SThree plc

("SThree" or the "Group")

Interim results for the six months ended 31 May 2009

SThree, the international specialist staffing business, is today announcing its interim results for the six months 

ended 31 May 2009.

Operational Highlights

• Satisfactory first half performance in a very challenging market. Gross Profit down 9% to £93.3m (2008: £102.5m). On a constant currency basis Gross Profit down 15%

• Permanent placements down by 34.1% to 3,302 (2008: 5,008) - average permanent placement fee up significantly by 17.3% to £11,838 (2008: £10,091)

• Number of active contractors at period end reduced by 21.8% to 4,494 (2008: 5,743) - average gross profit per day rates increased by 10.8% to £87.67 (2008: £79.11)

• Contract margin improved to 22.5% (2008: 21.4%)

• Contract versus permanent mix of Gross Profit now 58:42 in favour of contract (Full year 2008: 52:48)

• Non-UK Gross Profit for the period represented 54% of the Group total (Full year 2008: 45%)

• International business performed robustly, growing Gross Profit by 20% to £50.7m (2008: £42.4m).

The UK business posted a 29% decline in Gross Profit to £42.6m (2008: £60.1m)

• Non-ICT business segments grew by 9% to £23.6m (2008: £21.8m) representing 25% of total Gross Profit

• New offices opened in Dusseldorf, Frankfurt, Hamburg and Singapore

• Business right sized in Q2 2009 for the prevailing climate, resulting in a 25% reduction in headcount and an

exceptional charge of £8.5m 

• Basic earnings per share (before exceptional items) of 6.3p (2008: 11.8p); post exceptional 1.1p (2008: 10.8p)

• Net cash position strong at £43.9m (2008: £3.9m net cash) and reduction of days sales outstanding to 39 (2008: 51) 

• Interim dividend maintained at 4.0p (2008: 4.0p)

Russell Clements, CEO, commented:

"The Group performed very satisfactorily in the first half in extremely challenging market conditions.  In particular, we are pleased with the strong contribution made by our international businesses, which grew by 20%, reflecting both our growing international presence and the structural growth opportunities available outside of the mature staffing markets of the UK and US. Our commitment to maintaining price discipline was once again evident in our robust like for like fee growth, with average fees improving further even in the face of significant volume declines. This performance is testament to the strengths of the Group's well-established positioning in the SME market, significant contract business and focus on the placement of specialist candidates in higher wage bands.  

"Whilst we took decisive restructuring action in the period to align our cost base with the market opportunity, we also continue to invest for the future - expanding our international network into new territories and adding or growing new disciplines such as Legal, Sales & Marketing and Public Sector.

"With a strong cash position and healthy balance sheet the Group is well positioned to ride out the current downturn and capture the opportunities of the recovery when it arrives. In the meantime, it is gratifying to once again be in a position to reward our shareholders' commitment with a strong dividend payment."

  Enquiries:

Notes to editors

SThree, founded in 1986, is one of the leading international specialist staffing businesses, providing permanent and contract specialist staff to a diverse client base of well over 7,000 clients. From its well-established position as a major player in the information and communications technology ("ICT") sector the Group has further broadened the base of its operations by building fast-growing businesses serving the accountancy & finance, banking, engineering, oil & gas, pharmaceuticals, human resources, energy, legal and job board sectors.

Following the establishment of its first business, Computer Futures, in 1986, the Group has adopted a multi-brand strategy, establishing new operations to address growth opportunities. SThree operates through brands including FS Group (Computer Futures/JP Gray), Huxley Associates, Progressive and RPMG (Real/Pathway) and has 1,650 employees in eleven countries.

SThree has a selective approach to clients and focuses on high margin opportunities, predominantly within the small to medium-sized enterprises ("SME") market. From its inception the Group has avoided the high volume/low margin business model in favour of a focus on high quality business.

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

Important notice

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

SThree plc

("SThree" or the "Group")

Interim results for the six months ended 31 May 2009

Operating Review

Given the exceptional market conditions, the first half of 2009 saw a satisfactory performance from the Group, with Gross Profit (GP) reducing by a relatively modest 9% to £93.3m (2008: £102.5m). We are particularly pleased with the strong contribution of our international teams during the period. In the first half Non-UK GP grew by 20% to £50.7m (2008: £42.4m). Although early returns from our newer offices in Singapore, Dusseldorf, Frankfurt (our third office in this city) and Hamburg made a contribution, we are equally pleased by the growth posted by our longer established offices in continental Europe.

It is notable to see the extent to which outside of the UK and the US the business has performed more strongly. This resilience is a reflection of the structural growth that characterises much of our fast growing international business. That said, all of our Non UK offices faced deteriorating market conditions during the period in sharp contrast to the buoyant conditions they enjoyed during H1 2008.

