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. With me, I have Jessica Skon, CEO of BTS; and Philios Andreou, Deputy CEO of BTS, to present the second quarter. Jessica and Philios. Welcome.

Thank you.

Thank you.

Good morning, BTS investors. It is a very strong pleasure for Philios and I to be presenting our very first quarterly report following the transition of our dear founder and CEO, Henrik Ekelund, to Executive Chairman. As you've seen from the results, we are both extraordinarily proud to deliver another record quarter, Q2 of 2022, which is our 20th consecutive record quarter. And as you've probably seen, we're also upgrading our profit outlook for the year. So before we get into the details, I know that some of you have been very long-term investors, and we thank you for that and you know us well. Others are joining and starting to learn about BTS for the first time. So just a quick introduction for those of you who are new, BTS last year did roughly a little bit over SEK 2 billion in revenue. We have around 1,200 people. We have over 36 office locations. You can see 50 of the Fortune 100 are BTS clients. We were founded in 1986. For those of you who are early investors, we have a pretty impressive stock performance. If you invested in 2001 we went public, you'd have, on average, 18% return. We have 13% annual revenue growth and 14% profit improvement since the beginning. So -- and our focus has always been on strategy implementation and improving our clients' change strategy and culture. So with that, if we go into the details of Q2. So again, we are really proud of our 20th consecutive record quarter. The demand for our services continues to be strong. We have 24% revenue growth, of which 21% of that is organic and all 3 operating units delivering double-digit growth. Just as we said in the first quarter, the second quarter for the most part felt very similar: increasing demand on physical deliveries, which our people are enjoying; and we continued to invest in digital solutions. We're seeing increased demand from our clients to deliver our services at scale, so for tens of thousands of their people, to deliver services in a more personalized and kind of "in-the-flow work or in-the-moment way" and to provide more real-time data and analytics to support our clients' execution. And in addition to the revenue growth, our EBITA is also growing 36%. So in general, from that perspective, it was a great quarter. Now as we also reported, and I can explain now, we started to experience some volatility. In some of our software clients, they are starting to implement or started to implement right at the end of the second quarter and a bit into the third quarter some resiliency measures. I would say out of the software clients who either canceled or postponed their work with us, over half of them were unprofitable. And even a few of them have already come back and said, all right, let's get going. So I mean it when I say the beginnings of an experience that was a bit volatile. In the software, just a little bit more context. The software industry last year represented about 20% of BTS' revenues, but the heavy concentration of that is in 1 BTS office, which is our San Francisco office. So moving into more details. You've seen this slide in other earnings release. It's simply reinforcing the 20th record growth, you can see it from a revenue perspective. And when we look at the consecutive growth, we are not including 2020. Same thing in terms of profit per tax by quarter. You can see the details here, specifically for Q2. So again, the 24% revenue growth, the 36% EBITA performance and you can see the EBIT margin down below. If we look specifically at the business units. So starting with North America, although there was some reduction in software work in the second quarter, the business in North America continues to perform really well at 14% growth. EBITA went from 16.6% to 14.6%, and there's really one reason for that: it was a onetime organizational investment. BTS Europe, extraordinary growth at 35% and a huge improvement in EBITA margin from 20.3% to 27.6%. Strong use of resources, a nice license deal helped with that and so forth. And then BTS Other markets, again, continuing their strong growth of 35%, strong EBIT performance improvement from Q1 with an EBIT margin of 14.8% versus 18.1%. And APG also nice growth. January to June, if you look at the first half, you're going to see some very similar percentages. So 24% revenue growth and 36% EBITA performance. And similar again for the first half. So per country, not too many different things to report there in the first half versus the second quarter. So just a little bit on -- for those again who are getting to know us, why do we have this performance? Why do we continue to grow year-over-year, in this case, our 20th record quarter. We're pretty lucky, right? BTS is a unique type of consulting firm and we take share from different areas, both from the traditional consultants and from the HR and the talent consultancies. It's a highly fragmented market, of which we estimate we only have, let's say, 1% or 1% to 2% of that. We're in 36 offices around the world. So there's a lot of opportunity just for growing and the growth in those markets. We have a history of investing in both organic and inorganic growth. We continue to look for acquisitions and we'll continue to do so. We haven't made any this year except we expect, in general, to do 1 or 2 a year. On the organic side, we continue to increase our investments in our digital capabilities and marketing and sales. And I'd say we have a very strong competitive position. Now if you look at the circle in the middle, one of the things I have done in the last 3 months is I've spent time in 10 of the different markets. So every major market in Europe and in South Africa. And I mean, it was no surprise to me, but it was nice to feel it both in the conversations with our clients, and of course, in the conversations with our people the BTS culture is quite special and quite extraordinary. Not only do our people revere it and want to protect it as we grow, but our clients notice it and are curious and wanting to learn from it and take from it what they can for their own cultures. So we think we have significant market potential ahead. We have a very strong position in a large and growing market. If you think about what our -- what companies typically invest in, it's technology, process and people. And for us, we've always been on the people side and we see increase in investments towards people only going up. We have a long track record of double-digit growth and stable margins. And we have even more ambitious long-term financial goals even despite the beginnings of the experience of the volatility and some uncertainty in the market. And in terms of the longer-term financial goals, they maintain consistent with 20% revenue growth year-over-year, that would be a combination of organic and inorganic growth; and a 17% EBITA margin. So just to reinforce, we've upgraded our profit projections for the year. We expect our results to be significantly better than in the preceding year due to the strength of the first half and what we're seeing across the market, we feel that this is -- we're confident with this. And at the same time, given what we experienced in just one industry towards the end of the second quarter and a bit into the third quarter, even though we're not seeing any spillover effects into the other industries, it feels more uncertain than normal right now in the market and we have plans in place in case that spillover does begin. So with that, I think we'll turn it over to questions.

