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 at Erik Penser Bank here in Stockholm. With me, I have Jessica Skon, CEO of BTS Group; and Philios Andreou, Deputy CEO of BTS Group, who's going to present the BTS second quarterly reports. Jessica, the floor is yours.

Thank you, Rikard. Good morning, dear BTS investors. I would say, for the second quarter, BTSers were unhappy with our results for the second quarter and, at the same time, as I think you know about us, we never waste a down market. So while we're unhappy with our second quarter results, I think we're making really strong progress in our internal initiatives, and Philios and I are going to share a bit of both of those with you now. So in terms of the results, the customer cautiousness, the overall conservative feeling that we were experiencing in the North American market in the first quarter unfortunately has moved to BTS Europe and a couple of the countries and BTS Other markets. So as a result, revenue remained flat, right? So it's remained flat despite a more conservative market. We have basically 1% growth and negative 9% decline in EBITA. So if you look at the flat for a minute, given the more conservative market, the European business dropped negative 2%. It was offset by a 4% growth in other markets and a 1% growth in the North American market. And as I mentioned, EBIT dropped 9%, EBITA margin to 15.1%. So given that and given what we can see for the second half, our updated forecast now for the year is that our earnings will be in line with last year. And we're going to walk you through the different units. So starting with our biggest unit, North America. Basically, we're having stable EBITA performance and margin despite the fact that revenue dropped basically to 1%. And the reason for that, as you may remember, in the first quarter, pretty early in the year we launched a pretty big workforce initiative productivity -- aimed at improving the efficiencies and productivity of our people. And as a result, we had estimated about SEK 60 million in savings. The majority of that will be realized in the third and fourth quarter, but we were starting to see the benefits of that in the second quarter. The other thing helping the North American market in the second quarter is the revenue contribution from the Boda acquisition. It wasn't a full quarter in terms of their impact, they came in, in May. But despite that, we had about SEK 16 million in revenue, which helped the North America business is as well. And look, our referral initiatives, the focusing on industries that we're growing, the diversification outside of tech continues to be the focus. It started actually a year ago with a really big emphasis in the fourth quarter and ongoing. And so we saw growth in financial services, energy, biopharma, CPG and so forth. And the big star of the second quarter is the margin improvement of Other markets. So I'm going to turn it over to Philios to give you more detail.

Thank you, Jessica. Yes, we've had a good second quarter in Other markets, not only with some growth but, at the same time, with an EBITA margin improvement. So if we look at the results, that margin has 2 components: first of all, obviously, a little bit of growth, that helps; at the same time, some improved efficiency. We talked about it in the last analyst report, where we mentioned about some efficiencies initiatives that we were doing in Other markets. At the same time, our better pricing, better scoping of the deals helped to make the margin work. So that has been the story in Other markets, and it will continue for the rest of the year. In Europe, we've had a little bit of less revenue, so some drop in the revenues based on what Jessica mentioned as to the conservatism. But at the same time, our margin has been impacted by where those revenues were, so a little bit of a currency effect as to where the revenues were. And at the same time the service mix, so what type of services, where and how those services were managed, that impacted the Europe's margin. We are taking a number of initiatives, as we will mention, to make that improve over time. In APG, which is a smaller fourth unit, what we've seen is based -- being that it's based in the U.S., the conservative market has made it so we had smaller projects that impacted it. And whilst we are working a lot more in terms of increasing activities, we can see that this has been an issue with -- of the market as to the impact there. Now despite this situation, our view is that we do want to always work in such a situation and turn it around, so this idea of turning headwinds into tailwinds. We are working constantly to see what we can do, and we are experimenting and putting in place initiatives that would help turn this around. Jessica already mentioned that in North America, we have started with workforce planning, so ensuring that we have the right people for the right jobs and making sure that we have a lean and great workforce that can help us with the projects. Diversifying has been one of the key initiatives. And at the same time, I mean, in these first 6 months, we've actually won 45 new clients. That's an amazing record in the North American market, which shows us that the strategies are working. In Europe, we have implemented an account management initiative that would help us grow because we know that our European business has a lot of potential if we are able to tap in into growth again. So that's one of the main initiatives there. And in Other markets, we have gone through a focused account strategy, so deciding which clients we want to focus during these years, and working more on the pricing and productivity. So those were kind of the main initiatives. Our idea there is that obviously what we want to do is improve, and we are taking all measures towards that. So one of the things we are doing is actually working on some very new interesting topics, and Jessica would maybe take that through.

