Hi, everyone, and welcome to ABG Investor Days. My name is Nikola Kalanoski, and I'm an Equity Research Analyst here at ABG. With us today, we have the Interim CEO of B3 Consulting Group, Sverre Bjerkeli. The idea is that he will present to us his company for about 20 minutes, and then we will have an opportunity for a Q&A for about 5 minutes. With that said, Sverre, the floor is yours.
Ah, excellent. Thanks a lot. I'm all open for questions. I also agreed with Nikola that you may ask questions even when I'm talking, and then we will repeat the question and then try to give an answer. So feel free to reach out. Any questions so far? My name is Sverre Bjerkeli. I am. I was the Chairman of the Board in B3 just before the summer. Now I'm the interim Chief Executive, and I will probably be back as the Chairman after a few months. My family investment company is the biggest shareholder in B3, so we own around 20%. I joined the company as the Chairman of the Board 2.5 years ago.
So I've been around for that kind of period of time, and started buying some shares at a share price of SEK 50, and today it is better, however, worse than half a year ago. My story today is probably about if you are capable of building a strong business culture, you can probably deliver strong results over time. One of the things I found very interesting with B3 when arriving to the company is that they, in my opinion, have a good culture. The employee satisfaction surveys, the eNPS sized 52, is. This is brand new, it's a couple of weeks old, is one of the highest figures I ever have seen in any company during my 30 years in business.
And I think the good story behind it is that we have 23 smaller daughter companies that together is building up something called B3, and those people who evaluate their own company, they really evaluate the daughter company. "We belong here. We are a part of it. We feel important. We are empowered." And I think that's a very good basis for delivering strong results over time. B3 is a company with 800 people in Sweden. We have 200 people in Poland. I think we have plenty of growth opportunities in those two countries, but you shouldn't rule out the possibility for us to move to other places outside to where we stay at the moment.
It's. Think Norway, and then why, why, why wouldn't we in that area? If you have a look at the long-term figures in the company, I think that there are three things you could see here. One, we are growing 18% a year, the last 10 years. That's not bad. Most of that type of growth is organic growth. However, it has been some kind of M&A situations in history, but we haven't really bought anything since 2018. So from 2019 and onwards, it is organic growth coming up. So we are a growing company. The second point here is that it's not a straight line, and I guess that business is never, ever about a straight line, but the line trend is pretty strong. So that was kind of two statements.
The third one is that, obviously you can see an EBIT development in, 2022, which is incredibly strong. You are almost doubling your EBIT level from 2021 to 2022. However, we should remember that 2022, in our type of market, was an incredibly strong market, or close to exceptionally good, I would say. So I would say that this is a bit of luck in 2022, and then we are up against a difficult year to compare with in 2023. But I, I will show you even in a minute now that, the way we have started in 2023, the first nine months, is also actually pretty good. We have a higher EBIT level in nominal values after nine months in 2023 than in 2021.
So even if we are not kind of delivering exactly the same result this year like last year, the EBIT development trend is, in my opinion, strong. This is the kind of last year figures, 2022. 24.5% growth looks incredibly strong. Everything is organic. What you should remember is that we have a business model, starting up new companies, and then taking control of these kind of companies, owning them more than 50. Typically, we go up to 100% ownership, 3-4 years later. During that period, we consolidate figures in. So the point here is that the underlying reality on growth in 2022 is not that strong. You should think more like 15% growth in that market underlying.
The rest is a technical issue, and I'll be back to talk a little bit about that technical issue in 2023. So you have to go deeper down in order to truly understand the figures. They are not always what they look like. So the growth level here is formally correct, but underlying realities is slower than 25, and 2023 is stronger than what you will see formally. Be back to that in a Q2 . Q3 , 2023, from the Q3 presentation, the second-best Q3 in history. Not that bad, but if you compare with last year, not at all good. But the second-best Q3 in history, okay. It's okay.
We are on our way to profitable growth this year as well, even in a situation where the market is a lot worse than it was in last year. That's a fact. If you have a look at the Polish company, and the Polish company with 200 employees, they were growing with 100% last year. They are growing very fast this year as well. The Polish market is also, to a certain extent, challenging, but they maneuver very well and continue to deliver very strong figures. That company is not consolidated into the headline figures of the company, so you have to look upon Poland as an underlying reality in that area.
But if you should take an investment decision, you should have a look at the formal figures, you should have a look at the underlying realities, and then find out what to do. And the good thing is that we update you investors on one underlying company, which is the Polish one. We have other ones, but they are not that sizable, so it's not really necessary to update you. There are a couple of them. But if you have a look at the Q3 and the per Q3 figures in B3, you can see that if you are looking at underlying realities, we are growing single digit, not double. But okay, we are growing, and you can see that the EBIT level today is higher, both formally and underlying, than 2021 and every year back in history.
