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

Good morning, everyone. Good morning, everyone. My name is Rikard Engberg, and I'm an equity research analyst at Erik Penser Bank. With me I have Jessica Skon, CEO of BTS Group; and Philios Andreou, Deputy CEO of BTS Group to present with third quarter reports. [ Jess ], the scene is yours.

Super. Thank you very much, Rikard. Good morning, everybody. I'm calling in from San Francisco and, Philios is from -- calling in from [ Dubai ]. Pleasure for both of us to be here. This is our second quarterly report after taking over from our dear Founder and Chairman, Henrik Ekelund. I think both Philios and I are proud and happy to report it's another 21st record quarter in terms of absolute revenue and profit improvements and happy to go into the details. So just going to advance the slides. There we go. In terms of an executive summary on the third quarter, demand for our services continues to be strong. In terms of our major markets, Europe, other markets and APG, we're super proud of their performance, both in terms of growth and profit, continuing double-digit growth. 26%, Europe; 23%, other markets; and 28% APG, respectively and improved profits across the board. Now obviously, one of the things we're not very proud of is that the EBITA margin overall for the group dropped from 13.5% to 10.7%. And there's one reason for it, right? It's the same reason as to, if those markets are going over 20%, why is our currency adjusted revenue growth for the third quarter 12%. And that's our biggest unit, BTS North America. I'm happy to say that BTS North America will be back to growth in Q4. But the third quarter, given what we talked about in the last quarter in terms of the temporary slowdown of some of our software clients had that unit achieving just 1% growth. So our headcount went up in the third quarter. Growth was only 1%. We continue to make investments in digital. And while we do expect North America to get back to growth in the fourth quarter, the recession resilience initiative we started in May and June continues to move forward at full speed in terms of our teams focusing on the CEOs, industries and companies that we believe will be more recession resilient. So moving into a bit more detail in terms of overall revenue growth. Obviously, there is extraordinarily strong currency effects. So if you look at that, it's 29% growth in the third quarter, 12% currency adjusted. And out of that, 10% is organic. On the other hand, when you look at EBITA, considering our biggest unit went to essentially flat or 1% growth, we're still happy that EBITA did improve in the quarter. But obviously, the drop from 13.5% margin to 10.7% is not the direction we'd like to see, but it's 100% correlated to the slowdown in our North American market. If we do a double-click into the three units for a minute, I can speak a little bit more to North America, and then I'll turn it over to Philios to speak to the other markets in Europe and APG. So just like what we talked about in the second quarter, it played out as we discussed. So a handful of our North American software clients, especially those that were cash flow neutral are running unprofitable back in May, June, July and it hit the brakes in terms of hiring freezes, they stopped initiatives and so forth. And overnight, our North American group lost about 35% of their overall Q3 plan, which is pretty significant. Given that, I have to say I'm pretty proud of the team. I mean, once again, it's BTS culture in action of speed and agility and they stayed close to those clients. And even despite the fact that we lost around the third quarter from those, we still managed to grow 1% in our North American operations. But because of the close relationships with those companies, many have now reengaged with BTS in the fourth quarter and additional software work has been won as well. Philios, do you want to comment on Europe and the other markets?

Sure. Well, as we can see, I mean, the other three markets' growth is there. And what we are observing is that although clients do talk about what's going to happen next year, the signs from the clients is -- are not there to us. So we're looking at still a strong demand and still growing. And we're also seeing a big improvement in the profitability, especially in other markets. So as we have mentioned in the last report, we did quite a bit of hiring in the first half, and we were going to capitalize on that going forward. And therefore, that's what we are seeing here. We're seeing an improvement from about 1% margin in quarter 1 to almost 14%, 14.2%, in this quarter and with a growth in absolute profit and that trend continuing. APG, it's kind of a smaller unit, and we are glad to see that the increased sales activity is also giving it a little bit of a push this year with strong demand.