So thank you, Jessica. And my first question to start with before we discuss the quarter is can you please describe a bit your career in BTS? And what made you choose BTS as a company?

My career? I would love to. That's a very sweet question. I've been with the company for 23 years. I joined them as an undergrad. So I actually felt it was quite serendipitous in how I met that, I just moved to San Francisco. And I told myself back then as long as I keep learning at the pace I want to learn and I'm enjoying my colleagues, then I'll stay. Of course, I thought I'd go to grad school and I've had many offers from clients to join, but I am still here. And if I look back on the career, it's a combination of 2 things: it's having the freedom and the culture that Henrik created to innovate for our clients, which I spent the first probably 15 years of my career doing was listening, and they expected us to help them with bigger problems and we have the freedom to go after it. So I felt like I've invented quite a lot of our services and points of view and practices over the years; and then at the same time, being part of the company that's -- growing your own firm at the same time has been a wonderfully challenging, rich, and in a way, beautiful experience of having the ability to do both. And besides being a consultant, my entire career has been in our San Francisco office. But I went from being a consultant to running the San Francisco office to North America West to our leadership practice to North America, which was my last position. I took over North America in 2016. And the quick summary there was for the 5 years leading up to 2016, on average, BTS North America grew less than 5% a year. And then from 2016 through 2022, not including 2020, it's double-digit growth quarter after quarter. So I'm quite proud of the increase in growth that the leadership team in North America did.

Excellent. And my next question is, can you please describe what is driving the growth in both Europe and Other markets? Are there any certain industries?

I will actually turn it over to Philios to talk about most of the world first.

Great. Yes. Thank you. Actually, it's quite across industries, growth. I mean, we see -- we're quite strong in both the financial sector, but also we see in the pharma, medical sector we're quite strong. And it's quite even across, I mean, different markets within. We would work with different sectors, but there isn't one that is kind of pointing out to being more particular in these times. And I would say that also when Jessica mentioned that we are upgrading our outlook, we are upgrading and we are mentioning that there is volatility, but we have to mention that especially in Other markets, we haven't really seen any impact of any moves -- or resilience moves or recession moves as such. Our clients are not responding that way. However, we want to be cautious because the news are out there and we are expecting that volatility and we are making plans to ensure that we are there when it happens. But both -- and I would say both in Other markets and in Europe, we're seeing less in Europe. It was a little bit more because of the war, but less because of that tech industry impact.

And in Europe, all of the markets are performing really well and they're extraordinarily diversified in terms of industry coverage. So there's not really a standout growth one at the moment, but it's just all the offices are performing great.

Okay. Great. And can you please talk a bit about the mix between physical and virtual delivery during the quarter? Has it gone up? Or what level is it?

Yes. The percentage of physical has gone up.

Yes. About 40%...

Yes. I was going to say, gut feel, somewhere between 40%, 50% of the work now is in person, which I think, as I mentioned, our people are enjoying quite a lot. It's really rewarding to be closer with your customers and spending time with them together. And I think people on the client side are loving the time together as well so.

Okay. Great. How do you see the recruitment market right now, both for graduates and more senior consultants?

Yes. Well, first, one comment on that. I think out of the 3 markets, most of the world did a better job of attracting talent as needed throughout last year and into the first quarter. Europe and North America have been a bit behind. So it's taken us longer to fill the open positions that we've needed, which has meant that our people have been quite busy in the first half. But in general, North America now feels like a big group of consultants are coming in. And so we're actually pretty pleased with -- actually, we're very pleased with our efforts to date. So I think it felt more competitive at the end of last year and into the first quarter. And it seems like the process of getting candidates through is speeding up.

And can I maybe add that we are seeing a turnover that is quite less than what is out there in the market for professional services. So it seems that our people are sticking a lot more with us and are being a lot more engaged as such. And we're seeing even the people who may actually move on, they probably move on for different reasons like more like either moving into the corporate world or doing something that they actually like more and so on. So we're seeing a lot less of that typical professional service resignation changing from firm to firm, and that's primarily because of the culture and the way we are working. So people believe that we are the place to be if you want to be in the consulting business.

Okay. Great. Then I will hand over to the phone conference for questions.

[Operator Instructions] The first question of today from the line of Karl Norén from SEB.

Yes. I have a couple of questions. Maybe we'll start with a little bit lower margins in the U.S. and Other markets. Just curious about what you had in the report that you've seen a peak in the investments and how should we read that going forward? Should we expect margins to improve in the second half of the year in this region? So how should we read?

Sure. So just to respond to the second quarter. The major investment there was we had in our consultant conference. So we're going back to in-person. BTS did as well in terms of an annual event. We just haven't had that annual event in that quarter in previous years so I think that's the major standout cost difference, which is a onetime investment. And from my perspective, it was an incredible use of time and investment in terms of engaging the talent, giving everybody aligned to where we're going and so forth. The only other small increase for North America and most of the world was an increase in our digital investment, which has been kind of on strategy from the beginning. So anything else on most the world?

Yes. What I would say is, I mean, we are growing, as you've seen, about 35%, 40%, including the acquired revenues. And we want to push to continue growing. So that means that we are making a lot more investments. I mean the integration of the acquisition, we are working with them. We are seeing benefits. We are seeing now the first deals come in where, from the acquisition, either from their clients to the core BTS or from BTS to Netmind or agile working things. And therefore, what is there, I would say, is that we are seeing that we're going to continue high growth. We'll continue with higher profits. And our focus right now would be to ensure that margins over time start to go up, but we will kind of prioritize our growth at this moment rather than cutting costs to get to a higher margin temporarily. So we want to do that gradually over time, so it's more sustainable.

I mean for North America, we'll...

Yes. That's great.