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

So hello, and welcome, everyone, to BTS Q1 presentation for the first quarter results. My name is Karl Norén. I'm an equity analyst at SEB covering BTS. And today, I have the pleasure to be joined by the CEO of BTS, Jessica Skon, who will give a short presentation of BTS Q1 results. And after that, we will go into a Q&A session where everyone has the chance to ask questions to Jessica. So with that said, I would like to hand over the word to Jessica. The floor is yours.

Wonderful. Thank you. Good morning, everybody. So dear shareholders, it's been a challenging quarter for us, right? We're not happy about it. But we're using these challenges to make us better. Better in 2 ways. It's a next-level efficiencies and overall market competitiveness, both of which I have found are easier to do in challenging quarters than when times are going good. So I'd say even if it looks like a loss or a temporary loss, it's going to be a pretty big win in the long term. So let's dive in. So yes, a challenging quarter. For us, we experienced an overall more cautious, more conservative market that, in some cases, led to slower decision-making and overall project delays. There are major differences in our markets, right? So the North America market actually declined 6%. But on the other hand, BTS Other markets and BTS Europe had nice double-digit growth. In terms of the overall EBIT margin, we're definitely not happy about that. It shrunk from 10.8% to 8.2%, and that's because of the North American market, simply put. So let's dive into the North American market. So we saw the slowdown again in the tech sector. So starting to be a similar story. We saw it in Q3 last year, it bounced back in the fourth quarter and then the slowdown hit us again in the first quarter. So why? It was really the second wave of tech layoffs, right? The first wave was in the fall. The second wave was in early January with another 100,000 people losing their jobs. And then as the quarter went on, in some clients, it was even a third wave. And this just simply caused delays. It's confusion, chaos and projects got delayed or pushed out. We also -- we then had bank failures, which I'm sure you experienced in the news. There was 3 of them, which, for some of our fintech clients, also caused chaos and some delays. One important thing in the North American market is we're not losing work. We're not losing work to competitors and clients aren't changing their mind. It's just being pushed and delayed or starting smaller. And then in the first quarter margins, inflation and bigger payroll affected the margin, and I would say temporarily. So that's North America. In terms of the other 2 markets, we had good growth in Europe and Other markets at 13% and 14%. If we take a look at their margins, BTS Europe margin declined a bit from 11.9% to 10.2%. Basically increasing consulting costs in Europe were the reason there. Even though they had good growth, it was slightly slower than we expected. And BTS Other markets improving margin from 1.5% to 5.8% due to improved efficiencies, better pricing, better utilization of their team, shared resources across the countries and so forth. In terms of the APG market, we saw the same slower decision-making affecting them that we talked about in the fourth quarter, but on the same time that we're seeing a much stronger sales pipeline and outlook. So going back to my opening comments, never waste a downturn. This has been true for me at BTS for the last 24 years. And it certainly feels like it's the same sentiment inside our company right now given the first quarter realities. So we're taking advantage of our slower market. We've identified a lot of problems, and we've taken some fast actions. So let me go into 1 in more depth. In terms of efficiencies, North America has been doing quite a lot of fast work through the first quarter. We have a plan, and we've already started to move forward in terms of SEK 60 million in annual savings through these efficiencies. We'll start to see the impact of this in the second quarter with full effect in the second half. It's a combination, of course, of the hiring freeze that we stopped towards the end of last year. But even more so, it's about a reduction in our spend with externals because figuring out certain work can be done more with our internal consultants than in the past. We're kind of cleaning up and clarifying different specific roles of experts and generalists in the company, which results in better resource utilization and savings. And then we've slowed down a bit of our investment in our overall digital road map because, frankly, we've invested a lot, and there's a lot we're taking to market right now. So that's what we're doing on the efficiency side, specifically in North America. If we look at how -- what's happening in the first quarter in terms of increasing our overall market competitiveness, we're actually continuing to win a lot of new clients, and there's been some really cool innovations that have been released. First thing I'd say on the client acquisition side is we have a client-first mindset everywhere in the company. We have stopped any and all activities that are not client-facing just to maximize all of our time with our clients. We've had a referral drive in place for the last 6 quarters for all partners and all consultants, which has led to a lot of great meetings and new clients. A result of that is we brought in 33 new clients in the first quarter across the 3 different markets. Just to give you some ideas of some of the companies who have came in: American Express, Hyundai, Harbour Energy, Datadog, Emirates Global Aluminum, there's a bunch. So I'd say from a new client acquisition perspective, it was actually a really strong start to the year, which will help us throughout the next 3 quarters. In Europe, the number of meetings are way up. They had their largest client event in history with over 300 people. In terms of innovations, there's a few things I would like to share. One is we launched a new frontline leadership offering around the world. And what's cool about it is it gives maximum consumption choice to our clients. So they can continue -- they can purchase it from us and use it with all their frontline leaders on like a fixed price, which has been more traditional, or they can do it as a SaaS model, up to them. But overall, global reactions from the clients right now has been very powerful in the initial wave of marketing events and client tours. The second thing is, BTS also competes for share with the traditional consultants. So just to give you 2 examples of some cool work in the first quarter. The first one is on process redesign, which is traditional consulting work, right? It's not typical BTS simulation work. But one of our clients is one of the biggest banks in Thailand. The team was able to work with our client's employee base and take one of their work processes from 11 months down to a few weeks using BTS' innovation technologies and approach. And in our Korean office, we are now coaching Korean CEOs on communication, on their strategy plan and showing up as a more authentic self. So innovations at the C-suite in the traditional consulting process market and in scaled frontline leadership but being delivered as a SaaS offering as well. So we also, after the close of the quarter, made a really cool acquisition. We bought a company called The Boda Group. With The Boda Group, we expect both growth and EBITDA improvement. So a little bit on why Boda. First of all, it gives us a new capability, right, as an executive coaching offering, which is one-on-one services for C-suite down to Vice Presidents. We have very little client overlap with The Boda Group in the North American market. And in the first 5 days, we had 9 new opportunities come through the BTS account managers. They're a growing firm. They've had a lot of success. They have a great brand with their clients and better margins than BTS. Also because they provide coaching, their talent model is more flexible. So it's easier to ramp up when growth is faster than expected and it's also easier to manage costs in a slowdown. So this is a big source of pride for us at BTS. It's also what you've come to expect from us, right? A story of long-term profitable growth year after year. Given what we're seeing -- I mean this is our historic performance. And given what we're seeing in terms of our pipeline, the cost efficiencies I've talked about, our overall market competitiveness, how much time we're spending with clients, our outlook for the year remains unchanged and we believe that earnings will be better than in 2022. Thank you.

