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SThree PLC Interim / Quarterly Report 2019
4842_ir_2019-05-31_10329aeb-54d5-4491-bc4b-4dc413b2f6fd.pdf
Interim / Quarterly Report
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Building the future
Interim Report and Accounts 2019
SThree plc
("SThree" or the "Group")
INTERIM RESULTS FOR THE HALF YEAR ENDED 31 MAY 2019
Encouraging first half performance
FINANCIAL HIGHLIGHTS
| HY 2019 | HY 2018 | Variance | ||||
|---|---|---|---|---|---|---|
| Adjusted (1) | Reported | Adjusted (2) | Reported | Movement (3) | Constant Currency Movement (4) |
|
| £m | £m | £m | £m | % | % | |
| Revenue | 653.3 | 653.3 | 585.9 | 585.9 | +12% | +10% |
| Contract net fees (5) | 121.1 | 121.1 | 106.7 | 106.7 | +13% | +12% |
| Permanent net fees | 41.9 | 41.9 | 41.7 | 41.7 | - | -1% |
| Net fees | 163.0 | 163.0 | 148.4 | 148.4 | +10% | +9% |
| Operating profit | 24.6 | 23.3 | 20.4 | 18.0 | +21% | +18% |
| OP Conversion ratio (%) | 15.1% | 14.3% | 13.7% | 12.1% | +1.4%pts | +1.2%pts |
| Profit before taxation | 24.0 | 22.7 | 20.3 | 17.8 | +18% | +16% |
| Basic earnings per share | 13.5p | 12.7p | 11.6p | 10.1p | +16% | +14% |
| Interim dividend per share | 5.1p | 5.1p | 4.7p | 4.7p | +0.4p | - |
| Net debt (6) | (8.0) | (8.0) | (6.2) | (6.2) | - | - |
(1) HY 2019 figures exclude the impact of £1.3 million in net exceptional strategic restructuring costs and Senior Management change costs
(2) HY 2018 figures exclude the impact of £2.4 million in exceptional strategic restructuring costs
(3) Variance compares adjusted HY 2019 against adjusted HY 2018 to provide a like-for-like view
(4) Variance compares adjusted HY 2019 against adjusted HY 2018 on a constant currency basis, whereby the prior financial year foreign exchange rates are applied to current financial year results to remove the impact of exchange rate fluctuations
(5) Net fees were previously referred to as gross profit
(6) Net debt represents cash & cash equivalents less borrowings and bank overdrafts
OPERATIONAL HIGHLIGHTS
- Double digit grow th in net fees across three of the Group's four regions, driving profitability
- Adjusted profit before tax up 18% YoY to £24.0 million (HY 2018: £20.3 million)
- Reported profit before tax up 27% YoY to £22.7 million (HY 2018: £17.8 million)
- 86% of net fees generated from our international business (HY 2018: 82%)
- Strategic focus on Contract continuing to drive grow th
- Contract represented 74% of Group net fees (HY 2018: 72%)
- Contract ahead by 12%* YoY, w ith strong grow th across Energy, Engineering and Technology
- Permanent net fees dow n 1%* YoY, w ith good grow th in DACH (Germany, Austria & Sw itzerland) and Japan offset by declines in UK&I and USA
- Investment in the Group delivering returns
- Group period-end sales headcount up 12% YoY. Average sales headcount up 7% YoY
- The expected benefits are being realised from the successful restructure and relocation of the majority of our London-based support functions to Glasgow
- Interim dividend of 5.1p up 0.4p (HY 2018: 4.7p)
* Variances are held in constant currency
Mark Dorman, CEO, commented: "This set of results, the first since I joined the Group, demonstrates that our strategy is putting SThree ahead of the field. The engine room of our grow th has continued to be the key strategic focus areas of our business - progress w ithin the key STEM markets, particularly the USA and Continental Europe, as w ell as an increased Contract w eighting.
"Alongside our teams having capitalised on these major structural trends, it has been pleasing to note a number of other highlights for the Group. Our small but rapidly grow ing Permanent business in Japan, the strong performance for Energy in the US driven by trends to renew able energy and pow er transmission, and the strengthening of our market leading position in Life Sciences, w here w e continue to benefit from the emergence of new sector technology and data analytics.
"To build on this grow th, w e are continuing to strategically invest in the areas of the business w hich present the greatest opportunity, consistent w ith our vision to be the number one STEM talent provider in the best STEM markets. With the scale of the opportunity available to us, w e look forw ard to continuing to execute in the period ahead.
"Notw ithstanding the macro-economic backdrop in certain regions, the Group remains w ell positioned as w e enter the second half, and the Board's expectations for the full year remain unchanged."
SThree w ill host a presentation and conference call for analysts at 0930 GMT today. The conference call participant telephone details are as follow s:
Dial in: 0800 358 9473 Call passcode: 35582282#
This event w ill also be simultaneously audio w ebcast, at https://plcwebcast.uk/sthreeh1july19. Please note that this is a listen only facility. An archive of the presentation w ill be available via the same link follow ing the event.
A video overview of the results from the CEO, Mark Dorman, and CFO, Alex Smith, is available to w atch here: http://bit.ly/STHRh1interview.
SThree w ill issue its Q3 trading update on 13 September 2019.
Enquiries:
SThree plc 020 7268 6000 Mark Dorman, Chief Executive Officer Alex Smith, Chief Financial Officer Kirsty Mulholland, Company Secretariat
Alma PR 020 3405 0205 Rebecca Sanders-Hew ett [email protected] Hilary Buchanan
Notes to editors
SThree is a leading international STEM (Science, Technology, Engineering and Mathematics) recruitment company. It brings skilled people together to build the future through the provision of specialist Contract and Permanent services to a diverse client base of over 9,000 clients. From its w ell-established position as a major player in the Technology 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 grow th opportunities. SThree brands include Progressive, Computer Futures, Huxley Associates and Real Staffing Group. The Group has circa 3,100 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 USA 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.
INTERIM MANAGEMENT REPORT
CHIEF EXECUTIVE OFFICER'S REVIEW
Introduction
At this, my first set of interim results as CEO of SThree, I am pleased to say that my time w ith the business so far has reinforced my confidence in the three core strengths of SThree that initially attracted me to the Group; our purpose, the strong structural grow th drivers in our markets, and the high quality of our people.
The clear benefits of our model and the structural grow th drivers in our markets have shaped the encouraging results w e are reporting today. It is a great demonstration that the Group's focus on STEM and Contract is delivering effectively. Particular highlights include Group net fees up 9%* year on year, double-digit grow th across three of our four regions, and Contract, our strategic focus, delivering 12%* grow th in the first half and now representing 74% of Group net fees.
Our purpose
Our purpose is central to everything w e do as a business and is w hy w e exist, "to bring skilled people together to build the future". Our w ork is aimed at changing people's lives for the better and this is something that motivates my colleagues and I on a daily basis. As market trends shift and STEM skills become ever more prevalent, w e are helping build communities of talent and future-proof people's careers w hile providing our customers w ith their most valuable asset.
Market drivers
I have spent my time since March immersing myself in the business and it is apparent that w e are a truly unique recruitment business, w orking in high grow th markets w ith long-term structural drivers of grow th. The scale of opportunity in STEM globally is enormous, w ith the fourth industrial revolution fuelling an ever-increasing demand for STEM w orkers across all verticals. In the USA, according to the US Bureau of Labor Statistics, all STEM occupations are projected to grow by 10.8% betw een 2016 and 2026 (compared to projected grow th of 7.2% for non-STEM occupations). A recent survey of 25,000 businesses in Germany by The Association of German Chambers of Commerce and Industry cited the shortage of skilled w orkers as their greatest risk, w hile a study by Bertelsmann predicts that the demand for STEM experts in Germany w ill grow by 1.4 million by 2035.
Alongside this, the w ay w e w ork is structurally shifting, w ith the 'gig' economy, f lexible w ays of w orking, and the changing role of contractors becoming increasingly important. This is closely tied into highly skilled roles, w hich underpin the STEM markets.
Within our verticals, the thematic trends w e all read about – renew able energies, genetic editing, Artificial Intelligence ("AI"), cyber security, the Internet of Things ("IoT") – are examples of the key societal movements driving grow th across our diversified portfolio of sectors. For their implementation, these trends all require people that are hard to find, have specialist skills, or are brand new roles that w ere not in existence previously. In times like this, there is even more value in our niche market approach and know ledge base.
2019 has seen us continue to focus on the value w e provide to our customers in terms of providing specialist support, a key competitive advantage and a significant barrier to entry for the Group. As an example, in the UK w e have actively shared our know ledge on IR35 reform as our stakeholders w ithin the private sector gear up for the tax changes in April. Doing nothing is not an option for organisations that rely upon flexible w orkers and as the leading provider of specialist STEM talent, w e have provided support and material to help our contractors and clients understand how to remain both compliant and commercially attractive. Further to this, w e have actively fed into the ongoing UK Government Consultation.
Our People
We believe people are the most important asset to any business. SThree is no different and investing in our teams is critical in delivering our grow th plans. We increased average Group sales headcount in the period, predominantly in Contract, in line w ith our strategic focus. Our people are high performing and driven, and I w ould like to take this opportunity to thank them for their hard w ork and passion throughout the period.
For the second year in a row , the German SThree team w as aw arded the 'Top Employer' certification in the overall midsized employers' category by the Top Employers Institute. This marks SThree being named amongst Germany's top midsized employers for the sixth consecutive year in a row , w hich show s how well our ow n people rate our unique offering w hen it comes to excellent w orking conditions and talent strategy.
Testament to the strength of delivery across the business is our excellent Net Promoter Score ("NPS"), from both clients and candidates, w hich since the year-end has increased from 42 to 46, and show s our customers' w illingness to recommend our services to others. It is clear that both clients and candidates value our teams' ability to understand the specialty of the roles w e w ork to fill and also the specialist expertise our teams have – how to deliver the right result w ithin a given process.
Investing for the future
Building for the future is important to us, and w e are investing in the areas that w ill drive grow th.