Unsurprisingly the teams addressing those territories that are relatively more mature in terms of specialist staffing markets (such as Benelux) found conditions more challenging than their colleagues exposed to strong structural growth in territories such as Germany. Nonetheless the increasing internationalisation of the Group is the most significant theme to note from the period. As at the half year 54% of Group GP was derived from outside of the UK, up from 45% at the end of the 2008 financial year.

By contrast GP in the UK declined by 29% to £42.6m (2008: £60.1m). As a mature staffing market, the UK does not benefit from any structural growth to offset weak levels of demand. Ordinarily the normal fluctuations of the economy tend to have a limited impact at the very specialist end of the market, as the inherent shortage of highly skilled staff acts as a mitigating factor. However the severity of the current recession has clearly been too much for this shortage to make a material difference and as a consequence the Group found the UK market particularly difficult.

It is worth noting however that the current downturn has not experienced (with the exception of the banking market) the mass redundancies seen in the ICT market in the period following the Dot Com crash. Unlike then, this has meant that there is not a ready supply of unemployed candidates prepared to bid down the market rate for roles. Indeed given the prevailing level of uncertainty, candidates are often reluctant to put themselves on the market. The resulting scarcity of candidates for certain positions explains (along with the Group's price discipline) the robustness of our UK fees.

Very recently there have been indications that the UK market may be showing some signs of stability. In particular, the decline in productivity per consultant has been replaced by a modest improvement. However at this stage the data points are relatively limited and we therefore remain cautious regarding the UK market until such time as we see further evidence to suggest that the bottom has been reached. 

As we would expect, as a result of the difficult market conditions we have seen a further shift in the business mix towards contract. During the period 58% of Group GP was attributable to contract compared to 52% during the same period in 2008. However, although relatively more robust, the volume of contract runners at period end declined by 21.8% to 4,494 (2008: 5,743). Despite this the average contract margin improved from 21.4% to 22.5%, once again this is testament to the Group's unwillingness to compete solely on price.

The reduction in contract runners resulted in a commensurate unwinding of working capital and this contributed to a major strengthening of the Group's net cash position to £43.9m from £3.9m in the previous year. This strong cash performance was also driven by the Group continuing to trade profitably and a significant improvement in the Group's DSO figure to 39 from 51 in 2008. The latter was a reflection of seeing a return on the Group's investment in ERP as well as a concentrated management focus.

During the second quarter of 2009, the Group undertook a significant restructuring to right size the business for the prevailing market climate. This led to a restructuring charge of £8.5m, relating to people exit and office rationalisation costs, which has been taken in the accounts as an exceptional item. We anticipate that this will pay back within the current financial year.

Strategy

The Group has a well-established strategy based on rolling out the SThree model to an increasing number of geographies and across a widening range of specialist staffing disciplines. Clearly the current market conditions have in the short term impacted the scale and pace of the roll out. However we are focused on a strategy for the medium/long term and added to our international office network and grew our Non ICT franchises during the period. The success of the strategy is reflected in the fact that our businesses outside the UK ICT sector represented 67% of Group GP in the first half of 2009 compared to 55% in the first half of 2008. We will continue to look at further expansion opportunities with a view to ensuring that the Group is well positioned strategically to take full advantage of the inevitable upturn.

The Group's core strategy will continue to be based on organic growth. Although we are not philosophically opposed to considering acquisitions we would see any as opportunistic and more likely to be small "bolt-ons" capable of offering niche expertise we would find difficult to build internally.

In normal conditions the Group's growth strategy is to increase sales headcount to the fullest extent possible given market opportunity and management bandwidth. That said, our strategy is agile and we benefit from a highly flexible workforce. This enabled us during the period to rightsize the business by reducing headcount by approximately 28%, which was achieved at a relatively modest cost and paying back within the financial year, although we were still also able to invest in those geographies/sectors offering growth opportunities. We believe that headcount is now at a level commensurate with both the current trading conditions as well as our need to ensure a level of critical mass in our chosen markets. Our overall headcount strategy is to maintain team sizes at their current level until we see signs of meaningful improvement in the market. That said, in markets which offer strong structural growth and/or markets that we feel are strategically attractive for different reasons (for example size) we will continue to selectively add headcount where appropriate.

A further key element of our strategy is to remain highly selective regarding the quality of the business we undertake. We remain healthily sceptical of the value of the "high volume, low margin" model associated with servicing the larger corporate market in more mature markets (particularly in the UK & US). The Group instead prefers to engage with less price-focused clients who value its services.

