Earnings Call: Q3 2020

Nov 11, 2020

Quarterly report

Good morning, everyone. My name is Richard Engberg, and I'm an Equity Research here at ERK Pencil Bank. With me, I have Henrik Eklund, CEO of BTS Group. Henrik, the state is yours. Thank you, Richard, and thank you all shareholders for listening in today. I am presenting the 3rd quarter results. 2020 is a very challenging year for our industry, and I'm happy to present to you significant progress in the 3rd quarter, both short term and long term. How can we characterize 2020? Sometimes it feels like when you have when you're preparing to cross the street and you look at both sides for the cars and then you're hit by an airplane. It's been a dramatic year. It's been a year with big changes. And let me talk a little bit about what has happened in the market. First of all, we have a continued challenge with no physical deliveries. So 70% of what we normally do is gone and has been since middle of March. What we see then during Q3 is a gradually improving market because clients do not want to stand still. And 1 by 1 and more and more of them have started to do virtual and digital deliveries instead. So that's making the market improved. We also see a very split market. There are some industries that do not invest at all. You can imagine airlines, hospitality and other industries. But there are some industries that continue to invest like tech and pharma and consumer products. And we are focusing our sales on those industries and all those companies. If we then look at the Q3 results, we see a short term improvement, and we also see long term major opportunities for growth. Let me cover a little bit about that. So first of all, Q3, we're growing compared to Q2, revenues and profit. Normally, it's totally the other way around. So that is a very good sign that our business is moving in the right direction. We have made, we started immediately in February, a big investment into virtual and digital. We realized that physical deliveries would be gone for 2020, and we put all our people and all our money in becoming the best in digital and virtual. And we took this to our customers. And the results are really strong. We've sold $100,000,000 since March 1. So we've saved we've been saving costs 22% in Q2, Q3 compared to last year. However, we have chosen not to reduce our organization. We have a fantastic organization with high performing people, and they can all earn revenue for us. And it would be short term stupid to make big cuts just to maximize profit this year. But we've made other smart savings. We have not cut R and D. We have not cut marketing. On contrary, we put more money into marketing. One another example of the fact that we're going in the right direction is that other markets, which include Asia, that's the market that went sour first already in Q1 and big time in Q2. They are coming around and they actually achieved a higher margin this Q3 than last year's Q3. So that's another very positive sign. The operating profit is SEK 21,000,000, and that's not a fantastic number, but I must say, we're still very proud. We have kept investing long term. We have kept all our people in a falling market, and still we're making that type of profit. We are happy with that short term. Even, of course, long term, that number is ridiculously low. Now looking at the actual numbers, down 20% and the results between 70% 90% is gone. If we look at the units, we can see that North America and Europe has performed stronger than other markets during these 1st 9 months. If we look at Q3, we see that the fall in profit is somewhat smaller, still big. And looking per unit, we see here that other markets who was first into the crisis is first out. Now what is good news is that we have a very strong financial position. We have NOK 300,000,000 in net cash position. We have cash and cash equivalents of almost NOK 600,000,000. That is a great situation to be in now. That means there's no risk. That means that we can invest for the future. We can make acquisitions. It's a fantastic position to be in now. Now even though I'm talking positively about our progress, of course, you get a little bit depressed when you see revenues go down 20%, you see profit go down 70%. Those numbers doesn't make you happy. However, I don't think people I don't think people are shareholders. I don't think you are shareholders because you want us to maximize short term profits. I think you're shareholders because of this. These are the 18 years since we went into the market. We've grown revenues 14% per year on average, and we've grown profit faster 18% per year. So we have a long history through crises, through problems, through upturns and downturns to grow and to grow profit faster. And you can also see it here from a shareholder perspective, any krona invested when we went public is today, krona, even after the fall in the stock price. So I think this is why you're a shareholder in BTS. You want to have this year by year growth of revenues and growth of profit, which we've proven that we can deliver. Obviously, a year like 2020, when you're hit by an airplane and education is one of the hardest hit industries in the world together with airlines, hospitality, etcetera, when you're hit like that, of course, you get totally different numbers. And the wrong thing to do would be to try to maximize 2020. That is not our goal at all. We are thinking about how can we give our shareholders 18 more years like the ones we