation, has not recovered due to the relatively high break-even price of oil extraction in the region.  This has been compounded by weak Banking & Finance markets in 2016 and a slow-down in the rate of growth in China, which has impacted much of APAC. In 2017, the region reported an overall GP decline of 4%* YoY. Despite a significant improvement in Contract GP, the Permanent business deteriorated through the year.  Australia, our largest country in the region representing 34% of GP, declined 2%*. In response to the continuing decline in the performance of the region, we announced that the Hong Kong office would be downsized, reducing it to a satellite office. Average headcount for the region was down 11% YoY and period end headcount was down 1% YoY. 

 

Contract GP grew by 24%* YoY, with average headcount down 6% YoY. Energy and Banking & Finance Contract GP were up 22%* and 41%* YoY, respectively. The recovery in Contract was generated from a strong pipeline at the start of the year across the region.  The period end Contract runner book at year end (up 3%) was supported by an increased focus on Contract in the Middle East. GPDR declined 11%* YoY and was down across the region.   Australia, which represents 53% of regional Contract GP, saw good growth of 20%* YoY, driven by ICT and Banking & Finance. However, we note a slowdown in our performance in the ICT market as we exit this year. Dubai, which is our second largest Contract business in the region, saw a significant improvement, with Contract GP ahead by 49%* YoY. The growth in Dubai was largely due to the Energy market, where we focus on large international service companies. Banking in Dubai also showed  modest growth in the year.

 

2017 was a challenging year for Permanent with GP declining 22%* YoY. Average headcount for Permanent was down 17% YoY with yields down 5%*. We increased our focus in the year on the penetration of markets with higher fees and stronger structural growth opportunities, notably Japan, the second largest recruitment market in the world.  Our Japanese Permanent business increased GP by 30%* YoY and now represents 32% of Permanent GP for the region. Average Permanent fees for Japan were up 2%* YoY with average salaries also growing.

 

Banking & Finance, our largest sector for the region, remained relatively flat YoY. Energy saw strong growth, up 10%* YoY, driven by Dubai Contract. Permanent GP was down across all sectors.

 

 

Expectations for 2018

Our Chief Operating Officer ("COO"), Justin Hughes, led APAC & ME from Hong Kong until September 2017 when he returned to London to take on the role of COO full time. Japan and Middle East Contract are being managed for growth, while the rest of the region is being managed to maximise profitability. 

 

 

Sector Overview

On a sector basis, Group GP benefited from a continued recovery in Energy, up 25%*, and solid growth in Life Sciences up 7%*.  After a significant restructuring in 2016, Banking & Finance GP was down 2%* with average headcount down 11% YoY.  ICT and Engineering grew, with GP up 1%* and 5%*, respectively.  ICT suffered from a weak UK&I performance.

 

 

ICT

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
ICT	FY 17	+4%	-6%	+1%	75%	25%	+4%	-10%	-1%

 

ICT, which accounted for 43% of Group GP in 2017, continues to be our largest and most established sector. GP in this sector showed YoY growth for the fifteenth consecutive quarter, and provides opportunities across all regions. We saw modest growth in GP in the year of 1%*, but against a strong comparative in 2016, when GP was up 12%* YoY.  The rate of growth slowed in this sector due to a deterioration in the performance of the UK&I. Although average headcount in this sector was down 1% YoY, period end headcount was up 8%. The mix of headcount shifted further in favour of Contract and Continental Europe.

 

Contract, which was 75% of ICT, was up 4%* YoY. Runners in the sector were up 6% YoY, with GPDR growth of 2%* YoY. Permanent was down 6%* YoY, but saw a growth in average permanent fees, up +2%* YoY and yields increased 4%*.

 

Continental Europe, which constitutes 63% of our ICT business, was up 12%* YoY, against a strong prior year growth of 17%*. Contract GP in this region had an exceptional performance, up 18%* YoY. Permanent, however, remained flat across the region. DACH, which is our largest Permanent ICT business, saw growth of 7%* YoY and will remain a key area of investment in 2018.

 

UK&I, our second largest ICT region remained challenging. ICT in the UK&I includes Public Sector, which was 33% of ICT GP in the region. Public Sector employment reforms and a general slowdown in activity in the UK had an adverse impact which resulted in Contract being down 17%* YoY and Permanent being down 22%* YoY.

