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

Good morning, dear BTS investors. This is Jessica Skon. I'm calling in actually from the evening in San Francisco, but wishing you all a very good morning. Sorry to not be there in person. I'm sure I'll be there in person in February. And this is BTS Group Q3 2023 report. So if I -- at the highest-level summary, our third quarter felt a lot like the second quarter, I would say. We continued to see the customer cautiousness, the conservatism we've been talking about all year, now affecting all of our markets. And despite that, we were -- we kept our revenues flat. We're not happy with this negative 1%. But it means that while some of our customers have [ ideals ], we were still able to win others and so forth. If you look at the different markets, North America remained flat in the third quarter. We saw a decline in Europe of negative 4% in terms of revenue. They also started to have their second quarter of experiencing this cautiousness and more client project delays and so forth. And one large project, in particular, was moved out. In terms of other markets, they were able to grow 3%. And we can talk about that in a bit more in terms of which markets are stronger than others at the moment. In terms of profitability, I mean, obviously, we don't like to see our margin going down from 10.7% to 8.4%. And despite that, the kind of the headline is that the cost and efficiency measures that we've been talking about all year, right, that frankly started in the fourth quarter of the year before and again in the first quarter, are going according to plan. And always since according to plan, the final was that the vast majority would take effect in the fourth quarter. So because of that, our outlook is going to remain the same, in terms of our results are expected to be in line with 2022. So if we go into the markets, we'll start with our biggest market, North America. Again, continuing to see the client conservatism in the third quarter. We had started a year ago in terms of diversifying outside of our dependency on tech and software, and I'm really happy, to be honest with you, with the growth we've been able to get in energy, biotech, pharma, financial services and CPG, because despite the slowdown in the software and tech's fund, the country was able to remain flat. We also had the revenue contribution from the Boda acquisition, which is also very helpful right now. And then if I give you kind of an update on the market, I don't want this to be misunderstood as trying to be stronger than I'm saying it. But in terms of a market evolution, in some of the sectors, some of our clients seemed to be picking up hiring a little bit. And the reason I'm saying that is because demand for our selection, our assessment selection services has grown in the third quarter, which means companies are hiring again and spending and getting the right people in the right jobs, in particular, in financial services and biopharma. And then the other thing that started to happen in the third quarter is that we started to feel movement in the sales pipeline and a handful of our software and tech clients. So some of those companies that were still, I wouldn't say frozen but moving quite slowly, given the multiple rounds of layoffs over the last year, we're starting to feel that things are picking up. So it's still early to celebrate, but those are the things that the NAM market has experienced in the third quarter. And in terms of Europe and the other markets, what you can see here in the second -- or the third column is the currency adjusted growth. So we already talked about the flat, the negative 4%, the 3% in the negative 10%. If we talk about Europe, they had the biggest hit to their margin from 8.3% to 2.8% in the third quarter. That's due to the slowdown in the revenue and also the clients were demanding more of our services that we typically do with our external coaches and leadership experts and so forth. BTS Other markets had the growth of 3% and a margin of 11.6%. And specifically in other markets, we're seeing strong demand in the Middle East and Southeast Asia, in particular. The team in Italy had a great quarter. The team in Spain as well did well, and that's offsetting some of the more conservative, the softer markets. I would say one interesting thing from a market perspective and industry perspective is the Middle East team won a really a nice sized deal in infrastructure and actually Southern Europe and North America. So infrastructure is proving to us as a pretty attractive industry right now in terms of the deals that we're winning. And then in terms of APG, I'd say it's the same story that we've been talking about all year, right? Given the more conservative market, they tend to have more price-sensitive buyers and so forth, and their deal sizes are smaller and it's just slower moving for them. So as we've been talking about all year, right, and I still feel it now and this week and we'll fill it until the end of the year, we never want to have a year like this where we feel like we didn't get significantly better, right, in terms of setting ourselves up for the next level of growth and profitability and profitable growth. And so just a quick reflection on what we've been able to do this year. One, operational efficiency. I mean, I think we moved really fast. We can always have done more. But in terms of Q3 and Q4, other markets making a very conservative plan for the year. North America, by early February, having the SEK 60 million efficiency plan, which has been fully executed. Europe now has been taking measures, which we expect to benefit in the fourth quarter. So -- and all of those things are smart things for the business. It's not something that's going to hurt us in our ability to grow long term. The second one is, we want to feel like in a year like this, that we're raising the bar on our own competitiveness, that we are winning deals and our win rates are going up, that the deal sizes are increasing. And we feel that way. I think our industry focus has been extraordinarily important for the year. It's one of the reasons why we're flat and not shrinking, I guess, and our ability to diversify outside of tech and software. Our win rates are strong. In North America, we've won 41 new customers this year; in Other markets, 91. In Europe, we've won 18. It's also a a great time where we can innovate and continue to innovate. So there's kind of 2 major buckets of innovation for us this year. The first one has to do with partnering with our clients at scale, and in particular, helping them rethink how they deliver training to everybody in the organization. So leadership for all levels, sales training for 30,000 salespeople. There's a lot of companies right now who are rethinking and wanting to do things differently, and we are finding ourselves competing and taking share from the consulting firms, which sets us up really nicely for a large kind of longer-term partnerships. And then the second category I talked about in the second quarter is given generative AI and kind of the adoption and the experimentation that's happening in the world right now, we are seeing our services on AI training as well as the changed services associated with that growing in demand. And then the last category is we want to feel like our talent is stronger after a year like this, and we do. I think we were better at performance management at all levels of the organization. We've spent a lot of time training our people in terms of upskilling on proposal quality, on consulting skills and so forth. We've improved our global knowledge management system, organized around our client problems, our people can find that absolute best thinking from around the world and have that at their fingertips. And so these are some of the things that we feel -- I personally feel really good about, and I think we've executed on quite well and should set us up for a nice next 2 to 3 years. And all of that is in service of this, right? It's the expectation that you've grown to expect from BTS that you know and love us for is long-term revenue and operating profit performance. This is still our our ambition, right? So we've had 13% average growth since 2001 or between 2001 and 2022 and 16% average EBIT growth. So I'll leave you with this. As I said at the beginning, despite the fact that the third quarter is worse actually than the second quarter. But in the first half, you might be thinking how is this possible? It's because really the second bullet, which we've been saying all along, is the efficiency measures that we put in place a year ago. And in the first quarter have been, I think, well executed and are well underway. And the fourth quarter was always a quarter where we expected to realize the majority of that. I think we're still seeing the conservative attitude among our customers in general, but the diversification of industries and our deal win rates and actually deal sizes is making me feel like our competitiveness continues to improve. And of course, we will continue to remain cautious, right? I mean every week, we are doing everything we can to end with a strong year, and just as importantly, set up a strong first quarter. So with that, dear investors, I am available for any questions.

