SThree plc

("SThree" or the "Group")

Interim results for the six months ended 1 June 2008

SThree, the international specialist staffing business, is today announcing its interim results for the six months ended 1 June 2008.    

Operational Highlights

Russell Clements, CEO, commented:

"We are pleased with the performance of the Group in the first half, having once again posted strong growth. Our established strategy of geographical and sector diversification continues to deliver excellent results and it is pleasing to note that 41% of the Group's business now comes from outside of the UK.

The current uncertain economic situation has been reflected in some areas of the UK market, particularly those exposed to the banking & finance sector. However, this has been offset by an extremely robust performance from our international offices. As a result we believe we remain on course to make good progress for the year as a whole. 

We take confidence from the fact that SThree has a twenty two year track record of profitability and cash generation throughout the economic cycle. We also benefit from a seasoned management team who have gained their experience through all types of market conditions. SThree operates an agile business model notable for its flexibility and this positions us well to adapt quickly should the market require us to do so."

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 is now broadening the base of its operations by building fast-growing businesses serving the banking and finance, accountancy, human resources, engineering and pharmaceuticals, energy and job board sectors.  

Following the establishment of its first business, Computer Futures, in 1986, the Group adopted a multi-brand strategy, establishing new operations to address growth opportunities. SThree currently operates 12 brands, the four largest being Computer Futures, Huxley Associates, Progressive and Pathway, and has 33 offices in the UK and 21 offices internationally.

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. SThree also has a US level one ADR facility, symbol SERTY.

SThree plc

("SThree" or the "Group")

Interim results for the six months ended 1 June 2008

Operating Review

The first half of 2008 saw a solid performance from the Group, with Gross Profit (GP) growing by 24.2% to £102.5m (2007: £82.5m). We are particularly pleased with the outstanding contribution of our international teams. In the first half Non-UK GP grew by 58% to £42.4m (2007: £26.8m). Although early returns from our newest offices in Hong Kong, Dubai and Sydney 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 UK and the US, even the financial markets have held up relatively well. This resilience is a reflection of the strong structural growth that characterises much of our fast growing international business. The increasing internationalisation of the Group is the most significant theme to note from the period. As at the half year 41% of Group GP was derived from outside of the UK, up from 32% at the end of the 2007 financial year.

GP growth in the UK was 8.0% ahead at £60.1m (2007: £55.8m). This was due to two major factors. Firstly, the slowdown in the banking sector and areas directly linked to it had a meaningful impact. Secondly, headcount growth in the UK was modest by recent standards at 7.8% ahead from the first half of last year. Given this fact it is interesting to note that the per capita yields achieved in the UK were basically unchanged from last year. 

The slowdown in headcount growth in the UK was partly a reflection of the Group requiring fewer Consultants in the banking and related markets, as well as moving a number of experienced Consultants abroad to help with the Groups' international expansion and therefore deliberate. However it was also a reflection of the fact that the Group found hiring staff more challenging than in the recent past and hence were not able to grow teams as significantly as in previous years.

During the first half of the year the Group benefited from a far more stable environment in terms of its internal finance and information systems. We are now starting to see a return on the investment we made on the 2007 ERP implementation, which was reflected in the very significant improvement in the Group's cash collection performance. At the half year the Group held £3.9m of net cash compared to £40.6m of net debt at the same time last year. The days sales outstanding ("DSO") figure reduced to 51 days at the period end from 80 days in the prior year and is an improvement on the pre-ERP regime. This allowed the Group to fund the repurchase of £14m worth of its shares - approximately 5.5% of the total share capital.

At the start of the year the Group recognised a £2m loss associated with the early closure of a number of complex derivatives-based foreign exchange contracts. The Group now has a hedging strategy which makes no use of complex derivatives products. As such the loss is taken in the accounts as an exceptional item.

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. At the same time the Group does not neglect the importance of its longer established franchises. Our default assumption is that the strategy will be based on organic growth. As such we will continue to invest in growing the headcount of the teams wherever the market situation and management capabilities justify it. We are pleased to see the results of our diversification strategy reflected in the fact that for the first time in the Group's history its UK ICT franchise is now a minority of Group GP at 45% of the total. This compares with 53% for the first half of 2007.

A key element of our strategy is that we 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 (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 77% of the candidates we placed were ICT professionals, only 25% of our customers are in the ICT sector. The fact that the Group's first half contract margin improved to 21.8% (2007: 21.2%) is further evidence of the validity of this approach.  