 

Our USA business grew 12%* YoY. Although in 2017 USA is a small proportion of our total ICT business, we are confident that our knowledge and expertise in this sector will enable us to maximise the market opportunity in this region, the largest ICT market in the world, over time.

 

 

 

 

 

 

 

 

 

Banking & Finance

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
BANKING & FINANCE	FY 17	+6%	-10%	-2%	55%	45%	-7%	-15%	-11%

 

 

Banking & Finance represented 15% of Group GP in 2017, making it the third largest sector for the Group. We faced mixed trading conditions in this sector across our geographies, with GP declining by 2%* YoY. Average headcount in this sector in the year declined by 11% following a restructuring implemented in 2016 in response to difficult conditions in the global Banking market. Period end headcount was down 5%.

 

Contract, which was 55% of Banking & Finance, is more resilient and has had considerable success, up 6%*, despite a 7% drop in headcount.  Contract GP yields were up 13%*.  Runners at the end of the year were up 8%, with GPDR up 4%* YoY. Permanent GP declined, as expected, following a significant reduction in headcount in 2016. GP was down 10%*, with headcount down 15%. Permanent yields therefore improved 6%*. Average Permanent fees were down by 1%* YoY.

 

Continental Europe, which was our largest region in this sector was up 7%* YoY. The growth was heavily supported by Contract, which was up 20%*, with DACH, Benelux & France all showing good growth. Contract Runners for the region were up 25% YoY, which leaves us with a strong pipeline for 2018. Permanent GP in the region, declined by 9%* YoY and there was a moderate decline in Permanent average fee down 1%* YoY.

 

The UK&I business performance was hampered by uncertainty around the EU referendum leading to cautious hiring decisions. The reduced market confidence was reflected in GP being down 22%*, with Contract GP down 10%* YoY and Permanent GP down 45%*.

 

The USA, which was our second largest Banking & Finance market, saw growth of 2%* YoY, driven mainly from Permanent which was up 9%* YoY. Contract in this region declined 6%* YoY, but was showing signs of improvement as we exited the year. 

 

While the Banking sector has remained subdued over the last few years, we will continue to monitor performance in this sector and invest as opportunities arise. We see a strong opportunity for Contract in Continental Europe and Permanent in the USA.

 

 

 

 

 

Global Energy

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
GLOBAL ENERGY	FY 17	+26%	+15%	+25%	93%	7%	+4%	-19%	+2%

 

Energy now represents 9% of Group GP. Overall conditions in the Oil & Gas market have stabilised this year and this supported strong growth in GP, up 25%* YoY (2016: down 29%* YoY). Although, we have seen growth in this sector in 2017, we remain significantly below our peak performance in 2014. Our average headcount in the sector was up 2%* YoY and with measured investment in Contract through the year in key markets, our period end headcount was up 17% YoY.

 

Contract which is 93% of our Energy GP, was up 26%* YoY, with growth across all our geographies, excluding UK&I. Average Contract headcount was up 4% YoY, with period end headcount up 19%. Contract yields in the sector were up 21%* YoY, while GPDR remained flat* YoY. Contract Runners at the end of the year were up 35%, providing a strong platform for 2018. Permanent, although a small part of Energy GP, was up 15%* YoY, with yields up 43%* and average Permanent fees down 16%* YoY.

 

Continental Europe, which is 41% of Energy GP, was up 11%* YoY, with growth in both the Contract and Permanent divisions, up 11%* and 8%* respectively. The growth in Contract was across all countries in the region, whereas Permanent growth was concentrated on the Netherlands.

 

USA, which accounts for 41% of Energy GP, picked up significant upstream and power business though the year. This lead to GP being up 71%* YoY, with Contract, which is the larger part of Energy USA, up 68%* and Permanent up 117%* YoY.

 

UK&I, which is 6% of Energy GP, declined 22%* YoY. APAC & ME grew 10%* YoY.

 

We have noted significant YoY improvements in both Continental Europe and USA this year in both Contract and Permanent. We will continue to remain agile, but cautious, with our future investments in the Energy sector.

