BTG Consulting plc (BTA.F) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Begbies Traynor Group plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand over to Ric Traynor, Executive Chairman. Good afternoon, sir.

Good afternoon. Thank you very much, and thank you, everybody, for joining us. We'd like to give you our half year presentation, but also some background on the business. So those of you who may not know us. Looking at Page 2 of the presentation. We are a leading professional services consultancy with a differentiated service offering. What we do is help clients maximize the value of their assets throughout the economic cycle. So whether that's acting for creditors in the depths of recession maximizing the dividend from an insolvent company or we're acting for a successful business or property owner looking to maximize the value of their assets to the height of the boom. Currently, 60% of what we do is insolvency revenues. That's corporate and personal insolvency, but the vast majority is corporate. We have a market-leading position from a national office network and selective offshore locations. Our business model is to be very much in the heart of the local business community and workers referred to us from local intermediaries like accountants, listers, bankers and corporates directly seeking advice. And we provide our advice on the systems to SMEs and mid-market corporates. The other 40% of our revenue is advisory and transactional services which covers a number of different service lines, financial advisory, transactional support, funding, valuations, projects and development support, asset management and insurance. The bulk of that is done through our Eddisons Chartered Surveyors business, focusing on property and planting machinery, but we also have a corporate finance business operating under the Springboard brand. We also have finance brokerage, which looks at financing specific assets like property and plant and machinery. And then we have BTP Advisory Services, which covers restructuring, forensic and debt advisory. And overall, across all of our service lines, 80% of revenue is from insolvency in defensive activities and come from a common network of clients and professionals with centralized support services such as IT, finance, et cetera, supporting the whole organization. Turning to the next slide. You can see that over the last 10 years, our policy of diversifying the business away from being a pure insolvency practice has meant that we've grown year-on-year over the last 10 years. You can see from this graph, the darker block is our insolvency business. So in full year -- financial year [ '14 ], that was over GBP 40 million turnover and a very small contribution from non-insolvency activities. Over time, we've grown the business. So that proportion of non insolvency activities is now 40% and insolvency is the other 60%, that insolvency turnover is now over GBP 70 million, and those other services are over GBP 50 million. A lot of that growth has been through M&A, buying smaller businesses and rolling them up into our various service lines as well as organic growth. Turning on to the next slide. You can see as a result of that, the position to shareholders and the return to shareholders over that period is cumulative average growth rate of TSR. So total shareholder return, that's share price movement and dividends of 14% year-on-year over that period. which is something we're very proud of, and we're seeking to maintain moving forward. In terms of looking at the numbers for the half year review, I'll hand over to Nick. And if we could turn the Slide on to #6, please, that would be Great. Thank you.

