BTS Group AB (publ) (BTS-B.ST) Earnings Call Transcript & Summary

Good morning, and welcome to BTS Group Q2 Report 2025. [Operator Instructions] With no further ado, I hand the conference over to CEO, Jessica Skon.

Perfect. Thank you. Hello, dear investors. Thank you for joining. And for those of you I'll see later today, I'm looking forward to the time with you. Let's talk about Q2 2025. No doubt, it was absolutely defined by a big problem, right? EBITA dropped 23% in the second quarter. And if you unpack that, you will see that, that is due to one issue, that is the operations of BTS North America. And within BTS North America's profit performance, we lost about SEK 36.3 million in the second quarter. Half of that was due to onetime expenses of severance and legal fees associated with the Sounding Board acquisition and also part of the dropping unfavorable U.S. dollar exchange rate. The other drop was 100% because of the decline in revenue in North America. So what's been done? In early June, actually, we did a reorg. We have a new management team in place in BTS North America. I've gained 6 new direct reports as a result of that and about our top 30 partners in the company have switched to their reporting too. We'll talk more about that in just a minute. But Q2 was also defined by something else. We set out this year to get back to double-digit growth, and I'm very proud to say that 2 out of our 3 units are successfully back to double-digit growth, BTS Europe and BTS Other markets. Let's go through each one of the markets now in more depth. So BTS North America had negative 4% revenue growth in the second quarter, and our new growth strategy has been fully implemented. Our view on the main reason for the negative 4% growth is inefficient sales operations. It is true that Trump had an impact on tariffs from early April in the second quarter. It is true that some of our customers went into delays, conservatism. They froze one of our largest company clients, stopped all work, did a 17% reduction in force, and that obviously hurt the team. When we looked back at the second quarter, approximately 12% of the quarter's revenues were pushed out. Over half of that was in the last 7 weeks of the quarter. So that is true. On the other hand, it's been 3 years of unexpected Black Swan events, and we think the team can do better. And our success in most of the world in Europe show us that it's an internal issue. So we implemented the new team. The new growth strategy is completely implemented. It's starting to go through the company, and I have to tell you there is a lot of energy. We have more full-time sellers in the market. We have more time spent with our customers. We've slowed down anything that's not customer or stopped noncustomer-facing time. We're prioritizing our core clients, the clients that spend the majority with BTS and where we have the highest win rates. We are putting our AI offering in every single proposal, not 10%, not 20%, not 30%. 100% of our proposals right now have our AI technology and our AI services embedded. And we expect to return to growth in the first half of 2026 as we implement these changes as they gain traction and momentum and as we see our win rates coming back to the clip that we're used to. If we jump to BTS Europe, which was a very tough market in the first half of the year, we're super proud of our 31% revenue growth in the second quarter in BTS Europe. I'll remind you all what's behind this. For big competitive global deals coming out of Europe, the team has over a 60% win rate, which is double that of the rest of the company. And so despite the fact that the market remains sluggish, the second quarter was fantastic for them. We did start to see, towards the end of the second quarter were more sluggish and delays in some of their decision-making, but an absolutely fantastic quarter for Team Europe. We still managed to win large contracts. And of course, similar to [ NAM ] and across the whole company, we continue to push on early pipeline generation and strengthening our revenue growth culture. BTS Other markets, second quarter back to double-digit growth at 19%. Demand has been strong in most of our regions across Other markets. Southern Europe, which is part of other markets, has started to recover slowly, which is good news. More financial services from an industry perspective, we've had a lot of win rates in that sector in the second quarter. And the investments in the Middle East and our African operations have been paying off in terms of delivering high growth. So besides looking at BTS Europe and BTS Other markets to show us that double-digit growth in a more difficult market is possible, we can also look at our services. And the executive coaching shows us that double-digit EBITDA growth is also possible. So our coaching business' profit grew 34% in the second quarter. Their win rates are extraordinarily high. They're experiencing the highest renewal rates in their 12-year history. And the combination of the value proposition for the CEO and the executive team, combined with the new technology we acquired from Sounding Board is a winning value proposition. In fact, we purchased Sounding Board in March, and it's off to a very strong start. So in terms of statistics from that, the team has won 11 new clients in all 3 of our geographical markets since the end of March. Three of their accounts have expanded. I want to call out one particular competitive win because this maps to the vision of why we acquired Sounding Board. We wanted to be chosen as the global coaching provider of choice. So you could coach all leaders from the CEO to the front line. And our clients can also use the technology platform for their own internal coaching and mentoring needs. So we won a very large biotech Nordic company that's in 70 countries, and we just won as coaching provider of choice. So we're very proud of that. If you