 

Life Sciences

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
LIFE SCIENCES	FY 17	+15%	-4%	+7%	64%	36%	+9%	-3%	+3%

 

We pride ourselves on being one of the largest global professional recruiters in the Life Sciences market, with growth opportunities across all our geographies and both our divisions. Life Sciences is now 22% of Group GP and was up 7%* YoY, with average headcount up 3%.

 

Contract, which represents 64% of Life Sciences GP, was up 15%* YoY, with growth across all geographies. Contract Runners were up 16% YoY, but GPDR declined 5%*. Average headcount was up 9% YoY with our two largest regions, Continental Europe and Americas growing 13% and 8%, respectively. Permanent GP, was down 4%* YoY, with Permanent average fee up 4%* YoY and Permanent yields down 1%* YoY. Permanent average headcount declined 3% YoY, however, period end headcount grew 16%.

 

 

USA, our largest Life Sciences business, which accounts for 48% of GP, grew strongly, up 13%* YoY. The growth was driven by a strong Contract performance, up 18%* YoY, while Permanent grew 3%* YoY. We continue to invest in Life Sciences in the USA, which is a key growth market for the Group, Period end headcount was up 24% YoY.

 

Continental Europe accounts for 38% of Life Sciences GP. GP was up 4%* YoY, against tough comparatives of 13%* in 2016. Contract GP in the region was up 12%* YoY, with excellent growth in Benelux & France, up 59%* YoY. Permanent GP, was down 8%* YoY, against a tough prior year comparative of an increase of 23%* YoY.

 

UK&I, which was 11% of our Life Sciences GP, recorded moderate growth of 3%*. The growth was driven by Contract, which grew +8%* YoY, while Permanent declined by 7%* YoY.

 

 

Engineering

 

		GP					Average Sales Headcount
		Growth YoY*			FY 2017 Mix		Growth YoY
		Cont	Perm	Total	Cont	Perm	Cont	Perm	Total
ENGINEERING	FY 17	+17%	-18%	+5%	72%	28%	+21%	-11%	+7%

Engineering, which was 9% of our Group GP, is primarily focused on Continental Europe and UK&I. USA Permanent, a fairly new addition to our Engineering portfolio, has had some initial success, with GP quadrupling YoY. Our average headcount in this sector was up 7% YoY, with most of the headcount increase in Contract. Period end sales headcount was up 26% YoY. We expect further opportunities in this sector as we enter 2018.

 

Contract, which represents 72% of Engineering GP, was up 17%* YoY with growth in both UK&I and Continental Europe. Contract Runners are up 17% YoY with GPDR being flat*. In comparison, Permanent GP was weaker, down 18%* YoY, with only USA seeing significant growth. Permanent average fees and yields in the sector declined 2%* and 8%*, respectively.

 

Continental Europe, which represents 71% of Engineering GP, was up 2%* YoY with Contract up 19%*, offset by a decline in Permanent down 25%* YoY. Contract Runners at year end were up 25%, providing a strong pipeline for growth as we enter 2018.

 

Engineering in the UK&I was up 8%* YoY, with Contract up 12%* and Permanent down 5%* YoY.

 

 

OUTLOOK

 

Looking ahead to 2018, the momentum of our Contract business and the strength of our performances in the USA and Continental Europe leave us well-positioned for further growth.

 

We have been encouraged by our performance in 2017, particularly in the last quarter, which has provided us with a strong platform to deliver further growth in the coming year. We will continue to focus our headcount investment to maximise our returns and to pay close attention to productivity in Permanent and in the UK&I. The benefit of the restructuring and relocation of our support service function in the UK is expected to be fully realised during 2019.

 

Our focus on customers, services and our people, underpinned by investment in technology and innovation, gives us confidence that we are set up for success as we continue on our journey to become the number one STEM talent provider in our markets.

 

*In constant currency

 

CHIEF FINANCIAL OFFICER'S REVIEW 

 

In 2017, we delivered a robust financial performance ahead of market expectations. Our improved operational performance was further supported by currency appreciation against the pound, which enhanced growth in our Revenue, Gross Profit and Profit Before Tax.