Okay. Thank you. Good afternoon, everyone. So starting with the financial highlights on this slide, where we've reported double-digit revenue growth. So revenue up by 13% on the comparative period. Of that growth, 8% was organic and 5% was coming through acquisitions. We've maintained our operating margins. We've seen improvements in our insolvency and property activities, and that was offset by a drop in financial advisory and there's a bit more detail further on in the pack on some of those movements. Our adjusted pretax profits are up by 10% to GBP 9.9 million. That's having absorbed increased finance costs in the period, that EPS growth of 5% reflects the fact we've had the increase in U.K. corporation tax effective for the whole of the 6-month period that we're reporting here. Turning to the next slide. Just to explain the adjusting items. So these are the items that we exclude from our adjusted results, they all relate to acquisitions. The first group of transaction costs is of consideration for acquisitions. It's not an operating cost or salaries paid to vendors who remain with the business, but IFRS 3, which is the business combination accounting standards under IFRS, which we follow, requires us to charge all the consideration that we pay to profit if there is an obligation for the vendors to remain with the business. And for us, that's fundamentally important, lots of goodwill in these acquisitions is with the vendors that stay with the business for a period enables us to retain that goodwill undervalue from those businesses. So the acquisition consideration of GBP 4.5 million which is the first of those numbers. That's all consideration being amortized over the period of that commitment. What that means is because IFRS decrease, we don't have consideration as a capital item on the acquisitions. We end up with exceptional gains. We exclude those as well from our adjusted profits. That was a gain of GBP 0.7 million. Acquisition costs are the legal DD costs have completed in the transaction. So the total of those transaction costs in the period were GBP 3.9 million. The fact that's gone up year-on-year is because we have that very material gain in the comparative period of October '22. The next group of adjusting items are the noncash amortization charge of acquired intangibles. These are the intangibles that only get recognized under IFRS through acquisition accounting for us. They are brands, customer relationships or the books and websites, which are valued through that initial recognition of assets once we've acquired the business. This treatment, both of the charge to profit of acquisition consideration and the amortization charges will be the same as -- was the listed peers who are also acquisitive. So it's a common standard, which applies to all companies under IFRS. If we turn to the next slide and return to our operating performance, where we're seeing the balanced mix of services that we have across the group that have driven our double-digit growth. Very strong growth in our insolvency team over the course of the 6 months. We've seen a busier market, which Ric will talk about in a bit more detail. We've increased the size of our team and that's seen an increase in both revenue and profit and also our margins at that pickup in the period as well. Within property services, the breadth of expertise and the services that we have has enabled us to deliver organic growth and increase our margins. That mix of expertise really gives the resilience to that business. But in our valuation team, we've seen an increase in the advice that we give to banks on revaluing properties and giving them our bias on the value of the security they have against those assets. And for us, that's good work. It's probably higher margin, and that has replaced the valuations we gave on new loans. Now within asset sales, we've seen the same sort of trends. So we've seen an increase in assets being sold through auction. For us, we auction property and plant and machinery assets, and that's offset a drop in the agency sales of both property and small businesses. That just give an example of the natural resilience that we have within that business. And our build and consultancy team has continued to grow in the period, and that's advising clients on that property estate. We've our contribution from acquisitions in the period, that's both from current and prior year transactions. And going the other way, we've had that there was a strong comparative within our financial advisory team where we benefited from a number of contingent fees at the very start of that period. So we knew there would be some drop off year-on-year but we've also seen a pretty headwind for that team. Our performance has been resilient in the face of that, we've delivered margins of about 20% overall. We've seen refinancing and restructuring advice mitigating the reduction that we've seen in corporate transactions. And within shared and central costs, we've continued to invest in our IT and HR capability across the group and again theres a bit more detail further on in the presentation on that. But overall, we've delivered operating profit growth of GBP 1.2 million in the period. If we turn to the next slide. Just to report that we have introduced an EBT, we announced this on an RNS last week. It's the first time we've had an EBT in place in the group, and we intend to use that to satisfy employee share option awards moving forward, which will reduce dilution from that part of the remuneration package we offer to some of our senior people. We announced the initial purchase plan, which covers the period to the end of July like next year. So that's through beyond our full year results announcement. And our target there is a monthly maximum of GBP 750,000 worth of purchases with an overall cap of GBP 3 million. We announced our first purchase 50,000 shares at the back end of last week and they were done at [ 114 pence ]. Our balance sheet strength and our free cash flow, it means that we've got plenty of headroom to carry on funding growth strategy, so it has no impact on our M&A plans, on our ability to pay dividends, and we can still fund the EBT within that. Let me turn to the next slide. We continue to generate strong cash flow in the 6-month period. Free cash flow is up to GBP 4 million from GBP 1.8 million in the comparative period. You can see from last year, there's pretty much a half 1, half 2 phasing to our operating cash flows. Our working capital absorption has been broadly unchanged over the 6-month period and maintained our lockup position. And our acquisition payments in the 6 months of GBP 4 million comprised of initial consideration payments of GBP 0.8 million and an earnout of GBP 3.1 million of the prior year deals. In terms of the balance sheet, we closed with net cash at the end of October of GBP 1.1 million, compared to a net debt position solvency earlier GBP 2.4 million and that gives us plenty of headroom within our facilities, they run through until August 2025. And those facilities are a GBP 25 million committed line and a GBP 5 million unsecured acquisitions and growth. The final number slides from me, looking ahead for the remainder of the year and just move on to the next slide. We are confident of delivering market expectations within insolvency. We anticipate activity levels will continue to increase. The interest rates and inflation environment continues to cause financial stress for corporates, and we expect that growth will come through the second half of our financial year and beyond. Within financial advisory, we anticipate a broadly consistent second half. So the level of corporate transactions that we're seeing. We don't anticipate benefiting the second half, but we're hopeful that we'll see some return to more normal levels in our new financial year. Now within property services, the second half, we expect to be ahead of the comparative period, but will be lower than the first half due to the seasonality of some of the projects where we do those notably in our school work were we're advising schools on that property estate and the bulk of our work gets done in the summer holidays, which fall in our first half but we expect to report another year of strong growth for the property team. We're confident in continuing to build our strong track record in the current year and beyond. We'll do our next update on Q3 trading at the back end of February in the new year. So all in all, it's another good set of numbers, which we're very pleased with. The outlook looks good for the second half, and I'll now hand back to Ric to talk through the operating review in a bit more detail.