A key strategic focus is our investment in technology to help drive both grow th and efficiencies; w e believe our ability to harness actionable data insights and use of technology w ill continue to be a competitive differentiator going forw ard. Part of our strategy involves our ongoing investment in data to allow us to further analyse not just current but emerging trends, giving us unique insights into our markets and helping us to identify the best current and future business opportunities. In addition, w e are investing in solutions and technologies, w hich make our offer both more compelling and more efficient – for SThree, for our customers and for candidates. We w ill continue to review w hich investments are likely to deliver the right returns w ithin our buy/build/rent structure.
We w ill also continue to invest in our people and infrastructure, realising benefits for the Group. An example of this is our relocation to Glasgow and the creation of a Centre of Excellence, w hich is already delivering the benefits that w e w ere expecting; w e w ill continue to invest in this Centre to improve efficiency throughout the business.
Regional performance
Our diversity across geographies and STEM sectors provides grow th and resilience for the Group; the Group now derives 86% of its revenue from our international business. Our largest region, Continental Europe, continued to grow w ell, alongside USA. Both of these regions have benefitted not only from capitalising on the w ealth of opportunity available in their markets brought about by grow ing demand, but also from the strong delivery from our teams and strategic initiatives that have been put in place.
We have identified and focused on those areas of the business that need refinement. For example, in the UK, w e are spending time driving and resourcing the specific areas of skills and industry sectors w here w e have the opportunity to get the best returns. We are in the process of capitalising on the insight w e have into the market dynamics and focusing on allocating resources accordingly. Whilst these areas are a w ork in progress, w e are confident in the ability of our teams to deliver grow th. Ultimately, our focus is on execution across the business, based on informed and data-driven detail. We have plans in place to drive grow th across all areas of the Group.
Outlook
Overall, w e are pleased w ith trading in the first half of the year, driven by our strategy to focus on STEM and Contract, our global market exposure and the entrepreneurial spirit of our dedicated colleagues. We w ill be building on this strategy, driving execution through detailed operational plans, in the period ahead. Notw ithstanding the macro-economic backdrop of certain regions, the Group remains w ell positioned for the second half, and the Board's expectations for the full year remain unchanged.
HY 2019 GROUP TRADING PERFORMANCE
Overview
We are encouraged by our first half performance w ith net fees up 9%*, and strong grow th achieved in Q2, also up 9%* YoY. The grow ing breadth and scale of our international operations, w hich now account for 86% of net fees, underline how far the Group has grow n from its UK roots. Whilst broader market conditions are w eakening in some parts of Continental Europe, the STEM markets remain buoyant and w e are confident w e can maximise our opportunities w ith selective headcount grow th. The USA, our second largest market, continues to be robust. We are actively managing our business in the UK, w here broader macro pressures remain significant.
Our strategic focus on Contract continues to deliver good grow th across our key sectors and regions, as w ell as providing greater resilience in more uncertain economic conditions. Contract net fees w ere up 12%* in H1 YoY and up 13%* in Q2, w ith Continental Europe, USA and Asia Pacific & Middle East ('APAC & ME') delivering double digit grow th. Our focus in H2 is to prioritise investment in Contract in our fastest grow ing markets.
Permanent net fees w ere dow n 1%* in H1 YoY and dow n 2%* in Q2, driven by declines in UK&I and USA, both reflecting previous strategic decisions w hich w e anticipate w ill drive positive change going forw ards. We saw strong grow th in DACH and our small, fast-grow ing business in Japan.
Adjusted Operating Profit w as up 18%* YoY and w e are w ell positioned for the second half as our investment in headcount continues to mature and w e benefit from a strong Contractor book.
The expected benefits are being realised from the successful restructure and relocation of the majority of our London-based support functions to Glasgow .
Our investment in headcount, the quality of our management and increasing expertise in our niche markets alongside the strategic relocation and restructure of our support functions are all driving us forw ard 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 grow th strategy outlined at the Capital Markets Day in November 2017.
Group
| Net fees | Average Sales Headcount | |||||||
|---|---|---|---|---|---|---|---|---|
| Growth* YoY | HY 2019 Mix | Growth YoY | ||||||
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +12% | +1% | +9% | +8% | -4% | +4% | ||
| Q2 19 | +13% | -2% | +9% | +13% | +5% | +10% | ||
| HY 19 | +12% | -1% | +9% | 74% | 26% | +11% | - | +7% |
* Variances are held in constant currency
| Breakdown of net fees | HY 2019 | HY 2018 | FY 2018 |
|---|---|---|---|
| Geographical Split | |||
| Continental Europe | 58% | 56% | 57% |
| USA | 22% | 20% | 21% |
| UK&I | 14% | 18% | 17% |
| Asia Pac & Middle East | 6% | 6% | 5% |
| 100% | 100% | 100% | |
| Sector Split | |||
| Technology | 45% | 45% | 44% |
| Life Sciences | 19% | 20% | 20% |
| Banking & Finance | 12% | 13% | 13% |
| Energy | 11% | 9% | 10% |
| Engineering | 10% | 10% | 10% |
| Other Sectors | 3% | 3% | 3% |
| 100% | 100% | 100% |
Operating Review
Business M ix
Contract is w ell suited to our STEM market focus and geographical mix and it remained the key area of focus and grow th throughout the period.
Our Contract business has continued to go from strength to strength w ith increasing net fees and average headcount up 11% YoY. Q2 w as the 22nd consecutive quarter of net fees grow th achieved by Contract since it w as given greater strategic focus. The period ended w ith contractor numbers of 10,749, up 4% YoY.
Permanent net fees w ere marginally low er w ith UK&I and USA net fees declining, reflecting the previously reported UK restructuring and the leadership and strategic changes that w e made in the USA last year. Average sales headcount in our Permanent business remained flat. We have seen strong grow th in our largest Permanent region, DACH, up 9%*. Japan, our small but fast grow ing business continues to perform strongly as w e look to invest in this business further.
Average Permanent fees w ere up 1%* YoY as w e focus on specialist recruitment. We expect to strategically invest in Permanent in the remainder of 2019, predominantly in USA, DACH and Japan.
Regional Growth
We have seen strong grow th in Contract across most regions. 86% of the Group net fees are now generated from outside the UK&I w ith our largest regions grow ing w ell.
Continental Europe (58% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +14% | +6% | +12% | +12% | - | +8% | ||
| Q2 19 | +17% | +5% | +14% | +13% | +4% | +10% | ||
| HY 19 | +16% | +5% | +13% | 74% | 26% | +13% | +2% | +9% |
* Variances are held in constant currency
Continental Europe is our largest region comprising businesses in Germany, Sw itzerland, Austria, Netherlands, Belgium, France, Luxembourg and Spain.
The region delivered strong grow th in the period w ith increasing net fees across all main country markets. DACH, our largest territory in the region w as up 15%* YoY and w e continued to invest w ith average headcount up 8%. Netherlands also performed strongly, w ith net fees ahead by 11%* YoY and average sales headcount up 15%. Contract grow th in Technology, our largest sector, was very strong, up 19%*. This w as supported by Engineering, w hich grew 40%*.
The region delivered double digit grow th in contractors, up 12% YoY, creating grow th opportunities for H2, w ith Net Fees per Day Rate ('NFDR') up by 1%*. Net fees in this region performed particularly w ell against very strong prior year comparatives.
Grow th w as also delivered in Permanent, driven by DACH up 9%*. This w as in part dow n to an increase in average fees for Technology, Banking and Finance alongside Energy.
USA (22% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +24% | -1% | +17% | +7% | -3% | +4% | ||
| Q2 19 | +21% | -15% | +10% | +11% | +14% | +12% | ||
| HY 19 | +22% | -10% | +13% | 78% | 22% | +9% | +5% | +8% |
* Variances are held in constant currency
The USA is the w orld's largest specialist STEM staffing market and is our second largest region. We continue to see further opportunities for grow th in all our markets as STEM roles in the region continue to be highly sought after and are projected to grow by 10.8% betw een 2016 and 2026.
Grow th of 13%* YOY in the region w as across our major sectors Technology, Life Sciences and Energy. Life Sciences, our largest sector in the region, grew 10%* YoY. Energy continued to improve in the region up 68%* w ith Technology up 10%*.
Contract net fees in USA w ere very strong up 22%* YoY w ith double-digit grow th across all sectors except Banking & Finance w hich declined in line w ith global trends. Energy performance w as very pleasing, w ith net fees up 73%* YoY as w e continue to develop our customer portfolio, build on our strong position in renew able energy, pow er transmission and upstream alongside broadening our service offering. We have invested in our Contract business w ith average sales headcount grow ing 9% YoY. Net Fees per Day Rate ('NFDR') increased by 28%* YoY, as w e focused on higher margin and higher salary roles.
Permanent net fees declined 10%* YoY, largely due to the follow ing previously announced leadership and strategic changes made to the division. These changes w ere implemented to create a platform for more consistent and balanced grow th and w e are confident w e have made the right strategic decisions for the region. We expect the positive impact of these changes to be seen in performance during H2 2019 and beyond. Despite this it is encouraging to note that average fees in the region w ere up 6%* YoY w ith all sectors experiencing grow th. Year to date average headcount also increased by 5% YoY.
UK&I (14% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | ||
| Q1 19 | -5% | -16% | -7% | - | -29% | -8% | |||
| Q2 19 | -7% | -32% | -12% | +12% | -12% | +5% | |||
| HY 19 | -6% | -25% | -9% | 84% | 16% | +6% | -22% | -2% | |
* Variances are held in constant currency
The UK&I is one of our smaller regions, how ever it remains an important part of our business. Follow ing the previously reported restructuring, net fees in the region w ere dow n 9%* YoY, w ith a 2% YoY reduction in average headcount. We have put significant w ork into stabilising the region, the benefits of w hich are beginning to show .