 

Income statement

Revenue for the year was up 9% on a constant currency basis to £1.1 billion (2016: £959.9 million) and up 16% on a reported basis. On a constant currency basis, Gross Profit ('GP') increased by 4%, and on a reported basis by 11% to £287.7 million (2016: £258.7 million) supported by foreign exchange tailwinds of c.£18.1 million. Growth in revenue exceeded the growth in GP as the business continued to remix towards Contract. Contract represented 71% of the Group GP in the year (2016: 67%). This change in mix resulted in a decrease in the overall GP margin to 25.8% (2016: 26.9%) as Permanent revenue has no cost of sale, whereas the cost of paying the contractor is deducted to derive Contract GP. The Contract margin remained robust at 19.8% (2016: 19.9%).

Reported profit before tax was broadly flat at £37.7 million. Restructuring costs have been incurred in the current and prior year. We have reported certain KPIs on an "Adjusted" basis to provide a more like-for-like view of performance. Adjusted profit before tax was up 9% at £44.5 million (2016: £40.8 million) supported by foreign exchange tailwinds of c.£5.0 million. On a constant currency basis, our adjusted profit before tax was down 3%. This is reflected in a decline in our operating profit conversion ratio of 0.4 percentage points to 15.6% (2016: 16.0%). Our operating performance in the period has been strong with increased sales team yields driving our GP growth, but our cost base has increased as we invest in innovation, to secure the future of our business, and incurred other non-exceptional restructuring costs in the year.

 

Restructuring costs ('Adjusting items')

On 1 November 2017, as part of a strategic reassessment of our UK operations, we announced that we were commencing a consultation with employees on the proposed relocation of support functions away from our London headquarters to a new facility located in Glasgow, along with a restructuring of the marketing department. The purpose of this strategic restructuring is to realise cost savings of approximately £4 million - £5 million per annum.

The restructuring is expected to result in certain material one-off costs totalling approximately £14 million to £16 million, of which an estimated £15 million is operating expenses and approximately £0.5 million is property fit out costs (to be capitalised), less approximately £2 million of grants receivable from Scottish Enterprise. The costs are mainly related to people, property and professional advisor fees.

Exceptional costs of £6.7 million have been recognised and separately disclosed in the Income Statement in 2017, including £1.1 million of restructuring costs incurred or accrued, mainly for professional fees, and £5.6 million as a provision for redundancy costs. The additional exceptional cost to set up a centre of excellence in Glasgow in 2018 is expected to be between £8 million and £9 million, with a grant of up to approximately £2 million potentially receivable over several years.

In the prior year, we carried out a restructuring of certain sales businesses and central support functions in response to the adverse market conditions in certain sectors and regions. These actions resulted in one-off redundancy costs of £3.5 million. 

Due to their nature and magnitude, the restructuring costs in the 2017 and 2016 financial years have been separately highlighted to help readers understand the Group's underlying results for the year ('Adjusted'). The Group's adjusted profit KPIs for the year are presented in various sections of this Annual Report. The strategic nature and material cost of the restructuring of support functions announced in 2017 is of sufficient magnitude to warrant separate disclosure as an exceptional item on the face of the Consolidated Income Statement, in line with our accounting policy.

 

A reconciliation of 'Adjusting items' is provided below:

 

(1) 2016 figures were adjusted for the restructuring of certain sales businesses and central support functions.

 

Operating costs

Adjusted operating costs, excluding one-off restructuring costs of £6.7 million (2016: £3.5 million), increased by 12% to £242.8 million (2016: £217.4 million). The increase was mainly driven by an adverse foreign exchange impact of c.£13 million, focused expenditure on innovation (c.£2 million), management delayering (c.£1.2 million) and a restructure of our Hong Kong business (c.£0.4 million).   

Payroll costs represent 79% of our cost base. Average total headcount was flat at 2,668, with total sales headcount down 1%. The drop in average sales headcount is attributable to a restructuring of our Permanent business, in which headcount was significantly reduced in the second half of 2016 in response to market conditions. Selective headcount build continued throughout 2017. Improvements in consultant productivity and the strength of market activity provided management with the confidence to invest in headcount in the USA and Continental Europe in the second half of the year. Year-end headcount was up 11% at 2,866.

