The financial summary including operating statistics, financial ratios and performance as well as the segmentations per region of the previous five years can be found here.


2017 PBT ANNUAL BONUS TARGETS

In response to feedback on the FY 2017 Directors’ Remuneration Report, the Remuneration Committee is publishing additional information on the target-setting process for the annual bonus scheme.

In line with normal practice the Committee reviews the range of PBT (and other) financial targets it sets each year at the start of the financial year.

This process includes having regard to SThree’s internal budget (and our sensitivity analysis), external expectations for performance (consensus) and wider economic conditions. As a recruitment business, we are sensitive to the impact of economic conditions and the general trading environment. All of these factors help ensure that our target-setting process is robust.

With regards to the range of targets set for the FY 2017 bonus, these reflected our assessment of the above factors at the start of the financial year. This was reflected in the range of PBT targets that we set for FY 2017 of £36.9m-£45.1m. This was a lower range than the PBT target range for the 2016 bonus scheme of £39.6m-£48.4m.

At the time the targets were set, market consensus for FY 2017 PBT was £38.3m, with many analysts forecasting a fall in PBT from the amount achieved for FY 2016. Our assessment of the trading environment was reflected in our FY 2016 preliminary results announcement (Jan 2017) where the CEO stated “Looking ahead, the heightened level of political and economic uncertainty remains the primary feature of our trading outlook.” There are other separate comments in that announcement about uncertainty in specific markets. The factors underpinning this uncertainty in early 2017 included the results of the US election, upcoming elections in France and Germany and the ongoing uncertainty related to the outcome of the EU referendum in the UK. The changed political landscape created global macro-economic uncertainties, making this a difficult environment in which to plan. In this context, the range was felt similarly challenging to the FY 2016 range of targets.

The PBT targets which have been set for the FY 2018 bonus have been calibrated following a similar process. While the range is considered commercially sensitive and will be disclosed in the 2018 Remuneration Report, what we can state is that the bonus requires FY 2017 PBT of £44.5m to be achieved for any bonus relating to PBT to be earned. Therefore, a higher PBT range has been set, reflecting current market conditions which, while challenging, contain less uncertainty than was the case a year ago. This revised range has been set to be similarly challenging in the current circumstances to the range set for FY 2017.

The Committee is comfortable that it strikes the right balance in its financial target-setting between setting realistic targets at the lower end of the range through to demanding targets at the top end of the range that do not inadvertently result in undue risk taken.

PENSION PAYMENTS

The Company wishes to correct an error of reporting in the DRR. Note (iv) to Section 1.1 Directors' Remuneration for FY17 and Basis for Payments Under Incentive plans (Audited) contains the statement “Steve Quinn’s FY2016 and Justin Hughes’ FY2017 pension figures include amounts to rectify underpayment of this supplement to them from prior years. For Justin Hughes, the majority of this catch up occurred between FY2011 and FY2013 shortly following him moving to Hong Kong as he transitioned to local contribution arrangements. However, the table above includes pre-payments of £33.7k in respect of FY2018.” The wording referring to a pre-payment was included in error. Justin Hughes was overpaid £33.7k in 2017 as a payroll error. This amount has been clawed back and will be fully reported in the 2018 DRR.


Financial highlights

Investment Case

Segmental

As a medium case, we plan to double Group profits and further diversify the business.

All figures are reported figures before exceptional items in £'m unless stated otherwise.

  30 November
2017*
30 November
2016**
30 November
2015
30 November
2014
1 December
2013
Financial Performance
Revenue 1,114.5 959.9 848.8 746.9 634.3
Gross Profit 287.7 258.7 235.7 218.2 199.8
Operating profit 44.9 41.5 29.8 21.2 25.1
Total Assets 273.5 231.5 185.1 203.4 160.0
Total equity 80.7 75.7 59.4 51.3 51.6
Net cash/(debt) 5.6 10.0 6.2 (9.9) 8.7
Cash from operations 41.1 46.9 60.8 20.1 9.5
 
Financial Ratios
Conversion ratio (%) 15.6 16.0 17.6 13.7 10.6
Cash conversion 78.6 96 126.0 47.8 80.0
Basic EPS (pence) 25.7 23.2 23.2 16.3 9.1
Dividends per share (pence) 14.0 14.0 14.0 14.0 14.0
 
Operational Statistics
Average total headcount 2,668 2,667 2,487 2,228 2,234
Average sales consultants 2,090 2,044 2,117 2,002 1,736
Active contractors at year end 10,197 9,078 8,412 7,573 5,791

*2017 figures are adjusted for the impact of £6.7m of exceptional strategic restructuring costs

**2016 figures were adjusted for the impact of £3.5m of restructuring costs.


Segmental


  2017 2016 2015 2014 2013
GP - UK & Ireland 19% 25% 30% 30% 31%
GP - Continental Europe 52% 49% 44% 46% 49%
GP - USA 22% 20% 19% 15% 11%
GP - Asia Pac & ME 7% 6% 7% 9% 9%
 
Contract % 71% 67% 64% 61% 56%
Permanent % 29% 33% 36% 39% 44%



Financial highlights


  2017 2016(3)
  Adjusted(1)
£m
As reported(4)
£m
 
Adjusted(2)
£m
As reported
£m
Revenue 1,114.5 1,114.5 959.9 959.9
Gross Profit 287.7 287.7 258.7 258.7
Operating profit 44.9 38.2 41.3 37.8
Profit before taxation ("PBT") 44.5 37.7 40.8 37.3
Basic earnings per share 25.7p 21.5p 23.2p 21.2p
Proposed final dividend 9.3p 9.3p 9.3p 9.3p
Total dividend (interim and final) 14.0p 14.0p 14.0p 14.0p
Operating profit conversion ratio 15.6% 13.3% 16.0% 14.6%

(1) 2017 figures are adjusted for the impact of £6.7m of exceptional strategic restructuring costs.
(2) 2016 figures were adjusted for the impact of £3.5m of restructuring costs.
(3) All variances compare adjusted 2017 against adjusted 2016 to provide a like-for-like view.
(4) FX impacted positively on our results YoY on a reported basis.