As a result our customer base is wide and varied, with a high percentage of SMEs. This reduces the Group's exposure to a limited number of powerful customers and also ensures that we avoid the margin pressure associated with wholesale" buyers such as the major systems integration companies. In this respect it is instructive to note that despite the fact that in the first half of the year 75% of the candidates we placed were ICT professionals, only approximately 22% of our customers are in the ICT sector. The improvement in the Group's first half contract margin to 22.5% (2008: 21.4%) is further evidence of the validity of this approach even in very challenging conditions.  We are committed strategically to  maintaining our price  discipline even if  this  means walking

away from lower quality business which would flatter volumes but at an unacceptable margin.

This strategy is supported by our multi-brand approach which allows the Group to segment the market around specific niches. This allows us to credibly position ourselves as market experts, which in turn justifies premium pricing. Our entrepreneurial culture is reinforced by our Minority Interest model, which is both a significant retention tool for existing management and a unique proposition to attract the brightest and best talent into the Group.

Geographical Expansion & Sector Expansion

Contract/Permanent Business Mix

The Group saw reductions in volume mitigated by good value growth in both the Permanent and Contract sides of the business.

In the first half  the Group made  3,302  permanent placements, a  reduction of  34.1% (2008:  5,008). At  the same time  the

average fee achieved grew by 17.3% to £11,838 (2008: £10,091). At the half year the Group had a total of 4,494 contractors, a reduction of 21.8% (2008: 5,743). These generated an average gross profit per day rate of £87.67, an improvement of 10.8% 

(2008: £79.11). 

Due to the more rapid growth in Contract GP, the Group's mix of business has changed. In the first half Contract GP represented 58% of the total compared with 52% for 2008 as a whole and 51% for the half year 2008. This shift is explained partly by a natural move towards Contract hiring in a difficult market and by a larger contract contribution from our continental European teams. This in turn reflects the increasing acceptance of the temporary staffing model in territories such as Germany.

Staffing Levels

At the end of the half-year total headcount for the Group was 1,647, an overall decrease of 27.6% on the previous year (2008 year end: 2,274). The Group is agile in terms of its hiring programme and will adapt where necessary to market changes. The Group's strategic preference is for growing headcount primarily through hiring of graduates. As such, the Group has shown itself capable of rapidly increasing headcount as market conditions improve.

Brand Performance

As for the full year 2008, the four largest brands in order of GP contribution were Computer Futures, Huxley, Progressive and Real Resourcing. In aggregate these brands represented 83% of total GP, a figure slightly above 2008 when it was 82%.

In the first half of the year, Computer Futures declined by 11.2% in GP to £26.8m (2008: £30.2m). This was a satisfactory

result from our longest established business which benefits from a significant presence in Continental Europe. Huxley declined by 14.9% to £23.5m (2008: £27.6m), an acceptable performance when we take into account that this brand has historically been particularly strong in investment banking and is also more permanent focused than the rest of the Group. 

Progressive's GP of £19.8m (2008: £19.9m) showed commendable resilience, primarily due to an increase in its international business and a strong performance in the UK from its newer sectors, particularly Oil & Gas. Real Resourcing grew GP by 12% to £7.4m (2008: £6.6m), by continuing its drive in the public sector. Overall this brand's performance was a very notable achievement given its largely UK focus The smaller brands declined in aggregate by 12.7% reflecting their UK focus and in most cases a greater than (the Group's) average exposure to the financial market.

Taxation

The charge for taxation on profits before exceptional items amounted to £3.5m (2008:£7.5m), an effective rate of 31% (2007:31.4%). The tax rate for the full year is anticipated to increase from 30% to around 31% due to the increased proportion of profits that is expected to arise in overseas territories with comparably higher rates of tax.

Earnings per Share

Basic earnings per share before the exceptional item reduced by 46.6% to 6.3p (2008: 11.8p). After taking account of the exceptional item, earnings per share reduced by 89.8% to 1.1p. Diluted earnings per share before the exceptional item decreased by 46.9% to 6.1p (2008: 11.5p).

Cash Flow

At the start of the period the Group had net cash of £24.6m. During the period the Group generated cash from operating activities

of £37.3m (2008: cash inflow of £32.8m) being £6.5m of operating cashflow before changes in working capital and provisions (2008: £27.5m) and a reduction in working capital requirements and provisions of £30.8m  (2008: reduction in working capital of  £5.3m).

At 31 May 2009 the Group had net cash of £43.9m.

A  flexible invoice financing  arrangement  is in  place with Royal Bank of Scotland Group  (RBS)  until 25  February 2010. Under this arrangement the Group is able to borrow up to £50m, with a committed facility of £20m. The Board is in the process of assessing the level of  facility required and is in discussions  with a number of potential providers. The Board expects to conclude  this  later in 2009.

Treasury Management, Currency Risk and Other Principal Risks and Uncertainties affecting the Business

The main functional currencies of the Group are Sterling and the Euro. The Group has significant operations outside the United

Kingdom and as such is exposed to movements in exchange rates. 