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

Let me first start -- starting on the guidance side. I mean, the guidance seems like you expect a rather strong Q4. So I'm just wondering a bit, can you say something about how the quarter started and what makes you so confident in that Q4 will be so strong? Because yes, Q4 will be the best quarter ever if I calculate it right, back on your guidance here. Just for whatever reason, that would be very helpful.

Yes. I mean it is primarily because of the cost efficiency measures, and we're confident that those are playing out right as planned. And so that's the dominant one. If you talk about the top line, I think we will see a slightly better top line performance in a couple of the markets and weaker in another. But the main story on the fourth quarter is still the efficiencies that are mainly behind us.

Yes. And just when I do some calculations of the organic growth, it should be some -- maybe minus 4% to 5% if you take off away the Boda acquisition. I was wondering, do you see that organic growth should be positive in the fourth quarter in your guidance? Or how do you view the top line growth in the fourth quarter?

Yes. I mean, I want to be a little cautious because we typically don't give, right, next quarter details like that. Yes, it's going to be -- like I said, we're seeing that NAM and Other markets will do a bit better, right? And Europe is in a tougher spot. So yes, and then Boda will continue to help. But it's not -- Q4 isn't going to be this big growth revenue story yet. We're seeing improvements, right, in some areas, which is nice to see and experience, and some of the pipelines are moving a little bit more freely than before. But the outlook is based, I mean, significantly because of the cost efficiencies.

Yes. Okay. And on the cost side, have you done anything -- I mean when I just look at it, it seems like your number of employees is down by some [ 35% ], both in Q2 and in Q3. Is there anything else there that you have done to reduce the cost or is it mainly a reduction in number of employees?

It's the reduction of our employees. It's also being really disciplined on whatever external people we need, right? So as we kind of reestablish those guidelines, especially in Other markets and North America right away at the beginning of the year and ramped up a lot of our full-time people to do work that typically the externals would do. So it's keeping that discipline throughout the org. And then we also just -- we've clamped down on nonclient-funded travel and things like that. But it's mainly performance management, people leaving and then the contractor expense are the main ones.

Okay, yes. And then if you look on the market development, what is your feeling there? Are your development in line with the market? Or are you taking share? Or what's your impression?

