Good morning everyone and welcome. Thank you for joining us today. For our half year results briefing. I'm joined by Andy Beach, our CFO.
Good morning everyone.
And as usual together we will be walking you through the half year numbers, our strategic progress, and discussing the outlook. Let's go. During the period we marked a really important milestone in our evolution with the launch of our refined branding and value statement, which we believe is a more accurate reflection of who we are, what we offer, and what sets us apart. We are the Global STEM Workforce Consultancy. Let us show you what that looks like. We have long provided more than transactional staffing to our customers. We are workforce consultancy with a suite of resourcing solutions from compliance services, project solutions, and workforce structuring to the management of more than 9,000 contractors from 11 countries o n behalf of our clients.
W e specialize in high value, complex flexible talent where our consultative approach adds the most value and where human expertise supported by digital tools remains essential to the delivery of quality at pace. There aren't many other staffing firms that can provide the range of solutions that we do alongside our experience and regional know-how. As many of you know, the charts on this page show how our well-established strategy is positioned at the center of two long-term growth STEM and Flexible Talent. This remains as relevant today as it has ever been and it is here where we see our opportunity fulfilling the structural demand for STEM skills, which is underpinned by megatrends and is particularly well aligned to the contractor model. As a result of this focus, our contract business represents 84% of group total.
Our bias towards contract provides us with resilience, a more profitable revenue stream with better visibility, and is a powerful differentiator in the market. We have delivered a steady performance in the first half of the year against a persistently challenging market environment. We have made significant progress in preparing our business for when market conditions improve and to align with structural opportunities. As a result of the TIP rollout, over 80% of our business is now transacting through our future-ready end-to-end integrated technology infrastructure. This is driving operational efficiencies and significantly enhancing our ability to scale. We are now able to innovate at pace with the foundations to unlock rich data, insights, and layer in new functionality. We are building an organization fit for purpose, which combined with our industry experience, deep networks, and strong commercial footing means we are ready for the future.
We are often asked whether current industry trends are structural or cyclical. We believe they're both. Let's explore further regarding our end markets. This is clearly an extended cycle lasting longer than expected due to persistently low business confidence. However, we do expect this extended cycle to eventually subside and investment to resume. To stay ahead, organizations will need to invest in their future. We anticipate that once pent-up demand is released, the demand for flexible STEM roles will be especially acute. Beyond the usual economic cycles, a deeper transformation is underway. Emerging technologies like machine learning and generative AI are reshaping markets and sectors. These trends aren't short-term trends, they signal lasting structural change and we are well positioned to respond. From a client perspective, organizations of all sizes are reimagining their business models and workforces.
They are now faced with making smart and strategic decisions to ensure they have the skills and expertise needed to compete in an AI-enabled future. Every industry will be significantly impacted by technology investment. We have long recognized that structural megatrends, including technological advances, will shape the workforce of the future and we have deliberately placed our focus at the heart of this opportunity. We help clients build a workforce infrastructure that supports AI innovation across all roles and across all industries. Our tech focus connects businesses with the core skills needed to prepare their data and processes for effective AI adoption. From an industry perspective, our ability to offer workforce solutions means that compared to more transactional and blue-collar staffing businesses, we are less at risk of disintermediation from digital platforms. Our clients need experts that can advise them and that is our specialism.
Digital transformation, including advancements in AI, is reshaping staffing, creating opportunities to deliver enhanced client and candidate services and drive efficiencies. The world is moving fast, and the work we have done in the last three years allows us to capitalize on these trends as we have the right foundations in place with our focus and scale and one of the most modern technology stacks in our industry. Whilst the landscape around us is evolving rapidly, it is clear that there's pent up demand for the skills we are focused on, and we're extremely well positioned to not only keep pace with this evolving landscape, but lead the future of this industry. I will cover each of these differentiators in more detail later in the presentation. I will now pass over to Andy to talk us through the financials.
Thank you very much Timo. Let's start with a summary of the half year performance. Net fees are down 14% year on year on a constant currency basis. Contract, which represents 84% of net fees, declined 14% as continued softness in new business activity was partially offset by strong contract extensions. Pleasingly, we also saw a modest sequential quarter on quarter improvement in the rate of decline during Q2, reflecting an improved U.S. performance where initiatives aimed at strengthening market positioning are beginning to gain traction. Permanent, which is a smaller part of our business, declined 13% and continues to be impacted by challenging market conditions across most of our regions despite a softening in comparatives. Notably, our permanent businesses in the U.S. and Japan recorded growth in the first half of the year.