One of the -- thanks, Philios. One of the factors that we're keeping an eye on is how competitive we're remaining, right? And sometimes in a soft market, you might start to lose competitive bids or feel tremendous pricing pressure. That is not case for BTS, which I think is quite an important point. In fact, if you look at all 3 markets in the second quarter, our average deal sizes are increasing. So we're finding more strategic projects that are bigger in scope with higher average prices. And the other thing is we're winning still competitive bids, which I think bodes quite well for the future. Now to Philios point, in addition to the internal efficiency and productivity plus the competitive account management initiatives in each of the units, in the last 2 months, the Head of our Innovation, Digital Transformation Practice has been leading a company-wide initiative on our experimentation in the use of generative AI. And I'll share with you a bit about what's being done and what's been done and what we've been learning and where some of the progresses that we're already seeing. So there's 2 categories, right? One is by giving all of our people kind of prompt engineering training and making them start to tinker with the tools that are out there, what are sort of productivity gains that they're starting to experience that we might be able to expect in a way for a second wave of productivity initiatives. And then the other category is on actual client demand and new services for BTS that would be leading to growth. So on the productivity side, the first thing that we did, and there's going to be a lot of details on here, you don't have to look at them. But in the last basically 9 weeks, 50% of the company has been trained, right? And 50% of the company has been trained against 35 unique BTS tools and prompts that are specific to the work that BTSers do in a whole bunch of different categories. What that is resulting at is consultants, practice leaders, functional leaders are tinkering and they're playing around and they're realizing what's possible. I'll give you 2 examples. One is from our digital team and the other side is within one of our practice areas. So on the digital side, it took us in the past 18 months to build a bot, and this particular bot is used in coaching conversations or doing practice. The team challenged themselves in the month of May and said, "What if we gave ourselves 4 weeks using generative AI, using prompt-based approach to coding?" And they were able to build the same bot and even better bot in 4 weeks. So if we extrapolate that out in terms of our speed of differentiating ourselves with our bot-based approach in our simulations and in our services, that's a pretty significant future improvement or potential. Here's an example in one of our practice areas that comes from our assessment center of excellence. One of the things that assessors do is they observe people when they're getting ready for a big promotion or to get a job. And when you're observing them, you're going to have to create reports that are technically accurate. What the assessment team has realized is they can go from 4 hours in writing a report to 1 hour. And that's without obviously putting the firm or themselves at any sort of risk. So that's a 75% improvement in one service line or one part of the company. So we're pretty excited. It's early days. But this type of initiative, I think, is kind of the second half moving into next year in terms of us rethinking what's possible from a productivity perspective. On the growth side, we are seeing the first $2 million coming in, in the second quarter on supporting our clients in their own exploration and use of generative AI. And I'll share with you a couple of different categories. In terms of the BTS services that we are now taking to market, the first category is essentially to help people demystify what is generative AI, right, both large language models and predictive. The second one is our putting these bots and AI modules into our current simulations, leadership development and change offerings, and then we're starting to engage with customers on adoption and transformation services around it. And from our perspective, I mean, this list will continue to evolve as the world tinkers and figures out what's possible, especially on the -- well, actually on both sides. But from what we are seeing, in case this is of interest to you, it's a mix of clients thinking about how do we get better at probabilistic forecasting and decision making, AI integration and transformation, ethical leadership data and digital literacy and continuous learning. So I mean, for us, we're excited. We've been, I think, moving pretty quickly in the last 8 weeks on this, and this is our current state. So I'll end with this. Philios shared, and we've been talking now for 2 quarters, on innovative internal thinking that would drive efficiencies and productivities. BTS is not the company that cuts to the bone and hurts our chances of coming back with great growth and scale. So all of the initiatives that we're doing, both in terms of the types of deals we're winning and our internal efficiency initiatives, are just set us up for scale and long-term growth, consistent with the history of the firm and how we've been able to have long-term, I would say, pretty good shareholder performance in the past. So thank you, and back to you.

Thank you, Jessica. And my first question is, if we look at the quarter, we see a flat growth, but we still see a quite strong margin due to the initiatives you are taking. And my first question is these initiatives, if we return back to volumes, will you still be able to keep this pace of margin going forward?

That's the entire intention. So thank you for the question. That goes kind of back to my last point, is the shifts we're making are to help us scale, not to hurt our ability to scale. The situation we don't want to be in is returning back to growth and all of a sudden we don't have the headcount or the team that we need, right? So it's to accelerate our ability to grow quickly, not to hinder us.

Okay. So capacity will not be a problem when we see volume returning.

