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

Good morning, everyone, and welcome. My name is Rikard Engberg, and I'm an equity research analyst here at Erik Penser Bank. With me, I have Mr. Henrik Ekelund, CEO of BTS, who's going to present his 84th and last quarter report; Jessica Skon, the new CEO of BTS; and Philios Andreou, Vice CEO of BTS. Henrik, Jessica and Philios, the stage is yours.

Thank you very much, Rikard. Dear shareholders, good morning. I'm very proud and happy to announce our 19th record quarter in a row. BTS is on a roll. We are growing revenues and profits quarter after quarter. We have a position in the market, which is very strong, and this is our goal to continue for many quarters to deliver record after record. And I'm even more proud to present 2 amazing leaders that have worked with me for 20 years in BTS. So there's Jessica Skon, who is currently the leader of BTS North America, our biggest unit, who's taking over as CEO on Monday. So today is my last day as the CEO. Actually, Sunday would also be my last day as CEO. And also to present Philios Andreou, who's been running the most of the world and also been with us for 20 years. And these 2 people with an amazing track record will take over the leadership, and they are way better than I am and they will take the company to the next level. But before that, I will present a little bit what we did in Q1, a quarter that was really good for us. First, a few words about BTS in general for the people who do not know us. We are about a SEK 2 billion company in revenue last year. We have about 1,200 employees around the world. And we have 50 of the top companies as clients. We've had a pretty good track record at the stock exchange since we came in 21 years ago. We've been growing 13% per year on average; profit even better, 17%. And anyone who was lucky enough to buy shares or foresightful enough to buy shares in June 2001 has had an average return of 18% per year. Very few listed companies actually beat that track record. So that's so far. Now how have we started 2022? As you remember, 2021, we beat 2019 big time due to our long-term strategic moves in 2020. That was a watershed year for us. And we did some really good strategic moves thinking long term, which has really propelled us into a digital and virtual future. So how is that paying off in Q1? First of all, the market is strong. There's so much change going on in the corporate and business world, and that drives the demand for our services. Second of all, we see people are meeting again. In 2021, we had 100% virtual. Now physical delivery is coming back quickly. People are discovering that there are advantages of actually meeting face-to-face. However, virtual is here to stay, and we will have a big mix of those going forward. We are putting more and more money, this year, a record amount we invest in digital solutions because the pandemic has driven a growing need, and we see a big opportunity for high-margin solutions that can grow a lot for us there. Now looking at the numbers, 24% revenue growth in Q1 compared with Q1 last year. And now this number, 24%, is currency adjusted. So it's the real growth. Now out of that growth, 4% came from the acquisition of Netmind last year, and 20% is organic. Now the EBITA is growing much faster, 36%, and this is mainly the effect of currencies. So we have good currency winds in our back, helping our profit in krona to go up. And also, as you can see, a big jump, even bigger jump in tax and profit after tax. Moving on and looking at revenue per quarter. You can see the big, big jump in revenue in Q1 where we basically were bigger than Q2 and Q3 in last year. So that's really a big growth quarter. Profit, you also see -- you can see there 2020 in Q1, we hardly made any money. And you see really, if you look at those 5 years, you see an amazing up curve in Q1. And that's the growth story and our profit story that's very solid. And that's those 19 record quarters you can see on this -- on the slide. When I say 19 record quarters, I'm jumping over the pandemic when it was virtually impossible for us to run our business in a normal way. Now looking at the numbers more in specific, you can see what I just described, revenues are growing, 24% profit is growing much faster, mainly due to currency winds that's helping us. Now looking at the units, and this is very interesting, you can see that all the units are growing very healthily. North America, 18% organically, very, very strong. Europe is growing 22%, also very strong. And most of the world, my friend Philios here, is growing 40%. However, 16% of those 40% comes from an acquisition. And also APG, our fourth unit, is growing very nicely. In terms of margin development, you see that there's a very nice uptick in North America with a 1.3% margin improvement; and even bigger in Europe, 3%. Most of the world has a big drop in margin. But this is not so important because their profit in this part of the world is normally much lower in Q1. And we've invested a lot. We've hired a lot of people, preparing for the growth during the rest of the year. So that drop in margin is -- that big drop in margin is temporary. So just sharing a little bit about the offerings we have. We have 8 centers of excellence, and we've added and eighth one, diversity, equity and