In line w ith the broader Group strategy, the region is increasingly Contract focused as w e have cautiously invested in specific opportunities w ithin the STEM market. Follow ing a recently increased focus, w e saw growth in Life Sciences, how ever this w as offset by decline in all other sectors. Overall our Contract business saw a decline in performance w ith net fees dow n 6%* YoY. Demonstrating our continued commitment to UK&I over the first half w e made the decision to strategically invest in our Contract business w ith average sales headcount up 6% YoY. We anticipate this headcount w ill become productive in the second half of the year. Contractors for the region w ere dow n 4% YoY, how everwe saw our NFDR up 1%*, reflecting the increasingly targeted approach of the UK&I business.
Reflecting continued macro-economic and political uncertainty, Permanent net fees declined 25%* YoY. As part of the region's recent restructuring, w e significantly reduced our headcount in our Permanent division tow ards the end of H1 2018 and as a result our average sales headcount w as dow n 22% YoY. Our move to a specialist hub and onshore delivery model is now in place and w e w ill continue to cautiously build our presence in key sectors to maximise opportunity.
APAC & ME (6% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +16% | -3% | +5% | +11% | +21% | +17% | ||
| Q2 19 | +14% | +26% | +20% | +20% | +20% | +20% | ||
| HY 19 | +15% | +11% | +13% | 43% | 57% | +15% | +21% | +18% |
* Variances are held in constant currency
Our APAC & ME business principally includes Japan, Australia, Singapore and Dubai. APAC & ME represented 6% of Group net fees, a slight increase from 5% at the end of 2018.
Contract performance w as strong in the period, led by our Dubai business, up 42%*, w ith grow th in Banking & Finance and Energy sectors. Contractors grew 4% YoY in the region, w ith NFDR dow n 2%* YoY.
Grow th in Permanent net fees in the region w as primarily driven by Japan, w hich w as up 49%* YoY, w ith strong grow th in Life Sciences and Technology. We invested in Permanent headcount in Japan w here average sales headcount w as up 65%.
Average headcount w as up 18% YoY w ith Contract up 15% YoY and Permanent up 21% YoY.
We w ill focus on our investment in the Japan Permanent and Dubai Contract businesses in the second half w ith the rest of the region managed to maximise profitability.
Sector Highlights
The Group saw good grow th across four of our five sectors in the period. Technology, our largest sector, Engineering and Energy experienced strong grow th in the period. Our second largest sector, Life Sciences, also saw robust grow th.
Technology (45% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +9% | +11% | +10% | +9% | +3% | +8% | ||
| Q2 19 | +13% | +7% | +12% | +15% | +11% | +14% | ||
| HY 19 | +11% | +9% | +11% | 75% | 25% | +12% | +7% | +11% |
* Variances are held in constant currency
Technology is our largest and most established sector representing, 45% of the Group net fees and 48% of the Group average sales headcount, w ith the majority of its business in the more mature UK&I and European markets. Net fees for the period w ere up w ith grow th across both Contract and Permanent divisions. The sector has delivered 21 consecutive quarters of grow th. The rate of grow th w as impacted by the relatively soft performance of Technology in the UK&I, how ever all other regions w ere in double digit grow th. Contractors for the sector have increased by 10% YoY, w ith particularly strong grow th noted across Continental Europe. Average headcount in Technology w as up 11% YoY, w ith Contract grow ing 12% YoY and Permanent up 7% YoY. The mix in headcount is w eighted tow ards Contract w hich accounts for 71% of total Technology headcount.
Life Sciences (19% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +6% | -3% | +3% | -1% | -11% | -5% | ||
| Q2 19 | +11% | +3% | +8% | +3% | +2% | +3% | ||
| HY 19 | +8% | - | +6% | 69% | 31% | +1% | -5% | -1% |
* Variances are held in constant currency
Our Life Sciences sector is a market leader across several of our regions and Life Sciences represented 19% of Group net fees in the period. Total net fees grew by 6%* YoY w ith Contract grow ing 8%* YoY and Permanent remaining flat*. Contract performance w as pleasing and w as up across all regions. Contractors increased 7% YoY w ith NFDR up 1%* YoY. Average sales headcount was dow n 1% YoY, w ith Contract up 1% and Permanent declining 5%. 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 (12% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | -6% | +1% | -3% | +7% | -1% | +3% | ||
| Q2 19 | -12% | -16% | -13% | +1% | - | - | ||
| HY 19 | -9% | -8% | -9% | 58% | 42% | +4% | - | +2% |
* Variances are held in constant currency
Banking & Finance net fees w ere dow n 9%* YoY w ith Contract dow n 9%* and Permanent dow n 8%*. In line w ith broader trends, Banking & Finance w as our only sector in decline and w e saw mixed results across our regions. We saw good grow th coming out of our DACH business, w hich w as up 24%*. There w as grow th in our new Japan business, up 30%* along w ith Dubai, up 29%*. The UK&I business performance continues to be impacted by broader political uncertainty. Average headcount for the sector w as up 2% YoY.
Energy (11% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +26% | -4% | +25% | +1% | +28% | +2% | ||
| Q2 19 | +30% | +20% | +29% | +10% | +67% | +13% | ||
| HY 19 | +28% | +10% | +27% | 95% | 5% | +6% | +47% | +8% |
* Variances are held in constant currency
Energy represented 11% of our overall Group net fees and the sector has show n good grow th. Net fees in the sector w ere up 27%* YoY. Contract w hich represents 95% of our Energy net fees grew 28%* YoY. We continue to support our Contract business w ith headcount up 6% YoY. Contractors in the sector declined 9% YoY, how ever NFDR show ed strong grow th, up 18%* YoY driven by the USA w hich successfully repositioned to placing more niche roles w ithin pow er transmission and renew ables. Continental Europe and USA account for 85% of our total net fees in the sector - USA saw grow th of 68%* YoY w ith Continental Europe remaining flat*. Our Dubai business grew by 9%* YoY. Average sales headcount w as up 8% YoY and w e w ill continue to review the Energy business and selectively invest w here w e can maximise market opportunities.
Engineering (10% of Group net fees)
| Net fees Growth* YoY |
HY 2019 Mix | Average Sales Headcount Growth YoY |
||||||
|---|---|---|---|---|---|---|---|---|
| Cont | Perm | Total | Cont | Perm | Cont | Perm | Total | |
| Q1 19 | +39% | -17% | +19% | +28% | +1% | +19% | ||
| Q2 19 | +18% | -17% | +9% | +40% | +6% | +28% | ||
| HY 19 | +27% | -17% | +14% | 78% | 22% | +34% | +3% | +23% |
* Variances are held in constant currency
Engineering represented 10% of Group net fees and grew strongly, w ith net fees up by 14%* YoY. The sector is heavily w eighted tow ards Contract, w hich accounted for 78% of net fees. Grow th in Contract net fees w as very pleasing up 27%* YoY. Continental Europe is our largest region in the Engineering sector and w e saw good overall grow th of 25%* YoY. Contractors are up 16% YoY w ith NFDR up 6%*. Average sales headcount w as up 23% YoY w ith Contract up 34% YoY and Permanent up 3% YoY.
CHIEF FINANCIAL OFFICER'S REVIEW
Operating profit
Revenue for the year w as up 10% on a constant currency basis to £653.3 million (HY 2018: reported £585.9 million) and up 12% on a reported basis. On a constant currency basis, net fees increased by 9%, and on a reported basis by 10% to £163.0 million (HY 2018 £148.4 million). Grow th in revenue exceeded the grow th in net fees as the business continued to shift tow ards Contract. Contract represented 74% of the Group net fees in the period (HY 2018: 72%). This change in mix resulted in a modest decrease in the overall net fees margin to 24.9% (HY 2018: 25.3%), as Permanent revenue has no cost of sale, w hereas the cost of paying the contractor is deducted to derive Contract net fees. The Contract margin increased slightly to 19.8% (HY 2018: 19.6%).
The reported profit before tax w as £22.7 million, up 27%. The adjusted profit before tax ('PBT') w as £24.0 million up 18% YoY (HY 2018: reported £17.8 million and adjusted £20.3 million). The 'adjusted' PBT excludes restructuring costs of £1.3 million that w ere incurred in the current period in respect of the Senior Management changes and relocation of support functions to Glasgow (HY 2018: £2.4 million). The benefits of operational efficiencies delivered by the restructuring of our support functions contributed to the increase in the operating profit conversion ratio of 1.4 percentage points to 15.1% on an adjusted basis and 2.2 percentage points to 14.3% on a reported basis (HY 2018: adjusted 13.7% and reported 12.1%).
Restructuring costs ('Adjusting items')
The expected benefits are being realised from the successful restructure and relocation of the majority of our London-based support functions to Glasgow . This restructuring is anticipated to realise cost savings in excess of £5 million per annum.
Only immaterial net exceptional costs of £0.1 million have been recognised during the period in relation to the transition to the Centre of Excellence. The exceptional charge in the period included mainly personnel double-running costs of £0.2 million and property costs of £0.3 million. These costs w ere subsequently offset by the government grant income of £0.4 million recognised as an offset to the exceptional costs of an agreed percentage of gross w ages for each full time role created in the Centre of Excellence, bringing the total net costs recognised to date to £13.2 million (HY 2018: £9.2 million).
We do not expect to incur any further exceptional costs in the remainder of the year in respect of the move to Glasgow w hilst the additional government grant is anticipated to be received and recognised as exceptional income in the period through to the end of 2021.
On 14 December 2018, the Group communicated to the market that the Chief Executive Officer, Gary Elden, w ould step dow n from his role and the Board on 18 March 2019. The new Chief Executive Officer ('CEO'), Mark Dorman, joined the Group on 18 March 2019. The new CEO w as appointed follow ing Gary Elden stepping dow n from the role after leading the Company for six years. Mark w as appointed after a rigorous process determined he w as the best candidate to take the business forw ard to its next stage of grow th and development. These Senior Management changes resulted in the exceptional charge of £1.2 million in HY 2019. The total charge comprised contractual payments, recruitment and other professional fees, double running costs and relocation costs.