Thank you, Nick. If you can move to Slide 13, which we have now on the screen. This is looking at the U.K. insolvency market and our recent performance. Insolvencies are now higher than the pre-pandemic level. They went down during the pandemic as a result of government support measures and various other matters. But a lot of that rise has been from liquidations, which tend to be the smaller businesses. But we are now starting to see administrations, which tend to be the larger businesses start to be impacted as well. So those administration now numbers are somewhere along the lines of pre-pandemic levels. Still somewhere below those levels we saw in the last recession. So we do anticipate an increase in due course. In terms of our own performance, the graph on the top right shows our increase in turnover since the '19 year, which is just pre-pandemic up to the year we just reported on at the end of April, where our turnover has doubled from GBP 35 million to over GBP 70 million, and that compares with a 37% increase the market, which shows that we've taken market share over that period. We do anticipate higher levels coming into next year. With interest rates and inflation starting to have an increased impact on businesses as well as other headwinds. And again, we expect to see those administration numbers, the slightly bigger businesses actually starting to be impacted. In terms of meeting the requirements of that additional work, we've increased the size of the team by 12%, half of that being in the -- just in the half year we're reporting on. That's mainly junior recruits who are coming in to support the insolvency practitioners who are our senior people who are the qualified license holders, who win the work and have the expertise to actually administer it. We have increased that number of insolvency practitioners by 6. So we've got over 90 now. And in terms of turnover per insolvency practitioner, we're up to a run rate of about GBP 900,000. We anticipate that going to over GBP 1 billion in due course, subject to the support of those junior members of staff. Looking at some of the things that we've done over the period. We've certainly had some larger appointments in the mix generally, which is a result of more administrations in the market. But also, we've been undertaking a bounce back loan project with one of the major banks. Looking at some of that government support where bounce back loans were given to businesses and it's been inappropriately used. So we are investigating those cases and seeing if that money should come back into the insolvency state of the company to be distributed to creditors. So far, that pilot scheme is being successful and we're anticipating a further flow of work from the banks in respect of those particular types of assignments. We're also seeing an increase in fraud and investigation cases which is typical when the insolvency numbers increase. This also means that we can use the skills of our forensic team as well as insolvency practitioners on these cases. So it gives us a bigger breadth of services across the across the team. But overall, we expect further progress in the second half of the year and into the next financial year. If we move on to the next slide, just to look at our advisory services and particularly property. This is the hidden gem within BTG. It's been growing quietly along the sidelines, but now is a GBP 40 million turnover business in property. It's got multiple service lines across the various activities. They're active across the cycle. Nick has mentioned some of them when he went through the numbers. In terms of organic growth initiatives, we've invested in sustainability capability in building consultancy. So that's where we're giving advice to property owners, both private property owners, public sector property owners. In terms of upgrading their businesses to their property facilities to meet new environmental requirements, and that's likely to be an increased workload for many years to come. In terms of property auctions, we've been recruiting into that business following the acquisition of a business in Sheffield recently, which augmented our existing property auction business in the northwest of the country. And very recently, in fact, announced last week, we've bought another auction business in the Midlands. We've strengthened our property insolvency position -- sorry, insolvency position by building on the increase insolvency markets, of course, looking at the sale of assets, both property and plant and machinery in insolvencies. Both through our own insolvency business and some of our competitors. We provide those services and as a result of that general increase in the market, we've increased the size of that business. Looking at 3 acquisitions that we've done recently, all in the insolvency arena -- excuse me, all in the property arena, Banks Long & Co, which is a multidisciplinary chartered surveyors business in the Lincoln area. That offers property agency, property management, building consultants and valuation services. It's got a strong offering across Lincolnshire and Humberside, and it strengthens our business across the East of England and South Yorkshire in the chartered surveyors