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UK — SThree lower headcount inhibits profitability

19 July 2010

SThree Plc (STHR:LSE), the international specialist staffing firm, has today announced interim results for the six months ended 30 May 2010.

Revenues were down by -21% from 280.6 million Pounds in H1 2009 to 221.7 million Pounds to H1 2010.

Gross profit fell by -20.3% from 93.3 million Pounds in H1 2009 to 74.3 million Pounds in H1 2010.

Profit before tax, before exceptional items, fell by -34.8% from 11.2 million Pounds in H1 2009 to 7.3 million Pounds in H1 2010.

However, profit before tax, after exceptional items (a charge for corporate re-structuring announced on 15 April 2009 of 8.5 million Pounds), was up by +170.3% from 2.7 million Pounds in H1 2009 to 7.3 million Pounds in H1 2010.

Sequentially, Q2 2010 gross profit was up by +7.8% versus Q1 2010 with permanent placements up by +12% and contract placements up by +4.4%.

UK gross profit at 30.2 million Pounds was down -29% year-on-year (2009: 42.6 million Pounds) reflecting the reduction in the average number of consultants which was down -38% year-on-year. Permanent placements were down -16.2% and period end contractors were down -21.8% year-on-year. In terms of value, Permanent fees and GP day rates eased by 1.8% and 4.7% respectively. The latter was affected by the decline in demand for public sector contractors which were typically at higher margins than the UK average.

Mainland Europe gross profit of 36.8 million Pounds was down by -23% year-on-year (2009: 47.6 million Pounds). Market conditions in Benelux (and in particular The Netherlands) remained challenging and this is reflected in a -34% year-on-year reduction in gross profit. Like the UK, the Benelux region was also impacted by a reduction in the average number of consultants compared to H1 2009, which were down -28% year-on-year. France performed better in the period than Benelux, with gross profit down by -14% on the same period last year and the average number of consultants down by -17% year-on-year.

The German market was broadly level in gross profit terms despite comparison with a relatively strong H1 2009 during which the Group's German business performed very resiliently. Germany's H1 2010 performance is also a reflection of the headcount investment in what the Group considers to be a market capable of exceptional medium term growth. As such, the average number of consultants increased by +27% year-on-year, with consultants hired during H1 2010 having limited opportunity to contribute in the period. As these new hires gain experience the Group expects them to contribute meaningfully in H2 and beyond.

Rest Of World gross profit was up +136% year-on-year, with strong performances in Hong Kong and New York driven by SThree's exposure to the banking sector. New York's average permanent fees in the period improved by +9.1% to 21,537 Pounds (H1 2009: 19,741 Pounds) which compares to a group average of 12,071 Pounds and demonstrates that good quality business can be done in even a highly mature market if the market proposition is compelling.

Russell Clements, CEO, commented "we are satisfied with a very creditable first half performance achieved in a market which, although much improved on the same period last year, is still some way from being fully recovered. Our year on year comparatives remain challenging given our average consultant headcount during H1 is still some way down on the same period last year. However, the fact that our current consultant headcount is 11% up on the end of 2009 reflects both the sequential improvements seen in recent months, which have allowed us to begin to rebuild established teams, as well as the staffing of our new international offices and teams addressing new market segments."

"Having a strong sense of where the market is heading remains difficult, but on the basis of the currently available data we remain cautiously optimistic. That said, we are a debt-free, cash rich business with a long track record of consistent profitability and a highly experienced management team who are capable of dealing with whatever market conditions are presented to them. We are also a more diversified business by geography and by sector than at any time in our twenty four year history, increasingly exposed to markets with strong structural growth characteristics. This positions us extremely well both for the short and the longer term."

According to Dow Jones this morning, SThree is in the final stages of due diligence to enter the Brazilian market and is also in the early stages of looking at Russia for 2011. SThree opened new offices in Dusseldorf, Munich, Delhi and Perth in the first half of 2010, and plans to open in San Francisco and Qatar in the second half of the year. The Group's core strategy is for organic growth but they would consider an acquisition in some markets, such as Japan.

In early trading SThree's shares were down by -4.16% to 280.80 Pence.



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