So we'll first do that I ask some questions, and then we'll have the opportunity to ask questions on the telephone conference and then also from the room -- the audience in the room. But maybe I can start off with a question on the North American side. What are you seeing maybe right now? You have entered May. You've seen some parts of the second quarter. Are you seeing any improvement? Or is it still a tough market out there?

Yes. I mean we typically don't give too much detailed information on the in quarter, right? I would say in software and tech, because there hasn't been a fourth round of layoffs, things have settled a bit, right? The chaos is coming down. I mean people are still nervous. There's a general uncertainty in the American psyche right now with all the mixed news hitting them. But it's calmed a bit.

Yes. The reason why I wonder is because in Q3, you said that the Q4 has started a bit stronger, I guess. And now we can maybe read it as it's still maybe a bit tougher out there in the North American side, I guess?

Yes. Yes. There are still delays, but it's not as bad in the software sector.

And can you also maybe give some more flavor on the other parts of the business? I mean you have [ twofers ] that is not based in San Francisco or on the West Coast. Can you tell us a bit more on the development there? And how do you work with this efficiency program? Will it also affect the whole American organization? Is it -- or is it just the San Francisco office?

Yes. So first, I'll talk about our East Coast office because that has very little tech. It's mainly financial services, CPG, a little bit of telco. And they performed really well in the first quarter. It wasn't exactly a perfect balance with the decline in San Francisco, but it made up for quite a lot of it. I would say, given the bank failures, we started to experience the beginnings of just some, well, wait a minute, we're all nervous right now and are reevaluating, but nothing too material on the East. And then the overall efficiency initiative is across NAM, absolutely across NAM. I talked about the benefits of One Europe the last couple of years, and we started that kind of similar planning for North America in January, and it's across all the offices.