business. Andrew Forbes was a business that we bought in November, so just last month, a valuation specialist in the Southwest. That gives us a presence in the Southwest for the property business, and it also gives us a platform to grow that from just being a valuations business into being a multiservice property business, and we're able to tie in with our existing offices in that region in the insolvency advisory side in order to tap into their context and generate increased work for that business. And very recently, and that was last week, our auction business in the Midlands as to the existing Northwest and now Yorkshire practice, and we'll be looking to merge all of that together to get those economies of scale, and that makes us one of the largest auction houses in the country. And there are excellent opportunities for further organic and acquired growth in what is a large and fragmented marketplace. Moving on to Slide 16. Just looking at that proven growth strategy, enhancing the shareholder value overall. In terms of organic growth, the initiatives are strategic highs across the group. That's to expand expertise and capacity to enhance our cross-selling of our service lines and expertise to a wider client base. Our investments in technology and process to enhance working practices, customer service and deliver efficiency gains, so that's better service to clients and better margins. Retention and development of our existing partners and employees, given the [ success ] supply of qualified IPs, training our own and promoting them through the ranks is a very big part of the growth of the business. And I'm pleased to say that 6 have been promoted to what we call partner level. That's the insolvency practitioners who win the work and take the appointments, 6 have been promoted in the last half year. In terms of our acquisition strategy, it's value-accretive acquisitions in any of the following market segments. So that's insolvency to increase our market share. In our current non-insolvency services to enhance expertise or geographical coverage and other complementary professional service businesses to continue the diversification of the group and its service offering. Significant importance attached to the cultural fit and the strength of the management team. So we've got to make sure these businesses actually will fit in with us and stay with us for long term and there's quality management in order to be able to manage those businesses effectively and to grow them both organically and by acquisition. So we're looking to continue to build on the track record of our growth so far, both in existing service lines and new service lines. Moving on to the next slide. If we look at our record in 2019 in terms of that growth, you can see here that GBP 60 million worth of turnover in 2019 is now GBP 122 million. So that's doubled over that period, of which GBP 38 million has been through acquired. That's a number of acquisitions, as you can see on the right over that full year period. All those acquisitions we've made across the various service lines in addition to GBP 24 million worth of organic growth. This has significantly increased the scale of the group. And we intend to do more of these. They are available in what is fragmented marketplaces. We are generating appropriate cash in the operations of the business, both pay the dividends and an enhanced dividend policy as we've exercised to date, but also to provide the cash to just fund these bolt-on acquisitions. Moving on to the next slide. This is looking at the last 5-year track record, and I think these graphs speak for themselves. The one to probably focus on is the middle of the bottom row, adjusted diluted earnings per share. So returns to shareholders ultimately, where we've achieved more than 21% cumulative average growth rate in that diluted EPS figure over the course of the last 5 years. And our ambition is to maintain the growth track record and our medium-term revenue target is GBP 200 million while maintaining existing margins or indeed improving those margins if we can. So turning to Slide 20, the last slide of the presentation. We're strongly positioned for growth. We have a strong track record of cash generative profitable growth with a well-established progressive dividend policy. We're strongly positioned for growth with a market-leading insolvency practice, benefiting from the impact of higher inflation interest rates, and that's to see growth in the insolvency market. Long established referral network across the group, leading to a high level of repeat business, there's over 4,000 introducers to us, particularly accounted as lawyers, bankers, et cetera, who introduced work to us when their clients have a problem. And we have steady growth of non-insolvency activities. This diverse income stream provides multiple sources of growth across the economic cycle in fragmented markets and we have a proven financial threat record with a growth strategy of continued organic investment, complemented by value-accretive acquisitions across our service lines. We're confident in the performance of the business for this year and beyond. Can I hand back to Paul now and we'll be delighted to take any questions.

