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 a focus on tech and software. With me, I have Jessica Skon, CEO of BTS Group, who's going to present the Q4 report today. Jessica. Welcome.

Wonderful. Thank you. Good morning, everybody. It's a pleasure to be back in Stockholm this week and spending the morning with you all. Two main messages from BTS today. Number one, that we are improving our expected earnings that will be better in 2022 and North America had a big rebound in the fourth quarter. But first, I just want to say, I'm extraordinarily proud -- proud of the BTS Group, both for another record-breaking year. We -- our revenue overall increased 17%. All units are growing double digits, including Europe at 25%, other markets at 23%, North America at 12% and APG at 10%. And our overall EBITDA increased 21% for the year. I'm just as proud of that as I am for the fourth quarter. We had our 22nd quarter of improved revenue and EBITDA, revenue increasing 11% and EBITDA increasing 14%. So those of you who have been following us for some time, the story back in Q3 was a temporary slowdown in North America, given some of the short-term stalling of the software clients given the reduction in market caps and so forth. So how did North America do in the fourth quarter? North America had a rebound, growing 17% in the fourth quarter. I must say, I've been at BTS for 23 years and have been a part of the company as we've led through multiple economic softening or downturns. And once again, the culture came through bright and strong. BTSs move fast. They pivoted quickly. We've had a recession focus since the middle of the year focusing on different clients and industries and so forth. We innovated new services and as a result, had 17% growth in the fourth quarter. Operating profit also increased 8%. And now I know what you're probably thinking, okay? That's great. But Jessica, what happened to the North American margins? And you're right. So while North America increased our profit, our Q4 margin did not. It went from 18.5% the year before to 14.2%. So why was that the case? As we mentioned in the previous couple of quarters, we did stall our hiring around the middle of the year, but we did not renege on the offers that were outstanding. So more consultants continued to come into North America in the third quarter with the full cost hitting in the fourth quarter. We also continued to do internal training and development, had increased travel costs and spent a bit more on our contractor spend as well. So one of the things we've started in the last 8 weeks or so is a pretty big focus, what we're calling an overall workforce planning initiative in North America. The North American market represents the broadest breadth of the BTS portfolio to our customers. And with that comes some complexities in terms of the percentage of people who are specialists and generalists. So this initiative is intended to streamline and simplify making sure we have the right amount of people doing the right amount of work, drive efficiencies and improve margins. And in terms of talking about the margin, the North American margin decline is the reason for the overall group margin decline. If you look at the different markets, BTS Europe continued to improve their margin throughout the year compared to the year before and other markets improving in the fourth quarter. So you can see here more specifically, BTS Other markets went from 17.5% to 18.1%. A couple of reasons for that, more streamlined planning between contractors and full-time employees, but also their fourth quarter is just bigger. It's a bigger quarter than the other 3. So with a current cost base against bigger revenue, their margins went up. Europe, Europe has been the darling of the margin performance of the year, right, from 17.7% to 19.8%, improving the margin in all 4 quarters. One of the things that BTS Europe has done, this started probably about 18 or 20 months ago was the One Europe initiative. And I thought I would share with you one example of a margin improvement initiative going on, which is the One Europe initiative. And the intention here was to make sure that BTS Europe on every deal that came in, had the right expertise and the right team across the continent as well as making sure we have the right people on the right projects across country as well and to even out the billability and utilization across the market. This is one of the big drivers and reasons behind the margin improvement. And I'll give you one specific data point that supports that. If you look at the deals that were closed in Europe in 2022 and look at the size of those deals or the revenue recognized, the overall in-year revenue went up 18%. Another thing I thought might be interesting for you is if I highlighted just one client engagement of the fourth quarter that we're particularly proud of. And this has to do with on-demand simulations at scale. So in one of our software clients, I might describe their company as having a simulation culture. They have many active simulations with us, over 40 currently at the moment. But in particular, they were looking at -- as the fourth quarter was winding down, given how they were anticipating their different industry customers and buying cycles to shift, what's the most powerful way to get their entire global field organization prepared to have different client conversations and to show up differently with different deal structures that would better serve their customers in 2023. So about 4 weeks ago, 30,000 people -- 30,000 people is the number of their global worldwide sales force and customer success team, engaged in a BTS simulation in 1 day. So for 5 hours, 30,000 people teamed up and they practice the client conversations, the deal structuring and the moves that they need that will be most important for their customers in 2023. So in terms of an overall readiness perspective, they've got their entire 30,000 group ready to act differently and better support their customers. One other point on EBITDA margin is that both Europe and Other markets are kind of a beacon for us. They're showing us that we're well on our way to our overall long-term EBITDA margin target of 17%. So you can see the nice progression from 2016 up to 2021 in terms of every year improving our EBITDA margin. Yes, we have a little bit of dip in 2022, but the plan is to continue the trend up and to the right with the longer-term target of 17%. As we just take a moment to reflect not just on Q4, but the overall historical performance of BTS, I think we're extraordinarily proud, right? We're extraordinarily proud that BTS has been a story of long-term profitable growth year after year after year. You can see the data. Many of you have been on this journey with us, which we're very grateful for. But our average growth since 2001 has been 13% in terms of top line growth and EBITDA growth of 16%. If you look more recently from 2016 to 2022, we included 2020 in our yearly math, but it's very similar. So average growth of 11%, average EBITDA growth of 17%, and we expect to continue this performance in 2023. One of the other things that I'm particularly proud of, so I have been on the journey for a long time with the firm is we've had a stable and growing dividend since our IPO, excluding the pandemic year. And we announced our updated dividend as well of SEK 5.4. So in terms of the outlook for 2023 and just some general reflections from me on what we're seeing. We started our recession readiness plan last June in terms of focusing on the industries, in particular, CEOs and companies who we thought would continue to invest in readying their people for their shifts in their strategy and the market. We started the year with a very strong deal pipeline. We expect client conservatism. How could you not, right, in this environment? And in some cases, we're seeing that playing out both in Europe and North America, but quite a difference in terms of industries. More specifically, I would say it's the manufacturing sector, right? They're more vulnerable to increased energy costs. And we're seeing some slowdown in the software clients, which we think is temporary, given all the distractions of the layoffs and the reorgs and the M&A activity. There's no doubt, 2023 will be more challenging, probably for many companies in the world, including us. But once again, right, we've weathered pandemics and downturns and so forth over the 30 years. And these tend to be the years when BTSs get the most creative. We have breakthrough innovative client engagement models, and we improved the company at a faster clip. So looking forward, we believe our earnings will be better than 2022. And we're excited for the year and proud of our performance. So thank you.