look at just a snapshot of the units, you can see here what I've already been saying in terms of the growth and the EBITDA performance, but bottom line is strong organic growth in 2 out of the 3 markets. BTS Europe's margin has a particularly nice bump from 11.3% to 14.4%. Business mix was favorable. They were able to execute it with less external contractors, hence, the margin and BTS Other markets, we saw the demand picking up in most of the markets. APG, which is a very small unit in BTS North America, they act as a reseller of some of our products, not all of them, really was hit by the overall kind of malaise in the U.S. market in the second quarter. So their customers reduced project scopes. They try to do things in-house and/or they delay. Let's talk about AI in terms of keeping BTS competitive in the market and our AI services, and then we'll look at our gains in terms of productivity and productivity going forward. So I think this is an enormous opportunity for us, and I am deeply energized by our advancements, by the success of the Wonderway acquisition in the first 12 months, the creativity and the tinkering that I'm seeing across 24 countries and the win rates as a result of embedding AI in all of our proposals. And I'll just like take a step back for a second. From a market opportunity, I think it's huge. There's always going to be consulting firms that are going to implement big company tech. That's not BTS, right? There's going to be other firms that are going to recommend a change in business model. We are the only firm who's going to reflect their new strategy, their AI strategy, right? The new talent model in an organization that's happening because of the use of the new AI tools. We can reflect the new ways of working, and we can make it deeply personal, which is the core value proposition of BTS for the last 40 years. We have clients asking us now to be their -- what they said is their Accenture in terms of implementing their own look at how to create AI-based tools and simulations and drive adoption across the organization. So it's a very exciting time for us. To meet that market demand, we're doing a few things. First of all, in the first bullet here, you'll see the revenue associated with our AI-related adoption services. So training on the AI tools, next step maturity, getting adoption by business unit or function team after team. So our revenue growth here has grown 425% versus the same period last year. We have $8 million in bookings. It's absolutely just the beginning. We are also launching 3 new core services to help our clients further adopt and get the lift from the AI tools that they want their teams to use. The other way to look at this is our own AI platforms and the subscription revenue that we are getting from them. In the first 12 months of this offering, we're at $3 million in bookings, which is -- and we've had 100% growth from Q1 and Q2. The really interesting thing about the Wonderway AI conversational bot is that we're sticking it in our simulations for big sales kickoffs and large offsites and simulations. And the usage of that inside the simulation is driving scaled adoption and self-service subscription models on the platform. And the subscription offer was launched in May. So fast growth here right now, big market potential and a lot of energy internally in the firm on the tools that we have. If you think about the AI in terms of our productivity improvements, we've been doing quite a lot of things, I'm quite proud of this. So we can look at it both from the AI impact and our other automation initiatives impact. And the bottom line here is we announced our Phase 1, which was $5 million in employee savings. which mainly hit in the second quarter in terms of the severance costs. We'll start to see the lift from that already in Q3, Q4 and obviously next year. But if overall, in the first half of the year, you'll see a 7% decline in the total number of core BTS employees. Obviously, the acquisitions have added people on top of that. We are on track with our Phase 1, $5 million in savings. We see further AI adoption, not just within our consulting teams, but across the operational functions at a clip that we have not seen previously, which we all find very exciting. We can see in the workflows of the operational functions, the prompts and the GPTs that they're custom-building to improve the efficiency of every step along the way. And our simulation team continues to experiment on different vibe coating platforms that have very strategic potential for us in terms of how quickly, how large our teams would be in developing those and value for the clients. In terms of automation, we have one major initiative. It's one of the reasons we bought Sounding Board is to migrate BTS' coaching clients onto their technology with their operational teams. And that is 1 quarter delay, but on track where we expect the majority of the impact to impact us in 2026 and a little bit in 2027. So Q2 was tough, and it was tough for one reason, which was North America. Our competitiveness remains strong. The market is enormous and growing from my perspective. I'm very proud of our fast AI advancements. The team is energized, and we're starting to see the win rates and the pipeline pick up again in North America. So you have come to appreciate BTS as a story of long-term profitable growth year after year. You can expect that of us moving forward. We're proud of our historical performance, and I'm excited about the opportunities that AI is going to have for us, both internally and externally over the next 3 to 5 years. We'll continue to have a stable and growing dividend that you've also come to expect. And of course, given the poor Q2 performance, we changed our outlook. It's been lowered. The result is expected to be worse than in 2024. And looking forward to answering your questions. Do you want to start with some written ones?