No.

Good. And also, can you please discuss what industries that have been strong and weak during the quarter? We have talked a lot about the tech industry in the U.S. during the last couple of -- last quarters, but are there any other industries?

In the U.S. market, I'll speak of first. And then, Philios, you can add from the broader world perspective. The 2 that have helped us the most in the second quarter was the energy sector and financial services, and then right behind that was CPG and biopharma. So that's -- and that's completely in line with our focus of the last year.

I think it's very, very similar. What we are finding is companies, especially on the industrial side and other sides, have become a little bit more conservative as to the outlook. But -- and it doesn't mean they don't want to invest. So we're finding that we get -- we are there, we are competitive, we are working with them. It's simply that they are taking a little bit more precautionary measures and delaying or delaying starting, delaying making a decision. So it's -- so we are not seeing any of our industries that we currently play in really being in a big problem, except with particular tech, let's say, companies. But we're seeing more of a conservative approach in some of them and an upturn in energy, financial services and CPG.

And you can also please discuss a bit about the Boda acquisition. It has been in the company now for a couple of months. What has this contributed and how does it complement your other services?

I'll be happy to do that because it's in the North American market. We're super excited about them. First, kind of your last question, how does it complement? They are super high-quality focused on executive coaching. So the C-suite, c-suite minus 1, C-suite minus 2, that's their focus. They're best-in-class in it. And it's great to have the capability on the team. The second reason is we've been having an internal referral initiative for 9 or 10 months now, and that will just continue. It's a great way of running the business. And if you look across the whole partner base, we've generated about 150 referrals, average of 4 per partner. The Boda team comes in, and the particular founder of Boda has just, since she's been here, introduced the BTS team into basically the vast majority of her client base and is also an enormous source of referral. Plus she has such good relationships with the CEOs that choose coaching that we are also getting introductions into fairly big initiatives that we've already won through it. So it's not just that she's -- that the team is bringing us great capability and executive coaching and we've won deals on that side as well, bringing it into the BTS accounts, but they're also bringing us very quickly into their clients.

Okay. Great. Now we'll open the telephone conference for questions.

[Operator Instructions] The next question comes from Jonny Jin from SEB.

This is Jonny Jin from SEB on behalf of Karl Norén. So a couple of questions from my side. First, could you please comment a bit regarding your reasoning on your lowering of the outlook for 2023? I think shouldn't -- like comps have been easier. So isn't the lowering a bit prudent, maybe? And could you please some more flavor on that, please?

Sure. I mean, we did our final kind of P&L planning just yesterday and so we put all the pieces together, and we think this is a prudent decision. The market's cautious, in particular, in Europe, right now. And the people are on holidays and the pipelines have slowed a little bit. So that's the main factor, right, behind this. And it just feels like given everything we can see right now, it's as accurate as we can be.

Okay. And next, could you please talk a bit about Europe and your view on the margin there? And like growth, what do you think about growth ahead, please?

Sure. I mean, first of all, we should probably remember that Europe's margin in Q2 a year ago was unlike anything we had ever seen. So comparables are -- that's one of the reasons behind the big difference. I mean, Philios mentioned it. A couple of things that are standout that we can actually work on, other than getting the company back to growth, is their service mix. And when the service mix is off, it means they'll have to use external workforce instead of the full-time people, right? So getting that shift as accurate as possible to control spending will be something that the team -- well, they're are already working on in the third quarter as well as implementing some of those workforce productivity initiatives. In terms of back to growth, I mean, we're doing everything we can in terms of the account management initiative, the referral drives, the teaming on all of the proposals. The European team has actually just won a really, really great, really big deal, but it takes time for all that to kind of work through the system. It's hard to say right now. It seems like from my perspective, coming from North America, some of the similar delays in number of days it was taking to close work that we were experiencing in the first quarter is now hitting the European team, not everywhere, though, right? It's a heterogeneous market. So it's just in some customers and some deals, that's what they're experiencing. Yes.

Okay. I understand. And on North America, do you think positive organic growth is possible in the second half of the year?

Yes. It's -- we'll see. I mean, we generally don't comment on each of the different unit-specific forecast, right? We stay at the group level. So it's still -- we're still experiencing a conservatism. And I would call it a short -- it feels like a short-term conservatism right now. I think I mentioned this in the report, but it's probably worth saying, it's an unusual thing for our North American team to be asked to plan for next year in May, June and July of this year. It's just unusual. Even in the pandemic, in the '08 crisis, I can remember way back in the dot-com boom, the planning cycle for the North American clients gets -- tends to feel more real and specific in the fourth quarter. And to me, that is a signal that they want to move. They want to push the initiatives forward but there's this short-termism in just waiting a bit, and we still feel that.