inclusion. So we're helping many large companies around the world to tackle this trend of making their workforce more diverse and making sure that workforce is equitable in a great way. And this is a big trend. It has to do with society trends, but also of making companies more productive and stronger. So these 8 centers of excellence, this breadth gives us a very, very strong advantage in the market. But what we do in the assignments is we combine them, combine them in a powerful way to provide truly custom solutions that delivers really strong results around the globe. Also I want to talk a little bit about the pandemic. We were faced, when in February of 2020, when we faced the situation where we were going to lose 70% of our revenues, a lot of people asked us, how many people are you going to fire? How can you save the company? Anyone could do the math that possibly we could even go bankrupt. But we decided on a different strategy. We piled up a war chest of cash and instead went for the long term and kept everyone in the company and transformed quickly to virtual and digital. And this gave us an advantage against competition, and this is why 2021 became so strong, and this is why 2022 has started so strong. So it's interesting in a time of crisis, when you decide to think long term and have the guts to go long term, how that can be the best. And we were happy to note also that during 2020, almost all our shareholders believed in our long-term strategy. We were very explicit about it. And almost all our shareholders decided to stay and believed in our future. We also got some new shareholders who actually were attracted by the fact that we took that long-term digital approach. So why are we growing year after year after year? Our whole history on the stock market has been growth, growth, growth, and it will continue for many years. So just the fundamentals that are there and will continue to be there: number one, we are working in a growing market, and we're global. We're not restricted to the Nordic countries. We have the whole global market. And the good news, it's fragmented. It's not dominated by a number of big players, so it's easier to take market share. Number two, we have a better mousetrap. We are better than competition. We are taking market share because clients see what we provide is superior to competition. So those 2 factors are, of course, fundamental to growth. And they still remain, and that's why we will grow moving forward. Thirdly, we also acquire companies. Our growth is primarily organic, but it is also driven through acquisitions. And fourthly, we put a lot of money every year into growth. We put resources into R&D, into talent, into marketing. So these 4 factors plus the fifth, the talent and culture of BTS is growth. If you meet any of our 1,200 employees, they will all talk about growth, personal growth and business growth. And we know that these 5 factors are here and they remain constant, and this is why we will continue to grow year after year after year going forward. Our growth story is sustainable. And in particular, with the new management team, this will hopefully take an even higher growth going forward. So the share price has gone up a lot over the last 5, 6 years, over all our time at BTS at the stock market. And when I ask investors, why do you own the BTS share? Why do you still own the share despite its big climb recently? And typically, I hear 3 reasons. First of all, the shareholders say, you have the globe as your market, and you are very competitive. They love that market position and the market. Secondly, they look at the track record, and they say the best predictor of the future performance is past performance. And you're growing year after year after year. You can do this again. And finally, they like the fact that our goals are actually more ambitious than what we have delivered in the past. So we will -- actually, our goal is to grow 20% and to get to a 17% EBITA margin. And happy to say that in Q1, we did get to 20% growth, even more with the acquisition. And actually, we did a little uptick in our margin in our journey towards 17%. We haven't said when we will reach 17%, but we will, for sure, get there. So this is our growth story since we came to the stock market. So you can see back in 1986, where we started in a garage, cold garage, not far away from here, and we've grown quite a bit over the years. But it wasn't really a garage. It was more like an apartment, but very, very small and very, very basic. A little bit around our sustainability, which is something we invest a lot in. That's something that's truly important for us. And there's a lot of details here on this slide. But as you can see, we have a number of KPIs in sustainability. It's our impact on the planet. It's about our diversity. It's about how we live up to the UN different goals. And we're very proud to say that our sustainability performance is really strong. One of my favorite areas is that we help to train for free micro entrepreneurs in the third world. And we've trained over 0.5 million of those so far. So on the sustainability side, we invest a lot, and we truly believe in that, and we're very passionate about it. So looking at 2022, our outlook is unchanged. We will produce a profit that is better than in 2021. And with that, I conclude.