Hello, and good morning. Michael Wallin here, Head of Investor Relations. While we're waiting for calls or questions from the conference call, we'll take some sent by e-mail, and we have a few here. The first one is rather long, and it deals with the outlook for 2025. Elaborate more on how you reason around the outlook for '25. Adjusted EBITDA for the one-off costs of SEK 14 million in first half is around SEK 158 million in the first half, only slightly lower than SEK 169 million for first half 2024. How big cost savings is coming in during the second half of this year? And U.S. is meeting more easy comps. Is it reasonable then to assume that adjusted EBITDA for 2025 can meet the same levels as in 2024? Well, we've given our outlook, but maybe we can talk a little bit about what the outlook is based around or...

I think if I'm understanding the question, they're wondering if it's going to be better than what we're saying. So saying -- the chance of it being the same as last year, even though we just believe it's going to be worse. Yes, right? I mean my job is to be as accurate as possible in the moment and not have to have swings that are unexpected on a regular basis. Obviously, we're fighting with everything we've had to make up for the drop in the second quarter, right, and to get North America back to a healthy growth clip. I took over North America in 2016 after they had 5 years of very low single-digit growth and profit decline. And in that moment, it took me 3 quarters to turn it around and get it back to double-digit growth quarter-over-quarter for the next 3 years. So I am confident that we will do it. What we are mentioning is we think that will be in the first half, right? And North America is a big company. And so if they can't get back to a double-digit growth clip in Q3 and Q4, yes, we have the cost savings starting to come out due to the severance in the second quarter. But our estimate right now is as accurate as it can be.

Thank you. And then that question was from Alexander, and he has a couple of more questions. The second one is related to cost savings. Is any of the cost savings of USD 5 million seen in Q2? Or will the first effects be seen in Q3?

Correct.

Yes. elaborate on how large cost savings will be in Q3 and Q4 to understand momentum in the cost savings program going forward?

Yes. So most, I would say, 70% to 80% of the 5 million in cost savings were taken out in the second quarter, and then we paid the severance against that. We have a few more coming expected in the third quarter. So you will start to see a revenue per consultant improvement in the third quarter, both in North America and in most of the world. And then it will continue in the fourth quarter. And then obviously, the first 2 quarters, all of next year, we'll be running on a full year healthier clip against that full amount, right? So yes, I mean, it's pretty easy to do the math of what percentage would then hit in Q3 and Q4. And I would also say that most of the world had bigger hiring plans given their high growth, and they've cut those way down back in March or April. So you'll also see a nice lift in revenue per head in their market as well due to the AI productivity gains.

Thank you. And the third question from Alexander is buybacks. The management and Board view their view on a potential buyback program with current valuation, I guess.

Yes. We haven't discussed that in depth. I think we're -- we believe it's a good opportunity to invest. So -- but we haven't discussed it in depth.

Yes. And then second question is from Daniel Thorsson at ABG. There seems to be a problem with the dial-in function. So first question here, should we expect more one-off costs in North America in Q3, Q4? Or are these charges and organization changes behind?

Yes. They're 80% behind us. So there will be a little bit more, but it will be small.

Yes. And second question, the guidance on lower EBITA this year is reported EBITA one, I assume, which is affected by some SEK 20 million one-offs so far this year. Is it possible to see a more flattish adjusted EBITA versus 2024? Or do you expect EBITA adjusted for the one-offs to be lower than last year as well?

Once we take out the one-offs and the currency impact, what is core EBITDA doing? Is that the question?

I assume that's the question.

Yes, it's slightly lower than last year. And obviously, it depends on the strength of Q3 and Q4.

And then third and final question from Daniel is, thanks for sharing the AI KPIs and growth progress. looks promising. Do you see regional differences in demand or order bookings of these numbers? Is it mainly driven by the U.S. or Europe also showing good demand?

Yes. What's so cool, thank you for the question. And a lot of the AI tech subscription revenue is coming from the Wonderway acquisition, which we did 12 months ago. That acquisition is the most global integration we've ever done. Within the first 3 months, we had deals in Europe, Other markets in North America. So if you fast forward now 12 months into the integration, North America revenue is the biggest, but Europe has just as many deals or slightly less, like, let's say, 40% of the deals are in Europe and a few in most of the world and the North America has the revenue. So it's competitive in all the markets, and it's particularly competitive integrated in with the other things that we're doing.

Yes. And then a question from Johan. Have you lost revenues to competitors in the U.S.? Or is it the slower growth rate mainly due to the not being able to convince your customers to acquire your services?

Yes. I mean, honestly, it's been the slower growth. It's customers saying we're nervous on spending. We're going to try to do something in-house or we're going to wait. And I will say that we've started to see some movement, right, in the third quarter compared to the second quarter, which feels good, but we need a lot of movement to make up for what happened in the second quarter. So that's our goal. And yes, the win rates. Well, Europe is the one who had the 60% win rates for a percentage of the deals. The person who led that effort in Europe is now running all of our practices. And what was behind the success in Europe was that there was AI and AI innovations in every proposal. Plus there was a really good high practice discipline and the clients could see our culture more easily and so forth. And his practices are being adopted very, very quickly in the U.S., and we've already had our first wins based on that approach, which is pumping up the team. So yes, it was more market delay than us losing to competitors.

Yes. Sorry, that was from [ Joon ]. And then we have a question from Johan. AI-related revenue seems to be roughly 8% of your total revenue in the first half. Are margins from AI-related services above group margins?

Sorry, the second half of the question?

Yes, margins from AI-related services above group margins.

That's a great question. Certainly, the subscription portion of that is. I would say the margins on the training-related AI services and the more consulting is more in line with the company average.

Good. And then a question from Adam. Okay. This is in Swedish. I'll translate it quickly here. Are your forecast for the full year based on reported results or adjusted results? Because you had some one-offs in your first quarter, but also even if we didn't say how big they were...

We're including all the one-offs as part of the total earnings. So we're not saying all the one-offs go over here and live there, and I'm just going to talk about the core EBITDA outside of that.

Yes. And then some questions from Jonny. Can you elaborate on the market in North America, especially tying that you are -- that your comment regarding some movements in July. How should we think about the outlook in second half in North America?