Operating profit for the half was £10 million, which is down 72% on a constant currency basis. This primarily reflects the effect of our operational gearing on lower net fees across key markets, partially offset by disciplined management of operating costs and the early realization of further operational efficiencies. This has resulted in a conversion ratio, the ratio of operating profit to net fees, of 6.3%. Profit before tax is £10.1 million, down 72% year on year, reflecting the lower operating profit and lower net interest income on our cash. Now we do expect profits and margins to increase in the second half of the year, in part due to the benefits of our first half efficiency actions being weighted to the second half.
We continue to index calendar quarter net fee performance since 2019, the last full year before the pandemic, to show more clearly our performance compared to other staffing businesses. As the chart shows, we are less cyclical, which we believe is due to our strategic focus on flexible talent and STEM. We clearly outperformed the market through Covid and over the last three years we have sustained that outperformance. This shows that we are less volatile through periods of market disruption, with our contractor order book providing a runway of contract net fees due to be recognized as they are earned on a month by month basis over the life of a contract.
As we have seen historically, when markets recover and new placement activity increases, the recovery in net fees tends to be smoother and from a higher overall level, resulting in a more even through the cycle net fee profile compared to permanent-focused staffing businesses where net fees are recognized almost immediately. Overall, this demonstrates that we have the right strategy and that our business is high quality through the cycle. Looking at the regional and skill mix for the period, we have critical mass and a well-diversified business across key STEM markets and skill verticals. The first ring chart shows the split by region, with DUC remaining the largest region in the group, representing 33% of net fees. Looking to the far right, you can see net fees were lower across all regions in the first half.
The second ring chart shows our strong and unique position in providing STEM skills. Technology continues to be our largest skill, and it represents 45% of net fees. Engineering, our second largest skill, declined by 9% year on year following last year's record performance. Encouragingly, within this vertical, our clean energy business continues to perform strongly, growing 6% year on year and now accounting for 14% of group net fees. At the same time, we saw continued softness in demand for skills across both technology and life sciences, reflecting the persistently challenging trading environment. Throughout the first half, we continue to benefit from the ongoing trend towards flexible working. This slide looks at our net fees by service. A contract business can be split between independent contractors and employed contractors.
The most notable shift over the last few years has been the trend towards the employed contractor model, or ECM, which has grown from 22% of net fees in H1 of FY2019 to 40% of net fees in the first half of FY2025. Although acting as the employer of record is not a service unique to SThree PLC, it remains out of reach for most subscale recruiters due to the high barriers to entry driven by the complexity of compliance, operational infrastructure, and the balance sheet strength required to support it. Where SThree PLC stands apart from larger industry peers is in our comparatively higher net fee exposure to ECM, further reinforced by our focus on STEM disciplines.
Additionally, our ECM segment generates net fee margins around 30%- 40% higher than those generated by independent contractors, as our clients are willing to pay for the risk and complexity that we assume on their behalf. With the rollout of our new future-ready digital infrastructure, there will naturally be fewer manual touch points, eliminating the need to constantly increase headcount to service our contractors, thereby helping us to achieve higher profit margins and scale more efficiently. Looking now at the future visibility of our contract business, the contractor order book represents the value of contracts written up to the contractual end date, assuming that all contracted hours are worked. The book was down 8% year on year, as a continued strong extensions performance was only able to partially offset the slowdown in new placements from the prolonged market uncertainty.
However, even with the decline, the order book continues to provide us with sector-leading forward visibility compared to permanent-focused staffing businesses, with the equivalent of around five months' worth of future net fees already booked. The resilience of the contractor order book demonstrates that whilst new placement activity continues to be soft, all other underlying metrics around our contract business are strong. We've seen excellent extension rates in the half, and this has resulted in average contract lengths increasing by 18% compared to the prior year to 64 weeks, to sustain contract margins at around 21.5%. We've maintained tight pricing control, especially on extensions, and the average salary of the contract roles that we placed is up 1% year on year, now reaching £103,000. Productivity was 10% lower year on year, as the rate of net fee decline was faster than the reduction in average headcount.
The movement in headcount reflects careful management of natural churn, being highly selective about where we choose to hire, and the realization of operational efficiencies. Near term, we expect productivity to continue to moderate until market conditions improve, but over the mid term, we do expect to deliver sustainable increased levels of productivity as our strategic investments in digital infrastructure deliver the expected benefits. The Technology Improvement Program remains on budget, and the overall timeline remains on track to complete by the end of FY2025. Out of our 11 markets, 8 are now actively using the platform, representing over 80% of Group net fees. We expect total OpEx for the year to be in the range of £3 million- £4 million. This is weighted to the second half of this year based on the phasing of rollout activities, with around £1 million incurred in H1.