Our multi-brand approach allows the Group to segment the market around specific niches. This allows us to credibly position ourselves as market experts, which in turn justifies a premium pricing position. 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

At the half year the Group had a total of fifty-four offices in ten countries. In the first half the Group added four new offices; Dubai (Pathway), Sydney (Progressive), Paris (Huxley) and Amsterdam (Madison Black). In the former two cases these were the Group's first moves into the respective regions, in the latter two the offices added to an already well-established SThree presence in France and Holland. These illustrate the two parallel strands of our international strategy; launching into entirely new territories and further expanding within those where we already have a substantial presence. We continue to see significant scope for expansion in all our current overseas territories.

The new offices for Madison Black and Pathway were both brands' first non-UK locations and reflect the fact that the Group's international growth is increasingly being undertaken by brands which have hitherto been solely UK based. To put this in some context, our longest established international brand Computer Futures now generates more than 60% of its business from outside of the UK.

Overall Non-UK GP grew by 58% to £42.4m (2007: £26.8m) helped by the increasing contribution made by the roll out of newer sectors into newer geographies. The exciting potential of this approach is increasingly evident. The Group has had a successful UK engineering business for a number of years, but has only much more recently started placing engineers in continental Europe. The longer term potential of this initiative in a market such as Germany is clearly very significant and only one example of many.

The first half of the year saw the Group expand its geographical footprint into the Middle East and Australia. These represent very different opportunities given the major differences in the maturity of the specialist staffing market in the two regions. That said, we are pleased with the early progress we have seen and both businesses are making strides towards repaying their initial investment. The same applies to our Hong Kong office, which has performed very satisfactorily despite thus far being primarily focused on the investment-banking sector. We are currently enhancing this franchise through the addition of an ICT capability.  

We continue to believe that the structural growth characteristics of our international markets mean they have the potential to show greater resilience to economic uncertainty, given their relatively underdeveloped and less intensively competitive nature. On this basis we have further plans for expansion in 2009 and have targeted Singapore, France and Germany for additional office openings.

In the UK the Group grew GP by 8% to £60.1m (2007: £55.8m). The UK market has seen a significant impact from the fall out of the credit crunch with the investment banking market being the worst affected sector by some way. As a relatively mature market the UK is in principal more sensitive to the effects of a slowdown. Nevertheless, even with a very uncertain economic background and negative sentiment providing the backdrop for the whole of the first half, UK GP still grew satisfactorily. This performance was supported by the roll out of newer segments, which helped offset the impact of the banking slowdown. Notable amongst these was the strength of demand in the UK Oil and Gas market.  

Sector Expansion 

Overall the Group grew GP from non-ICT sectors by 56% to £21.8m (2007: £13.9m). This was a significant acceleration in the rate of growth recorded during the full year 2007 when the non-ICT business achieved 33.3% growth. This result needs to be seen in the context that historically the Group's single largest non-ICT franchise has been its UK investment banking business which, as noted above, has been badly affected by the fall out from the banking crisis. 

The strength of the Non-ICT segment reflects two factors. First, the somewhat longer established UK Non-ICT teams have reached a meaningful degree of critical mass. Second, the roll out of non-ICT disciplines to the newer geographies, which was at an embryonic stage last year, has started to gain traction. 

As a consequence the contribution made by the non-ICT segment to the overall mix of business increased significantly. In 2007 the overall percentage of GP attributable to the newer sectors was 17% whereas by the half year this figure had changed to 21% of the total. This is a strong reinforcement of the potential of rolling out the SThree model to newer disciplines and we will continue to invest in this area. Our assumption is that as this programme continues, the non-ICT segment will play an increasingly important role in the Group's performance.  

Contract/Permanent Business Mix

The Group once again benefited from improvements in both volume and value in both the Permanent and Contract sides of the business. In the first half the Group made 5,008 permanent placements, an increase of 9.3% (2007: 4,580). At the same time the average fee achieved grew by 10.7% to £10,091 (2007: £9,116). At the half year the Group had a total of 5,743 contractors, a growth rate of 15.5% (2007: 4,580). These generated an average gross profit per day rate of £79.11, an improvement of 8.2% (2007: £73.14).

Due to the more rapid growth in Contract GP, the Group's mix of business has changed. In the first half Contract GP represented 51% of the total compared with 49% for 2007 as a whole and 50% for the half year 2007. This slight change is explained partly by a natural move towards Contract hiring in a less confident market such as banking in the UK, but also a larger contract contribution from some of our continental European teams. This 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 2,122 (2007: 1,771) an overall increase of 19.8% on the previous year. Of this total, sales headcount grew by 23% but this growth was heavily weighted to our newer geographies, which were 59.1% ahead of their 2007 figure. By contrast the UK sales headcount was only 7.8% ahead of which a large proportion was attributable to teams addressing newer non-ICT disciplines. 