The non-recurring nature of these strategic projects continues to be of sufficient magnitude to w arrant separate disclosure as an exceptional item on the face of the Consolidated Income Statement, in line w ith our accounting policies. Disclosure of items as exceptional highlights them and provides a clearer, comparable view of underlying earnings.
| HY 2019 | HY 2018 | Variance | |
|---|---|---|---|
| £m | £m | £m | |
| Reported profit before tax after exceptional items | 22.7 | 17.9 | 4.8 |
| Net exceptional costs – charged to operating profit | 1.3 | 2.4 | (1.1) |
| (i) Senior Management changes | 1.2 | - | 1.2 |
| (ii) Support functions relocation | 0.1 | 2.4 | (2.3) |
| Reported profit before tax and exceptional items ('Adjusted') | 24.0 | 20.3 | 3.7 |
A reconciliation of profit before tax on an adjusted basis to reported basis
Accounting changes
On 1 December 2018 IFRS 9 Financial Instruments ('IFRS 9') and IFRS 15 Revenue from Contracts with Customers ('IFRS 15') became effective for the Group. We changed our accounting policies and made retrospective adjustments accordingly.
IFRS 9 introduced new requirements for classification, recognition and impairment of financial assets.
Overall, IFRS 9 had an immaterial impact on the Group. On the date of initial application of the standard, no adjustments w ere made to the opening balance of retained earnings or other reserves. In line w ith the transitional provisions in IFRS 9, comparative figures have not been restated. From 1 December 2018, the Group presents changes in the fair value of all its equity investments in other comprehensive income, as these instruments are held for long-term strategic purposes. Certain investments in convertible bonds w ith the embedded conversion rights w ere reclassified from 'available-for-sale' to 'financial assets held at fair value through profit or loss'. There w ere no changes to the Group's existing impairment methodology for trade receivables.
IFRS 15, a new revenue recognition standard effective for the Group from 1 December 2018, w as adopted on the modified retrospective basis w ithout restatement of comparatives. IFRS 15 permits the recognition of contingent consideration provided that it is highly probable that a significant reversal in the amount of cumulative revenue recognised w ill not occur w hen the uncertainty associated w ith the contingent consideration is subsequently resolved. Historically, the Group's policy of estimating Contract accrued income resulted in certain amount of revenue being reversed. Accordingly, on 1 December 2018 the Group revised the w ay the Contract accrual income is estimated. This change resulted in a net (post-tax) adjustment of £2.4 million that reduced the opening balance of retained earnings on the date of initial application of IFRS 15.
Further details are provided in note 1 to the Consolidated Interim Financial Report.
Investments
During the period, w e continued to invest in in-house innovation initiatives, expensing a total of £1.0 million on our 'build' programme. We have reprioritised our innovation effort tow ards our most promising initiatives, one of w hich is Hirefirst, w hich w as launched in October 2018 and is at the early market testing stage and, generating its first revenues in the half.
We continued to hold non-controlling shareholdings in three innovation start-ups w hich, since the date of initial application of IFRS 9 are fair valued through other comprehensive income. In the six months to 31 May 2019, our investments in The Sandpit Limited and separately in Ryalto have been w ritten dow n by £0.8 million and £0.2 million respectively. The equity rights in The Sandpit Limited, w hich discontinued its operations earlier this year, w ere converted into a minority shareholding in The Sandpit Ventures Limited at an immaterial nominal book value. The dow nw ard valuation of Ryalto equity rights w as caused by the dilution in the existing shareholders' ow nership of Ryalto as a result of the company issuing new equity.
Taxation
The tax charge on pre-exceptional statutory profit before tax for the period w as £6.5 million (HY 2018: £5.3 million), representing an effective tax rate ('ETR') of 27% (HY 2018: 26%). The ETR on post-exceptional statutory profit before tax w as 27% (HY 2018: 27%).
The ETR primarily reflects our geographical mix of profits. Other material items affecting the tax charge include the European Union's Anti-Tax Avoidance Directive, and US Tax Reform. The Group is also affected by the European Commission's state aid investigation into the UK's controlled foreign company legislation. We continue to note this as a contingent liability.
Earnings per share ('EPS')
On an adjusted basis, EPS w as up by 1.9 pence at 13.5 pence (HY 2018: adjusted 11.6 pence and reported 10.1 pence), due to an increase in the adjusted profit before tax offset by an increase of 1.2 million in w eighted average number of shares. On a reported basis, EPS increased to 12.7 pence, up 2.6 pence, attributable mainly to an improved trading performance and decline in restructuring costs as explained above. The w eighted average number of shares used for basic EPS grew to 129.9 million (HY 2018: 128.7 million). Reported diluted EPS w as 12.2 pence (HY 2018: 9.6 pence), up 2.6 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 w ill 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 5.1 pence (HY 2018: 4.7 pence), amounting to approximately £6.7 million in total. This w ill be paid on 6 December 2019 to shareholders on record at 1 November 2019. The Board monitors the appropriate level of the dividend, taking into account, inter alia, achieved and expected trading of the Group, together w ith its balance sheet position. As previously stated, the Board is targeting a dividend cover of betw een 2.0x and 2.5x, based on underlying EPS, over the short to medium term.
Cash Flow
On an adjusted basis w e generated higher cash from operations at £12.0 million (HY 2018: £7.5 million on an adjusted basis). It reflects a combination of the improved underlying trading performance in a number of markets and sectors, and the benefits of operational efficiencies including cash collection.
Capital expenditure decreased to £1.2 million (HY 2018: £3.1 million) w ith low er spend on office moves and IT infrastructure. Within the six months ended 31 May 2019, the bulk of the capital expenditure w as in relation to new IT hardw are, £0.5 million.
Overall, the cash conversion ratio increased to 44% on an adjusted basis and 39% on a reported basis (HY 2018: 22% on an adjusted basis or 13% on a reported basis). The net cash outflow from exceptional restructuring items w as £1.6 million (HY 2018: £2.1 million).
Income tax paid decreased to £6.3 million (HY 2018: £7.4 million) and dividends remained largely unchanged at £6.1 million (HY 2018: £6.0 million). During the period, the Group also paid £0.9 million (HY 2018: £1.0 million) for the purchase of its ow n shares to satisfy employee share schemes in future periods. Foreign exchange had a moderate positive impact of £0.5 million (HY 2018: positive impact of £0.2 million).
We started the period w ith net debt of £4.1 million and closed the period w ith net debt of £8.0 million (HY 2018: net debt £6.2 million).
A reconciliation of cash conversion ratio on an adjusted basis to reported basis
| HY 2019 | HY 2018 | |||||
|---|---|---|---|---|---|---|
| Adjusted | Reported | Adjusted | Reported | |||
| Cash flows from operating activ ities | £m | £m | £m | £m | ||
| Operating profit | 24.6(1) | 23.3 | 20.4(1) | 18.0 | ||
| Non-cash items | 4.4(2) | 4.7 | 5.1 | 5.1 | ||
| Changes in working capital | (17.0)(3) | (17.6) | (18.0)(4) | (17.7) | ||
| Cash generated from operations | 12.0 | 10.4 | 7.5 | 5.4 | ||
| Capex | (1.2) | (1.2) | (3.1) | (3.1) | ||
| Cash conv ersion ratio (%) | 44% | 39% | 22% | 13% |
(1) Excludes £1.3 million in exceptional costs (HY 2018: £2.4 million)
(2) Excludes £0.3 million in IFRS 2 charge classified as exceptional (HY 2018: £nil)
(3) Added back £0.6 million in a net decrease in exceptional provision
(4) Excludes £0.3 million in a net increase in exceptional provision
Treasury management
We finance the Group's operations through equity and bank borrow ings. The Group's cash management policy is to minimise interest payments by closely managing Group cash balances and external borrow ings. We intend to continue this strategy w hile maintaining a strong balance sheet position.
We maintain a committed Revolving Credit Facility ('RCF') of £50.0 million, along w ith an uncommitted £20.0 million accordion facility, w ith HSBC and Citibank, giving the Group an option to increase its total borrow ings under the facility to £70.0 million. At the half year, the Group had draw n dow n £15.0 million (HY 2018: £22.5 million) on these facilities.
The RCF is subject to financial covenants and the funds borrow ed under this facility bear interest at a minimum annual rate of 1.3% above a three-month Sterling LIBOR, giving an average interest rate of 2.0% during the period (HY 2018: 1.8%). The finance costs for the half-year amounted to £0.6 million (HY 2018: £0.3 million).
The Group also has an uncommitted £5.0 million overdraft facility w ith HSBC.
Foreign exchange
Foreign exchange volatility continues to be a significant factor in the reporting of the overall performance of the business w ith the main functional currencies of the Group entities being Sterling, the Euro and the US Dollar.
For HY 2019, the YoY movements in exchange rates betw een Sterling and the Euro and the US Dollar provided a moderate net tailw ind to the reported performance of the Group w ith the highest impact coming from the Euro and US Dollar. The exchange rate movements increased our reported HY 2019 net fees by approximately £1.6 million and operating profit by £0.4 million.
Exchange rate movements remain a material sensitivity. By w ay of illustration, each one per cent movement in exchange rates of the Euro and the US Dollar against Sterling impacted our HY 2019 net fees by £0.9 million and £0.4 million, respectively, and operating profit by £0.3 million and £0.1 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 w ith protection against adverse movements in the Euro and US dollar during the settlement period. The Gr oup 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 w ithin the Strategic Report sec tion of the Group's 2018 Annual Report, a copy of w hich is available on the Group's w ebsite w w w .sthree.com.
In terms of macroeconomic environment risks, our strategy is to continue to grow the size of our international business and new er sectors, in both financial terms and geographical coverage. This w ill help reduce our exposure or reliance on any one specific economy, although a dow nturn 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.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their know ledge:
(a) the Condensed Consolidated Interim Financial Report (unaudited) has been prepared in accordance w ith 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).
The Directors of SThree Plc are listed in the SThree Plc Annual Report for 30 November 2018. A list of the current Directors is maintained on the Group's w ebsite w w w .sthree.com.