The Board has undertaken a review of its currency hedging strategy to ensure that it is appropriate and currently the Group does not actively manage its exposure to foreign exchange risk by the use of financial instruments, consistent with its major listed competitors. However, the impact of foreign exchange will become a more significant issue for the Group as we expect the business mix to move further towards International, with International business accounting for 54% of gross profit in 2009 (2008: 45%). The Group continues to monitor its policies in this area.

Other principal risks and uncertainties affecting the business activities of the Group are as detailed within the Directors' Report

section of  the Annual Report for  the year ended  30 November 2008, a copy of which is available on the Company's  website at www.sthree.com. In terms of macro economic environment risks, as previously stated, our strategy is to continue to grow the size of our international business in both financial terms and geographic coverage in order to reduce the Group's exposure or dependence on any one specific economy, although a downturn in a particular market could adversely impact the Group's business. In the view of the Board, there is no material change expected to the Group's key risk factors in the foreseeable future.

Dividends

It is the Board's intention to pay dividends at a level that it believes is sustainable throughout the economic cycle and is broadly in line with comparable quoted businesses' dividend covers. The Board proposes to pay a maintained interim dividend of 4.0p (2008: 4.0p) per share. The interim dividend will be paid on 4 December 2009 to those shareholders on the register at 6 November 2009.

Outlook

Trading in the first half of 2009 took place against a background of a severe global downturn and sharply declining business confidence. 

During the period the Group took decisive steps to ensure that the business remains fit for purpose in the current climate. That said, we are also committed to maintaining a scaleable platform to support future growth and will continue to make prudent investments as these opportunities arise.

The Group's extremely healthy cash position is particularly pleasing to note. This, along with our twenty two year track record of consistent profitability and our seasoned management team position us extremely well to deal with whatever the market presents us with.

Looking beyond the current downturn the Group operates in an extremely attractive market which has delivered profit for the Group in every year since its inception in 1986. Historically the Group's bounce back from downturns has been very rapid. Given that we are ever more an international business and increasingly exposed to markets with strong structural growth, we believe there is no reason why our recovery from the current downturn will be any less marked. In the meantime the strongly cash generative nature of the business and its healthy balance sheet puts us in a strong position to continue to support a robust attitude towards our dividend payment.

Consolidated Income Statement - unaudited 

for the six months ended 31 May 2009

An interim dividend of 4.0 pence (1 June 2008: 4.0 pence) per Ordinary Share will be paid on 4 December 2009 to shareholders on the register at the close of business on 6 November 2009.

Consolidated Balance Sheet - unaudited

as at 31 May 2009

Consolidated Statement of Changes in Equity - unaudited 

as at 31 May 2009

Consolidated Cash Flow Statement - unaudited 

for the six months ended 31 May 2009

Notes to the Financial Statements - unaudited

for the six months ended 31 May 2009

1.  Accounting policies

General information

SThree plc ("the Company") and its subsidiaries (together "the Group") operate predominantly in the United Kingdom and Europe. The Group consists of 12 different brands and provides both permanent and contract specialist staffing services, primarily in the ICT sector and, to an increasing extent, the banking and finance, accountancy, human resources, engineering, pharmaceutical and jobboard sectors.

The Company is a limited liability company incorporated and domiciled in the United Kingdom. The Company is listed on the London Stock Exchange.

These consolidated interim financial statements were approved for issue on 17 July 2009.

These consolidated interim financial statements do not comprise statutory accounts within the meaning of section 240 of the Companies Act 1985 (section 434 of the Companies Act 2006). Statutory accounts for the year ended 30 November 2008 were approved by the Board of directors on 30 January 2009 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 237 of the Companies Act 1985.

These consolidated interim financial statements have been reviewed, not audited.

Basis of preparation

These consolidated interim financial statements for the six months ended 31 May 2009 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, Interim Financial Reporting as adopted by the European Union. The consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended 30 November 2008, which have been prepared in accordance with IFRSs as adopted by the European Union.

Significant accounting policies

The same accounting policies, presentation and methods of computation are followed in these consolidated interim financial statements as were applied in the preparation of the Group's consolidated financial statements for the year ended 30 November 2008.

There were no new International Financial Reporting Standards or interpretations that had to be implemented during the period that affect these consolidated interim financial statements.

2.  Segmental analysis

As the Group operates in one business segment, being that of recruitment services, no additional business segment information is required to be provided. The Group's secondary segment is geographical and the segmental results by geographical area are shown below.

For reasons of risk management and tax planning, in certain instances the Group uses UK registered companies to transact with clients located in continental Europe. As a result we report fully allocated operating profit by location of operating company rather than by location of client.