Yes. We've been winning in terms of the competitive deals. Our win rates have stayed percentage-wise, the same or slightly up in North America and Other markets for the year, right? And in both of those markets, deal sizes are getting bigger. So those are 2 really good signs. Europe, last quarter and a little bit at the beginning of the end of the first quarter, it felt more sensitive. I think I mentioned we had a handful of companies telling us that some of our competitors are doing work for free, and they were surprised that hot the low -- the sort of low pricing they were able to get. But Europe's win rates in the third quarter have gone up. And so -- and in terms of competitive RFP win rates, not just winning the next proposals with their clients. So that's a good sign as well.

Yes. And then for the next year, I want to do action planning for that. What is the current kind of scenarios you are seeing? Or do you expect the market to continue to be like here we saw in Q3, Q4? Or do you expect it to improve or get worse or...

I wish I knew it with more clarity. The San Francisco market was our first one that froze up and became nervous, right? And we're now -- this is the sixth quarter after that happened in the fourth quarter, right? Ending the third quarter was our fifth quarter of software and tech going through the cycle. And the second half of the third quarter for us, at least, with some of our software clients felt like the fears and the slowness and all of that were something from earlier in the year. So there's some movement that started, which feels nice. But it's not at a pace that makes everybody just feel relieved and it's fully back to normal yet, right? So it's too early to celebrate, but it does feel good that the deal flow is up and the movement of the deals is -- has improved. But that's just one sector, and that's just one industry right? But since it started here for us, right? And then it's kind of moved around the world at a different pace, I pay attention to that because we'll see how that evolves. Since we're talking about North America, our success in pharma, bio has been great. Absolutely great. We're winning really big deals there, and it's helped us this year, and it will be really important to us in the first half next year. So we'll continue to focus there. And those clients seemed to be moving a bit more freely, right, and so forth in terms of demand for our services. And then I mentioned the infrastructure one, which was, for whatever reason, we had a few months in a row where we were winning really big deals, all in infrastructure, 1 in North America, 1 in Europe and 1 in Dubai and significantly above average deal sizes, yes.

And then just a final question from my side. On the cash flow, it's been negative now, I think for cash flow from operations for the year until now. So I'm just wondering if you're seeing any signs of improved working capital there? I think Q4 is usually quite a strong quarter on the cash flow side. Do you expect that to be in Q4 this year as well?

Yes. The -- I mean, if -- I just want to comment on the accounts receivable, we did see an increase in revenues in like the last 5 weeks of the third quarter. So those will play into the fourth, and then we'll probably get those down again in the first quarter. But can you just restate your question, just the last part of it?

Ye. Usually, I think Q4 is a quite strong cash flow quarter for BTS. And now you've had a quite weak cash flow in the first 3 months -- the first 3 quarters. I was wondering do you expect to catch up some of that in Q4 this year as well?

Yes. We do. I mean it will be a bigger quarter, so that will be helpful. And in the third quarter, we had some interest rate hikes, and we also paid off some of the Boda acquisition stuff. And so we won't have that in the fourth quarter. So it should get better, yes.

The next question comes from Rikard Engberg from Erik Penser Bank.

A couple of questions, if I may. So my first question is, you state that one of the main reasons that you believe that you can restate the guidance is that you believe in margin expansion during Q4. But going forward after Q4, do you believe that you will have the capacity to deliver if growth returns to the market?

We do, we do. Our -- the read on our total capacity utilization by the end of the third quarter, and I will update that after we get close to the end of the fourth quarter now, is we have somewhere between 10% and 13% capacity right now in terms of being able to grow, which sets us up quite nicely, right? So we would start 1st of January with 5% less headcount, right, compared to the first half of last year, but let's say, a conservative 10% capacity to do more work across the system. We expect to raise prices a bit, especially in North America and most of the world. We'll continue to do that. So I think we're actually set up in a pretty nice place right now to have a strong next year, assuming we can get the growth back to double digits.

Okay. Good. Great. And my next question comes to the different markets. You said that the North American market and the tech market has started to move a bit. And we see that Europe is maybe in a place probably North America and the tech market was a couple of quarters ago. Looking at Other markets and especially the Middle East or Asia, do you see that they are in a favorable interface similar to Europe for the coming quarters? And also, have you been affected by the recent turmoil in the Middle East?