Approved by the Board 19 July 2019 and signed on its behalf by:
Mark Dorman Alex Smith Chief Executive Officer Chief Financial Officer
CONDENSED CONSOLIDATED INTERIM FINANCIAL REPORT
CONDENSED CONSOLIDATED INCOME STATEMENT - UNAUDITED
for the half year ended 31 May 2019
| 31 May 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Note | Before exceptional items £'000 |
Exceptional items £'000 |
Total £'000 |
Before exceptional items £'000 |
Exceptional items £'000 |
Total £'000 |
||
| Revenue | 2 | 653,268 | - | 653,268 | 585,940 | - | 585,940 | |
| Cost of sales | (490,279) | - | (490,279) | (437,545) | - | (437,545) | ||
| Net fees | 2 | 162,989 | - | 162,989 | 148,395 | - | 148,395 | |
| Administrative expenses | 3 | (138,383) | (1,333) | (139,716) | (127,998) | (2,434) | (130,432) | |
| Operating profit | 24,606 | (1,333) | 23,273 | 20,397 | (2,434) | 17,963 | ||
| Finance income | 29 | - | 29 | 46 | - | 46 | ||
| Finance costs | (628) | - | (628) | (313) | - | (313) | ||
| Gain on disposal of associate | - | - | - | 146 | - | 146 | ||
| Profit before taxation | 24,007 | (1,333) | 22,674 | 20,276 | (2,434) | 17,842 | ||
| Taxation | 4 | (6,481) | 253 | (6,228) | (5,320) | 462 | (4,858) | |
| Profit for the period attributable to owners of the Company |
17,526 | (1,080) | 16,446 | 14,956 | (1,972) | 12,984 | ||
| Earnings per share | 6 | pence | pence | pence | pence | pence | pence | |
| Basic | 13.5 | (0.8) | 12.7 | 11.6 | (1.5) | 10.1 | ||
| Diluted | 13.0 | (0.8) | 12.2 | 11.1 | (1.5) | 9.6 |
The accompanying notes on pages 16-25 form an integral part of this Interim Financial Report.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - UNAUDITED
For the half year ended 31 May 2019
| Note | 31 May 2019 £'000 |
31 May 2018 £'000 |
|
|---|---|---|---|
| Profit for the period | 16,446 | 12,984 | |
| Other comprehensive income: Items that may be subsequently reclassified to profit or loss: Exchange differences on retranslation of foreign operations |
220 | 680 | |
| Items that will not be subsequently reclassified to profit or loss: Net loss on equity instruments at fair value through other comprehensive income |
1 | (983) | - |
| Other comprehensive income for the period (net of tax) | (763) | 680 | |
| Total comprehensive income for the period attributable to owners of the Company | 15,683 | 13,664 |
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION - UNAUDITED
as at 31 May 2019
| 31 May 2019 |
Audited 30 November 2018 |
||
|---|---|---|---|
| Note | £'000 | £'000 | |
| ASSETS | |||
| Non-current assets | |||
| Property, plant and equipment | 6,136 | 6,915 | |
| Intangible assets | 8,614 | 9,609 1,977 |
|
| Investments | 1 | 1,017 | |
| Deferred tax assets | 2,633 18,400 |
2,750 21,251 |
|
| Current assets | |||
| Trade and other receivables | 270,383 | 285,618 | |
| Current tax assets | 2,099 | 2,751 | |
| Cash and cash equivalents | 7 | 22,591 | 50,844 |
| 295,073 | 339,213 | ||
| Total assets | 313,473 | 360,464 | |
| EQUITY AND LIABILITIES | |||
| Equity attributable to owners of the Company | |||
| Share capital | 9 | 1,321 | 1,319 |
| Share premium | 30,795 | 30,511 | |
| Other reserves | (5,408) | (5,275) | |
| Retained earnings | 70,544 | 75,116 | |
| Total equity | 97,252 | 101,671 | |
| Non-current liabilities | |||
| Provisions for liabilities and charges | 1,465 | 1,569 | |
| Current liabilities | |||
| Borrow ings | 8 | 15,000 | 37,428 |
| Bank overdraft | 7 | 15,620 | 17,521 |
| Provisions for liabilities and charges | 8,854 | 9,614 | |
| Trade and other payables | 175,282 | 191,742 | |
| Current tax liabilities | - | 919 | |
| 214,756 | 257,224 | ||
| Total liabilities | 216,221 | 258,793 | |
| Total equity and liabilities | 313,473 | 360,464 |
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - UNAUDITED
for the half year ended 31 May 2019
| Share capital |
Share premium |
Capital redemption reserve |
Capital reserve |
Treasury reserve |
Currency translation reserve |
Fair value reserve of equity investments |
Retained earnings |
Total equity attributable to owners of the Company |
|
|---|---|---|---|---|---|---|---|---|---|
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Audited balance at 30 November 2017 | 1,317 | 28,806 | 168 | 878 | (8,535) | (1,067) | - | 59,138 | 80,705 |
| Profit for the half year ended 31 May 2018 |
- | - | - | - | - | (1,083) - |
- | 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 | - | - | - | - | - | - | 351 |
| Purchase of ow n shares by Employee Benefit Trust (note 9) | - | - | - | - | (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 | X222 1,319 |
29,155 | 168 | 878 | (9,403) | 387 | - | 55,470 | 77,200 |
| Audited balance at 30 November 2018 | 1,319 | 30,511 | 172 | 878 | (7,830) | 1,505 | - | 75,116 | 101,671 |
| Effect of a change in accounting policy (note 1) |
- | - | - | - | - | - | - | (2,392) | (2,392) |
| Restated total equity at 1 December 2018 | 1,319 | 30,511 | 172 | 878 | (7,830) | 1,505 | - | 72,724 | 99,279 |
| Profit for the half year ended 31 May 2019 |
- | - | - | - | - | - | - | 16,446 | 16,446 |
| Other comprehensive income for the period (note 1) |
- | - | - | - | - | 220 | (983) | - | (763) |
| Total comprehensive income for the period | - | - | - | - | - | 220 | (983) | 16,446 | 15,683 |
| Dividends paid to equity holders (note 5) | - | - | - | - | - | - | - | (6,069) | (6,069) |
| Dividends payable to equity holders (note 5) | - | - | - | - | - | - | - | (12,722) | (12,722) |
| Settlement of share-based payments | 2 | 284 | - | - | 1,507 | - | - | (1,507) | 286 |
| Purchase of ow n shares by Employee Benefit Trust (note 9) | - | - | - | - | (877) | - | - | - | (877) |
| Credit to equity for equity-settled share-based payments | - | - | - | - | - | - | - | 1,672 | 1,672 |
| Total movements in equity | 2 | 284 | - | - | 630 | 220 | (983) | (2,180) | (2,027) |
| Unaudited balance at 31 May 2019 | 1,321 | 30,795 | 172 | 878 | (7,200) | 1,725 | (983) | 70,544 | 97,252 |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
for the half year ended 31 May 2019
| Note | 31 May 2019 £'000 |
31 May 2018 £'000 |
|
|---|---|---|---|
| Cash flows from operating activities | |||
| Profit before taxation after exceptional items | 22,674 | 17,842 | |
| Adjustments for: | |||
| Depreciation and amortisation charge | 3,001 | 2,787 | |
| Accelerated amortisation and impairment of intangible assets | - | 724 | |
| Finance income | (29) | (46) | |
| Finance cost | 628 | 313 | |
| Loss on disposal of property, plant and equipment | 8 | 8 | |
| Loss on disposal of subsidiaries | - | 70 | |
| Gain on disposal of associate | - | (146) | |
| FX revaluation gain on investments | (5) | (29) | |
| Non-cash charge for share-based payments | 1,672 | 1,577 | |
| Operating cash flows before changes in working capital and | 27,949 | 23,100 | |
| provisions Decrease/(increase) in receivables |
3,187 | (7,960) | |
| Decrease in payables | (19,905) | (8,916) | |
| Decrease in provisions | (916) | (777) | |
| Cash generated from operations | 10,315 | 5,447 | |
| Finance income | 10 | 25 | |
| Income tax paid - net | (6,345) | (7,445) | |
| Net cash generated from/(used in) operating activities | 3,980 | (1,973) | |
| Cash generated from operating activities before exceptional items | 5,606 | 127 | |
| Cash outflow from exceptional items | (1,626) | (2,100) | |
| Net cash generated from/(used in) from operating activities | 3,980 | (1,973) | |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (721) | (1,718) | |
| Purchase of intangible assets | (520) | (1,380) | |
| Net cash used in investing activities | (1,241) | (3,098) | |
| Cash flows from financing activities | |||
| (Net repayments of)/proceeds from borrow ings | 8 | (22,428) | 10,453 |
| Interest paid | (570) | (313) | |
| Employee subscription for tracker shares | 70 | - | |
| Proceeds from exercise of share options | 286 | 342 | |
| Purchase of ow n shares Dividends paid to equity holders |
5 | (877) (6,069) |
(989) (6,041) |
| Net cash (used in)/generated from financing activities | (29,588) | 3,452 | |
| Net decrease in cash and cash equivalents | (26,849) | (1,619) | |
| Cash and cash equivalents at beginning of the year | 33,323 | 17,621 | |
| Exchange gains relating to cash and cash equivalent | 497 | 225 | |
| Net cash and cash equivalents at end of the year | 7 | 6,971 | 16,227 |
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL REPORT - UNAUDITED
for the half year ended 31 May 2018
1. ACCOUNTING POLICIES
Corporate Information
SThree plc ('the Company') and its subsidiaries (collectively 'the Group') operate predominantly in the United Kingdom & Ireland, Continental Europe, USA and Asia Pacific & Middle East. The Group consists of different brands and provides both Permanent and Contract specialist recruitment services, primarily in the Technology, 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.
