BTS Group AB (publ) (BTSB) Earnings Call Transcript & Summary

Good morning, everyone. My name is Rikard Engberg. And I'm an equity research analyst here at Erik Penser Bank. I'm here to lead the Q&A session afterwards. And with me are Mr. Henrik Ekelund from BTS Group. So Henrik, the floor is yours. And please present the year-end reports.

Thank you very much, Rikard. Dear shareholders, thank you for coming here today, and thank you for listening in. I'm very proud to report our 14th record quarter in a row. And in particular, last year's fourth quarter was amazing. We grew profit than -- more than 50%. And we had a profit warning, a positive profit warning and to beat that quarter, this -- last Q4. We're very proud of that, delivering to you shareholders another record quarter. Very briefly about BTS. Since all of you are shareholders, you know what we do. Our vision is to become the global leader in turning strategy into action, and putting us a little bit on the map compared to other professional services firms. You can see that we come in, in the third phase. So typically, in the more strategy setting, in the analysis, in the research, there's a lot of consultancy companies that specialize there, and we come in the third phase, the really demanding and challenging phase to make strategy happen through people. That is our space, and we aim to become the global leader in that space. Now to summarize a little bit about the Q4, as I said, 14 record quarters in a row. We're very proud of that, and we aim to continue to deliver more record quarter. For the full year, we improved operating profit 21%. And to give a bit of perspective, if we look over the last 5 years, profit has grown, on average, 23%. So it's not only 1 strong year, it's 5 strong years. Actually, almost 18 strong years since we came into the -- since our IPO. We -- as you know, we are working every year to improve our margins, and we are on a journey. From 2016 to '17 to '18 to '19, we've improved our margin. We continue that trend in the Q4. 17% EBITDA growth in Q4. As you can notice, a little bit slower than the average during 2019. So 17% versus 21%. Does that mean that we are declining? No. It is primarily an effect of a very strong Q4 last year. BTS U.S., our biggest region, had a great quarter, a great year. BTS Europe also. We had some more -- we had some issues in BTS other markets during the quarter and during the year, I will come to that. We continue to invest a lot in digital. We take roughly 3% of the revenues and every year invest in new products, and that has really helped us grow our digital solutions. We have a new practice area called change and transformation, where we take a larger consulting assignment, often competing with a traditional consulting firm that is very fast-growing for us as well as our assessment practice. As you know, during the year, midyear last year, we acquired a company called Swiss Virtual Business School. And very early this year, we acquired another digital company called the Rapid Learning Institute, 2 important strategic acquisitions for us, making us stronger in digital and also impacting our earnings positively. And we see more opportunities to acquire as we move into 2020. So that's a little bit about the summary. So to go a little bit deeper, you can see that for the year, we grew 10%, currency adjusted, so more in Swedish krona. And our profit grew faster than our revenues, primarily due to this higher-margin that we delivered. If we then look per business units, you can see that BTS North America, BTS Europe, solid double-digit revenue growth and better margins. And then we come to other markets. So other markets, that's the remaining 90% of the world's population. Everything outside the U.S. and in Europe. And as you might remember, this has been a growth story for us, 2015, 2016, 2017, 2018, we grew roughly 20% per year. So this is our fastest-growing unit. But in 2019, we run into some problems, and we've only grown 4%. And because we took on, we invested in growth, you can see that our profit has decreased for the year. So that's obviously not good news for this -- for 2019. But for 2020, it's pretty good. When I look at delivering another record year in 2020, I'm happy that I have numbers that are easier to beat, in other markets. So there's both bad and good news with that. And then looking at the Q4, you can see we're growing slower, and we are growing profit slower than in the year. That is a result of an amazing, very strong Q4 that we had in 2018. Per business unit, you can see the same pattern, but even stronger. You can see that other markets actually declined in Q4. We did work a bit on the cost side to get the margin up during Q4. This graph is interesting. As you know, our quarters are quite seasonal. We have always a very strong Q4 and Q2, a little bit weaker Q3 and Q1. So when we compare, we break it and compare by quarter. And you can see, look at this beautiful graph going northeast, quarter-by-quarter, we are improving the profit that we create for our shareholders. And this is the 12-month rolling average. Another very beautiful graph going to the Northeast for revenues and even faster earnings because we are improving margin. So a little bit about -- we've been on a fantastic development the last 14 quarters in BTS. And you might have noticed, our shareholders, the price has gone up also quite a bit. Why is that? Why is BTS doing so well? Why do companies -- people want to invest in