So in a tougher or harder market, which we have today in the, in IT consultancy sector in Sweden, we are pretty happy with what's delivered. It's not good enough, but it's, it's okay. A couple of words about our business model and the financial targets going forward. So if we start with the, the business model, we are not a company. We are 23 companies. I, I think Knowit is 100. And some competitors, they are one company. It means that headquarters takes the decision, and the different people out there implement. We are not like that. I listened to Prevas a bit earlier today. I do understand that you also have a decentralized. I can see you here in the audience. You also have a decentralized model. We have a decentralized model, and we have 23 daughter companies.
If we can encourage them to find their own way in the market and support them, I think this could be a good model. And then the mother company must value-add and not grow and be too big in that area. So we are happy with the model. We are growing in a number of companies. Sometimes we consolidate a few of them, but not very often in that area. So you should probably expect us to be more companies in the future, and we are doing start-up activities as we speak in that area. I'm not saying it's the best model. It's our model.
So if you do that good, you will probably continue to grow double digit for the next 5-10 years with a healthy, EBIT level, which is a lot better than history. Because if you go 5-6 years back, the margin level of B3 was pretty poor. After 2021 and 2022, that has leveled up to a kind of a more acceptable level. And what is a more acceptable level? So what we have said to the market is that we will reach around SEK 1.5 billion annual volume in 2025. Last year, 1.15 billion, give or take. It's expected low single-digit growth today, so we are still kind of, if you exclude Poland, below or around SEK 1.2 billion this year.
But remember, this figure including Poland, because Poland will be consolidated not later than 2025. That's a contractual situation. We have an agreement. It will be consolidated, whether that happens in 2024 or 2025, that's up to the two parties, the co-owners in Poland and us. But what you should expect is that that will happen in 2025. So if you add the Polish volume and see some kind of growth in 2024 and 2025, it's not very difficult to see that you shouldn't do a lot of M&As to get to 1.5. You should actually do pretty little M&A in order to get to 1.5. A question? Nice.
Yes. So did you say that Poland will be a 100% owned subsidiary in 2025 or?
The base plan is that the Polish company will be 100% owned in 2025. That's the base plan. That's the kind of agreement between the two parties. We may negotiate otherwise, to say that we go up to 75 or 80 or something like that. But unless we agree on something new, the Polish company will be 100% owned from not later than 2025. And the estimated investments around this kind of consolidation, they are given to the market, so you can have a look and find out. I have the figure, but it will confuse you if I start talking about it now. Have a look at it and think through it then. I forgot to repeat the question, Nikola.
That's fair. We picked it up anyway.
The answer was pretty easy to.
Very clear
Understand anyway-
Yep
In, in that area. Okay, so what do we do when we meet a harder market, a tougher market in Sweden? We do two things: we accelerate and brake at the same time. What does brake mean? It means cut cost. What is the target? We cut cost to a level around two percentage points improved margin. Where do we take it? From the mother company. So we do not cut any cost at all in the 23 daughter companies. Everything is taken from the headquarters. The headquarters is too big, it's too many people. I, as a Chairman, kind of seen that happen and accepted that. In hindsight, it was not really a good decision to take, neither by management nor by the board and me.
What we do when we meet a harder market, we cut cost. It's doable, and it will not hurt the company. So you should think that during the next three quarters, we do have a situation where the margins, everything else equal, is around two percentage points lower. It's happening as we speak. The cost is going down today and tomorrow, and we will have a 90% effect in Q2 , 2025. That's a fact. You can't argue about cost. It's pretty easy to understand. So we cut cost. We think that we will get out stronger in the other end by cutting cost, and at the same time, we accelerate in the market. So we are not cutting cost in all areas, and remember, we are 23 companies.
10 of them is delivering a higher EBIT today compared with the first nine months last year. They are doing very well, and some are doing it medium okay, and some are doing it poor. And then we have to kind of find out what to do with the poor ones and then stimulate the good ones to, to continue. So obviously, it is sectors where we invest as we speak. More marketing is one example. We increased the marketing budget in tougher times. Another one is in AI. Obviously, we are investing in AI, and it's a pretty concrete statement here, given for the first time to the market today, is that we will invest around 100,000 hours in AI in 2024. It's a pretty concrete figure, isn't it? Who will pay the bill? Clients, the employees, and the company.
This is not a profit warning, not at all. It's kind of, basically, on the contrary. The message to every employee in B3 is that you are either relevant or out. If you don't know and if you don't understand what's going on here, you should find another place to be in that area. We must understand what's going on. We are staffing up, and we are speeding up AI, and we are happy that Sam Altman is back again in OpenAI after 3-4 days with kind of interesting dialogues over on the other side here. What about capital allocation? Have a look at it. Have a look at it. At least we have a capital allocation model, and read it through and give me feedback if you don't like it.
I got a question about it during the summer, and I understood that we didn't really have a capital allocation model, and if you don't have it, you can't communicate it. Now we have it, and we have communicated it. One of the things we do at the moment is to buy back our own shares. So that's happening as we speak, and we are on our way to buy back. So please invest in B3 is my final slide, and there is questions from the audience and from you, Nikola. You run the Q&A show.