Super. So for those of you who are learning about BTS more for the first time, we've included a little bit of just overview slides in terms of our growth prospects going forward, both when economics are booming and also when it softens. So as a general summary. Why is BTS growing year after year? This is our 21st record quarter. It's a combination of -- we have less than 1% market share, fragmented, strong competitive position. We continue to invest in acquisitions. Although we haven't invested in another one yet this year, but we are talking with many, and we'll continue to invest in organic growth. So if I kind of click into each one for a minute. We have a 34-year track record. If our average revenue growth has been 13% a year, average profit improvement of 17% a year. You can see the breadth of our different centers of expertise from strategy alignment to change, culture, work, leadership, development, innovation, digital transformation and so forth. We've got about close to 1,200 people now around the world with 600 contactors, which is quite helpful for us to manage both upturns and downturns and a pretty awesome client base as well. One of the questions we often get is a bit more of our overall market position and who our major competitors are. So, sorry -- there's no builds on this slide, but I'll break it out for you from the top of the slide kind of going down. But a very conservative TAM estimate for us at BTS is SEK 30 billion, and that's conservative. So we have less than 1% of our TAM. And our services are typically purchased by three different budgets or buyers in our client companies. The first one on the left is the HR, the talent learning leadership development function. So working on improving leaders' abilities to change, strengthening the culture and so forth. The second bucket would be the Chief Revenue Officer, their sales enablement functions, right? Those are the groups trying to drive growth for their firms and equipping their go-to-market teams and their salespeople to be excellent at driving growth. And then the third bucket is transformation office, P&L owners and functional leaders of the executive team, right, who are focused on implementing their strategies, creating one and driving big change initiatives or transformation initiatives. If you look on the left-hand side, the group #1 and #2 together for a minute. I mean this in a humble way, but most training enablement leadership development selection services are mediocre at best. It's been one of the reasons why BTS has had such a strong growth record. If you jump down to the competitive landscape for a minute, there's basically 4 major groups of competitors that serve bucket 1 and 2. You've got the executive ed programs from major universities and credit institutions that have wonderful professors. They write great books. They do amazing research. They inspire all of us. At the end of the day, though, they tend to be not practical enough, meaning not tied close enough to the future direction of the firm, the unique strategy, unique business model and unique culture. You've got a whole bunch of mom-and-pop boutique firms, many of which we look at to acquire over time. They tend to not have a global footprint, and their business model is to take the framework that they've invented to the world. You have larger search-based HR and talent companies that continue to be search first. And then you have a bunch of tech start-ups who are doing great work, great work at scale, but they're standard. I mean their entire business model and shareholder value creation model is to take standard to companies. And our view is a lot of companies also need stuff that has the right fingertip feel for their business. And then on the right-hand side, we also go head to head with the traditional consulting firms, right? So McKinsey, BCG, Deloitte, Accenture, in particular, when our clients are going through big transformations and they're looking for a partner who can help them in a different or more modern way. So in this bucket, BTS helps both with the strategy creation and the strategy implementation, primarily through our modeling and our simulation abilities. And if you think about people, process and technology, we've always been on the people side of change for the last 35 years, helping to get every person in the company to work differently. And our clients feel how different our culture is from the different consulting firms. So that's just a little bit about who we sell to and the competitive market. In terms of investing in acquisitions, you can see the summary of the companies we've purchased since 2013 and kind of the major capability gaps such as geographical gaps, which were the primary reason for the acquisition. Philios and I spend a good amount of our time meeting with potential partners and companies to acquire. And while we haven't closed another one yet since our Netmind acquisition, definitely on our radar and so we'll be doing that relatively soon. Finally, so -- and then we continue to invest in organic growth. We have a very innovative culture with a lot of freedom. Our teams are free to be creative and invent with their clients. We are probably most well known for our ability to simulate strategies, businesses, cultures, roles, processes, workflows and so forth but we have quite a broader set of methodologies and services. And we're at a size and scale now that we can really start to take advantage of it, right? We have 30-something offices that have had that freedom to be highly entrepreneurial and we don't want to give that up. But there's plenty that even those heads up offices are asking for in terms of more of a one-way, a one BTS way that I think will drive some cost advantages and keep our account managers and our leaders with clients as much as possible. Philios, anything else you'd like to add before we get to culture?

No, I think that's great. Go ahead.