So thank you, Jessica. And before we let the telephone conference in, I would like to ask some questions. And my first question is, last quarter, we discussed the software industry a lot. And in this quarter, has there been an industry that has been driven the growth this quarter?

Yes, in the fourth quarter?

Yes.

Yes. In particular, software came back. Financial Services is really strong and Energy. Those would be the top 3. And then right below that is our pharma and biotech services as well. And actually, I'll introduce our Deputy CEO, Philios Andreou, to join us in the Q&A as well.

Okay. Great. So my next question will actually be to both of you. And you mentioned it during the presentation, but can you please describe the strong margin development in both Europe and other markets, basically, what is driving it? And can it be converted to the North American market?

Yes, that's the idea. I'll talk about Europe, and I will let Philios speak for most of the world which he runs. Europe has had exceptional margin improvement, and there's a few reasons for it. One is what I already mentioned, which is the One Europe initiative, which has driven utilization availability up across the countries, higher deal sizes and just greater efficiency. The second one is Europe did a great job with their pricing mechanisms to continuously increase pricing and stay ahead of inflation. They're focusing on not just price increases now, but even better scoping on the front end. So there's a real kind of operational rigor there. That's been very helpful to them over time, and we will take those lessons towards the North American initiative as well.

Yes. And maybe if I could add, I think that both in Europe and in most of the world or in other markets, what we do is we've gone through in 2022 in a more centralized approach. So Europe had the One Europe approach. And in Other markets, we actually consolidated in 3 bigger units, the Southeastern Europe and Latin America, it's one unit, APAC, Asia going -- Australia together and then EMEA, which is India, Middle East and Africa. And that consolidation is starting to give us also as we go ahead, more opportunities for resources to be better used across the units for expertise to be better used and therefore, efficiencies to be found. So yes, I think in the last quarter, it's more evident because their revenues are also higher, but at the same time, it's a work that has been going on throughout the year. So yes, so we're hoping that this will continue and we'll find more and more opportunities there for these efficiencies.

Okay. Great. And my last question is that if you could just elaborate a bit on the recruitment climate for BTS right now when we are in a more uncertain environment?

I think it varies still widely across the markets, right? I can speak for North America, and then I can let Philios speak for the broad markets that he runs. Yes, the recruiting market is not as hot. I mean in North America, though unemployment is still amazingly low, even though I think some of the data might be focused on just part of the country. We have slowed down on recruiting. We're doing some replacement hires for consultant type of roles. And it's, in general, easier for us to find people.

Okay. Great. And my last question before I let in the teleconference is, BTS has a history of acquisitions. Can you please elaborate a bit on how the climate is right now and what you are evaluating?