Yep, absolutely. We can take a question from the audience, and I can just repeat what you said, just we pick it up.
So what's the intrinsic value?
What's the intrinsic value?
Intrinsic value is the calculated real value of the company. So every analyst doing an analysis of a company or companies like us, they are trying to find out what is the real value of the company. Warren Buffett and others call that the intrinsic value, and-
How does it define the intrinsic value that you have?
How-
You're buying back shares now.
Yes.
What do you think is the Intrinsic Value?
Okay, so what kind of level? Is it 200 or 150 or something like that? Is that your question?
Yeah. How did you arrive at the conclusion that it's trading below?
Now, we are putting it in kind of what we could call fair assumption into our model, and we use the normal methodology in order to calculate the intrinsic value. We have an opinion. The board have discussed the intrinsic value of the company, and we are of the opinion that the share price today is lower priced than 33% below intrinsic value. How much margin of safety to 33%? I will not communicate on that. That then I would have given you the intrinsic value. I'm a personal investor, a family investment company. My personal intrinsic value evaluation on B3 is more than twice the share price today. Normally, chief executives and chairmen do not talk about share price. I do. I do, but that's my personal statement from the family investment company.
Absolutely. Well, very informative. I think if we just, we can just continue on the capital allocation question. You know, from an ownership perspective, how do you balance M&A, buybacks, and dividends? Could you perhaps give us some more flavor on that?
Yeah, I think that we consider buyback, and we may decide on buyback when the discount to intrinsic value is higher than 33. Let's say that is 50, then we would probably prefer buyback to M&A situation. However, M&A situations today could be of interest, depending on which company to buy and what is the price. Because the present price level on M&A situations today are lower, obviously, than a year ago. So we can do the math. We can calculate both an M&A situation and a buyback situation, and the last priority is dividend. So we don't have a kind of a stable dividend policy. We would like to grow organically. That do not cost any capital. That's not really an issue.
Then we can do M&A situation, or we could do buyback, and at the moment, I find buyback pretty attractive. But it's not ruling out M&A situation because our balance sheet is very strong, probably too strong. We have close to zero debt, which in my opinion, is not good capital allocation, so we should probably gear up the company. So we can leverage up, and do more. At the moment, we buy back shares.
Yep. And I think if we continue on, I guess, the M&A part, part of your strategy, as you say, is to start up new IT consulting companies with entrepreneurs that you believe will fit your culture. Could you let us know what your opinion is of the supply and the quality of entrepreneurs out there that you would like to invest in, and how is that process going on right now?
We are spending more resources. It's kind of an acceleration area as we speak. We are spending more resources now to find new startup initiatives compared with the last 2-3 years. And the last 5-7 years, we have probably started 1-2 companies a year. We are now looking more to 4-6 companies a year, and we will update you every quarter on whether we have started new companies or not. I think it's doable to find new startup entrepreneurs today, even if people are a bit more afraid to take that step today compared with a year ago. But if you dare to go now, you are probably even more the right person.
So we find the situation very interesting in order to find new entrepreneurs, within our kind of areas in Sweden, potentially also outside in Sweden. We would typically expect to fail in one to two out of six new startups, so you shouldn't expect us to be successful on all of them. It doesn't cost too much money. It's a very small handful of SEK millions you lose if you fail in a startup growth type of situation, and you should probably expect us to fail on exit situation, let's say one out of four or one out of five. B3 has been pretty good, but every growth situation have a risk, M&A have a risk, and startup and earn-out situation have a risk.
So in our calculations on a startup situation, we do expect some kind of failure rate, both in the beginning and in the end. It's a part of the game. We are trying to do that as good as possible, but if we never, ever fail, we are probably doing too little in that area. So startup, very important part of our strategy, and we have, for the first time in B3's history, started to stimulate our own people to start up. Why don't you leave B3 and start your own company? You haven't been allowed to at an earlier stage, and I don't really understand why. So we have changed the policy. Now, you are allowed to go out there, start your own company, bring one, two, three people from the company and do a startup. Why wouldn't we?
We know, know those people better than brand-new people from the market. So we have announced one, a company, getting out from B3 already, and there is more to come, in that area. So startup, important, it's happening now. It's slightly difficult, but doable.
Yep, and just a final question to, to wrap up. Could you comment perhaps on what your appetite looks like for hiring IT consultants?
It's. We don't have an appetite. We have many. We have 23 companies. Some of them are hiring today and tomorrow, and some are not. So the question is a bit difficult. You shouldn't expect too much net recruitment during the next 2-3 quarters. We will also stick to the profitability targets we do have at the moment. I say to the 23 chief executives, "If you have a question whether you should hire or not, you should hire." The market will be back. It's not that difficult in that area. So if you are in doubt, feel free to go.
Well, thank you very much, Sverre. That was very clear. Thank you for the presentation, and thank you to everybody else for listening in. Thank you.
Thank you, Nikola.