BTS? So there's really 3 main reasons. It's about the market we are addressing first; it is about the track record we have, second; and it is -- thirdly, our goals going forward. So talking a bit more in-depth about these. The market we are addressing, which really is companies' investments in their people, that market is growing. It is growing because talent are becoming more and more the most important competitive factor for companies. And it's also growing because companies are changing, and technology is changing. Companies need to invest more and more in their people. And it's a big market. And the good news for us, for BTS, we're not confined to Sweden or the Nordics, we are all over the world. We can target the whole global market. So still, we are under 1% global market share. So it's a big, big growth opportunity for us. Another good news is this market is fragmented. There's not a couple of really big players that are hard to beat. There are many small players, which means it's easier to win market share and also easier to make acquisitions. So the market we are in is a great opportunity for us. Secondly, looking at our track record, if I take an even longer track record, since we came to the stock market in 2001, we've grown revenues on average 14% per year and earnings 18% per year. So we grow. We have a track record that show that we grow and grow revenues and profit every year. That's another reason why a lot of our shareholders are attracted investing into BTS. So a little bit about our growth. Why is that? First of all, the market opportunity, huge market growing and fragmented. Second of all, we have a better mousetrap than our competitors. We have a better solution. We are bringing technology into this usage. We are the world leader in building simulations, which are very effective. We work very tightly with the customers to customize it. We also have global capabilities and digital capabilities. So we are winning more than our competitors. That's the second reason. The third reason is we are investing. We are taking money from the shareholders and putting into growth. Every year, we take money on our P&L and put into the future, investing into R&D, into marketing, into talent, into sales. And the fourth reason is we are making acquisitions. As you might have seen, the last 5 years, we've made acquisitions basically every year. And we acquired companies that bring us into new markets, like Germany and Italy, the last couple of years, 2 successful acquisitions, and also that give us new services such as assessment, such as coaching and now digital. So acquisitions are really important for us. When we acquire companies, we target smaller companies. So in the range of EUR 5 million to EUR 20 million. It is -- you can acquire those with more attractive prices. And you can integrate them and you can quicker create value out of those acquisitions than if we bought by -- if we acquired bigger companies. So these are the 4 reasons, and this is why we will continue to grow year after year after year. As you know, we're a professional services company, but we do also have a scalable business model. We have license revenues. We have a big library on simulations. We have a lot of content that is well-structured that we can reuse. So it is a scalable business model. Of course, it's dependent on talent and hiring, but it's not a pure like a law firm or an advertising agency. There is scalability in what we do. Now as I mentioned, we've been growing 14% per year, and we are taking that to 20%. Last year, we delivered 10%, the year before 26%. The average is to aim for 20%. And the way we're getting there is maintaining our organic growth rate by acquiring a bit more companies, which we've done the last couple of years. And we're working towards a higher margin. To talk a little bit about the margin, we started this raise at 2016 when we had 10.6% margin. And last year, we delivered 13.2%. So 0.5 percentage unit up to 1 percentage unit per year until we hit 15%, and then we will look and see if we can possibly set a new goal. And this is how we're working to drive our margin. It's a very systematic work. Obviously, it's easy to increase the margin by cutting your investments in the future. We do none of that. But we look for efficiencies. We look -- scale drives our margin and, of course, also our license revenues, which have higher margin. In terms of dividend, we aim to give roughly half of the profit after tax. A company such as ours with a strong cash flow, we can grow and at the same time, invest in the future and give a dividend to our shareholders. And if you look at the dividend here, as you can see, it's grown pretty nicely. It's probably more than 20x higher than when we came to the stock market, if we take what the Board proposed as the 2019 dividend. For 2020, we say the same thing as we say after -- at the beginning of every year, we expect profit to be better than last year. Looking back the last 5 years, we have delivered better than 1 year and significantly better 4 years. Looking at the shareholders here. We are happy to have also Stefan af Petersens here, who is 1 of our founders and a long-term shareholder. And he also brought his daughter here, [ Sauga ], to ensure that the next-generation is staying. Because if you have a very stable, long-term shareholding in the company, both the individuals and the institutions stay with us for a long, long time. And that concludes my presentation. Thank you very much.