As noted above, the relatively modest headcount growth in the UK reflects a more challenging environment for hiring trainee consultants in the UK and is also a function of the Group's year-on-year reduction in the number of consultants addressing the banking market.  

The Group plans to continue to hire to support its growth where the market opportunity supports this approach. In the current circumstances this is likely to result in relatively modest headcount growth in the UK and continued strong growth in other territories. However, the Group is agile in terms of its hiring programme and will adapt where necessary to market changes - be they positive or negative.  

Brand Performance

As in 2007 the four largest brands in the first half in order of GP contribution were Computer Futures, Huxley, Progressive and Pathway. In aggregate these brands represented 82% of total GP, a figure slightly above 2007 when it was 78%. All four brands grew significantly albeit at differing rates depending on their mix of business and sector specialism.

In the first half Computer Futures achieved a 30.6% improvement in GP to £30.2m (2007: £23.1m). This was a strong result from our longest established business which benefits from a significant presence in continental Europe. Huxley grew by 24.5% to £27.6m (2007: £22.2m), a satisfactory performance when we take into account that this brand has a well developed UK banking franchise and hence has faced the most challenging market conditions of our major businesses.

Progressive's GP of £19.9m (2007: £14.1m) showed a major acceleration in its growth from 27.3% to 41.6%, primarily due to an increase in its international business and a strong performance in the UK from its newer sectors, particularly Oil & Gas. Pathway grew GP to £6.4m (2007: £5.4m) a rate of 19.2%, with its new office in Dubai playing a role in offsetting a tougher UK market. The smaller brands managed in aggregate to grow by a more modest 3.3% reflecting their UK focus and in most cases a greater than (the Group's) average exposure to the banking market.

Taxation

The charge for taxation on profits before exceptional items amounted to £7.5m (2007: £6.0m), an effective tax rate of 31.4% (2007: 31.3%). Under Schedule 23 of the Finance Act 2003, the Group obtains a corporation tax deduction relating to the various share awards and options exercised. The amount of the tax deduction is calculated by reference to the share price at the time of award or exercise. As a consequence, there is a cash benefit to the Group of such tax deductions, which, under IFRS, is dealt with through equity. The total Schedule 23 tax benefit amounts to £0.6m (2007: £9.1m).

Earnings Per Share

Basic earnings per share before the exceptional item (i.e. the £2m derivatives loss) increased by 27% to 11.8p (2007: 9.3p). After taking account of the current-period exceptional item, earnings per share increased by 16%. Diluted earnings per share before exceptional items increased by 28% to 11.5p (2007: 9.0p). 

Cash Flow

At the start of the period the Group had net cash of £3.5m. During the period the Group generated cash from operating activities of £32.8m (2007: cash outflow of £24.7m) being £27.5m of operating cashflow before changes in working capital and provisions (2007: £21.0m) and a reduction in working capital requirements and provisions of £5.3m (2007: increase in working capital of £45.7m). At 1 June 2008 the Group had net cash of £3.9m.

During the period, the Group spent some £14.4m purchasing 7.2m of its own shares. Since the period end the Group has purchased a further 2.7m shares at a cost of £4.5m This programme was financed utilising existing facilities. A flexible invoice financing arrangement is in place with Royal Bank of Scotland Group (RBS) until February 2010. Under this arrangement the Group is able to borrow up to £50m, with a committed facility of £20m.The Board is satisfied that these facilities are appropriate for the Group's needs. It is the current intention of the Group to continue to purchase shares for cancellation when the circumstances make it appropriate to do so.  

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

The Group does not have material transactional currency exposures although is exposed to translation differences on the profits and cash flows generated by its overseas operations, the main functional currencies of the Group being Sterling and the Euro. As reported in February 2008, some derivative transactions were undertaken to mitigate certain exposures to complex derivative financial instruments and these results include a £2.0m loss arising from having closed the positions before maturity. 

The Board has since undertaken a review of its foreign exchange hedging strategy to ensure that it is appropriate, given the Group's increasing international business and has adopted a policy not to hedge translation risk, but to hedge transaction exposures, consistent with our major listed competitors. As a result of the earlier mitigation, the Group no longer has exposure to complex derivative financial instruments, which the Board believes are not appropriate for the Group going forward.

The other principal risks and uncertainties affecting the business activities of the Group remain those detailed within the Directors' Report section of Annual Report for the year ended 2 December 2007, 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 in these factors in respect of the remaining six months of the year.

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 an interim dividend of 4.0p (2007: 3.1p) per share, an increase of 29%. The interim dividend will be paid on 5 December 2008 to those shareholders on the register at 7 November 2008.