Yes, if I can comment. I think there's a couple of points there when you're running such a business. So some signs that we're getting are extremely positive. So we've mentioned our average deal size is going up. That's hugely positive when you are in such a business. Getting new customers, 45 new customers. I think overall in BTS first half, we probably got around 110 new customers. So in such a market, the ability to bring in new customers, that's huge. So that -- those 2 combined together create a lot of optimism. Now at the same time, as a trade-off, we have a more -- a market which is more conservative. It takes more time to make decisions. So although we are seeing those great signs, we are also counteracted with a situation where, for the moment, we need to be cautious. So we do believe that what we are doing now and those signs that I mentioned is creating for us a much stronger position as an organization to the future. Whether that would be realized in second half or next year, it's a different story. But I think the point we are seeing is that we are doing the right things to make sure that we are coming out of this really strong.

Okay. And on cash flow, could you please provide some more color on the working capital there, please?

I don't know if I have the specific numbers in front of me. Can you share a little bit more? Let me just try and find it and then I can give you an accurate answer. Michael, do you have the working capital?

What in particular were you...

Yes. What is a particular question on the -- I mean, we haven't seen anything particularly worrying or unusual.

We don't have issues with customers where they're delaying paying us. So I'm just thinking through the delta from Q2 last year.

Yes, yes. Okay. No, but it's fine. I was just wondering if you can comment around that as it takes up a lot of cash flow.

Yes. I mean, one thing that always affects us in this moment is the fact that a lot of our cost or a bigger part is in U.S. dollars, and that may seem like much bigger in SEK because of the exchange rates. But other than that, we are not seeing anything.

Okay. And one final question from my side. Could you say something about how Q3 has started?

Q3 for me feels similar to Q2 in a way. I don't feel a strong change in the cautiousness stuff that we've been experiencing. We have won some really cool deals. I'm happy to talk about those now or in the follow-up meetings. But I -- it feels consistent right now.

The next question comes from Daniel Thorsson from ABG Sundal Collier.

I'll start off with a question here on North America versus Europe. So basically, you've managed the North American demand switch very well by reallocating resources, as you have explained. Is that even close as easy to do in the other regions given different countries, languages, et cetera, and to move people between different areas?

Yes. I would say North America is a bit unique in terms of the broader breadth of services that we have, which gives us a bit more flexibility in terms of being able to make those shifts. At the same time, the European team has already made some important decisions, right, in terms of how they can drive more efficiencies. But we would expect to start to experience those benefits in the fourth quarter. Philios, speak on most of the world?

Yes. So -- and in Other markets, I think that we've started early on. So the kind of efficiencies are kicking in, we've seen it in the margin in Q2. And for the year, it looks like a year that we will see a realization of the work done. Basically, a lot of it is around being able to manage this without new net hires, managing much better the work that -- where we need externals, better scoping on the projects. So there's a number of underlying initiatives that we are working on in the Other markets, which some of them are very similar, I have to say, with North America and Europe. So we are sharing a lot of the learnings and applying it to the different markets. So yes, I mean, we're seeing a big impact.

One of the things that Philios and his team doing a great job of is cross-country sharing of teaming and resources. I mean, people work virtually, right? So if we see a tech slowdown in Korea, for example, they can help out on the Singapore projects. That's just one example. And for me, that's extraordinarily helpful. And I think the team likes it, right, because they have different varied client experiences.

Yes. I see, okay. That's helpful. Secondly, the number of employees are down quite a lot here in Q2 versus Q1 on group level. Is that mainly in the U.S. where we have seen weakness for a few quarters? Or have you already started proactively to reduce number of employees also in Europe and maybe other markets for a potential upcoming weakness, for example?

Yes. No, it's across the company. One of our kind of core principles, as you can see things a little bit more clearly when it's not as hectic, right, is to make sure that when we look at the quality of our talent, that we come out of a cycle like this with just simply a stronger team, right? And we do that through a couple of areas. One is we're just better at performance management. We move faster, we're more clear. And for us, I don't really believe in like first in, first out. You kind of look at the performance of everybody up and down the organization and help them move on into potentially better fits for themselves and all of that. So -- and that also frees up some space then for acquisitions or a great talent from a competitor or something that we also want to bring in, right, before the cycle is over. So that's been the main reason.