Thank you, Henrik, and thanks for the -- all that 86 presentations -- 84 presentations.

So my first question is, can you please describe what markets and what drives the stronger organic growth in the quarter?

I think I will let my 2 colleagues take that question for North America and for most of the world. You want to start, Philios? What drives the organic growth in your region?

Yes. So obviously, we're present in more and more markets. So that's one driver of growth. So we have -- we started, especially in Asia now, more operations. We're stronger in Malaysia, in Thailand, Southeast Asia in general. We're just opening operations in Indonesia. So a number of new markets. Also in the Middle East, we are working more with Saudi Arabia and Dubai. So there's new markets, so that's one driver of growth. Second driver of growth is that even in all these markets we are present, we are getting more share. So clients know us more. So we get more attraction to new clients, so new logos, new clients come in. So that's the second one. And I would say the third one is that there are newer strategies around how we work with clients, as Henrik mentioned, about combining the expertise we have. We're getting bigger deals. So those would be kind of the 3 main drivers: more markets, more clients, bigger deals. That will be kind of a summary for most of the world.

It's a little simpler in North America because it's one country, one market. So first ones could be industry. I'd say we're very well balanced across multiple industries. When COVID hit, we doubled down on a few sectors, and it paid off really well. So software and tech was one, biopharma was another, CPG was a third and then health care. And if you look at some of our biggest accounts, they expanded significantly within those sectors. Second lens would be, as Henrik mentioned, competitive positioning. It's pretty fun to be BTS because we're able to take share from multiple different segments. So whether we're competing against more traditional leadership development, training companies or the big 4 strategy consulting firms or traditional search and HR firms or even ad tech kind of tech-first learning companies, we enjoy kind of winning deals and taking share from all 4, and we're seeing that across North America.

Excellent. And how was the mix between physical and virtual delivery during the quarter?

I'll say a lot more fun for our people would be the answer, and that's because physical came back, right? It came back in multiple forms. It didn't come back 100% overnight, but it started to resurface, right? So it's growing in demand from our clients. But basically, in both small group working sessions, so kind of top-of-the-house meetings, CEOs are bringing their people back for big events, top 100 meetings or sales kickoffs where thousands of people are coming together, and then in the more traditional small workshop-based experiential learning stuff that we do. So we saw it come back in kind of all different forms. But it just began in Q1, and the demand has been increasing.

Could be it like 10-90, 20-80 or something?

I would say in Q1, it's probably 10%.

10%, yes.

And it's increasing. Yes.

And growing, yes.

Good. And my next question is looking at the cost base and compared to sales, can you please elaborate a bit about the development here? And is it increased physical delivery that is driving -- driven the high cost base? Or is it something else?

As you see, revenues are growing faster than cost, significantly in Europe and North America. So we see a very positive development there. And that's why we are really investing. And then in most of the world, we've invested a lot. And then there, we have a bit of a lower margin. Do you want to comment on that, Philios?

Sure. I mean in any way, our quarter 1 is always like a smaller quarter in most of the world because we have a number of our geographies still on the holiday season as we come back, like Australia season, Latin America and so and so. So what we see, it's a little bit of a higher growth in the quarters as we go into quarter 2 and forward. And what we've done is, both coming very strong in 2021 and also anticipating work in 2022, we actually hired quite heavily in some of the markets because we need to invest in that to be able to continue with our growth. And that has been kind of the 2 effects, a little bit of a smaller quarter with a higher investment on the people side that will be paying off in the following quarters.