Investment Case

Our business model is well diversified across geographies and sectors, while focusing on markets that meet certain criteria to drive profitable growth. We cover the different and complementary revenue streams of both contract and permanent recruitment

We are a pure STEM recruiter with multiple brands to maximise opportunities, including allowing our brands to compete where this creates greater shareholder value

We participate in markets where demand for talent exceeds supply, giving us structural long-term growth opportunities

Our leading-edge systems and global infrastructure provide a scalable platform for future growth

We have a unified single database of customers

Our focus on customer experience provides sustainable competitive advantage

We have a diverse and engaged workforce

Our strength in Contract provides more predictable future earnings

The Contract market has higher barriers to entry because of cash requirements and regulatory complexity

We have a consistent and robust dividend track record supported by a strong balance sheet

Our entrepreneurial culture is supported by a range of long-term incentives to drive sustained performance

Our balanced business model provides us with a good degree of resilience across a range of sectors, geographies and employment mixes

Existing footprint and investments give us significant operating leverage to double profit before tax over a five-year period

Our experience over the last 30 years gives us insight and flexibility to rapidly re-deploy our staff across sectors and regions in response to changing market dynamics.

Diverse Sectors and Countries

Having started in the UK we now generate over two thirds of our business from our international operations. We have a total of 40 offices in 16 countries. We operate across a range of industry sectors including ICT, Banking & Finance, Engineering, Energy and Life Sciences sectors.

Balanced portfolio of Permanent and Contract business

Although we have a balanced business model, including both Contract and Permanent, each having its own benefits, our current focus is on building Contract, whilst building productivity in Permanent. With our contract runner level at a record high we continue to believe that this presents us with sustained growth opportunities in 2018 for the following reasons:

  • Long-term societal preference for contract assignments, particularly among skilled individuals
  • Higher lifetime value than a Permanent equivalent
  • Higher Consultant productivity on Contract compared to Permanent
  • STEM markets are often project-based
  • Tendency for contract rates to rise in positive economic climate when talent is in short supply
  • Greater barriers to entry due to cash requirements and growing compliance and regulatory requirements
  • More predictable and visible earnings stream
  • More resilient than Permanent in times of economic uncertainty as companies defer long-term investments
  • Ongoing client relationships more likely to generate other opportunities
  • Contract is a key requirement to deal with Managed Service Providers (MSPs) who cover roughly 30% of global recruitment spend
  • Additional future growth opportunities by expanding into Employed Contractor Model in addition to standard Contractor model

Pure play specialist stem recruiter

The STEM recruitment market has the following characteristics:

  • Ideal for the recruitment sector as highly skilled candidates are difficult to identify
  • Benefit from future market changes brought about by technology/automation
  • A job market growing faster than the overall job market
  • Broad client mix
  • Higher average salaries and margins
  • Increasing government and industry regulations require larger compliant organisations
  • The contract offering is particularly well suited to the STEM market

Demand for quality talent in STEM markets is on the rise, primarily due to:

  • Structural shift in favour of Contract increases candidate mobility
  • Expanding client portfolios
  • Demographic shifts and an ageing workforce
  • Relatively high churn as candidates move to update skills and projects require different skill mixes
  • Shortage of specialist skills in technical areas
  • Expanding client portfolios
  • Shortage of talent considering careers in STEM

Increasingly exposed to markets with structural growth

Many of the territories in which we operate have relatively immature specialist staffing and our exposure to these countries is increasing as we grow internationally.

Focused on project-oriented markets

We play to our strengths in our STEM sectors which are, by their nature, project oriented and technology driven. This not only benefits our contract business as clients are often seeking temporary hires, but it also expedites natural churn on the permanent side to levels above that typically seen in other professional sectors. This enhances demand even in mature markets.

Leading edge systems as a platform for growth

We have always had a firm belief in the power of providing the right tools for the job. Our industry-leading systems have been developed with the aim of turning huge amounts of data into commercially useable information. Our candidate databases are accessible on a global basis and we run the business through bespoke sales management applications. Our systems and global infrastructure provide a scalable platform for future growth.

Robust dividend track record

The cash generative nature of our business allows us to adopt a robust attitude towards our dividend. Even during the global downturn we maintained our dividend at the pre-downturn level.

A highly entrepreneurial culture led by owner managers

We believe strongly in the importance of equity participation by our staff. Our CEO and many of our senior managers have significant holdings of SThree stock. We also operate a (Tracker Share) ("minority interest") Scheme which allows selected management to buy a stake in the business for which they are responsible, making them part-owners rather than simply paid managers.

Tracker share arrangements

Low barriers to entry into the recruitment market make it a challenge to retain senior staff - tracker shares help to retain staff.

The "tracker share" or Minority Interest ("MI") model helps combat this by allowing selected individuals to invest in the business for which they are responsible. This enables them to share in the success of the business they help to create. This is unique in the sector and helps drive strong retention and ownership behaviours at a senior level.

  • Strong governance via MI steering committee
  • 2017 settlements £3.2m (2016: £4.6m, 2015:£8.5m)
  • Expect future settlements to be £5-£15m in shares
  • Settlements entirely at SThree's discretion - no put option