have given. That's our focus. That's our focus. That's why we're keeping fantastic people, why we invest in R and D, why we move to virtual and digital, why we invest in marketing. That's our whole focus. So if you're unhappy with the profit in 2020, don't stay as a shareholder. We are going for the long term growth of revenue and profit. And a little bit more specific, what does it mean to come out stronger? But first of all, we have managed during this crisis year to grow our customer base. For example, just one region, other markets, have 72 new customers. We've attracted those because we've invested marketing. We have not cut down when our competitors have been cutting down. And because we have this lead in virtual, new clients are coming to us. Secondly, a broader offering. We used to have only physical. Now we are physical, virtual and digital, so much more to sell to our client base. The stronger organization. I've told you that we have not reduced the organization. We have continued to do what we do every year, and that is to optimize. So some people have left, and we found some great new talents coming in to the organization. And marketing, we have put more money, we become better at marketing. It's something we have had to do, and we will bring that with us for the future. So again, our focus for 2020 is to create a situation so we can deliver 18 more years like the one we have delivered from 2,001 to 2019. So as you know, the board decided not to give a dividend when we were back in Q2. It was simply a crisis that we couldn't oversee, and we had to be very cautious. Now we've seen that Q3 is better than Q2. We see a better market. We have very strong finances. So the board has proposed to take money from the 2019 profit and propose a dividend. And I should add that BTS has not received any government support in Sweden, so we don't have any of that issue at all. And just to remind you, when we ask shareholders why are you a shareholder, Three reasons. Number 2, we've talked about that. We have a long track record That is very, very few companies in the stock market can match our track record. And number 1 there, we're still super small in an enormous market. We have 33 offices around the globe. We are addressing a market which is enormous, and very strong. And thirdly, our long term financial goals remain. If we then look at the market outlook, as I said, it has improved since early Q3, and this continues during Q4. So far, even though the number of cases has increased all over the world compared to Q3, we have not seen customers changing. In Q2, we saw them panicking and cutting. It seems like they are taking it a bit easier now. We hear from customers that they are in it for the long haul, and they expect this to be over. We will see, of course, what happens in the rest of Q4, but that's the situation so far. When we speak to our clients, they think they plan to start physical deliveries again when restrictions are withdrawn. However, the virtual deliveries will take a big part of that. This change has arrived here to stay. And we believe we have a big lead in virtual delivery over competitors due to our big investments and our early move. Yes, that's the 3rd point really that I concluded. We expect a permanent change in demand, a disruption actually. And our plan is to come out as a winner through this disruption. Now this is a list of the 10 largest shareholders. And there, I stop. And please, any questions? Thank you. And my first question is that I like the reinstated dividend. However, is there still capital available for M and A when you decide for dividend? Well, we have the dividend is about 1 sixth of all the cash we have. We have a net cash position of 300,000,000, we have almost 600,000,000 in cash. So absolutely no problem. If you look at our KPIs, our covenants with the banks, they're negative. So we there's a lot of room. However, we only make acquisitions when we find really good deals with really good companies. Okay. Fair enough. And can we talk about the nature of the decrease in the cost base, please? That's a good question. It is primarily expenses related to physical delivery, such as travel and printing and so on and the use of subcontractors. So it's not primarily not a long term cost reduction. It's more a question of the decline of physical delivery and our response to try to save. Some of these cost savings, we might keep, but most of it is related to how we are saving and to volume. And that brings me to my next question. Can you please elaborate a bit about the margin expansion in other markets? Is it due to price? Or is it due to what you see a higher margin in non fiscal delivery? So I would like to invite Filios, Filios Andrio, if you come up here. Filios Andriyo lives in Spain, and he runs other markets, which covers 90% of the world's population, and he has 15 offices. So, Filios, please repeat the question for Filios. So, Filios, can you please elaborate a bit about the margin expansion in other markets? Is it due to price or is it due to that non fiscal delivery has got a higher margin or is that combination? I think it's a combination. We are we have worked Yes. So it's a combination. We have worked hard over the first two quarters and reduced somewhat the expenses, a little bit of a lower workforce focusing on the high performance and ensuring that there is some space for hiring in the future. So there has been a little bit lower workforce there. We try to be more productive. We