As you know, Rikard, we always focus on the long term. We never try to optimize the quarter. We always think the best growth possible long term and invest if needed.

Excellent. And my last question is, have you seen any challenges in recruitment during the first quarter? How was the competition for talents?

Great question. Jessica, do you want to start?

Yes, I mean it's -- the competition is up compared to before, but we're still getting really high acceptance rate of candidates. I hear from the recent hires that our -- the candidate experience is second to none. So we're still getting pretty much our first-choice candidates. We've hired a few more people in the recruitment team just because our volume and the scale demands are a lot more, but it hasn't been too significant.

Great. And then I think I will leave over to the telephone conference. Or let's take some questions from the audience first.

Just a question on other markets or 2 actually. When you grow in other countries, as you say, do you expand with existing customers? Or is it new customers in new countries?

Yes, it's a great question. So I would say that primarily, our strategy is always to expand with existing customers, either because they have operations there and we go with them or because we win a bigger deal that involves multi-country, and that gives us an edge to start operations. There has been some situations, especially in Asia, where big organizations like PETRONAS, like companies like that may issue an RFP, and we go for that. And once we win that, even though we have a base in the nearby countries, it can give us opportunities to establish as well like in the Malaysian kind of a country as well. So it's a little bit of a combination. Mostly the strategy is follow the customer.

Great. And on the margin, was the Netmind acquisition, was that part of the margin drop?

Yes. So in Netmind, we -- obviously, it's the first quarter therein. And our focus was growing that space, integrating together with BTS, and part of it has been some additional cost in doing that. So yes, I mean the Netmind business, we are looking kind of more of a long-term where it will grow a lot more. And when we had bought it, then that will show up the scaling effect as we go forward.

And then in general, for Jessica as well, when you do recruitment, which I presume has burdened margin in other markets now, what's the payback time for that FTE in terms of reach 0?

That's different depending on the level of talent that we're hiring. If it's kind of a baseline starter consultant, we try to get them billable right away because that's how they learn, right, on projects. By the time they're fully productive for an entry-level consultant, it's probably, I mean, 6 months or something. Or -- but then if you hire -- sometimes you bring in seasoned talent, so consultants or other consulting firms will join and then it just depends on what the hurdle is going forward.

We have a question from the telco as well. Hello, do we have any questions from telephone line? Well, I can finish with one question, and that is you talked about M&A. And can you please elaborate a bit about the M&A market nowadays? Are the valuation back on the levels they were before COVID? Or how do you see it?

So obviously, it's been a bit of a ride up and down. Valuations clearly climbed as the stock market climbed. The last couple of months has been a bit of a reverse development. There are fewer buyers out there. So it's -- prices are a little bit back to normal. We, of course, have a pipeline, and we always actively look for acquisitions. But as you know, Rikard, we're picky. It has to be a really good strategic fit and has to be a really good deal for us to make an acquisition. But we're actively, of course, still out there.

Okay. Do we have any questions from the audience?

I remember you used to say that you had a global market share of 1%, 1.5%. Is that still so? And do you have any internal goal on how your -- how big your global market share can be?

I mean, basically, if you have access to the global market, which we have, and you have a unique and valuable concept, you can grow forever. And that is our plan. So there's no limit. The market is so big. The only limit to growth is our ability to execute growth. So we don't really -- just set a goal. The sky is the limit. There's so much growth opportunity, and it's up to us to execute on that growth.

And Henrik, can I add to that?

Please.

You're right, we used to say that, and that was even in the times when we were defining our global market as more of a little bit more of a narrow market. But now we operate in so many multiple and connected markets that is increasing. And also, we see clients also changing their way of investing in the people side of strategy. So those 2 combinations are making the global market even bigger. So yes, I mean, immense opportunities for us to keep on growing there.