Okay. Cool. And then finally, there's something that's pretty special that's happened in the last couple of months, so I'll share it with you. And that's more and more CEOs are asking to meet with me and they're wanting to meet with me for one reason, they're super curious about the BTS culture. And it's because they're experiencing our talent on their big company priorities and initiatives, and it just feels different, right? It feels different. It's people who are having fun together with them, but it's on strategy. And we're improving their culture while we're helping them change, right, and be better. So it's -- this is Henrik's legacy, and it's a pleasure to be the steward of this moving forward. It's why we did so well in the pandemic. It's why we weathered the previous recession so well. It's the San Francisco team in Q3 was able to help North America still get to 1% growth despite a 35% decline overnight. And it's why, frankly, I'm bullish about the next year because we have this. So for us to summarize, again, for those of you who are newer to us, and for those of you who aren't, thanks for listening. We have a very unique set of services and assets and culture that's in a very large, growing and fragmented market. We get to take share both from the talent to HR type of companies, and we get to compete and take share against the big four consulting firms. I think our history and track record speaks for itself. And more and more I think our culture is going to help our clients' cultures evolve to one that will deliver superior shareholder returns, but in a way that people are feeling like they're doing their best work and they're super proud at the same time. And Philios and I mentioned this in the last quarterly call, but our outlook is unchanged for 2022. So consistent with what we said a quarter ago, we believe that our earnings will be significantly higher than 2021. Rikard, back over to you?

Yes. Thank you, Jessica, and Philios. And my first question is to you, Jessica and Philios as well, what industries are you seeing driving growth this quarter?

Sure. Well, obviously, not software, in the third quarter. But outside of that, it's pretty consistent with the ones that I think have been key to our growth for the last, probably 18 months or so. It would be oil and gas or energy, pharma, bio, financial services, fast moving consumer goods. I don't know, Philios, if there's any others you would add?

Yes. No, no. I would say -- I mean, obviously, around the world, we get a lot of the different types of clients. And something we've noticed and we're putting is that even with the same industry, you may have clients that are more conservative and clients that are very bullish about doing and more investing in their people. So even within this classification of industries, we do find companies that actually behave very differently. And we like to focus and work a lot more with the clients who believe people are their key assets and how they move them forward. So yes.

Okay. Thank you. And my next question is related -- is to you, Philios. Can you please despite what is causing the rate margin developments in the segment other markets this quarter?

Yes, sure. So it's, let's say, a couple of things. As we said, we've done quite a bit of hiring in the first half, which then allowed us to be in a great position going into the second half with growth of revenues, but not needing to a, hire; and b, those hires were already productive in the second half. So that's part of the answer. The second answer is that we did put a little bit more emphasis on the margin development. So that's taking more care of ensuring that we work better, both on the pricing, the scoping of the assignments as well as kind of the -- taking a little bit more care of the general expense that we had. We moved there. We closed one office that we didn't really do it was a very marginal office that we didn't really do a lot of business in Costa Rica. So we moved that into our Mexico operations. So we did some elements there that both allowed us to be better on the costing. But I would say mostly, it has been because revenues growth has developed as expected and at the same time, we had already the big investments done earlier on.

Okay, cool. Thanks. And my next question is back to you, Jessica. Can you please talk a bit about the dialogues that you have with your clients within the segment -- software segment in the U.S.? How was the development of -- during the quarter?

Yes. Well, I'll mention it again, I'm really proud of the San Francisco team in particular, because of their close relationships with those software companies. They stay close to them. They stayed helpful. I mean, nearly all of them are like complete company freeze, right, when it happened. And they took a couple of months or a few months for them to kind of work through next steps and what to unfreeze and so forth. And so as a result of being helpful and staying close, a good number of them are active clients again now in the fourth quarter. So -- and then in addition, the team was able to find both expansion in the other software companies that were continuing to invest as well as bringing some new clients.

Okay. Great. And my final question is, can you please describe what makes you feel comfortable in reinitiating your guidance for the full year?

Sure. It's a combination of a few things. First of all, the return to growth for North America in the fourth quarter. Secondly, we had a very strong first half as well. And then, I guess, thirdly, the currency is extraordinarily strong right now, but would be those three things in that order.

Okay. Great. Now I will hand over to the telephone line for questions.

[Operator Instructions] Your first question comes from Daniel Thorsson at ABG.