So thank you, Henrik, and I will start off with some questions. So can you please elaborate a bit about the development in other markets? What's the reason behind the lower growth rate during 2019 compared to early years? And how are you certain that you will be able to change this development?

Yes. I think the story is really about growing very quickly for 4 years and expecting to grow again. And it's not uncommon that in a growth story such as that, you get 1 year where you stumble a bit. And then if you've invested in growth, obviously, the impact is higher on profit. So there's nothing in the underlying structure of what we do in these markets. These markets are huge. There's growth in them. It is more individual projects, individual customers that have reduced or that have postponed their purchases. And it's also not 1 unified pictures. We are in many different -- this is a -- this region consists of many subregions. So it varies quite a bit. Now what has happened also in other markets since -- during Q1 is the coronavirus. And as we state in the quarterly report, that has an impact for us, a significant impact in China and in Asia. Now our business in China and Asia is small compared to all the BTS. So in total, the impact is marginal. And we see a lot of opportunities going forward. And our estimate is that our earnings for 2020 will be higher in -- for most of the world other markets than in 2019. So again, we are, of course, not pleased with this development in 2019. But on the one hand, as I plan to deliver another record year, I'm happy that one of my regions, it's going to be easy to beat the number going into the next year.

Okay, fair enough. And my next question is, can you elaborate a little a bit about the margin developments? And where this margin improvement comes from? Because we can see that licenses are still 9% of revenue. So what is more that improves the margin?

Yes. So really 3 things. It is, as you pointed out, the increased license sales, where we have a higher gross margin. Secondly, we look for efficiencies in how we run projects and how we use technology and how we operate, and we find those efficiencies. And thirdly, we do have quite a bit of a fixed cost base to run the business in terms of R&D, in terms of management, and many other aspects. So as we grow the company, mathematically, our margin will grow. So those are the 3 main drivers.

Okay. Fair enough. And you started off the year with one acquisition, Rapid Learning Institute. Can you tell me more about this acquisition? Is the revenue mix similar to BTS? Or is it 1 business area that is significantly higher revenue?

Very, very different than BTS. What Rapid Learning has? They have -- they do no live consulting. Everything is digital. And they built a library of 300 short digital courses. So 300 8-minute courses focusing on leadership, on business, on sales. And this is very interesting because our clients today, they ask us not only to deliver fantastic live programs. They ask us how can -- let's say, in a big company like Microsoft, where we've trained 10,000 people, how can you add to that live training, a library of digital courses so that these 10,000 people can then continuously learn and address specific personal needs that they have. So it's something really in demand in the market and it is something that fits very nicely with what we sell, and it generates a license revenue. So we are very excited about this acquisition. Also, the quality of these programs are very high. It's research based. It is storytelling based. It's not a boring e-learning that I think many of us have seen, it's really engaging. So very, very excited about this.

Okay. So I guess, it's a fair assumption to assume that the margin in this acquisition is higher than BTS as a whole?

Absolutely, over time. I mean what we're saying is it will contribute to our earnings in a positive way. Obviously, we're investing in the early days. But over time, for sure, we can get a much higher margin in RLI than we have today.

Okay. And regarding acquisitions, I mean, you started the year earlier with this acquisition. Do you still believe and do you have still enough cash to do -- continue acquisitions during the year?

Many of our shareholders tell us that our balance sheet is too strong, that we have all this cash. We have very little leverage. So many shareholders are asking us to be become more aggressive in making acquisitions and going really big. So there is absolutely room to buy the companies that we want to buy.

Okay, and when you look at acquisitions, do you look like firms that are similar to Rapid Learning Institute with a higher proportion of license revenues?

Yes, but also other acquisitions. We can strengthen some geographies. We can open some new geographies. We can, for sure, add digital resources. But again, other services. So it's a range of things. You also need to be a bit opportunity driven in terms of what are the great fits, the great companies out there that you can find.

Okay. And valuation of acquisitions, do you see a development that has increased, and that demand for price has been higher?

I would -- if I would look 3 years, sure, it has gone up somewhat. Again, we are not acquiring these bigger companies where you have to pay EBITDAs of 12% and 14% and all that. We have much, much more attractive multiples when we make our acquisitions.

Okay. Fair enough. Do you have any questions from the floor? Okay. Yes.