Total CapEx is expected to be around £6 million- £7 million, with just under £3 million spent in the period. As we approach the final stages of the program, we have further refined our delivery forecast. We are pleased to confirm that projected spend remains comfortably within the original £30 million- £35 million budget and is now expected to come in towards the mid to upper end of that range. Turning to the year-on-year operating profit bridge, you can see the decrease in both contract and permanent net fees is partially offset by people costs being down year on year. This is primarily due to the 5% average decrease in headcount compared to last year, which is partly reflective of the further operational efficiencies coming through. To date, we have made good progress and remain on track to deliver the £6 million in-year net saving target for FY25.
Of this, around £2 million has already been achieved. Since most of the costs to deliver were incurred in the first half of the year, we expect a natural uplift in savings in the second half. You can also see the £0.3 million year-on-year increase of OpEx costs for the Technology Improvement Program and £2.1 million year-on-year increase of other operating costs. This includes additional expenditure related to the commencement of Technology Improvement Program amortization and license fees, as well as property and marketing expenditure, which is partially offset by disciplined management of other operating costs. This leaves profit for the half at £10 million. Looking at our net cash position, excluding the impact of the £20 million share buyback program, we are broadly in line with the FY24 year-end position.
We see our usual outflows, including a share purchase for the Employee Benefit Trust, payment of the final FY24 dividend, lease principal payments, and CapEx, including around £3 million incurred on the Technology Improvement Program. We recorded only a modest net increase in working capital as movements in receivables and payables broadly offset each other, including the purchase of nearly 8 million shares under the share buyback program. Our half-year cash balance is around £48 million. Before moving on to look at dividends, I wanted to share with you a brief reminder of our capital allocation policy. Our overarching intention is to always maximize value for our shareholders. We look to maintain a strong balance sheet to provide flexibility at all times, while also providing shareholders with a sustainable through the cycle dividend with long term earnings growth. We then prioritize our deployment of capital in the order shown.
Now turning to dividends. Notwithstanding the reduction in our near term profitability, we continue to have strong confidence in the future of the business. I'm pleased to confirm that we will be paying an interim dividend of £0.051 per share. The Board's decision to maintain the dividend in line with last year reflects a considered assessment of the group's future outlook, underpinned by a robust balance sheet and a strong track record of cash generation. It also underscores the Board's commitment to returning surplus capital to shareholders where appropriate.
To sum up, we're reporting a steady trading performance with the rate of decline in net fees improving sequentially through the half, operating profit reflecting the lower net fees partially offset by disciplined cost control, a contract order book that continues to provide good visibility of future net fees, and a robust balance sheet which positions us well to fund our future ambitions. Thank you. I'll now hand back to Timo.
Thank you, Andy. We will now turn to look at what we have achieved strategically throughout the half. As part of our ongoing evolution, we took the decision to reassess the alignment of our growth pillars to our business strategy. We have renamed our position pillar to proposition, and we've introduced the fifth strategic pillar to support our execution. Our customers are at the heart of everything we do, so it felt appropriate to dedicate a specific pillar towards them, given their importance. I will now touch on each pillar in turn. Our market reach remains strategically aligned with 11 of the strongest STEM markets globally. We regularly review our position in these regions, and since early 2023 we have been deliberately rebalancing our portfolio, ensuring all our markets are well positioned to take advantage of significant growth opportunities when they arise.
A great example of this strategy in action is what we have done in the U.S. over the past few years. We rolled out several internal and go to market initiatives, anticipating that U.S. market would rebound earlier than others. These initiatives included targeted investments in our core skills verticals to better balance our portfolio, strengthening our permanent offering, and sharpening our overall market approach in the region. We're already seeing the benefits of our efforts with Q2 performance in U.S. rebounding, driven in large part by strong performance from our engineering vertical. Turning to our platform, Nick is going to explain the progress we have made in detail in a second. From my perspective, H1 marked another positive chapter in our tech journey. This has been a journey that has been challenging, but one that was bold and has seen us transform our position for when the markets recover.
It is no mean feat to deliver a program of this nature and size on track and on budget. We should be incredibly proud. We have started to show that the Technology Improvement Program is not just delivering functional improvements, but is also beginning to unlock commercial and operational upside, particularly where maturity, adoption, and leadership alignment are strong. Now over to Nick.
