Despite the negative implications of the COVID-19 health crisis, the Group succeeded in improving underlying sequential performance in the second half and delivered a resilient result for the full year. The demand for contract staff accelerated and our contractor book stabilised due to new deal activity and improved contractor retention rates in the second half. At the end of the year, Contract represented 76% of the Group net fees in the period (2019: 74%). Our net fees margin increased to 25.7% (2019: 25.5%).

Operating expenses decreased by 1.2% on a reported basis, mainly attributable to a reduction in personnel and miscellaneous costs. The slowdown in the Group's operations caused by the COVID-19 health crisis led to a pause in marketing spend, a decline in commissions and bonuses, and a temporary reduction in the Senior Executives' salaries. The Group also benefited from the government job retention support schemes in selected countries.

The Group's financial results were impacted by certain significant items of expense and income. ? The impairment charge of GBP1.1 million was recognised for underperforming internally developed assets which were

assessed as no longer recoverable in the course of normal operations. ? In response to the significantly changed economic environment and increased risk and uncertainty caused by

COVID-19, we took steps to right size the structure and strategy of certain local businesses. These changes will

optimise SThree's resilience in the future. A charge of GBP3.3 million was recognised in the current year. ? During the year, the Group took advantage of job retention schemes launched by a number of national governments,

whereby a portion of salaries was reimbursed for furloughed staff. In 2020, the total benefit, including the

associated payroll savings, was GBP1.2 million (2019: GBPnil). The compensation was presented as a deduction in

reporting the related staff expense. The Group decided to repay UK furlough money as performance exceeded the

Directors' expectations and is therefore not included in the above figure.

The reported operating profit was GBP31.8 million, down 45% YoY (2019: GBP57.7 million). The adjusted operating profit of GBP31.3 million (2019: GBP60.0 million) excluded exceptional income of GBP0.5 million in respect of the government grant receivable from Scottish Enterprise on the relocation of support functions (2019: GBP2.3 million primarily in respect of the CEO changes and restructuring of senior leadership).

Our operating profit conversion ratio decreased by 6.8 percentage points to 10.3% on a reported basis and 7.7 percentage points to 10.1% on an adjusted basis (2019: reported 17.1% and adjusted 17.8%).[2] The YoY movement reflects the overall slowdown in the Group trading activity in the light of the health crisis, partially offset by cost management initiatives implemented during the year in response to the crisis.

In line with our revised strategy and ambition to be the number one talent provider in the best STEM markets in which SThree has the highest opportunity to take market share, we ceased our operations in Australia. Its results were taken out of the above analysis for both the current and prior years. In 2020, the discontinued operations incurred an operating loss of GBP1.8 million (2019: breakeven), including exit costs of GBP1.1 million.

Net finance costs

Net finance costs increased to GBP1.2 million (2019: GBP1.0 million), which was a result of the full drawdown of the RCF to ensure strong liquidity in the first half plus the adoption of the new standard IFRS 16 on leases.

Foreign exchange exposure

For 2020, the YoY movements in exchange rates between Sterling, the Euro and the US Dollar (the main functional currencies of the Group) provided a moderate net headwind to the reported performance of the Group, reducing our reported net fees by approximately GBP1.0 million and operating profit by GBP0.2 million.

Exchange rate movements remain a material sensitivity. By way of illustration, each one per cent movement in annual exchange rates of the Euro and US Dollar against Sterling impacted our 2020 net fees by GBP1.8 million and GBP0.8 million respectively, and operating profit by GBP0.5 million and GBP0.3 million respectively. Our foreign exchange risk management strategy involves using certain derivative financial instruments to minimise the transactional exposure arising from currency fluctuations.

Income tax

The tax charge on the Group's adjusted profit before tax was GBP11.7 million (2019: GBP15.9 million) for the year, representing an effective tax rate ('ETR') of 41.5% (2019: 26.9%). The ETR on the Group's reported profit before tax was 41.1% (2019: 27.3%).

The ETR on continuing operations was 39.0% before exceptional items and 38.7% after exceptional items.

The Group's ETR primarily varies depending on the mix of taxable profits by territory, non-deductibility of the accounting charge for LTIPs and other one-off tax items.