This Condensed Consolidated Interim Financial Report ('Interim Financial Report') of the Group as at and for the half year ended 31 May 2019 comprises that of the Company and all its subsidiaries. The Interim Financial Report is unaudited and has not been review ed 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 2018 w ere approved by the Board of Directors on 25 January 2019 and a copy w as delivered to the Registrar of Companies. The auditors reported on those accounts, their report w as unqualified, did not draw attention to any matters by w ay of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The Interim Financial Report of the Group w as approved by the Board for issue on 19 July 2019.
Basis of preparation
This Interim Financial Report for the half-year reporting period ended 31 May 2019 has been prepared in accordance w ith the Disclosure and Transparency Rules of the Financial Conduct Authority and w ith IAS 34 Interim Financial Reporting as adopted by the European Union. The Interim Financial Report is presented on a condensed basis as permitted by IAS 34 and therefore does not include all disclosures that w ould otherw ise be included in an annual financial report and should be read in conjunction w ith the Group's 2018 annual financial statements, w hich w ere prepared in accordance w ith International Financial Reporting Standards ('IFRSs') as adopted and endorsed by the European Union.
The Directors have elected to change all references to "gross profit" in the financial statements to "net fees" w ith effect from the half-year reporting period ended 31 May 2019.
Going concern
The Group's business activities, together w ith 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 flow s, liquidity position and borrow ing facilities are show n 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 s ufficient resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going conc ern basis in preparing this Interim Financial Information.
Significant Accounting Policies
The accounting policies adopted are consistent w ith those applied in the preparation of the Group's 2018 annual financial statements and corresponding interim reporting period, except for the adoption of new and amended standards as set out below .
New Standards and Interpretations
A number of new or amended standards became applicable for the current reporting period and the Group had to change its accounting policies and make retrospective adjustments as a result of adopting the follow ing standards:
- IFRS 9 Financial instruments
- IFRS 15 Revenue from Contracts with Customers
As at the date of authorisation of this Interim Financial Information, the follow ing key standards and amendments to standards w ere in issue but not yet effective. The amendments listed below do not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods.
- IFRS 2 (amendments) Share Based Payments
- IFRIC 22 Foreign Currency Transactions and Advance Consideration
- IFRIC 23 Uncertainty over Income Tax Treatments
The impact and timing of the adoption of IFRS 16 Leases is disclosed 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 16 Leases
IFRS 16 Leases ('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 Leases. For every lease brought onto the balance sheet, lessees w ill recognise a right-of-use asset and a lease liability. The only exceptions are short-term and low -value leases.
Within the income statement, operating lease rental payment w ill be replaced by depreciation and interest expense. This w ill result
in an increase in operating profit and an increase in finance costs.
The standard w ill affect primarily the accounting for the Group's operating leases. Based on the results of a preliminary impact assessment, on the date of initial application of IFRS 16, the Group's net assets are expected to decrease by a range of £3 million to £4 million (a net result of the recognition of lease assets at approximately £35 million to £40 million offset by lease liabilities of £38 million to £44 million).
The new leasing standard is mandatory for first interim period w ithin the annual reporting periods beginning on or after 1 January 2019. The Group does not intend to adopt the standard before its effective date. The Group w ill transition to IFRS 16 on a modified retrospective basis in the financial reporting period commencing on 1 December 2019.
Changes in accounting policies
This note explains the impact of the adoption of IFRS 9 Financial Instruments ('IFRS 9') and IFRS 15 Revenue from Contracts with Customers ('IFRS 15') on the Group's financial statements and also discloses the new accounting policies that have been applied from 1 December 2018, w here they are different to those applied in prior periods.
(a) Impact on the financial statements
As a result of the changes in the Group's accounting policies, normally prior year financial statements have to be restated. As explained in point (b) below , IFRS 9 w as adopted w ithout restating comparative information. The reclassifications and the adjustments arising from the new fair valuation requirements and impairment are therefore not reflected in the statement of financial position as at 30 November 2018. As explained in point (d) below , IFRS 15 w as adopted on the modified retrospective basis, w hereby the adjustment arising from the revised Contract accrued income policy w as recognised in the opening balance of retained earnings on 1 December 2018.
The follow ing tables show the adjustments recognised for each individual line item. Line items that w ere not affected by the changes have not been included.
| 30 November 2018 |
IFRS 9 | IFRS 15 | 1 December 2018 |
|
|---|---|---|---|---|
| Impact on the statement of financial position (increase/(decrease)) (extract) |
£'000 | £'000 | £'000 | £'000 |
| Current assets | ||||
| Trade and other receivables | 285,618 | - | (13,017) | 272,601 |
| Current tax assets | 2,751 | - | 766 | 3,517 |
| 288,369 | - | (12,251) | 276,118 | |
| Current liabilities | ||||
| Trade and other payables | 191,742 | - | (9,859) | 181,883 |
| Equity | ||||
| Retained earnings | 75,116 | - | (2,392) | 72,724 |
(b) IFRS 9 - Impact of adoption
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.
The adoption of IFRS 9 from 1 December 2018 resulted in changes in accounting policies; how ever there w ere no adjustments to the amounts recognised in the financial statements. In accordance w ith the transitional provisions in IFRS 9 paragraphs 7.2.15 and 7.2.26, comparative figures have not been restated. Due to the immaterial impact of IFRS 9 adoption, the adjustment to the opening balance of retained earnings or other reserves at 1 December 2018 w as not recognised.
(i) Classification and measurement
On the date of initial application of IFRS 9, the Directors assessed w hich business models w ere applicable to the financial assets held by the Group, and classified its financial instruments into the appropriate IFRS 9 categories: financial assets held at fair value through profit or loss ('FVTPL'), financial assets held at fair value through other comprehensive income ('FVOCI'), and financial assets held at amortised cost (the latter comprise primarily 'Trade and other receivables'). The main effects resulting fr om this reclassification w ere as follow s:
| FVTPL | FVOCI (Available-for-sale) |
Trade and other receivables |
|
|---|---|---|---|
| Financial assets - 1 December 2018 | £'000 | £'000 | £'000 |
| Closing balance 30 November 2018 - IAS39* | - | 1,977 | 285,618 |
| Reclassify debt investments from available-for-sale to FVTPL (note (i.a)) | 435 | (435) | - |
| Reclassify equity investments from available-for-sale to FVOCI* (note (i.b)) | - | - | - |
| Adjustments arising from the adoption of IFRS 15 (note (d)) | - | - | (13,017) |
| Opening balance 1 December 2018 - IFRS 9 | 435 | 1,542 | 272,601 |
*The closing balances as at 30 November 2018 show available-for-sale financial assets under FVOCI.
(i.a) Reclassification from available-for-sale to FVTPL
Certain investments in convertible bonds w ith the embedded conversion rights w ere reclassified from available-for-sale to financial assets at FVTPL (£0.4 million at 1 December 2018). Due to the embedded call option, they did not meet the IFRS 9 criteria for classification at amortised cost, because their cash flow s did not represent solely payments of principal and interest.
There w ere no related fair value gains or losses to transfer from the available-for-sale financial assets reserve to retained earnings on 1 December 2018. Under IAS 39, the bonds w ere held at cost less impairment.
On the date of the initial application of IFRS 9, the fair value of the bonds w as equivalent to the cost for these assets. There was no impact on retained earnings at 1 December 2018. In the six months ended to 31 May 2019, an immaterial uplift w as determined in the fair value of one bond including the embedded option. Hence, no upw ard fair valuation w as performed in the income statement.
(i.b) Equity investments previously classified as available-for-sale
The Group elected to present changes in the fair value of all its equity investments in OCI, as they are held for long-term strategic purposes. As a result, assets w ith the carrying value of £1.5 million under IAS 39 w ere reclassified from available-for-sale financial assets to financial assets at FVOCI under IFRS 9. There w ere no fair value gains or losses recognised for these investments in other reserves in prior years. On the date of initial application of IFRS 9, the Directors estimated fair value of the entire equity portfolio at £1.7 million. This represented an immaterial uplift from the carrying value of £1.5 million under IAS 39, resulting in £nil impact on retained earnings at 1 December 2018.
How ever, in the six months to 31 May 2019, the Directors w rote off £0.8 million in relation to the inves tment in The Sandpit Limited and £0.2 million in relation to Ryalto. The w rite-off amounts w ere recognised in OCI. The equity rights in The Sandpit Limited, w hich discontinued its operations, w ere converted into a minority shareholding in The Sandpit Ventures Limited at an immaterial nominal book value. The dow nw ard valuation of Ryalto equity rights w as caused by the dilution in the existing shareholders' ow nership of Ryalto as a result of the company issuing new equity. The amount of the w rite-off w as recognised in OCI.
(ii) Impairment of financial assets
The Group has tw o types of financial assets that are subject to IFRS 9's new expected credit loss model: trade receivables and cash and cash equivalents.
The Directors determined that the Group's existing impairment methodology for trade receivables is overall compliant w ith IFRS 9.
Under the existing policy, trade receivables are grouped based on the days past due. For each category, the Group applies fix ed provision rates based on historical collection experience and current economic trends. In addition, the Group performs an individual assessment for a selection of exposures, using qualitative factors such as forw ard-looking expectations about debtor's credit standing or macroeconomic conditions.
As such, no adjustment to the loss allow ance or opening balance of retained earnings w as recognised on transition to IFRS 9.
The loss allow ances increased by a further £0.9 million to £3.6 million for trade receivables during the six months to 31 May 2019. The increase w ould have been same under the incurred loss model of IAS 39.
The expected credit losses on cash and cash equivalents w ere immaterial ow ing to the short-term nature of the Group's bank deposits and strict treasury policy w hich stipulates a list of approved counterparties, w ith reference to their high credit s tanding, resulting in £nil impact on retained earnings at 1 December 2018.
(c) IFRS 9 - Accounting policies applied from 1 December 2018
(i) Classification of investments and other financial assets
From 1 December 2018, the Group classifies its financial assets in the follow ing measurement categories:
- those to be measured subsequently at fair value (either through OCI, or through profit or loss), and
- those to be measured at amortised cost.
The classification depends on the Group's business model for managing the financial assets and the contractual terms of the c ash flow s. For assets measured at fair value, gains and losses w ill either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this w ill depend on w hether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at FVOCI.