Okay. But it does not include any layoffs in the efficiency program, it's more...

We've done performance layoffs, we'll continue to. A few people have quit, which is just helpful. But it's mainly around less external usage and then kind of reprioritizing who does which work.

Okay.

So it's more long-term beneficial than short term.

Yes. And then on the efficiency program, I guess, it's expected to improve or show improvements in the second half of the year, but you still keep your guidance for earnings to grow. So I guess you have some visibility on that. It's not going to get that much worse going forward. Can you just give us some more flavor on how we should think regarding the rest of the year? Because you had the earnings decline that was quite steep here in Q1. So it really needs to improve going forward for the outlook to reach, I guess.

I know. I know. And -- I mean it's a combination of essentially what's still or was on the screen, right? It's the benefit of the efficiency savings, the higher sales activity and what we can see right now from our pipelines across all the markets, and then the expected positive contribution from The Boda Group acquisition. It's really all 3. And we'll keep adjusting with the market, right?

And then just the last question from my side. You saw still good growth, in my view, in the other regions such as Other markets and Europe. Can you give any more -- can you say something about which industries are driving this? Or are you seeing any like recessionary signs or what is really the picture out there?

Well, I'll also say I've -- since I've spoken with you last, I've been -- I've spent a lot of time in Southeast Asia and the Greater Asia. So I've been to our Singapore, Seoul, Tokyo, Bangkok, Kuala Lumpur offices and met with probably over 50 or 40 -- 40 to 50 different companies and the teams. So I have a little bit of a sense of what's happening in that market just from those conversations. But in general, I would say, as the year has progressed, we have experienced more delays than usual outside of tech, right? So it's not just tech. However, the materialness of those delays is not so significant, right? I mean they're a nuisance and our pipelines have to be bigger, but we've known that. So it's going to be a challenging year, no doubt about it. But I kind of -- some things are affecting other markets and countries, I would say, later than North America.

Yes. And if you look on a broader base, do you still feel that you are taking market share? Or how is your feeling that you performed versus the market, if you understand me?

Yes. Again, the story for us which helps confidence is its delays as opposed to losing deals, right? And we had -- I'll just give you a fun story, but it's an N of 1, right? The fun story is one of our long-term clients in North America, CEO is sponsoring a big transformation effort, and we competed against the small companies and the big consulting firms. And one of the big consulting firms won it because they said they'd do phase 1 for free, which is a 3-month upfront phase 1. So we just got a call saying, even though it was for free, they're taking forever and they're very unhappy. So can the CEO meet with you again next week? So like we love to hear things like that. But -- so competitiveness, I'm very bullish. Also, we just -- on the innovation and just the culture in general. Yes.

Sounds good. Do you have any questions from the telephone conference?

[Operator Instructions]

So we seem to have no questions from the teleconference. Do we have any questions in the room?

Yes. I can start, Daniel Thorsson with ABG. I'll start off with a question. In your guidance, do you expect Europe and Other markets to remain growing for the rest of the year? Or do you expect North America to come back to growth again?

I think it's going to be challenging for all the markets, and we'll see how they do, right? I wouldn't say we have some sort of general optimism just because of -- just because we expect more delays to hit, right? And therefore, we just need bigger pipelines like we've been doing. So it's hard to say.

Yes, I see. Okay. And then secondly, on the hiring freeze that you mentioned, is that only North America or in the other regions as well?

The whole -- all of BTS Group is in a hiring freeze.

All the BTS Group?

Yes. And I will say that markets are doing a nice job of sharing resources more than we've done in the past. So there's a specific group in Europe that was overutilized and one that was underutilized in NAM, so they're just covering on each other's projects as an example.

Okay, because that was actually my next question. I guess that it's much easier to move resources within the U.S. because it's the same country, from West to East Coast, even though it's different end markets, while moving consultants from Spain to Sweden, for example, or between Europe and Other markets may be slightly more difficult if we see slowdown in those markets. Do you agree with that? Or do you think you can mitigate that in any way?