Year-end sales headcount represented 79% of the total Group headcount.

The full benefits of the restructure of our UK Support function on personnel and property costs are expected to be realised from the financial year 2019 onwards.

 

Investments

During the year, we invested in a number of innovation start-ups (£1.2 million), created our own innovation incubator (c.£2 million) and invested in new technology to serve the needs of our customers (£3.4 million, of which £1.9 million in the year was spent on developing a new contract management system and a contractor timesheet application).

Our most significant investment in innovation start-ups was a 30% non-controlling interest in the share capital of HRecTech Sandpit Limited ('HRecTech') for a total consideration of £0.8 million. The Sandpit Limited is a privately owned group that specialises in developing early stage start-up companies within defined markets.

We continued to support Ryalto in which we have an 18% investment, purchasing convertible bonds for a total consideration of $0.5 million (£0.4 million) in October 2017.

The bulk of our investment in our own innovation incubator was focused on Talent Deck, a recruitment platform focused on cultural fit and automated matching that is now in the initial stages of its roll-out. We expect to increase the amount spent on the creation of innovative products to c.£3 million in the current financial year.

We expect to reduce our investment in non-innovation technology spend in the current financial year as we relocate our IT function.

Impairment of investment in subsidiaries (Company only)

During the year, we reviewed the recoverable amount of the Company's own portfolio of investments, including SThree UK Holdings, which in turn owns SThree Partnership LLP, and determined that an impairment loss of £88 million needs to be recognised due to the significant downturn in the trading performance and prospects of the UK business. This was the result of several factors, including: the unfavourable impact of the ongoing political uncertainties following the EU referendum on trading in the Permanent division and Banking sector; changes in working practices in the Public Sector, namely IR35 and framework agreements, and reduced margins impacting the profitability of the UK region.  After booking this impairment, the distributable retained earnings were £179.9 million (£2016: £267.3 million).

Taxation

The tax charge on pre-exceptional statutory profit before tax for the year was £11.4 million (2016: £10.1 million), representing an effective tax rate ('ETR') of 25.6% (2016: 27.0%). The ETR on post-exceptional statutory profit before tax was 26.7% (2016: 27.0%).

The ETR primarily reflects our geographical mix of profits and a cautious approach to recognising assets on tax losses. The ETR will also be influenced by any changes to tax rates and legislation, which may result in certain expenses not allowable for tax, non-taxable income or enhanced tax deductions such as research and development tax credits.

US Tax Reform legislation passed on 20 December 2017 sees the reduction in the federal corporate tax rate from 35% to 21%. This will have an overall positive impact on our business with an estimated annual tax saving of £1 million at current levels of profitability. This is a non-adjusting post balance sheet event. The full benefit of this will largely be offset in the first year by the reduction in the deferred tax asset.

Other regulatory changes which may impact the group in future years include:

(i)        The extent to which the OECD member countries continue to implement changes to domestic legislation as a result of recommendations from the Base Erosion and Profit Shifting project.

(ii)       The October 2017 announcement of the European Union Competition Commissioner's State Aid investigation into the UK's Controlled Foreign Company legislation.

We will continue to monitor and assess the impact of any changes as they are implemented.

Earnings per share ('EPS')

On an adjusted basis, EPS was up by 2.5 pence at 25.7 pence (2016: adjusted 23.2 pence), due to an increase in the adjusted profit before tax and a drop in the effective tax rate. On a reported basis, EPS remained broadly flat at 21.5 pence, up 0.3 pence on the prior year (2016: 21.2 pence), attributable mainly to an increase in restructuring costs as explained above. The weighted average number of shares used for basic EPS remained stable at 128.6 million (2016: 128.3 million). Reported diluted EPS was 20.8 pence (2016: 20.6 pence), up 0.2 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

In line with the Group's strategy to operate a policy of financing the activities and development of the Group from retained earnings and to maintain a strong balance sheet position, the Board has proposed a maintained final dividend of 9.3 pence per share (2016: 9.3 pence). Taken together with the interim dividend of 4.7 pence per share (2016: 4.7 pence), this brings the total dividend for the year to 14.0 pence per share (2016: 14.0 pence). This represents a dividend yield of 4% based on the average share price for the year (2016: 5%). The final dividend, which amounts to c.£12.1 million, will be subject to shareholder approval at the 2018 Annual General Meeting. It will be paid on 8 June 2018 to shareholders on the register on 27 April 2018.