I start off with a question on North America as well. We have seen all of the large layoffs recently in the U.S. tech segment, obviously. So it's very understandable to see the pause in investments here. But when they come back on spending money with you now and plan for activities in Q4, what does that really relate to? Is it a different tasks or different kind of health they would like to get from you? Or what is it?

If I generalize, the biggest growth coming from their problems is to help them drive growth. Yes, it's investing in their go-to-market teams, both expand their own accounts, reduce churn. I would say that a disproportionate amount of the new deals is on the selling and marketing side for the software clients.

Okay, I see. And what are kind of the news flow that we should look after now they have already announced big layoffs, et cetera. What should we look after ahead here from that customer group?

Yes. I'd probably be a much wealthier person if I gave you a perfect answer, but I can share just the general mood and sentiment. It was pretty dark back in May and June, right, in terms of fear and the -- we all remember how the market caps were slashed pretty intensely. And that darkness has gotten better, right, kind of every month since then. I was in London maybe a month ago or something, and the sentiment in London actually felt like Silicon Valley to me back in May and June. I think that some of the software clients will see slower growth, right, but they're still growing. So slower growth moving into next year. For sure, your -- it costs consciousness, but it's -- I want to say this in the most humble way, but it has lightened a bit in Silicon Valley since May and June.

Okay. That's interesting. That's interesting. And then a follow-up on that one. How do you find the labor market currently, especially in the U.S.? Is it the challenge to keep and hire more people? Or has it become slightly easier given the huge layoffs we see in the industry here?

Yes. I mean, two responses for me on that, especially because you said the U.S., retention has gotten better. So I think less interest in thinking the grass might be greener or getting a lot of competitive offers. We felt that much more in the first quarter. But keep in mind, we also froze hiring back in June. So we had given a lot of offers in the first half. Those people were able to start in the third quarter. But given what we were seeing, right, the 35% in the third quarter drop -- we froze hiring, so I actually don't have really great statistics right now on our offer rates because we haven't been giving many.

Yes. Okay. I see. That makes sense. And then a question for Philios. In Europe and other markets, have you seen any slowdown in any end sectors or segments that are macro related here because both have grown plus 20% in the quarter here.

Yes. Thank you. No, we have not seen any slowdown, both in, I would say, in all other markets and in most of our European offices. So we are continuing doing strong demand. I -- as we said in the last report, it would be foolish of us not to acknowledge that there is a lot of discussion and a lot of sense of something is coming up in terms of the markets and so on, but that hasn't translated in any clients either postponing, canceling or doing things in a different way. As we also mentioned with Jessica, we've already since about -- we've put in place a resilience plan across the firm, which is basically based on three principles very related to this. Principle number one is ensuring that we keep our costs under control. So that's one. Principle number two is ensuring that we focus our energy and our activities on the right clients and the right industry. So we have identified the right clients and industries that we want to be focusing on that we believe would be more resilient going forward. And at the same time, as I mentioned, particular clients that despite being in one industry or another, they have a very unique way of seeing their talent and how their people will help them move in the forward environment. And principle number three is -- and I think you've touched upon in the first part of the question or the question before that Rikard does, which is focusing on a number of services that we believe that even in a more slower market, they will still be in high demand because it's like in soccer. You may lose some gains, maybe you're not doing as well. But at some point, you really want your team to be at its best in order to keep up there. So what are those services, and Jessica mentioned one, sales related in terms of growth, but we also believe assessment and some other services would be very key going forward.

Okay. Interesting. That sounds pretty promising for '23 then. My last question is on the revenue split here, virtual versus physical delivery in the quarter. Where are we kind of now in that mix for the group?

We haven't seen a dramatic change since the last quarter, meaning it's a mix, right? We're still doing virtual. We're doing a lot of physical. Q1 for us is a typical like big company off-site quarter because our clients are pulling together the top 50, the top 100 or all their salespeople kicking off the years. And if I look at the demand in terms of the clients' planning for those meetings, they have to make a decision between virtual and physical. It's a mix. There's still a bunch who are planning to be in person for those meetings and there's a handful who are choosing virtual. It may change in the next 6 weeks, 8 weeks, depending on stuff. But right now, we see -- it's a mix.