[Operator Instructions] Ric, Nick, as you can see, we've received a number of questions throughout today's presentation. Nick, if I may just hand over to you just to read out the questions where appropriate to do so, and I'll pick up from you at the end, please.

Okay. Great. Well, thank you very much. So we'll go through these, and we'll answer them between us. So the first question is how operationally geared is the business? Are you investing in tech to a growth and margin?

Well, Nick, do you want to answer that?

Yes I can answer that. So yes, the operational gearing comes through the fact that we are a people business, about 75% of our cost base is people. So I guess that's what that means on the upside as we see growth, we'd expect to see margin accretion coming from that. In terms of the tech angle, we have geared up our in-house IT team over the course of the last 18 months. You can see that investment. If you look at our share and central costs to invest in our IT team and our people team and the sorts of areas that we're looking at is how we can use tech for smarter and better within the property arm. There is a lot which we can do through using third-party software products, which enable us to improve our processes, make ourselves more efficient, should improve margin. Slightly harder on the insolvency side, it's a smaller industry. So those third-party solutions aren't necessarily available, but we're looking at how we can use available solutions, things from the Microsoft suite of products to do the same. So yes, very much part of what we're doing, and we see the use of tech as being one of the key areas that we can self help to improve margin as well as looking at growing market share. Okay. So hopefully that answers that question. The next question is, when making acquisitions, are you looking to expand offering or bolster market share? And how much cross-selling do you see?

Should I take that one?

Yes.

Well, we're certainly intending to look at more acquisitions, which will bolt on to existing services but also to look to expand those services over time. There's lots of opportunities to do that. We're in a very fragmented marketplaces. Typically, the sort of acquisitions we're doing are GBP 1 million to GBP 3 million turnover. There are some larger ones. The auction business we just bought last week is over GBP 4 million turnover. And potentially there's some even larger ones in the property arena, less so in solvency. In terms of cross-selling, that's something that we've started to see the benefit of. There's certainly work that goes, as I mentioned in the presentation, from our insolvency business to our property business and dispose of assets. But also, it's looking at those sources of work for us that 4,000-plus intermediaries who refer clients in when they have the insolvency problem, also referring clients into us who have property-related services or corporate finance needs, et cetera. So we think there's a good opportunity to do that. It is the holy grail in professional services, actually getting your professionals to concentrate on selling something other than their own particular area of expertise, but we think that there is real headway we can make in that over the course of the next few years. It's something we are making a concerted effort to do.

Okay. And the next question is, how do you plan to sustain the growth momentum given the strong performance?

Again, shall I take that one?

Yes, I think so.

So we think there's plenty of opportunity to do more of the same. In terms of organic growth, the things that we identified it's ensuring we make the most of the resource we've got. So that's retaining our people, it's training them appropriately, giving them the skill sets to be promoted and actually be work winners and work managers in due course. Lots of acquisition opportunities along the lines of the things we've done and I've just mentioned. And looking at that year-on-year growth in value for shareholders, that total return of 14%. That's something that we're keen to try and maintain over time and our aim to be a GBP 200 million turnover business in the medium term, we think is eminently achievable through a mixture of organic growth on smaller bolt-ons. If we find a significant additional service line and acquisition to make, then obviously, that will turbocharge that growth. But we feel confident that we'll be able to maintain that track record that we've seen over the last 10 years.