Good morning ladies and gentlemen. I'm Nick Folkes, Chief Operating Officer at SThree and I oversee the group's Technology Improvement Program or TIP. Three years ago we set out on an ambitious journey to transform the operational core of SThree. At the time we recognized that our legacy technology, while serviceable, was limiting our scalability and capacity to innovate. What we needed was not a service level upgrade, but a complete re-engineering of our digital infrastructure. We made a bold decision not to optimize around the edges, but to fundamentally reinvent. Rather than settle for tactical fixes or short-term gains, we chose to take on the harder, more ambitious challenge to replace every core system and build a fully integrated cloud-native platform from the ground up. An end-to-end integrated platform capable of supporting our ambitions for growth, efficiency, and competitive differentiation.
It was a long-term investment, one that demanded persistence and deep alignment across the business. It was the only way to unlock the agility and intelligence we knew we needed to lead in the years ahead. Today that decision is proving itself in faster innovation, smarter decision making, and measurable improvements in performance across the business. That decision wasn't just about technology, it was about reimagining how we operate as a business. We set out to elevate every aspect of the business to deliver step change in service quality, unlock richer real-time insights, and dramatically boost productivity at scale. Delivering on that ambition required more than new systems, it meant standardizing our ways of working across the business and fully digitalizing SThree's operations from front to back. Fast forward to today and I'm pleased to report that we're delivering on that vision.
As of now, over 80% of group net fees are processed through the new platform. We are live in eight out of our 11 global geographies, having recently completed deployments in the Netherlands, France, Spain, Switzerland, and Austria. We've onboarded over 13,000 internal and external users, all of whom now operate on a single global platform. The feedback from our users has been clear. This isn't just better, it's transformational and it's enabling outcomes that until recently weren't possible. In just the last six months, we've delivered 60 new product enhancements and continue to develop five key features powered by AI, a testament to the maturity of our platform and the pace at which we can now innovate. We're no longer constrained by fragmented systems or manual workflows. Let me share a few examples.
In the front office, our AI-driven shortlist generator is already speeding up placement cycles and enhancing candidate matching precision. It provides consultants with richer, more relevant profiles and helps clients make faster, more confident hiring decisions. In the back office, we've automated time-consuming, repetitive tasks such as timesheet validation and document checks through AI models that significantly reduce human intervention. We're just getting started. Next, we're deploying tools to help consultants identify and nurture warm leads, expand active networks, and surface opportunities that once required hours of manual effort, and these capabilities are already delivering real, measurable returns. We've now achieved a total of $6.5 million in annualized cost savings from our automation in our middle and back office operations and sales management layers, thanks to enhanced data and reporting capabilities that drive faster, more impactful decision making. This comfortably exceeds our original expectations.
Across the U.S. and Germany, we've seen a 34% reduction in time to first interview, enabling our consultants to move faster and more efficiently for both clients and candidates. Perhaps the most compelling proof point is the performance of our most junior consultants, those with zero to 24 months of experience who have historically shown consistent productivity regardless of trading conditions. In the U.S. and Germany, those cohorts have delivered a year-on-year productivity improvement of 32% and 5% respectively, outperforming the overall market cohorts in those countries by significant margins. That level of uplift speaks to the system's ability to reduce ramp time and empower early career talent faster than ever before. This success has only been possible thanks to the commitment of our global teams and the agile, iterative delivery model we've adopted. I want to take this opportunity to extend my personal thanks to everyone involved in our transformation.
We're now entering the final phase of the program with ECM delivery for Germany and three remaining markets scheduled for rollout. As we close the formal program at the end of this financial year, I want to highlight that we are delivering our Technology Improvement Program, an enhanced scope, on time and on budget. While TIP formally concludes, our momentum does not. We currently have over 20 additional enhancements in development and will continue investing in this platform in line with our capital allocation priorities. However, the most powerful impact of TIP may not lie in what it delivers today, but in what it makes possible tomorrow. With a clean, standardized, and fully integrated data and systems landscape now in place, we've built more than a technology platform.
We've established the foundation for a fundamentally more adaptive and insight-led business, one capable of evolving rapidly and scaling confidently in a changing world. This positions us uniquely within the sector. We can now drive recruitment technology innovation at a pace once out of reach, unlocking next generation AI capabilities that point towards entirely new ways of working. We're actively exploring opportunities that extend far beyond the limits of traditional platforms, possibilities enabled by real-time data, intelligent workflows, and a unified architecture driving every decision and interaction. These are the kinds of capabilities that will shape the next era of recruitment, and we're well positioned to lead it. We're confident that this foundation will continue to deliver superior performance and sustained value over the long term. Thank you for your continued support and interest. I look forward to sharing more in the months ahead.