found ways to better work with the virtual, improved our way to customers using more digital and virtual so that the end result is a great experience. But at the same time, for us, it's a little bit less intensive in terms of people and therefore, saved also on subcontractors and other continue and at the same time, keeping an eye on how can we be more productive ourselves in the units. And my next Just to build on that, thank you, Filios. I mean, in a big disruption such as this one, there are many things changing. And in these moments of change, that's when you can find new ways of working and new opportunities to improve margin. Also in a crisis, you have to rethink a lot. So we're trying to use this crisis as a springboard to get to move into a higher margin in the future. Okay. Thanks. And my next question is a bit, can you elaborate a bit about the development during the quarter? Because as we all know, the COVID situation changed from the beginning of the quarter to the end of the quarter. Can you please elaborate about your business that developed from the start of the quarter in August to the end? I think it has remained pretty much the same. Perhaps we saw an improvement from July to August, September. What do you think, Filios? I think we have a lot yes. So I think we are getting a lot of different customers now. So we've struggled in the first, let's say, 6 months in terms of because we were with a customer base that got hit as well by the crisis. And all the new customers that are coming in, obviously, are customers that either are in the right industries and obviously, we're in the right projects. So that allows us to also be more productive in terms of what we can do for them, expand the services we can sell. And that focus for us is really important in terms of productivity and also increased business. That's what I would comment. Thank you, Filius. You can stay up in the front. I'll give you all the questions as we move forward. So that was all the questions for me. Do we have any questions from the web or the telephone line? Thank Our first question is from Daniel Thorson of ABG. Please go ahead. Your line is open. Yes. Hi, Henrik. Thank you very much. I'll start off with a question regarding competition. Do you face new competitors in the new way of delivering your services, like fewer tech companies to a larger extent? Thank you for that question. First, I want to say that when we look at other competitors that are in similar situations with physical deliveries, we have declined 32% Q2, 20% in Q3. Our similar competitors have declined 40%. So visavis those, we are doing better. In terms of new competitors, the only really serious one is a company called BetterUp, which specializes in coaching, which is one of our 7 practice areas. They are venture capital backed with quite a lot of money, and they have great technology. They put a lot of money into marketing, which is good because they're driving the coaching market, and that's good for everyone. Can I say that I in the different markets, one trend that I see is also a consolidation? A lot of our we compete with a lot of competitors, and a lot of the smaller competitors are having real problems this year. So I'm seeing a lot of people being fired. I'm seeing small companies going out of the market. So obviously, everybody's been hit, but I think that the stronger ones, like ourselves, are more prone to be able to come a lot stronger out of it because there is going to be more consolidation. Also clients that in the past used to say, let me go to a competitor because I know them, they're good, they're a small outfit. Nowadays, they're very reluctant as to put their money on something which requires a lot of digital, a lot of virtual capabilities, a lot of investments. So the small firms are also having a harder time there. So we are I believe that both our differentiation, but also our global capabilities, investments and so on are helping us a lot to get a lot further in the marketplace. Okay. Thank you very much for that. A bit connected to that one. When you look at the M and A targets, do you look more for software companies today rather than people's businesses historically? Of course, acquisitions, that's an important possibility at this time of the cycle. We see that more companies are coming out for sale. And these smaller companies, the valuations are becoming a bit more attractive. We are very, very picky. It has to be a great deal, it has to be a great company. For sure, we are looking for companies with a strong technology. We're also looking for companies who take us into growth areas. There are some sectors where the demand is growing for change and learning. And if we are not in one of those spaces, we're interested in acquiring a smaller company who has great content, great concepts and can bring us into a growth segment. Okay, very good. In terms of geographies of potential M and A targets, can you say anything of if you're looking in North America, Europe, other markets? We look everywhere. As I said, we are very small compared to the total market. So we can buy companies who strengthen us in the U. S. Or in Europe or in Japan or in China, we can also go into some new markets. So we look everywhere. It's really up to getting a really good business with some good entrepreneurs and a good fit. That's what we're looking for. Okay. And then the question on how to look at the future here really. When people are getting less involved