Yes. And our plan is to continue to acquire companies. So we look for geographical footprints, capability gaps, great talent. We have a decently healthy pipeline right now of a handful of companies that we're talking with. And yes, we expect the valuations to come down and be an easier year to take advantage of that.

Okay. Great. Do we have any questions from the telephone conference?

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

A couple of questions from my side here. So if we start with the outlook for 2023, would it be possible maybe to elaborate a bit on how we should view the outlook? Will it more be driven the increased earnings by margin improvements? Or is that the growth should continue to be strong? Or is it a mix of both?

Yes. It's -- our planning currently is a mix of both. So...

Okay. That was clear.

We're definitely looking to drive efficiencies, right, and feel proud of that by the end of the year, and we also are expecting growth.

Yes. That's great. And then I have a question on the European margin. I mean, of course, very strong for this year. But if I look on a historical trend, I mean, margin has been around 13% to 14% on average during the last 5, 10 years, and now it's 18%. Is there any reason to believe that it should decrease to historical levels? Or is this a new normal with all the initiatives that have been ongoing?

Our plan is to make it the new normal. Q1 is typically a smaller quarter than the other quarters and so forth, so they fluctuate throughout the year. But given our size and scale now, it's a different reality in terms of what's possible with some of these initiatives, right, in terms of driving the next level of efficiencies. And then remember, on top of it, as we do more and more scaled work for our clients and through our digital investments, we're tending to increase our deal sizes, which have more licensing associated with them. So getting the workforce planning in line and taking advantage of the licensing that's coming in and helping Europe and most of the world have a similar benefit is -- should yield over time, a higher likelihood of us reaching the 17% sooner than later.

Yes. Yes. Great. And a question for Philios maybe on the slower growth in Other markets. Can you just elaborate a bit on what has happened because organic growth has been coming down quite dramatically from recent quarters. And maybe just some more on the initiatives taken to increase growth going forward?

Yes. So 2 reasons there. The first one is that if we look at the -- our quarter 4 in 2021, it had a growth of 36%. So therefore, we were kind of coming back of -- to grow over 36% over time, which then this 7% that we see there, it's -- I would say it's more -- it's less that we didn't grow, but more that we had a much bigger hurdle to grow over. So that's reason one. Reason two is obviously in Other markets, there's a lot of units. Some units were a little bit better off than others. So we had some temporary issues in some of the markets like in our Middle East market, in Argentina, in China. So a couple of these markets that some of them were a mixture between market issues that we faced at the time and at the same time, some internal leadership changes that we installed. So yes, we're looking at -- as Jessica said, going forward, that will be stabilized and we will see the growth that we should be having throughout the year.

Great. I guess one last one from my side. If you could give kind of an update on the current environment as of now, I mean, you're almost 2 months into 2023, which units or which sectors are you seeing a bit slower demand? You mentioned, manufacturing. Is there anything else that we should be aware of in the beginning of '23?

No. I mean historically, we typically don't give quarterly specific guidance. It's more on the overall year. And the slowdowns, we're experiencing slowdowns, but not cancellations. So it feels very different, right, than in the third quarter. And again, it's mainly manufacturing. We're seeing some clients just saying we want to start in April instead of the first quarter. And then I would say outside of manufacturing, it's also software. It's -- there's a distraction, right? With the next 100,000 people that were laid off in January, it causes things to slow down and kind of freeze up for a minute. But unlike the summer where we're like full on stop, it's just -- it's more like a feeling of delaying at the moment. I would say we're also seeing client proposals right now where clients are wanting to start with like a Phase I versus a much bigger upfront deal. So more conservatism of starting small and moving forward. We've had a couple of examples, but this is really not material of the larger consulting firms offering to do stuff for free, which for us, we know that historically when they get nervous, that's something that we tend to experience in the market. So...

Do we have any more questions from the telephone conference?

[Operator Instructions]

Daniel Thorsson from ABG. Can you hear me well?

Yes.

Excellent. Okay. So first question on the U.S. market. We see that U.S. tech layoffs continue to accelerate in Q1. I think to date, it's up 20% versus the full of Q4. So it does not seem to be any near-term improvement in site. How do you think 2023 will play out in terms of that end sector and your exposure in San Francisco and Silicon Valley? And are you now planning to reallocate employees around the U.S.? Or do you expect it to come back in the quarter or so?

Yes. That's what we can't wait to see. Now -- financial services is doing extraordinarily well in the U.S. market. So the team kind of on the East Coast is really busy, and we can use some excess capacity to support that sector. Biopharma is also doing well and Energy continues to do great, right, down in our Houston market. So yes, I mean, it's one country, so it's pretty easy for us to move the resources around as we need. The current feeling in talking with our software clients is it's not as dramatic as it was in June, right? As I've mentioned, it's not cancellations. It's more delays, and it just feels a bit chaotic, right? So number one, they're sad because they're saying goodbye to a lot of their colleagues and friends. And that just disrupts things for a minute. You got to get new people in place, which causes reorgs and then they kind of reestablishing. So that's more the feeling right now. And it's not with all of them. We brought in 4 new software clients over the holidays, for example, and they haven't missed a beat. So it's a mix.