Yes, yes. So I'll start with Asia and then we can end with the Middle East. There are countries that have been affected similar to, let's say, San Francisco and then Europe in the last couple of quarters. And that's primarily Korea and Japan a little bit. But Korea in particular, because so many of the bigger companies, there are tech and tech-related companies. So they also did some layoffs and they had some kind of corporate slowdowns and all of that. Obviously, China has been a difficult market for some time. However, the Southeast Asia team, right, which is Singapore, Kuala Lumpur, Jakarta and Bangkok, are doing great. They're having a great year. Their first quarter was a bit tough because they were dependent on a couple of big tech clients who paused, but they've absolutely made up for it and will have great growth this year. So I -- we don't have signs from that team yet that feel even remotely close to some of the other markets. So I would anticipate that Southeast Asia would continue to do quite well. I'll share with you when we start to see signs otherwise. But they need to do well enough to make up for the -- a bit of the cautious side right now in the other markets or in the other countries in Asia Pacific. Middle East is really strong for us. We are winning -- I haven't heard of a time that we've lost one of the competitive big RFPs there. They are not price sensitive. They seem to love our services. And so far, we are not affected from the war in Gaza in Israel. But I expect we will be. So...

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

I have a question on Spain here. You mentioned in the report that you had a one-off cost in the quarter closing an office in Spain. How many people did it relate to? Should we expect more? And what was the approximate cost here in the quarter?

I need to get back to you on the approximate cost. I don't remember what the in-quarter rate is. So if you don't mind, I'm happy to show you a note on that. But it was related to the Netmind acquisition. They had 2 locations. Most of the people are in our Madrid area, and so we were able to find a smaller space for that team.

Okay. Have [ they ] been moved into the BTS offices elsewhere in Spain? Or -- and should we see some risk to the Netmind intangible assets in the balance sheet here then if it was related to an acquisition?

No, I don't think so. I mean, it's just more of a classic -- our people using the office and can we get a smaller space that will have higher utilization and save some money. So...

Okay. I see, I see. That's clear. And then secondly, on salary inflation going into next year. You are a services company, we see that services PMIs are holding up very well still. Is there a tough labor market do you need to compensate for the recent inflation also next year, you think, on your global salaries? Or will it be much lower next year?

No. It will be lower. I mean I think there are some hot markets, right? And we actually need to have either more BTSers move to those markets or start to hire again there and then maybe reduce headcount elsewhere. And so we don't -- we wouldn't do a foolish thing of -- we'll do it market by market, but overall, average salary raises will be less.

I see. I see. And then finally, on the licenses here, is it tougher? Or could it partly be easier to sell larger license deals that you could roll out for large customers in this market? Or how should we view that development really near term?

It's been really interesting this year, and I probably mentioned this before, but it continues to be the case that we are being invited to bigger and bigger and more complex client problems and opportunities. And with that, what makes things complex and harder is that clients are trying to figure out how to best serve a lot of people, right? 5,000, 10,000, 50,000, 100,000, 150,000 people on a regular basis, and that goes to kind of the rearchitecting a function work that we've been doing. In every single one of those conversations, the license kind of subscription being able to use BTS in terms of the microsims when they need them and the content when they need them is a part of those conversations. So I am finding that I think it's going to be easier for us to do it. And at the same time, I think we're realizing that to be an effective partner at scale. There's a lot of consulting and advisory services that go along with that to make sure that it's fulfilling its promise, right? So rather than seeing that as just kind of a stand-alone product that's generating license, it's more of a bigger partnering model that we're now starting to do with clients, that we're getting additional consulting advisory. We're closer to the client because of it, and we're making sure that the adoption and the usage of that stuff at scale is world-class.

Yes, I see. That makes sense. And then a final one as well. On the Q4 guidance here, what's the risk on that one? I mean, we're only 4, 5 weeks left for the quarter, and we're more than 6 weeks into the quarter. What could happen to screw it up, basically?

Yes. I mean, look, because it's been a tough year, it's -- you've kind of -- I leave myself and the team leave ourselves open for any bad news can still happen, right? I mean you could potentially have a client say, I know we were going to do this project with you and now we're going to cancel the last 4 weeks. But every week that goes by, even if that happens, then the amount of revenue affected becomes pretty small, right?

Yes, exactly. That was my point. And so following up on that one...

Yes, that's the point. And then new deals are coming in as well, right? Every week, we celebrate a little bit more.

Yes, I see. But you haven't really baked the full year guidance on assumptions that the market will recover in the end of the quarter? Anything like that? Because least to happen -- to me, least is rather something that could happen to [ mix ] it.

Yes. Correct. I won't -- I don't like taking on that much risk or hype, right? So we have line of sight just like we did when we updated the outlook in the last quarter, right? And of course, things change. But no, right now, we have line of sight to it, and it's just if something pretty strange happens. But we're still fighting and more new stuff is coming in and so...

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speaker for any closing comments.

Wonderful. Well, I know it's early for all of you, so thank you for the time and have a wonderful day. Talk to you soon.