(ii) M easurement of investments and other financial assets
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at FVTPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in profit or loss.
Financial assets w ith embedded derivatives are considered in their entirety w hen determining w hether their cash flow s are solely payment of principal and interest.
Equity instruments
The Group subsequently measures all equity investments at fair value. Where the Directors have elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassif ication of fair value gains and losses to the income statement follow ing the derecognition of the investment. Dividends from such investments continue to be recognised in the inc ome statement as other income w hen the Group's right to receive payments is established.
Changes in the fair value of equity investments at FVTPL are recognised in other gains/(losses) in the income statement. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately fr om other changes in fair value.
Debt instruments
Subsequent measurement of debt instruments depends on the Group's business model for managing the asset and the cash flow characteristics of the asset. At present, the Group classifies its debt instruments into tw o measurement categories:
- Amortised cost: assets that are held for collection of contractual cash flow s w here those cash flow s represent solely payments of principal and interest are measured at amortised cost. Any interest income from these financial assets is included in finance income using the effective interest rate method. Impairment losses are recognised in the income statement.
- FVTPL: assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognised in the income statement and presented below operating profit in the period in w hich it arises.
(iii) Impairment
Under IFRS 9, the Group w ill continue to assess trade receivables for any expected credit losses associated w ith the instrument based on historical collection experience, current and forw ard looking economic trends.
(d) IFRS 15 - Impact of adoption
The adoption of IFRS 15 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements on 1 December 2018. In line w ith the transition provisions in IFRS 15, the Group adopted the new rules on the modified retrospective basis w ithout restatement of comparatives. Under the modified transition method, on 1 December 2018, a net (posttax) adjustment of £2.4 million w as made to the opening balance of retained earnings, to recognise a new policy of estimating accrued income.
The follow ing adjustments w ere made to the amounts recognised in the statement of financial position at the date of initial application:
| IAS 18 | IFRS 15 | ||
|---|---|---|---|
| 30 November 2018 £'000 |
Re measurements £'000 |
1 December 2018 £'000 |
|
| Trade and other receivables (Accrued income only) | 78,741 | (13,017) | 65,724 |
| Trade and other payables (Accruals only) | (107,105) | 9,859 | (97,246) |
| Current tax assets | 2,751 | 766 | 3,517 |
| Post-tax adjustment at the date of initial application of IFRS 15 | (2,392) |
The impact on the Group's retained earnings at 1 December 2018 is as follow s:
| 2018 | |
|---|---|
| £'000 | |
| Retained earnings prior to adjustment | 75,116 |
| Restatement of accrued income | (13,017) |
| Restatement of accrued cost of sales | 9,859 |
| Tax adjustment to retained earnings from adoption of IFRS 15 | 766 |
| Opening retained earnings 1 December from adoption of IFRS 15 | 72,724 |
(e) IFRS 15 - Accounting policies applied from 1 December 2018
Contract revenue ('accrued income') is recognised w hen the supply of professional services has been rendered. This includes an assessment of professional services received by the client for services provided by contractors betw een the date of the last received timesheet and the reporting end date. Accrued income is recognised as revenue for contractors w here no timesheet has been received, but the individual is 'live' on the Group's systems, or w here a client has not yet approved a submitted timesheet.
Previously, such accruals w ere systematically removed after a three-month cut-off date if no timesheet w as received or no customer approval w as obtained. That policy of estimating accrued income/cost historically resulted in a portion of revenue/cost being reversed (this is referred to as 'shrinkage').
Under IFRS 15, an amount of estimated Contract accrual can only be recognised if it is highly probable that a significant rev ersal in the amount of recognised revenue w ill not occur in subsequent periods.
In line w ith this new requirement, to prevent the over-recognition of revenue, from 1 December 2018 the Group has applied the historical shrinkage rate to the amount of accrued income/cost determined for unsubmitted or unapproved timesheets. As a consequence, on 1 December 2018 the accrued income and cost w ould have been £13.0 million and £9.9 million low er respectively. This resulted in a net adjustment to the opening balance of retained earnings of £3.1 million pre-tax.
Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Interim Financial Report requires the Directors 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 know ledge of the amounts, the actual results may ultimately differ from these estimates.
In preparing the Interim Financial Report, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty w ere the same as those that applied in the Group's 2018 annual financial statements, w ith 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 sec ond half of the year compared to the first half. In the financial year ended 30 November 2018, 46% of net fees w ere earned in the first half of the year, w ith 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 review ed by the entity's chief operating decision maker to make strategic decisions and assess segment performance.
The Directors have 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 People Officer and the Chief Sales Officer, w ith other senior management attending via invitation. Operating segments have been identified based on reports review ed by the Executive Committee, w hich consider the business primarily from a geographical perspective. The Group segments the business into four reportable regions: the United Kingdom & Ireland ('UK&I'), USA, Asia Pacific & Middle East ('APAC & ME') and Continental Europe. The latter comprises DACH (Germany, Sw itzerland and Austria) and 'Benelux, France & Spain'; both of these sub-regions w ere aggregated into one reportable segment based on the possession of similar economic characteristics.
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 2018 annual financial statements.
Revenue and net fees by reportable segment
The Group measures the performance of its operating segments through a measure of segment profit or loss w hich is referred to as 'net fees' in the management reporting and controlling systems. Net fees are the measure of segment profit comprising revenue less cost of sales.
Intersegment revenue is recorded at values w hich approximate third party selling prices and is not significant.
| Revenue | Net fees | |||
|---|---|---|---|---|
| 31 May 2019 |
31 May 2018 |
31 May 2019 |
31 May 2018 |
|
| £'000 | £'000 | £'000 | £'000 | |
| Continental Europe | 383,328 | 328,804 | 93,910 | 83,934 |
| UK&I | 124,662 | 131,721 | 23,779 | 26,501 |
| USA | 114,554 | 98,443 | 35,468 | 29,465 |
| APAC & ME | 30,724 | 26,972 | 9,832 | 8,495 |
| 653,268 | 585,940 | 162,989 | 148,395 |
Continental Europe primarily includes Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Spain and Sw itzerland. APAC & ME mainly includes Australia, Dubai, Hong Kong, Japan, Malaysia and Singapore.
Other information
The Group's revenue from external customers, its net fees and information about its segment assets (non-current assets excluding deferred tax assets) by key location are detailed below :
| Revenue | Net fees | |||
|---|---|---|---|---|
| 31 May 2019 £'000 |
31 May 2018 £'000 |
31 May 2019 £'000 |
31 May 2018 £'000 |
|
| Germany | 163,296 | 142,005 | 47,673 | 42,811 |
| Netherlands | 126,512 | 109,015 | 24,738 | 22,371 |
| UK | 117,754 | 126,025 | 21,617 | 24,414 |
| USA | 114,554 | 98,443 | 35,468 | 29,465 |
| Other | 131,152 | 110,452 | 33,493 | 29,334 |
| 653,268 | 585,940 | 162,989 | 148,395 |
| Non-current assets | |||
|---|---|---|---|
| 31 May | Audited 30 November 2018 £'000 |
||
| 2019 £'000 |
|||
| UK | 12,054 | 14,354 | |
| Germany | 966 | 1,060 | |
| USA | 810 | 1,136 | |
| Netherlands | 721 | 803 | |
| Other | 1,216 | 1,148 | |
| 15,767 | 18,501 |
The follow ing 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 | Net fees | |||
|---|---|---|---|---|
| 31 May 2019 |
31 May 2018 |
31 May 2019 |
31 May 2018 |
|
| £'000 | £'000 | £'000 | £'000 | |
| Brands | ||||
| Progressive | 216,883 | 182,092 | 49,244 | 40,580 |
| Computer Futures | 193,957 | 168,141 | 49,511 | 44,991 |
| Huxley Associates | 121,849 | 122,942 | 28,762 | 29,306 |
| Real Staffing Group | 120,579 | 112,765 | 35,472 | 33,518 |
| 653,268 | 585,940 | 162,989 | 148,395 |
Other brands including Global Enterprise Partners, JP Gray, Madison Black, New ington International and Orgtel are rolled into the above brands.
| Revenue | Net fees | |||
|---|---|---|---|---|
| 31 May 2019 |
31 May 2018 |
31 May 2019 |
31 May 2018 |
|
| £'000 | £'000 | £'000 | £'000 | |
| Recruitment classification | ||||
| Contract | 610,563 | 544,062 | 121,098 | 106,705 |
| Permanent | 42,705 | 41,878 | 41,891 | 41,690 |
| 653,268 | 585,940 | 162,989 | 148,395 |
| Revenue | Net fees | |||
|---|---|---|---|---|
| 31 May 2019 |
31 May 2018 |
31 May 2019 |
31 May 2018 |
|
| £'000 | £'000 | £'000 | £'000 | |
| Sectors | ||||
| Technology | 310,501 | 270,691 | 73,111 | 66,488 |
| Life Sciences | 97,536 | 90,748 | 31,532 | 30,594 |
| Energy | 88,362 | 75,976 | 18,379 | 14,013 |
| Banking & Finance | 79,082 | 87,597 | 18,777 | 20,066 |
| Engineering | 62,475 | 51,516 | 16,343 | 14,292 |
| Other | 15,312 | 9,412 | 4,847 | 2,942 |
| 653,268 | 585,940 | 162,989 | 148,395 |
Other includes Procurement & Supply Chain and Sales & Marketing.
3. ADMINISTRATIVE EXPENSES - EXCEPTIONAL ITEMS
The expected benefits are being realised from the successful restructure and relocation of the majority of our London-based support functions to Glasgow . This restructuring is anticipated to realise cost savings in excess of £5 million per annum.
Only immaterial net exceptional costs of £0.1 million have been recognised during the period in relation to the transition to the Centre of Excellence. The exceptional charge in the period included mainly personnel double-running costs of £0.2 million and property costs of £0.3 million. These costs w ere subsequently offset by the government grant income of £0.4 million recognised as an offset to the exceptional costs of an agreed percentage of gross w ages for each full time role created in the Centre of Excellence, bringing the total net costs recognised to date to £13.2 million (HY 2018: £9.1 million).