Outlook

Trading in the first half of 2008 took place against a background of an international banking crisis, economic uncertainty and a decline in business confidence. Notwithstanding this the Group grew GP by 24.4% to £102.5m (2007: £82.5m) and profit before tax (before exceptionals) by 24.0% to £23.8m (2007: £19.2m) We see this performance as an indication that the specialist staffing market has the capacity to show greater resilience than it is often given credit for having. 

Without question the Group's first half result was enhanced by the excellent performance of its international franchises and the strong structural growth characteristics, which are typical of the markets in which they operate. Similarly we must recognise that the UK market is tougher than it has been in recent years. 

Even so, we regard the fact that a market as relatively mature as the UK has shown the ability to grow in such difficult circumstances as a positive sign. Historically the specialist staffing market has not required buoyant economic growth to grow healthily. Given the evidence currently available, the Group remains realistic but positive regarding its future prospects and we have no reason to assume that we will not be able to achieve the Board's previous expectations for the year as a whole. 

In the event of a serious further deterioration in the underlying economic situation the Group would of course expect to be affected. However SThree has a number of strengths that position it well to cope with a change in market conditions. First, the Group has a strong contract business - the temporary market has consistently been more resilient to downturns and also provides a cash hedge as working capital unwinds. Second, it has exposure to international markets with significant structural growth characteristics. Third, it has a flexible business model, particularly in terms of the low percentage of fixed to variable consultant remuneration. Finally, it has a twenty two-year track record of profitability and a seasoned management team with experience gained throughout the economic cycle.

Consolidated Income Statement - unaudited 

Six months ended 1 June 2008

An interim dividend of 4.0 pence (3 June 2007: 3.1 pence) per ordinary share will be paid on 5 December 2008 to shareholders on the register at the close of business on 7 November 2008.

Consolidated Statement of Changes in Equity - unaudited 

As at 1 June 2008

Consolidated Balance Sheet - unaudited 

As at 1 June 2008

Consolidated Cash Flow Statement - unaudited 

Six months ended 1 June 2008

Notes to the Financial Statements - unaudited

Six months ended 1 June 2008

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 18 July 2008.

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 2 December 2007 were approved by the Board of directors on 7 March 2008 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

This consolidated interim financial statements for the six months ended 1 June 2008 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 2 December 2007, 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 financial statements as were applied in the preparation of the Group's financial statements for the year ended 2 December 2007.

Notes to the Financial Statements - unaudited

Six months ended 1 June 2008

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.

Notes to the Financial Statements - unaudited

Six months ended 1 June 2008

2.  Segmental analysis (continued)

The following segmental analyses by brand, recruitment classification and by discipline (being the profession of candidates placed) have been included as additional disclosure over and above the requirements of IAS14 "Segment Reporting".

(1) Including banking and finance, accountancy, human resources, engineering, pharmaceuticals and jobboard sectors.

Notes to the Financial Statements - unaudited

Six months ended 1 June 2008

3.  Administrative expenses - exceptional items

Exceptional items are those items which, because of their size, incidence or nature, are disclosed to give a proper understanding of the underlying results for the period. Items classified as exceptional are as follows:

The Group does not have material transactional currency exposures although is exposed to translation differences on the profits and cash flows generated by its overseas operations, the main functional currencies of the Group being Sterling and the Euro. During the prior period some derivative transactions were undertaken to mitigate certain exposures to complex derivative financial instruments and these results include a £2.0m loss arising from having closed the positions before maturity. The Board has since undertaken a review of its foreign exchange hedging strategy to ensure that it is appropriate, given the Group's increasing international business and has adopted a policy not to hedge translation risk, but to hedge transaction exposures, consistent with our major listed competitors. As a result of the earlier mitigation, the Group no longer has exposure to complex derivative financial instruments, which the Board believes are not appropriate for the Group policy going forward. 

4. Taxation

Interim period income tax is accrued on the estimated average annual effective rate of 31 per cent (6 months ended 3 June 2007: 31 per cent, year ended 2 December 2007: 33 per cent).

5. Dividends

The final dividend of 6.2 pence (2007: 4.8pence) per ordinary share was approved to be paid on 9 June 2008 to shareholders on record at 2 May 2008.

An interim dividend of 4.0 pence (3 June 2007: 3.1pence) per ordinary share will be paid on 5 December 2008 to shareholders on the register at the close of business on 7 November 2008.

Notes to the Financial Statements - unaudited

Six months ended 1 June 2008

6. Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data.

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the Employee Benefit Trust which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares.

Notes to the Financial Statements - unaudited

Six months ended 1 June 2008

7. Property, plant and equipment