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 report. Jessica, the floor is yours.
Thank you, Rikard. Good morning, dear BTS investors. I would say for the Q2 , BTS is-- we're unhappy with our results for the Q2 , and at the same time, as I think you know about us, we never waste a down market. While we're unhappy with our Q2 results, I think we're making really strong progress in our internal initiatives, and Philios and I are going to share a bit about both of those with you now. In terms of the results, the customer cautiousness, the overall conservative feeling that we were experiencing in our North American market in the Q1 , unfortunately, has moved to BTS Europe and a couple of the countries in BTS Other Markets. As a result, revenue remained flat, right? It's remained flat despite a more conservative market.
We have basically 1% growth and -9% decline in EBITDA. If you look at the flat for a minute, given the more conservative market, the European business dropped -2%. It was offset by 4% growth in other markets and a 1% growth in the North American market. As I mentioned, EBIT dropped 9%, EBITDA margin to 15.1%. Given, given that and given what we can see for the H2 , our updated forecast now for the year is that our earnings will be in line with last year. We're going to walk you through the different units. Starting with our biggest unit, North America, basically, we're having stable EBITDA performance and margin, despite the fact that revenue dropped basically to 1%.
The reason for that is, you may remember in the Q1 , 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 Q3 and Q4 , but we were starting to see the benefits of that in the Q2 . The other thing helping the North American market in the Q2 is the revenue contribution from The Boda Group 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 American business as well.
Look, our, our referral initiatives, the focusing on industries that were growing, the diversification outside of tech continues to be the focus. It started, you know, actually a year ago, with a really big emphasis on in the Q4 and ongoing. We saw growth in financial services, energy, biopharma, CPG, and so forth. You know, the big star of the Q2 is the margin improvement of other markets. 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 EBITDA margin improvement. If we look at the results, that margin has two 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. 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, so some drop in the revenues, based on what Jessica mentioned as to the conservatives. At the same time, our margin has been impacted by where those revenues were. A little bit of a currency effect as to where the revenues were, and at the same time, the service mix. What type of services, where, and how those services were managed, that impacted the Europe's margin. We're 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 US, the conservative market, has made it so it had smaller projects that impacted it. Whilst we are working a lot more in terms of increasing activities, we can see that this has been an issue with in, of the market as to the impact there. Despite this situation, our view is that we do wanna always work in such a situations and turn it around. 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, 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 six 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. That's one of the main initiatives there.
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. 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. 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, one of the -- Thanks, Philios. One of the factors that we're keeping an eye on is how competitive we're remaining, right? Sometimes in a soft market, you might start to lose competitive bids or feel tremendous pricing pressure. That is not the case for BTS, which I think is quite an important point. In fact, if you look at all three markets in the Q2 , our average deal sizes are increasing. We're finding more strategic projects that are bigger in scope with higher average prices. 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 two months, the head of our innovation and digital transformation practice has been leading a company-wide initiative on our experimentation in the use of generative AI. I'll share with you a bit about what's being done and what's been done and what we've been learning and what are some of the progresses that we're already seeing. There's two 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?
The other category is on actual client demand and new services for BTS that would be leading to growth. 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 nine weeks, 50% of the company has been trained, right? 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 two examples. One is from our digital team, and the other side is within one of our practice areas.
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 during practice. The team challenged themselves in the month of May and said: "What if we gave ourselves four weeks using generative AI, using prompt-based approach to coding?" They were able to build the same bot, an even better bot, in four weeks. If we, 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. It 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.
When you're observing them, you then have to create reports that are technically accurate. What the assessment team has realized is they can go from four hours in writing a report to one hour, and that's without, you know, obviously putting the firm or themselves at any sort of risk. That's a 75% improvement in one service line or one part of the company. 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 Q2 on supporting our clients in their own exploration and use of generative AI. I'll share with you a couple 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 we are 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. From our perspective, I mean, this list will continue to evolve as the world tinkers and figures out, you know, what's possible, especially on the... well, actually on both sides. From what we are seeing in cases 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? I mean, for us, we're excited.
We've been, you know, I think, moving pretty quickly in the last eight weeks on this, and this is our, our current state. I'll end with this. Philios shared, and we've been talking now for two quarters, on innovative internal thinking that would drive efficiencies and productivities. BTS is not the company that, that cuts to the bone and hurts our chances of coming back with great growth and scale. 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 to 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. Thank you, and back to you.
Thank you. Thank you, Jessica. My first question is: we look at the quarter, we see a flat growth, but we still see a quite strong margin due to initiatives you're taking. 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. Thank you for the question. That goes kind of back to my, 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 wanna 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? It's to accelerate our ability to grow quickly, not to hinder us.
Okay, a capacity will not be a problem.
No
when we see volume returning?
No.
Good. Also, can you please discuss what industries that have been strong and weak during the quarter? We've talked a lot about, about the tech industry in the US during the last couple of last quarters, but are there any other industries?
In the US market, I'll speak of first, and then, Philios, you can add from the broader world perspective. The two that have helped us the most in the Q2 was the energy sector and financial services, and then right behind that was CPG and biopharma. That's-
That's completely in line with our focus of the last year.
I think it's ex- very, very similar. What we are finding is companies, especially on the industrial side, and other sides, are becoming a little bit more conservative as to the outlook. It doesn't mean they don't want to invest. We're finding that, you know, 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, and delaying starting, delaying, delaying making a decision. so it's, so we're 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. We're seeing more of a conservative approach in some of them and an upturn in energy, financial services, and CPG.