In 2020, the extent to which tax credits on loss-making businesses were recognised had a material impact on the Group ETR. The COVID-19 health crisis increased the ratio of operating losses as a proportion of the absolute profits and losses of the Group. This, together with the reduction in Group results, resulted in the non-recognition of tax credits on loss-making businesses. The Group is affected by the European Commission's investigation into the state aid received by foreign subsidiaries controlled by SThree plc. Whilst this was noted as a contingent liability in 2019, in 2020 it was determined that it was no longer probable that the uncertain tax treatment surrounding this issue will be accepted. As such, a provision for GBP1.3 million was recognised and this also impacted the Group ETR.

Overall, the reported profit before tax from continuing operations was GBP30.6 million, down 46% YoY. The adjusted profit before tax from continuing operations was GBP30.1 million, down 49% YoY (2019: reported GBP56.8 million and adjusted GBP59.1 million).

Our reported profit after tax from continuing operations was GBP18.8 million, down 55% YoY. The adjusted profit after tax from continuing operations was GBP18.4 million, down 57% YoY (2019: reported GBP41.3 million and adjusted GBP43.2 million).

Earnings per share ('EPS')

On an adjusted basis, EPS was down 58%, at 13.9 pence (2019: adjusted 33.2 pence), due to a decrease in the adjusted PBT, an increase in the Group's ETR, and a 2.2 million increase in weighted average number of shares. On a reported basis, EPS was 14.2 pence (2019: 31.8 pence), down 17.6 pence on the prior year, attributable mainly to a decline in trading performance as explained above. The weighted average number of shares used for basic EPS grew to 132.1 million (2019: 129.9 million). Reported diluted EPS was 13.8 pence (2019: 30.9 pence), down 17.1 pence. Share dilution mainly results from various share options in place and expected future settlement of certain tracker shares. The dilutive effect on EPS from tracker shares will vary in future periods depending on the profitability of the underlying tracker businesses and the settlement of vested arrangements.

Dividends

Due to the prevailing uncertainty caused by the COVID-19 health crisis, the Board did not propose to pay the 2020 interim dividend (2019: 5.1 pence).

With underlying sequential improvements noted across the Group in the second half, and in the light of the Group's continued, robust financial position, the final dividend has been proposed at 5.0 pence and will be subject to shareholder approval at the 2021 Annual General Meeting. Despite the improved financial performance of the Group, the Board remains cognisant of the heightened volatility facing the Group and will continue to keep the capital allocation policy under review.

Balance sheet

Total net assets increased to GBP128.5 million (2019: GBP116.8 million), driven by the excess of net profit over the reduced dividend payment, favourable foreign currency, offset by the adoption of IFRS 16 and share buy-backs. Our trade receivables (including Contract assets) declined to GBP226.8 million (2019: GBP256.2 million) reflecting lower revenue and due to enhancements in credit risk management to preserve cash and provide greater clarity on the financial viability of the trade debtor book. Days sales outstanding remained level at 44 days (2019: 44 days).

Investment in subsidiaries (Company only)

Following the review of the recoverable amount of the Company's own portfolio of investments, a total impairment loss of GBP13.2 million was recognised. It was mainly in respect of the UK operation, which experienced increased risk, uncertainty, and reduced economic activity caused by COVID-19.

After booking this impairment, the retained earnings were GBP87.2 million (2019: GBP122.0 million).

Tracker shares

Only an immaterial number of tracker shares were settled during the year as the annual buy-out process was postponed (2019: tracker shares were settled for a total consideration of GBP4.4 million). In 2020 we settled the consideration in SThree plc shares by utilising 33,949 treasury shares. In the prior year, we settled the consideration for vested tracker shares in SThree plc shares either by issuing new shares (2019: 475,738) or treasury shares (2019: 974,583). Consequently, the arrangement is deemed to be an equity-settled share-based payment arrangement under IFRS 2 Share-based payments. There is no charge to the income statement as initially the tracker shareholders subscribed to the tracker shares at their fair value. We expect future tracker share settlements to be circa GBP5.0 million per annum. These settlements may either dilute the earnings of SThree plc's existing ordinary shareholders if funded by new issue of shares or will result in a cash outflow if funded via Employee Benefit Trust shares.[3]

Liquidity management

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