We have a question from the telephone conference, and it's from Daniel Thorsson from ABG.

This is the audio operator speaking.

Thanks. Do we have a question from Daniel Thorsson still? Do we have a question from Daniel?

Seems to be a technical issue here.

Yes.

Yes, Daniel, go ahead. Your line is open. I think you're on mute, Daniel.

Hello, we do have an audio question.

Perfect. Yes.

Do you hear me?

Yes. Go ahead, Daniel.

Daniel, you can go ahead with your question, please.

Yes. Excellent. Do you hear me now?

Yes.

Okay. Great. It's Daniel from ABG. Okay. I'll start off with a question related to inflation. You say that it is affecting you significantly. Is it mainly direct salary costs you're talking about on the negative side? And given your solidarity and loyal strategy in the pandemic, do you expect that the employees will be happy with slightly smaller wage increases due to this that we may see in other companies in the sector?

Well, thank you. That's a great question. For sure, salary, there's salary inflation out there. And we need to stay competitive in -- for our people and for the new people we hire. So that is the major impact. Retention, the turnover of people has really gone up all across the consulting industry. And there is a competition and there's a salary competition out there. Our turnover rate has gone up. So always below 10%, now it's above 10%. But in the consulting industry in general, it's around 25% now. It's quite crazy. And our turnaround rate is lower because we have a more loyal employee base. We have a great culture. And we have -- what you offer please is not only salary, there are many, many more factors. So yes, Daniel, it's true because of our culture and how we lead our people, including the pandemic, we have an advantage in the labor market to keep our people and to hire people.

Excellent. That makes sense. Second question, on demand, you say that you have not seen effects from slower demand due to the worsening macro environment in Q1. But can you comment anything if you have seen any effect so far into Q2? We are already halfway into the quarter.

I mean the text there in the Q report, obviously, because the Q report is written today, what we write there is valid until today. We have not seen a decline in demand up until today. The only exception is what we mentioned in the report that the war in Ukraine has led to some loss of business in Russia and that we've given up ourselves, plus some assignments in Eastern Europe. But that's a small -- very small part of our revenues.

Excellent. That's clear. The next question is for Jessica and Philios, I guess. How do you see the importance of software and digital tools for future growth and success for BTS in the industry as we see the emergence of ad tech peers growing pretty rapidly in the last few years? And also, does it differ across the different regions you have? I guess Jessica may have a different view as Philios, for example.

Yes, I can start. So extraordinarily critical because if we want to have large impact at scale for our clients, then we need software and digital services to provide that to them, right? The ability to touch 100,000 employees at once or over the course of a year to keep them aligned to a strategy, keep them doing their best work requires software. So from that perspective, to deliver more and more impact and to be a closer partner to our clients, that's why it's critical. Open to continue to learn from the ad tech companies, partner as our clients require us to. But in general, they're more standard solutions and offerings, right? They're tech first, so in their nature, then they tend to be more standard. And most of our clients feel like their context is important.

Yes. Do you see the same trends in other markets, Philios?

Yes, very similar. And I think that for us, as BTS as well, our approach is both using the software and digital as a way for the delivery for getting through to the participants, to the clients and so on, but also for providing more and more tools that can be reinforcing what we are working with them and helping them in the flow of work. So that 2 combination, we are both investing and working with those 2. And as Jessica said, I mean that's going to be more and more important going forward, which is why we are investing a lot in digital.

Excellent. My last question is also for Jessica and Philios here. Are there any parts of the business or the way of managing the company that you think will differ from Henrik's way of doing it? I mean it's very individual of how you're managing a group of people, but also the way you look at strategy for the firm here ahead. Anything you can comment on that?

Look, we were raised by him. He's loved inside of BTS and by us, and that's for the culture that he created and that's his leadership. So no, there's no big problem that we have to solve right now that I can see a reason of differing from the way that Henrik led the company. So no, it's protecting it, strengthening it and keeping that life experience for all of our employees to then bring it to their customers.