Share options and tracker share arrangements

We recognised a share-based payment charge of £3.3 million during the year (2016: £2.9 million) for the Group's various share-based incentive schemes. The greater charge in 2017 is primarily due to an increase in the number of participants in the 2017 Long Term Incentive Plan ('LTIP'), and an improvement in regional performance metrics for legacy LTIPs.

We also operate a tracker share model to help retain and motivate our entrepreneurial management within the business. The programme gives our most senior front office sales colleagues a chance to invest in a business they manage, with the support and economies of scale that the Group can offer them. In 2017, 38 employees invested an equivalent of £0.4 million in 15 Group businesses.

We settled certain vested tracker shares during the year for a total consideration of £3.2 million (2016: £4.6 million) which was determined using a formula in the Articles of Association underpinning the tracker share businesses. We settled the consideration in SThree plc shares either by issuing new shares (393,910 new shares were issued on settlement of vested tracker shares in 2017) or treasury shares (in total 647,507 were used in settlement of vested tracker shares in 2017). Consequently, the arrangement is deemed to be an equity-settled share-based payment arrangement under IFRS 2 'Share-based payments'. There is no charge to the income statement as initially the tracker shareholders subscribed to the tracker shares at their fair value. We expect future tracker share settlements to be between £5 million to £15 million per annum. These settlements will either dilute the earnings of SThree plc's existing ordinary shareholders if funded by new issue of shares or will result in a cash outflow if funded via treasury shares.

Note 1 to the financial statements provides further details about all Group-wide discretionary share plans, including the tracker share arrangements.

Balance sheet

At 30 November 2017, the Group's net assets increased to £80.7 million (2016: £75.7 million), mainly due to the excess of net profit over the dividend payments and share buy backs during the year supported by a strengthening of the Euro vs Sterling. 

The most significant item in our statement of financial position is trade receivables (including accrued income) which increased to £217.7 million (2016: £182.6 million), with £2.3 million of the increase due to a favourable change in foreign exchange rate. Other drivers of an increase in receivables are a three day increase in Days Sales Outstanding to 40.6 days (2016: 37.5 days) and a 14% increase in Contract GP in Q4 year-on-year. Trade and other payables increased from £138.9 million to £159.6 million, with £2.2 million due to movements in foreign exchange rates and the remainder primarily due to an increase in Contract GP.  Creditor days were 18 days (2016: 19 days). Provisions increased by £8.7 million primarily due to a £6.7 million increase in restructuring provisions, including a provision for the relocation of central support functions from London to Glasgow (£5.6 million).

 

Cash Flow

On an adjusted basis, we generated lower cash from operations of £41.1 million (2016: £46.9 million on an adjusted basis) due to continued growth of the contract runner book increasing our working capital and an increase in Days Sales Outstanding. This resulted in a lower cash conversion ratio of 78.6% (2016: 96%) on an adjusted basis or 90.2% (2016: 95.0%) on a reported basis.

Capital expenditure reduced to £5.8 million (2016: £7.2 million), of which 33% was related to investments in innovative technology to improve our customer experience. We expect capital expenditure will further decline in 2018. Investments in associates and available for sale assets of £1.2 million (2016: £0.7 million) were made in the year.

During the year, SThree plc bought back shares amounting to £7.8 million (2016: £6.8 million) to satisfy employee share schemes in future periods. Small cash inflows were generated from share based payment schemes.

Income tax payments increased to £10.9 million (2016: £8.5 million). The figures shown for 2016 reflected a lower than usual outflow due to advanced tax payments made in 2015. Small cash outflows were made for interest payments.

Dividend payments were £18.0 million (2016: £18.0 million) and there was a small cash outflow representing distributions to tracker shareholders.

We started the year with the net cash of £10.0 million and closed the financial year with a lower but solid net cash balance of £5.6 million. The year-on-year decrease primarily reflected increased cash absorbed in working capital.

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. In general, we do not keep excess cash in any of the countries in which we operate. We have central cash pooling facilities in place for Euros and US Dollars.