Okay. But do you expect to see improvement in 2023 from the software clients or...

I do. I do, but I'm not abundant. So I -- but they tend -- the beautiful thing about the software companies in general is they know how to move fast, right? So they're volatile and dramatic, but they get moving again. So...

And maybe can I add that because of our model, our business model, our consultants and people working on the clients are not -- they have sector expertise but they also work in multiple sectors. So even if one particular industry in a certain time faces a little bit of a slowdown, that doesn't mean like in one of the bigger firms that you would say, "Oh, I have so many people, and they're only specializing in that sector. I don't know what to do with them." We work across multiple sectors. So that allows us to be very agile in moving people around and working on the industries that tend to move faster. So I think that's also something important there.

I see. I see. Okay. Then second, roughly how much of the 11% FX adjusted growth in Q4 was related to price increases, if you can help us out with that?

Yes. It varies a little bit by market. And maybe Philios can, do you remember the percentages?

In the Q4?

Yes.

So well, I mean, more than Q4 is for the year, right?

Yes.

So for the year, maybe it's about 5%.

Yes. I think Europe, on average was about 8%. The North American market was approximately 4-ish, worth believing and most of the world was a little bit lower.

Yes.

Okay. Interesting. And then my final question is on OpEx going into 2023. You have now 10% more employees than a year ago. We will have some kind of salary inflation on group level in 2023. You also have quite a lot of offices. I think it's around 35 or so now. And you will see office rentals going up in '23 as well. How should we think about the total group OpEx in '23? I mean is it reasonable to see 15%, 20% increase in that given the factors I mentioned?

Bringing up Karl's question earlier, we have a lot of initiatives underway to drive efficiencies, right, both in our COGS and in our below the gross margin line as well. So -- and actually, in some markets, the rents are going down, San Francisco being one of them. So it is a bit of a mix around the world. We've renegotiated both leases in New York -- sorry, in Chicago and San Francisco for -- as a benefit to us. But yes, no, they -- the initiatives we have are focusing on how much contractor spend do we need because that's a bit easier to kind of turn on and turn off and then the mix of talent, as I described before. And we'll continue to do performance management related decisions as well.

And on the real estate strategy, I mean, we had a good look in all our offices, and we are not increasing space. So what we are doing is either renegotiating downwards or maintaining. So despite the kind of increase in people over time, we are -- because of the way of working now, the more hybrid way and so on, we are maintaining our real estate as more of a flat way. And we're actually reusing those spaces for client events, for things that otherwise we would have done in hotels and so on. So that's a way to get some efficiency back on that one. On the salary side, we are -- obviously, we want the best, and we have to pay well. So we look at also comparisons in the markets and to be competitive as we go ahead. But knowing that our personnel expenses are one of the key ones. So we need to maintain that to a level that profitability will be able to cover that.

Yes. Okay. Good responses. Absolutely -- how do you see number of employees growing in 2023? What kind of your base scenario now? I think it sounded like you are pretty forward leaning on recruitment here. It's easier to find people, et cetera. Should we expect it to grow in '23?

Yes. No. I think it will be different between the 3 units. So North America and Europe are currently holding headcount flat, and we are doing replacement hires on a strategic decision only, that has to go all the way up to the head of units. So we are taking a very conservative approach to headcount at the moment. At the same time, there will be great talent available during the year, and we've learned historically to try to take advantage of that. I can tell you every other market downturn or softening here we've been through, we have come out on the other side needing a lot more people, right, because the swing is usually pretty strong and positive. So it's that art in balance, but North America and Europe are currently holding. In most of the world, we have a growth plan in the markets that are on hypergrowth like Southeast Asia and so forth.

Okay. That sounds good. And then I really just have to follow up. The last thing that you said, I mean, it makes sense to come out stronger and have more people, but that should mean that you should suffer the short-term margin in '23, if it turns out to be a weak year and you, despite that, continue to recruit quite a little bit. But in the beginning of the Q&A, you said that we should expect the margin to go up. So that's not the strategy you will do in '23, I guess?

Correct. There's other things we can do operationally to run more efficiently and drive more productivity and I think take the company to another level.

So since we have no more questions from the telephone line, I would like to wish you all a continuous pleasant day, and I also would like to thank Jessica and Philios for coming here at Erik Penser Bank in order to present for Q4.

Pleasure. Thank you.

Thank you.