Yes. And is the reduction in number of employees mainly driven by no inflow of new employees or a higher outflow? Or how should we see the gross and the net changes here and in the future?

No, we stopped hiring across the company in October, I think it was September, October. And of course, the people we hired in the summer and in the fall then hit the increase in numbers, right, going into this year. So it's a matter of time. Before then it just looks a lot better. But -- and then also people quit in the first half as well.

And we do some replacements. So there is an inflow of talent because we always need to be looking at new talent coming in. So there is some inflow. It's simply that the way it's balanced, there is more outflow than inflow. So it's not that we have stopped bringing talent. So that's continued, yes.

But it's way slowed down.

Yes, yes. It did.

I see, I see. I also have the final question on the guidance. I think thinking the other way around of the first question, we heard of the guidance that it could be prudent guidance. I mean, given that you actually downgraded it here post-Q2, the quarter should have developed somewhat weaker than you expected while still the guidance implies earnings growth in the second half of the year given that it was down in the first half of the year. Is there a risk to that assumption given that the market obviously -- or are you in a deteriorating trend right now? You have reduced now the employees, the top line could face some headwinds, et cetera, which could cause you to miss that guidance on the downside?

Agree. Agree with your points. The strongest lever right now and giving us the most -- best look we can at everything we can see is the savings from our efficiency gains, right, as opposed to some expected big upswing in revenue. So that's some of the -- I wish it was both but that's the view at the moment. And we're giving you the most accurate view we have right now, right? And we did the final round up just yesterday.

Yes. And I think when we say prudent, what we mean is, yes, we know what we can do internally. We see some optimism in clients in terms of -- as a market in general, but we don't know how quickly that may turn into something for us or not. So that's the prudency there also in the guidance.

And I would say that optimism is in pockets, right? I think the market we're most nervous about at the moment is Europe.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers.

So we have actually one question from the web. And that is, what are you specifically seeing among your North American tech clients sequentially? Does the demand show signs of stabilization during Q2? Or does it continue to deaccelerate?

From our -- from what we experienced with our clients, I'll just speak to that, we are not still experiencing a deacceleration, right? The corporate kind of freezing of a year ago when the market caps dropped in half and then the reorgs and the pausing that followed the first 100,000 layoffs and the second 100,000 layoffs and the third run of layoffs in the first quarter, that has stopped, right? And so the companies feels like they're in motion again, right? Of course, they're still conservative but they're moving, right? The stalling tactics and what they were going through in the first half is not what we're experiencing now. And obviously, they're still struggling, right, as an industry and access to capital and pressure on profit improvements and so forth. But some of our bigger software clients are now starting to implement again some of their core initiatives that's starting up in the fourth quarter. So just to give you a sense of at least what we're experiencing.

And one last question from the web. We have partially discussed this, but can you also discuss a bit how we have been facing inflation during the first half of the year compared to your pricing?

In terms of client demand or in terms of our internal costs?

Both, I guess.

I can speak to it from a cost perspective first. We haven't -- it's very different, 2021 and 2022 in terms of the war for talent and all of that. And so we haven't made any shifts in terms -- to our people salaries other than what we did in the first quarter.

Yes. I think we have decided that our people is our most important asset. So we want to pay fairly and we want to be good to them as to keeping up and being able for them to respond in the market. And that has meant that we did raises in 2023 at the beginning to help them match the rising costs. What we have done on the other side is work both on the pricing side, so looking at how do we price with clients, to compensate for that and on productivity gains on the other side. So the margin stabilization that we see is that combination. Do we have higher salaries than 2022 per employee? Sure. But that has -- we have worked against it with working on the pricing, how do we price, how do we scope engagements and how more productive can we be engaging in a number of different projects for it. So yes, we are very aware but we tackle it upfront there.

Yes. And one other thing. In general, what we do is we give the inflationary raises more generously in the bottom of the company, right, and less at the top. So that also helps the balance.

Okay. Great. It seems that all of the questions from the webcast, from me and the telephone conference has been answered. So I hand over to you for any closing remarks.

Yes. Thank you for your time. Thank you for the long-term support. It's a tough year, but the BTS I know and the one I've -- we've grown up in, right, takes advantage of these moments. You see things more clearly. You upgrade and upskill your talent, you become more competitive, you invent new services. And in our case, I'm particularly proud and excited that the deals we're getting are more strategic, more CEO-led and are higher average sizes. So I think I'll leave us at that.

Thank you, Jessica. Thank you, Philios. And thank you, everyone, who has been listening and watching.