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 for general corporate purposes. We also have a separate £5 million overdraft facility with RBS. At the year end the Group had drawn down £12 million (2016: £nil) on these facilities.

The RCF is subject to financial covenants whereby we need to maintain a ratio of net debt to adjusted EBITDA of 2.0 times or lower, and maintain interest cover of at least 1.2. In 2017, we ended the year with significant headroom on our covenants, with a net cash balance of £5.6 million and interest cover (including dividends) of 3:1. The funds borrowed under this facility bear interest at an annual rate of 1.3% above 3 month LIBOR giving an average interest rate of 1.5% during the year (2016: 1.8%). The finance costs for the year amounted to £0.4 million (2016: £0.5 million). The RCF expires in May 2019 and we will renew the facility in the first half of 2018.

The Group's UK-based treasury function manages the Group's treasury risks in accordance with policies and procedures set by the Board, and is responsible for day-to-day cash management; the arrangement of external borrowing facilities; the investment of surplus funds; and the management of the Group's interest rate and foreign exchange risks. The treasury function does not engage in speculative transactions or operate as a profit centre.

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 2017, movements in exchange rates between Sterling and the Euro and the US Dollar provided a strong tailwind to the reported performance of the Group with the highest impact coming from Eurozone countries. Over the course of the year, the exchange rate movements increased our reported 2017 GP and operating profit by c.£18.1 million and £5.0 million, respectively. Our financial performance KPIs remain materially sensitive to exchange rate movements. By way of illustration, each one percent movement in annual exchange rates of the Euro and the US Dollar against Sterling impacted our 2017 GP by £1.5 million and £0.6 million, respectively, and operating profit by £0.5 million and £0.2 million, 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 section of the Annual Report.

 

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 in constant currency

 

 

 

 

 

 

 

 

 

 

SThree plc

Notes to the financial statements

For the year ended 30 November 2017

 

 

1.        Basis of preparation

 

The financial information in this preliminary announcement has been extracted from the Group audited financial statements for the year ended 30 November 2017 and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group financial statements and this preliminary announcement were approved by the Board of Directors on 29 January 2018.

 

The auditors have reported on the Group's financial statements for the years ended 30 November 2017 and 30 November 2016 under s495 of the Companies Act 2006. The auditors' reports are unqualified and do not contain a statement under section 498(2) or (3) of the Companies Act 2006. The Group's statutory financial statements for the year ended 30 November 2016 have been filed with the Registrar of Companies and those for the year ended 30 November 2017 will be filed following the Company's Annual General Meeting.

 

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') and IFRS Interpretations Committee ('IFRS IC') as adopted and endorsed by the European Union and have been prepared under the historical cost convention with the exception of certain financial instruments classified as available for sale.

 

The same accounting policies, presentation and computation methods are followed in this preliminary announcement as in the preparation of the Group financial statements. The accounting policies have been applied consistently by the Group.

 

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance, its financial position, cash flows, liquidity position and borrowing facilities are described in the strategic section of the Annual Report. In addition, notes to the Group financial statements include details of the Group's treasury activities, funding arrangements and objectives, policies and procedures for managing various risks including liquidity, capital management and credit risks.

 

The Directors have considered the Group's forecasts, including taking account of reasonably possible changes in trading performance, and the Group's available banking facilities. Based on this review and after making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt a going concern basis in preparing these financial statements and this preliminary announcement.

 

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 Group Management Board ('GMB') made up of the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Chief People Officer and the Chief Sales Officer, with other senior management attending via invitation. Operating segments have been identified based on reports reviewed by the GMB, 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 to the Group financial statements in the summary of significant accounting policies.

 

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 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.  

    

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:                                                       

 

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.                                                                                   

 

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

 

Other includes Procurement & Supply Chain and Sales & Marketing.

 

 

3.        Administrative expenses - Exceptional items

 

On 1 November 2017, the Group communicated to the market that it was commencing a consultation with employees on the proposed relocation of central support functions away from its London headquarters to a new facility located within Glasgow and a restructuring of the marketing department. The purpose of this strategic restructuring is to realise annualised cost savings of approximately £4.0 million per annum.