Okay. I've got a suspicion of the next question is probably one for me, which is around the acquisition consideration of the [indiscernible] which, hopefully, the slide which was in the deck explained, but I'll just reiterate in response to the question, which is, can you explain what it covers, in particular, is it only performance related to acquisition payers? Or does it cover any element of salary? So as I said in the presentation, the amount that gets charged to profit is purely consideration payments, it's amounts which are defined in the sale and purchase agreement. And the reason it gets treated as a P&L item rather than a capital item is because we require vendors to stay with the business for a period for us that is typically a 5-year period. We're obviously paying those people a salary over the time they are with us as well, and that is charged above the line and within operating profit. So the amount that we're excluding is purely the consideration element for buying those businesses, so hopefully that's clear there for you. And I think we've got one more question here, which is around our acquisition strategy and approach to acquisitions. It's quite a long question, but it's saying, [indiscernible] appears to be undervalued. How do we think about the opportunity cost of acquiring other businesses relative to doing share buybacks with cash in his place? There's a follow-on question, but we'll pick that one up in the first instance.

Yes. Well, in terms of buying businesses, we're typically buying businesses which are on an after-tax fee of between [ 5 and 7 ] and some of the consideration we pay is deferred over a 2- or 3-year period. So I think in terms of those businesses being immediately accretive, income accretive they are, in terms of them being at a discount to our own valuation, they are and all of those businesses, we think, also have growth potential once we bought them. So I think it clearly makes sense to continue to buy those businesses where they are available and to expand our own business. That is a more sensible use of funds at the moment rather than increasing the dividend or share buybacks, et cetera. That's something that we will review in due course. But in terms of looking forward for the next 2 years, at least, we think that continuing with that strategy of organic and acquired growth is a sensible one for shareholders.

Okay. I could not answer the second part of the question as well, which was either consider the opportunity cost of paying dividends rather than doing a buyback or acquisitions. So hopefully that's covered that question. And then there's a further question, which is what percentage of senior staff leave after deferred acquisition payments are completed?

The answer to that is very, very few. In percentage terms, it certainly would be less than 10%. What we find is that 5-year lock-in ensures, A, that people who join us want to actually join us as well as sell their business because 5 years is a long-term commitment. And we find that at the end of 5 years, most people are happy where they are, effectively institutionalized have no desire to move on elsewhere. So we've been extremely pleased over the years with the retention of senior people once that 5-year lock-in has come to an end. Obviously, it's a retirement scenario and somebody retires, then that's something that we respect and indeed expect given their age. But in terms of people leaving to go to a competitor or start of a business, again, that's extremely rare.

That's fantastic, Ric. Thank you very much indeed, you've addressed all the questions that have come through today. And of course, any further questions do come through, the team will be able to review those and we can publish those questions back on the Investor meet company platform. Ric, perhaps just before redirecting investors to provide you with their feedback, which is particularly important to you and the team. I should ask you for a few closing comments, please.

Yes, of course. I'd just like to reiterate, we're very pleased with the half year performance we just reported on. We're confident of performance for the rest of the year, and we're confident of maintaining that 10-year growth record we have, both across the insolvency business, which has continued to grow. Obviously, it's subject to the economic cycle, but overall, our breadth of services, the fragmented marketplaces we operate and the ability to grow by acquisition as well as organic growth means that we think that track record is something that we can continue to achieve moving forward. And I'd like to thank everybody for listening to us and indeed, if there any further questions, obviously, you know where we are, and we'd be delighted to speak to shareholders at any point in time.

Fantastic, Ric. Thank you very much indeed, Nick, thank you for updating investors today. Please we ask investors not to close the session. You should be automatically redirected to provide your feedback in order the management can better understand your views and expectations. This may take a few moments to complete, I'm sure it's greatly valued by the company. On behalf of the management team of Begbies Traynor Group plc, I'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.