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UK – SThree increases profits despite fall in revenues in 2010

31 January 2011

Revenues for the year decreased by -8.6% from 519.4 million Pounds in 2009 to 474.5 million Pounds in 2010 at SThree Plc (STHR:LSE), the international specialist staffing firm.

Preliminary results for the year ended 28 November 2010 published today show that gross profit for the year decreased by -2.8% from 171.2 million Pound in 2009 to 166.4 million Pounds in 2010, representing a group gross profit margin of 35.1%  compared to 33.0% in 2009.

The group gross profit margin increased as a result of the remix in business towards permanent, which represented 49% of gross profit in 2010, up from 42% in 2009. Permanent revenues are accounted for at 100% gross margin, whereas contract gross profit is shown after the associated cost of sale.

Administrative expenses before prior year exceptional items decreased by -5.2% from 153.2 million Pounds in 2009 to 145.2 million Pounds in 2010, as the group benefitted from close monitoring of costs and made efficiency savings on advertising spend, professional fees, motor vehicle costs, bank charges and a number of other such costs. As a result, the group's conversion ratio grew from 10.5% in 2009 to 12.8% in 2010.

Profit before tax increased by +20.0% from 18.0 million Pounds in 2009 to 21.6 million Pounds in 2010 before prior year exceptional items are taken into account and by +142.7% from 8.9 million Pounds in 2009 to 21.6 million Pounds in 2010 after prior year exceptional items.

Taxation on profit before exceptional items was 7.4 million Pounds (2009: 5.5 million Pounds), representing an effective tax rate of 34% (2009: 31%). The increase in the effective tax rate was driven by a remix of the business towards jurisdictions with higher tax rates. Based on the current structure of the group and existing local taxation rates and legislation, it is expected that the underlying effective tax rate will remain at around this level.

Non-UK share of gross profit increased from 55% in 2009 to 60% in 2010, with this trend expected to continue as the group becomes increasingly international.

New offices were opened in Perth, Delhi, Houston, San Francisco, Munich and Düsseldorf, bringing the total to 52. Offices in Doha, Sao Paulo, Antwerp and Abu Dhabi are due to open in H1 2011.

The contract versus permanent mix of gross profit in 2010 was 51:49 in favour of contract compared to 58:42 in 2009.

Non-ICT disciplines now represent 38% of total gross profit compared to 28% in 2009 due to continued sector diversification. 76% of gross profit is now derived from outside of the UK ICT market compared to 69% in 2009.

Group headcount was 1,863 at 28 November 2010, up +16.7% on the opening headcount at 29 November 2009 of 1,597. Average total headcount for the year was 1,772, down by -3.7% from 1,841 in 2009.

Russell Clements, CEO, commented "SThree delivered a strong result in 2010 in a market which was still some way from fully recovered. Sentiment improved steadily and we ended the year with all our markets and territories in growth. We were also pleased with the increasing momentum in our longer established businesses building towards the end of the year. Looking ahead, we remain well positioned to make further progress through a combination of expansion in existing markets and further investment in new geographies with their substantial structural growth potential."

The group says in a statement "ultimately, the global economic backdrop will to some extent influence the scale of our market opportunity in the coming year. However, it is worth remembering that the history of the group specifically, and the specialist staffing market more generally, demonstrates that SThree do not need exceptionally strong economic tailwinds as a precondition for strong performance. Indeed, it is candidate confidence as much as any other major factor which drives demand and the group's experience shows that a healthy level of candidate confidence is not predicated on above-trend economic growth."

"In addition, the group is more exposed than ever before to markets with strong structural growth characteristics. Recent experience in territories such as Germany suggest that the underlying growth of the specialist staffing market can act as a powerful counter-balance even when economic conditions are dire. Given that the balance of opinion suggests at least a benign global economic scenario for 2011, markets such as these have particularly strong potential. At the same time the group's longer established franchises had all returned to growth by the end of 2010 and have no reason to believe that this is a trend which will not continue."

"Taking all the available indicators into consideration, the group's feel there are justifiable reasons to remain optimistic about the forthcoming year. As always, the group takes confidence that twenty five year track record, seasoned management team and well established brands provide an excellent platform to make the most of whatever the market has to offer."

In early trading SThree's shares were down by -6.30% to 370.10 Pence.


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