The restructuring is expected to result in certain material one-off costs totalling approximately £14 million to £16 million, of which an estimated £15 million is operating expenses and approximately £0.5 million is property fit out costs (to be capitalised), less approximately £2 million of grant receivable from Scottish Enterprise. The costs are mainly related to people, property and professional advisor fees.

 

In 2017, restructuring costs of £6.7 million have been charged to the Consolidated Income Statement, including £1.1 million of restructuring costs incurred or accrued, mainly for professional advisor fees, and £5.6 million as a provision for redundancy costs. 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 year end have not been included within the 2017 restructuring provision and will be recognised each year up to 2020.

 

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. Disclosure of items as exceptional, highlights them and provides a clearer, comparable view of underlying earnings.

 

Items classified as exceptional were as follows:

 

 

 

 

4.        Operating profit

 

Operating profit is stated after charging/(crediting):

 (1) The accumulated foreign exchange net loss reclassified from Currency Translation Reserve to the Consolidated Income Statement on liquidation of subsidiary companies.

 

 

 

 

 

 

 

 

 

5.        Taxation

 

(a)   Analysis of tax charge for the year

 

 

 

 

 

(b)   Reconciliation of the effective tax rate

 

The Group's tax charge for the year exceeds (2016: exceeds) the UK statutory rate and can be reconciled as follows:

 

 

 

 

 

 

 

 

(c)   Current and deferred tax movement recognised directly in equity

 

 

The Group expects to receive additional tax deductions in respect of share options currently unexercised. Under IFRS the Group is required to provide for deferred tax on all unexercised share options. Where the amount of the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates not only to remuneration expense but also to an equity item. In this situation, the excess of the current or deferred tax should be recognised in equity. At 30 November 2017 a deferred tax asset of £1.0 million (2016: £0.6 million) has been recognised in respect of these options.

 

 

6.        Dividends

 

 

 

(i)                    2016 interim dividend of 4.7 pence (2015: 4.7 pence) per share was paid on 9 December 2016 to shareholders on record at 4 November 2016.

(ii)                   2016 final dividend of 9.3 pence (2015: 9.3 pence) per share, was paid on 9 June 2017 to shareholders on record at 5 May 2017.

(iii)                 2017 interim dividend of 4.7 pence (2015: 4.7 pence) per share was paid on 8 December 2017 to shareholders on record at 3 November 2017.

(iv)                 The Board has proposed a 2017 final dividend of 9.3 pence (2016: 9.3 pence) per share, to be paid on 8 June 2018 to shareholders on record at 27 April 2018. This proposed final dividend is subject to approval by shareholders at the Company's next Annual General Meeting on 26 April 2018, and therefore, has not been included as a liability in these financial statements.                                                                                                               

7.        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 year excluding shares held as treasury shares and those held in the EBT 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.                                                                                                                                                                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.        Cash and cash equivalents

 

 

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 with legally enforceable rights to set-off cash and overdraft balances. Where there is an intention to settle on a net basis, cash and overdraft balances relating to the cash pooling arrangements are reported on a net basis in the statement of financial position. Other bank overdrafts are shown separately as above and in the statement of financial position.

 

 

 

 

9.        Borrowings  

 

The Group has a committed RCF of £50 million along with an uncommitted £20 million accordion feature in place with HSBC and Citibank, giving the Group an option to increase its total borrowings under the facility up to £70 million. The RCF expires in May 2019. The funds borrowed under the facility bear interest at an annual rate of 1.3% (2016: 1.3%) above 3 month LIBOR. The average interest rate paid on the RCF during the year was 1.5% (2016: 1.8%). The Group also has an uncommitted £5 million overdraft facility with RBS.

 

At the year end the Group had drawn down £12 million (2016: £nil) 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 Group has been in compliance with these covenants throughout the year.

 

 

 

10.     Annual Report and Annual General Meeting

 

The 2017 Annual Report and Notice of 2017 Annual General Meeting will be posted to shareholders shortly. Copies will be available on the Company's website www.sthree.com or from the Company Secretary, 8th Floor, City Place House, 55 Basinghall Street, London, EC2V 5DX. The Annual General Meeting of SThree plc is to be held on 26 April 2018.