Yes. As we had a conference for our people last week, and Jessica and I showed a slide that said, this is not season 2, it's season 1 extended. So...

For me to comment on this, I mean, first of all, a transition like this is huge. But Philios and Jessica, I worked with them for 20 years. They're just amazing leaders, and they create profitable growth year-after-year. So as shareholders, we can feel really good about that. And I'm convinced that this is leveling up. They will do a better job. And of course, as CEO, you have -- you're great at some things, but then there's some blind spots. So there are a lot of things to still improve. And here, we have 2 very experienced, brilliant people with new ideas who will take the blind spots I've had and make improvements there. So this is leveling up for BTS, this leadership change. And I'm very, very excited to be able, as Chairman, to see how Jessica and Philios makes our company even better.

And there are no further questions, I'll hand it back to the speakers.

Thank you, Daniel. Do you have any concluding remarks from you?

Well...

Sorry, we have one question from the floor.

Just a question maybe, if I may, on the inflationary pressure, as you mentioned. Can you speak a little bit about maybe how you work with raising prices, et cetera, because I guess that's very important now with the wage inflation we see? And is it possible maybe to say how much of the growth in the quarter because, I guess, the 20% organic growth was, to some extent, driven by price increases?

Yes. It's -- I mean the vast, vast majority of the growth is about volume. But clearly, there is some percentage in there, a smaller number. But still, that is -- of the growth, that is price increase. And what we find is that, number one, clients understand that we do need to work on our prices even though they're not happy about it, but there is an understanding out there. And number two, because we are not just any consultant or tech provider, we have a unique position in the marketplace, and we have such a high customer satisfaction. We have pricing power, so to say, and that helps us. So this has worked well for us. And obviously, we're also working to create mechanisms that for the longer contracts that we can adjust prices going forward. So clearly, this has worked well for us, and we just need to be very good at managing it going forward.

Yes. And then maybe another question on maybe the demand outlook. You mentioned in the annual report, I think that tech is the largest segment for you right now. And we're seeing some, let's say, change maybe in strategies among the tech companies, especially in the U.S. maybe where we're seeing this maybe as going for growth, and losing a lot of money is not really maybe working anymore as it's not very easy to raise capital. Have you've seen any impact on your business from that? I mean I guess it could be both positive and negative in some ways.

Yes. I mean we're very, very strong in tech. Jessica can talk more about that because a lot of that is on the West Coast where you live. The good news is that we are still have very low market penetration in the tech sector. And Jessica, would you want to comment what signs do you see on -- in this market segment?

I mean the last part of your point, I'll just want to reinforce, which is as they pivot, so as they're growing fast and they're going from like an SMB to an enterprise space, they're realizing they have to become profitable. Those pivot moments are great times for them to hire us when we work with them and do a lot of work. At the same time, for the hyper growth, they often feel like their leaders are in the biggest jobs of their lives, and so we also help them establish a leadership culture in a way of performance that is kind of fundamental, right, for them. So those are kind of the 2 main needs that drive a lot of demand for our partnerships with them. Yes, I think there's a bit of nervous hype amongst them right now just because their valuations have been dropping, and it's pretty erratic. But it's more a sentiment as opposed to a crisp reality yet. So it's a little too early to -- for us to feel the shifts.

Yes. I mean we haven't seen any drop in revenues. There's still a lot of business opportunities in tech for us. So let's see what -- how the market develops.

Thank you. And do you have any concluding remarks from you guys?

Just to conclude and say, we're very happy. We're grateful to the shareholders that you believe in our company that you want to continue to own shares. We will do our utmost to make it a great investment. And so -- and again, as a shareholder, I'm very, very happy to now, from Monday, leave the leadership to a stronger team that will perform better than I have done. Thank you very much.

Thank you, Henrik. Thank you.