We do not expect to incur any further exceptional costs in the remainder of the year in respect of the move to Glasgow w hilst the additional government grant is anticipated to be received and recognised as exceptional income in the period through to the end of 2021.
On 14 December 2018, the Group communicated to the market that the Chief Executive Officer, Gary Elden, w ould step down from his role and the Board on 18 March 2019. The new Chief Executive Officer ('CEO'), Mark Dorman, joined the Group on 18 March 2019. The new CEO w as appointed follow ing Gary Elden stepping dow n from the role after leading the Company for six years. Mark w as appointed after a rigorous process determined he w as the best candidate to take the business forw ard to its next stage of grow th and development. These Senior Management changes resulted in the exceptional charge of £1.2 million in HY 2019. The total charge comprised contractual payments, recruitment and other professional fees, double running costs and relocation costs.
Due to the material size and non-recurring nature of these strategic projects, the associated costs have been separately disclosed as exceptional items in the Consolidated Income Statement in line w ith the treatment in HY 2018. Disclosure of items as exceptional, highlights them and provides a clearer, comparable view of underlying earnings.
Items classified as exceptional w ere as follow s:
| 31 May 2019 |
31 May 2018 |
|
|---|---|---|
| Exceptional items - charged to operating profit | £'000 | £'000 |
| Senior Management changes | ||
| Contractual payments for CEO departure | 731 | - |
| Recruitment and other professional fees | 342 | - |
| Double running costs | 56 | - |
| Relocation costs | 60 | - |
| Total - Senior Management changes | 1,189 | - |
| Support functions relocation | ||
| Staff costs and redundancy | 249 | 1,494 |
| Property costs | 305 | 147 |
| Other | 29 | 793 |
| Grant income | (439) | - |
| Total - Support functions relocation | 144 | 2,434 |
| Total net exceptional costs for the period | 1,333 | 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 £6.2 million (HY 2018: £4.9 million) at an effective rate of 27% (HY 2018: 27%). The effective tax rate on the pre-exceptional trading profits arising in the period is 27% (HY 2018: 26%).
5. DIVIDENDS
| Amounts recognised as distributions to equity holders in the period | 31 May 2019 £'000 |
31 May 2018 £'000 |
|---|---|---|
| Interim dividend of 4.7p (2017: 4.7p) per share | 6,069 | 6,041 |
| Final dividend of 9.8p (2017: 9.3p) per share | 12,722 | 11,976 |
| 18,791 | 18,017 |
2018 interim dividend of 4.7 pence (2017: 4.7 pence) per share w as paid on 7 December 2018.
2018 final dividend of 9.8 pence (2017: 9.3 pence) per share w as approved by shareholders at the AGM on 24 April 2019 and has been included as a liability in this Interim Financial Report. The dividend w as paid on 7 June 2019 to shareholders on record at 26 April 2019.
2019 interim dividend of 5.1 pence per share w as proposed and approved by the Board on 19 July 2019 and has not been included as a liability as at 31 May 2019. It w ill be paid on 6 December 2019 to shareholders on record at 1 November 2019.
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 ow ners of the Company by the w eighted average number of shar es in issue during the period excluding shares held as treasury shares and those held in the Employee Benefit Trust w hich are treated as cancelled.
For diluted EPS, the w eighted 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 w ill vary in future periods depending on any changes in these factors.
| 31 May | 31 May | |
|---|---|---|
| 2019 | 2018 | |
| £'000 | £'000 | |
| Earnings | ||
| Profit for the period after tax before exceptional items | 17,526 | 14,956 |
| Exceptional items net of tax | (1,080) | (1,972) |
| Profit for the period attributable to owners of the Company | 16,446 | 12,984 |
| Million | million | |
| Number of shares | ||
| Weighted average number of shares used for basic EPS | 129.9 | 128.7 |
| Dilutive effect of share plans | 5.3 | 5.9 |
| Diluted weighted average number of shares used for diluted EPS | 135.2 | 134.6 |
| 31 May | 31 May | |
| 2019 | 2018 | |
| pence | pence | |
| Basic | ||
| Basic EPS before exceptional items | 13.5 | 11.6 |
| Impact of exceptional items | (0.8) | (1.5) |
| Basic EPS after exceptional items | 12.7 | 10.1 |
| Diluted | ||
| Diluted EPS before exceptional items | 13.0 | 11.1 |
| Impact of exceptional items | (0.8) | (1.5) |
| Diluted EPS after exceptional items | 12.2 | 9.6 |
7. CASH AND CASH EQUIVALENTS
| 31 May | Audited 30 November |
|
|---|---|---|
| 2019 | 2018 | |
| £'000 | £'000 | |
| Cash at bank | 22,591 | 50,844 |
| Bank overdraft | (15,620) | (17,521) |
| Net cash and cash equivalents per the statement of cash flow | 6,791 | 33,323 |
Cash and cash equivalents comprise cash and short-term bank deposits w ith 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 w hich allow any one account to be overdraw n up to £50.0 million, so long as the overall pool of accounts do not exceed a net overdraw n position of £5.0 million.
8. BORROWINGS
The Group has access to a committed RCF of £50.0 million along w ith an uncommitted £20.0 million accordion facility in place w ith HSBC and Citibank, giving the Group an option to increase its total borrow ings under the facility to £70.0 million. The funds borrow ed under the facility bear interest at a minimum annual rate of 1.3% (HY 2018: 1.3%) above the appropriate Sterling LIBOR. The average interest rate paid on the RCF during the year w as 2.0% (HY 2018: 1.8%). The Group also has an uncommitted £5 million overdraft facility w ith HSBC.
At the half year end, £15.0 million (H1 2018: £22.5 million) w as draw n dow n 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 2018 annual financial statements. The Group has been in compliance w ith these covenants throughout the current period. The RCF facility is available under these terms and conditions until 2023.
The Group's exposure to interest rate, liquidity, foreign currency and capital management risks is disclosed in the Group's 2018 annual financial statements.
Movements in borrow ings are analysed as follow s:
| £'000 | |
|---|---|
| Opening amount as at 1 December 2017 | 12,000 |
| Net draw ings during the period | 11,089 |
| Changes to carrying amount due to RCF refinancing (1) | (636) |
| Unaudited closing amount as at 31 May 2018 | 22,453 |
| Audited closing amount as at 30 November 2018 | 37,428 |
| Net repayments during the period | (22,336) |
| Changes to carrying amount due to RCF refinancing (1) | (92) |
| Closing amount as at 31 May 2019 | 15,000 |
(1) £0.1 million (HY 2018: 0.6 million) million represents the unamortised amount of transaction costs including those incurred on renegotiating the facility.
9. SHARE CAPITAL
During the period 139,665 (H1 2018: 123,633) new ordinary shares w ere issued, resulting in a share premium of £0.3 million (H1 2018: £0.3 million). These shares w ere issued pursuant to the exercise of share aw ards under the Save As You Earn scheme.
Treasury Reserve
Treasury shares represent SThree plc shares repurchased and available for specific and limited purposes.
In the six months ended 31 May 2019, none of its ow n shares w ere purchased by SThree plc treasury and no shares w ere utilised from treasury on settlement of Long Term Incentive Plan ('LTIP'), Save As You Earn ('SAYE') or Share Incentive Plan ('SIP') aw ards. At the period end, 1,045,334 (HY 2018: 1,724,673) shares w ere held in treasury.
Employee Benefit Trust
The Group holds shares in the Employee Benefit Trust ('EBT'). The EBT is funded entirely by the Company and acquires shares in SThree Plc to satisfy future requirements of the employee share-based payment schemes. For accounting purposes shares held in the EBT are treated in the same manner as shares held in the treasury reserve by the Company and are, therefore, included in the financial statements as part of the treasury reserve for the Group.
In the six months ended 31 May 2019, the EBT purchased 290,000 (HY 2018: 923,000) of SThree plc shares. The average price paid per share w as 302 pence (HY 2018: 314). The total acquisition cost of these shares w as £0.9 million (HY 2018: £1.0 million), for w hich the treasury reserve w as reduced. During the period, the EBT utilised 466,554 (HY 2018: nil) shares on settlement of LTIP aw ards. At the period end, the EBT held 1,146,783 (HY 2018: 1,419,407) shares.
10. CONTINGENT LIABILITIES
State Aid
In June 2019, the UK government filed an annulment application w ith the European Union General Court, against the European Commission's decision of April 2019, that certain parts of the UK's Controlled Foreign Company regime gave rise to State Aid. The Group has historically relied on this regime in certain jurisdictions. Our maximum potential liability is estimated at £3.2 million. Given the UK government's annulment application, our assessment is that no provision is required in respect of this issue. Despite the annulment application, under EU law the UK government is still required to recover aid in line w ith the Commission's findings. In this event, w e expect any agreed amount to be held in escrow , pending resolution of the legal process.
Legal
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 w ill arise. The Directors are of the view that no material losses w ill arise in respect of legal claims that have not been provided against at the date of these interim financial statements.
11. RELATED PARTY DISCLOSURES
The Group's significant related parties are as disclosed in the Group's 2018 annual financial statements. There w ere no other material differences in related parties or related party transactions in the period compared to the prior period.
12. SHAREHOLDER COMMUNICATIONS
SThree plc has taken advantage of regulations w hich provide an exemption from sending copies of its interim report to shareholders. Accordingly, the 2019 interim report w ill not be sent to shareholders but w ill be available on the Company's w ebsite w w w .sthree.com or can be inspected at the registered office of the Company.
Capital Markets Day 2019 Financial Year end
FINANCIAL CALENDAR
2019 13 September Q3 Trading update 1 November Ex-dividend date for 2019 interim dividend 21 November 30 November 6 December 2019 Interim dividend paid 13 December Trading update for the year ended 30 November 2019
2020
27 January Annual results for the year ended 30 November 2019