Aligned with our refreshed go-to-market branding, we have taken another important step forward by introducing a new strategic pillar, one that sharpens our focus on driving revenue through deeper client engagement and stronger candidate relationships. Backed by our Technology Improvement Program, our evolved brand positioning, and continued investment in team development, we are now more joined up as an organization than ever before. That unity is helping us enhance our service proposition and cement our place as a true strategic partner in the STEM workforce space. We are working to rebalance our client mix by pushing further into the enterprise space, which we see as a real opportunity for us. Our global client strategy is a key part of this, creating a more consistent, standardized approach to growing and partnering with our most strategic accounts, and we're seeing encouraging results.
Despite the macro environment we have been experiencing, we have seen year-on-year growth across our top 20 clients. For our candidates, our focus is on long-term relationships. We are committed to connecting skilled STEM professionals with the right opportunities in dynamic organizations that align with their ambitions. This is made possible by the network we've built over decades, nurtured through a mix of digital marketing, thought leadership, industry events, and other multi-channel engagement. Now turning to our people pillar, the full potential of the exciting changes we are making lies in the hands of our people. From the outset of the Technology Improvement Program, we have paired our technology implementation with investment in people, fostering a culture of inclusion and continuous learning. We continue to roll out global training across our systems and new ways of working, and we're pleased to see a continuous increase in engagement and adoption.
As part of our commitment to thinking big, we brought our sales efforts more to the forefront of what we do with a strategic shift towards driving a high-performance culture. A natural next evolution in this journey was the launch of two new performance frameworks across our sales function. These frameworks, which are integrated with our technology and systems, are designed to build more processes that are scalable and will guide our employees to increase success rates. As highlighted earlier, it's been a busy and productive first half of the year as we focus on strengthening our brand positioning, reinforcing our position as a trusted strategic partner for workforce solutions. As part of this, we brought all seven of our go to market brands closer together under the SThree umbrella.
We believe this will unlock real value, allowing us to harness the collective strengths of our global STEM expertise while still maintaining the specialist focus that makes each brand unique, which customers are looking for. The early response from our customers and partners has been really encouraging, and we are confident this will continue to support our ambition to become the authority in the STEM world of work. We also launched our very first STEM Skills Index, a data-driven ranking of countries based on their ability to develop, retain, and apply STEM talent. It's already become a cornerstone of our thought leadership, and it's proving to be a powerful tool for our consultants, helping them advise and lead more meaningful data-led conversations with clients about workforce capability, STEM talent strategy, and long-term planning.
To bring everything I've discussed together and highlight what makes SThree unique and well placed to deliver, our focus on contract provides resilience and sector-leading visibility. Our STEM focus sets us apart. Our conviction continues to be that STEM skills will build the future across all industries, and these skills remain particularly well aligned to our contract model. We are at the forefront of our industry with our technology investments. Not only will we be a digitally enabled, scalable business with high barriers to entry, but we will also be able to drive significant efficiencies and innovate at pace. As Nick said, the most powerful impact of the Technology Improvement Program may not be what it enables today, but what it makes possible tomorrow.
We're in a unique position in the sector to drive further innovation, leveraging the very latest technologies including AgentIQ AI to maintain our first mover advantage in the market. Finally, in line with our repositioning as we have highlighted it, we are not just a traditional recruiter, we are a workforce consultancy. This enables us to become a strategic partner for our clients. We service businesses around workforce compliance globally, build expert teams, and deliver project solutions to outpace tomorrow. Together, these services help us increase account penetration through deeper engagements with our clients. To sum up, we delivered a steady performance in the first half of the year against a persistently challenging market environment, and we enter the second half of the year in line with guidance. The Technology Improvement Program rollout is entering the final stages.
We are maintaining strong momentum with over 20 new platform enhancements already in development, including next generation AI-driven tools designed to support consultants in opening new opportunities and maximizing their networks, another key step in embedding intelligence in the workflow. As we continue to scale globally, we remain confident that the Technology Improvement Program will be a key driver of high margin growth, structural efficiency, and sustained competitive advantage. Finally, we are building an organization fit for purpose, which, combined with our industry experience, deep networks, and strong commercial footing, means we are structurally positioned to benefit as markets recover and evolve.