[Operator Instructions] Your next question comes from Karl Norén at SEB.

I have a couple of questions as well. Maybe if we start with maybe the outlook side, I think it's quite -- you're quite clear. We thought you expect an improvement in the North American business in Q4. And I'm just curious, as Daniel mentioned, we have seen very big layoffs from the big techs during the last weeks or so. I'm just curious, what is your visibility now going into the first half of next year? Because I think you have a little bit better visibility now after the fall maybe than last time we spoke.

Yes. And we'll get even more in the next couple of weeks as all of our operating units will be putting forth their plan, which is to summarize you from all of our account managers, right? And we're going to do multiple planning for next year so that we can remain agile kind of month by month and quarter by quarter or 2. I mean, I think we should expect volatility, right? And so I don't think we normally give specific guidance, but we're planning for it to be -- we'll be on our toes as like Philios said, and be as proactive as possible. We just haven't experienced yet material slowdowns other than software in Q3.

That's clear. And then I just have a question on the European market in the quarter because I noticed very strong growth, but the profitability was, I think, rather in line with last year. I'm just wondering why is not the margin improving? Is it because of growth investments? Or what can you say on the margin side in Europe?

Yes. The main thing, and I think we mentioned this before, is Europe was understaffed, right, specifically in the first half of the first quarter and a good number of people started at the end of the second quarter impacting the third quarter operations. That's the main one.

Okay. I understand. So we should continue to expect quite solid growth when you're now normal, that I guess.

Yes. Yes. Similar to North America, right? I mean we've had extra headcount in the third quarter that essentially we didn't need, but now we're glad we have them because we need them in the fourth.

Yes. And then just a question on the longer term. I mean, what can you do now? You mentioned it's a bit in the presentation, but what can you do and what are you doing currently to secure long-term sustainable growth in your business? And how do you look at net recruitment, et cetera, here in these volatile times?

Yes. In terms of recruitment of talent, tricky times right now to set that strategy. Look, we've learned from Henrik, this would be my fourth. If there is a recession, it will be the fourth economic slowdown since I've been at BTS. And what has served us well, I think what continue to serve us moving forward, which is a long-term view, right, a long-term view and to make sure we come out the other side, a better and stronger company. But as it comes to recruitment, I mean we just had a partner meeting in Argentina last week where we talked a lot about this, and we talked about doing two scenarios for next year, just so we could have the best of possible at our costs. So a higher growth and then a flatter growth scenario. And at the same time, everybody wants to hold a very clear view of what our pyramid needs to look like to hit our 2025 growth targets. So that's a very long way of saying it's tricky for us right now. And if Q1 has the growth that we're seeing, obviously, we'll open up the hiring again then as quickly as possible and take advantage of the market. And we know things can change quickly as well.

That's clear. And then just a more financial, last question for me, on the capital or the investments in the quarter. It seems at least to me that it was quite a bit higher than in the previous quarters in Q3. I'm just curious if you can comment anything about what is driving this higher investments, I mean, outside of acquisitions, of course.

Yes. I mean I think our digital investments continued at the same pace as the previous quarter. So with the slower growth, I mean it offsets that. And we had -- we increased our digital investments just a bit as well in the third quarter to support one of our service lines, which is more actually as a service oriented. So -- but that will take some time.

Next, we have a follow-up question from Daniel Thorsson.

Yes. It was a follow-up from your Q4 guidance here for North America, just I'm a bit curious here to understand what you see. We are 6 weeks into Q4 now. You say that you expect to grow in North America in Q4. Can you help us get some more confidence and visibility into that assumption? Is that because you have seen growth already in October? Or is it that you give in the pipeline, expect to return to growth in the last 6 to 8 weeks of the quarter, just to get the feeling of your visibility into that assumption?

I tend -- I think Philios and I both tend to be more conservative than aggressive.

As we are showing no further questions, I would like to turn the conference back to our presenters. Thank you.

Super. Rikard, is there anything else you would like from Philios and I?

No, most of my questions have been answered. So I would like to thank you for taking your time to present the earnings with us here at Erik Penser Bank.

My pleasure. Thank you for doing it virtual. Have a good day.

Thanks. Thank you. Bye.

Bye.