physically in the meetings and they are doing it in digital workshops or through software programs or virtual delivery, Could that be a risk that the people side of the value add becomes slightly less important for your clients so that they may transit over to a pure technology based solution or a competitor from that field? Is that a risk like 2 to 3 years ahead? I think on the contrary, the more we are virtual, the harder it is to keep the culture and keep the creativity. So the more we stay virtual, the more we need to invest in our people. And when you deliver virtual and digital, technology is important, but it's not everything. It's like you compare a great film or a great TV show. Technology is part of it, but it's the design. It's the story. It's how you keep people engaged. So our competence, because we're fantastic at experience based learning, fits straight into that future demand in virtual. And I will let this question is so important, so I will let my colleague, Filios, add here. Thank you, Hernig. Well, I mean, the way I also see it is it's like going to restaurants, right? There's lots of choices nowadays for ordering in and you can get the ingredients and you can cook at home. But we really want to go to the good restaurants because that's not about the food. We can maybe cook the same at home, but it's about the experience. It's about the social aspect, about being with others. So what the trend we are seeing is that, yes, companies would start as we go into 2021, they will start to say, I want to really invest in the experience in bringing my people together when it really matters. And there, I will invest a lot. And then I will do other things virtually online to take advantage of the cost base. And I think in BTS, we are very well positioned for both. So we can give what is scalability and the ability to do things great virtually and digitally, but we can also host the amazing experiences that will make an impact. So that dual strategy is a winning strategy going forward for us. Excellent answers from both of you. Really have to say that. And my really final question here, just a detailed question on North America. In my book at least, we saw a bit of a setback in Q3 versus Q2 with revenues being down quarter over quarter and the EBITA being down 76% year over year. Is that driven by a slower uptake of the virtual transition or client or sector specific development? I agree with your second point. Profit went down. We're not happy with that. We had some projects that required a lot of subcontractors. On the first point, no, because revenues are basically if you take away the currency impact, revenues are basically flat from Q2 to Q3. And normally, Q2 is much, much bigger in North America. So revenue wise, we're seeing the right sign. And then we have some exceptional costs in Q3 in North America that should not stay with us as we move forward. Okay, fair enough. That's all from me. Thank you. Are there any further questions from the web or from the phone line? There is a question from the web. Can you hear? Yes. So we have a question from Denmark. It says that you're right that the revenue of equivalent competitors for which official data is available has decreased approximately 40%. Could you name these equivalent competitors? Well, 2 examples, Kure International that is owned by Bevere. And another example is Mind Gym, which is located in England and is on the London Stock Exchange. Thank you. And we have a question here from London. How much do you aim to increase software spend specifically? So I think that detail is something we wouldn't share at this time. What I can say is that we are investing in digital. We have invested more than ever in 2020, and we will continue to invest in 2021. We will make the investments that are necessary to have an amazing offering to our clients that is highly, highly competitive, just as Filios described. And a follow-up question on that. Is it necessary to compete with Better Life and others in addition to investing in people? I don't fully understand the question there. Yes. Better Life, I'm not sure. That's better up, but Better up maybe they refer to, yes. I mean, we I would expect more tech based competitors to come our way. That's what's in the market today. And we welcome that. We meet that by investing in technology ourselves, but then leveraging all the other strengths that we have, that Filios described so well. We have a fantastic group of 850 creative people with a huge experience in design and delivery. And that soft asset is something that the new tech competitors do not have. So for sure, more tech companies will arrive into this industry. We think that's interesting. We think that they will their innovation and their marketing investments will be good for the industry as a whole. So there seems to be no further questions from the mail or from the telephone line. So Henrik, any closing remarks? Well, I want to thank all the shareholders for the confidence you are showing us. We see that the vast, vast majority of shareholders, you keep your shares even if the share price has gone down this year, even if you know that our industry and our company has been facing tough challenges. We thank you for that confidence. And I want you to know that we are working very, very hard to provide continued long term great investment for you. And I'm happy then with this Q3 report to describe some of the progresses we are making to get there. Thank you. Thank you.