Can you 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 'cause 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 one, C-suite minus two, 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, you know, we've been having an internal referral initiative for 9 or 10 months now, right? That will just continue. It's a great way of running the business. If you look across the whole partner base, we've generated about 150 referrals, average of four 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 she's coaching, that we are also getting introductions into fairly big initiatives that we've already won through it. It's not just 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.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Jonny Jin from SEB. Please go ahead.
Hi, good morning, and thank you for taking my question. This is Jonny Jin from SEB on behalf of Karl Norén. 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 the, like, comps ahead, be, be easier, so isn't the, the lowering a bit prudent maybe? Yeah, could you please give some more flavor on that, please?
Sure. I mean, we, we did our final kind of most, you know, P&L planning just yesterday, and so we put all the pieces together, and we think this is a, a prudent decision. The market's cautious, in particular in Europe right now, and you know, the people are on holidays, and the pipelines have slowed a little bit. That's the main factor, right, behind this, and it just feels like the... Given everything we can see right now, it's as accurate as we can be.
Okay, thank you. Next, could you please talk a bit about Europe and your view on the margin there and, like, growth, what you think about growth ahead, please?
Sure.
Thank you.
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. Comparables are, that's one of the reasons behind the big difference. I mean, Philios mentioned it, a couple of things that are stand out that we can actually work on other than getting it, the company back to growth, is their service mix. When the service mix is off, it means they'll have to use external workforce instead of the full-time people, right? Getting that shift as accurate as possible, to control spending will be something that the team, well, they're already working on in the Q3 , 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 kinda 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 and number of days it was taking to close the work that we were experiencing in the Q1 is now hitting the European team. Not everywhere, though, right? It's a, it's a heterogeneous market, so it's just in some customers and some deals, that's, that's what they're experiencing. Yeah.
Okay, I understand. On North America, do you think positive organic growth is possible in the H2 of the year?
Yeah, it's... We'll see. I mean, we generally don't comment on each of the different unit-specific forecasts, right? We stay at the group level. We're still experiencing a conservativism, and I would call it a short- it feels like a short-term conservativism right now. I, I think I mentioned this in the report, but it's probably worth saying. It's, 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 2008 crisis, I can remember way back in the dot-com boom, the planning cycle for the North American clients tends to feel more real and specific in the Q4 .
To me, that is a signal that they want to move, they wanna push the initiatives forward, but there's this short-termism in just waiting a bit, and, we still feel that.
Yeah, if I can comment, I, I think there's a couple of points there when you're running such a business. Some signs that we're getting are extremely positive. We've mentioned, you know, our average deal size is going up. That's hugely positive when you're in such a business. Getting new customers. 45 new customers, I think overall in BTS' first half, we probably got around 110 new customers. In such a market, the ability to bring in new customers, that's huge. Thus, those two combined together create a lot of optimism. 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.
Although we are seeing those great signs, we are also counteracted with a situation where, for the moment, we need to be cautious. 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. I, 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, 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, let me just try and find it, and then I can give you an accurate answer. I have the... Michael, do you have the working capital handy?
What what in particular were you --
Well, yeah, what, what is a particular question on the... I mean, we haven't seen anything particularly.
Unusual
worrying or unusual, but.
We, 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.
Yeah, yeah. Okay. No, it's, it's, it's fine. I was just wondering if you could comment around that, as it takes up a lot of cash flow.
Yeah. I mean, one, one thing that always affects us in these moments is the fact that a lot of our cost or a bigger part is in US dollars. That may seem like a much bigger in SEK because of the exchange rates. Other than that, we are not seeing anything.
Okay, thank you. One final question from, from my side. Could you say something about the how, how Q3 have, 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 at, in the follow-up meetings, but it feels consistent right now.
Okay. That was all for me. Thank you so much.
The next question comes from Daniel Thorsson from ABG Sundal Collier. Please go ahead.
Yes, thank you very much, and good morning, Jessica and Philios. I start off with a question here on North America versus Europe. Basically, you've managed the North American demand switch very well by reallocating resources, as you have explained. Is that even close to as easy to do in the other regions, given different countries, languages, et cetera, and to move people between, between different areas?
Yeah. 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 Q4 . Philios, you want to speak on most of the world?
Yeah. In any, any 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, you know, it, it looks like a year that we will see 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. 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, you know, with North America and Europe. We are sharing a lot of the learnings, and applying it to the different markets.
Yeah, I mean, that we're seeing a big impact.
One of the things that Philios' team is doing a great job of is cross-country sharing of teaming and resources. I mean, people work virtually, right? If we see a, 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.
Yeah.
Yeah. I see. Okay, that's helpful. Secondly, the number of employees are down quite a lot here in Q2 versus Q1, on, on group level. Is that mainly in the US, 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?
Yeah. No, it's, it's across the company. One of our kind of core principles is 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 cycle like this with just a simply a stronger team, right? We do that through a couple areas. One is we're just better at performance management. We move faster, we're more clear, more clear, and for us, we 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, you know, move on into potentially better fits for themselves and all of that.
And that also frees up some space then for acquisitions or a great talent, you know, from a competitor or something that we also want to bring in right before this cycle is over. That's, that's been the main reason.
Yeah. 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-
No, no.
changes here in the company?
We stopped, we stopped hiring across-
Yeah
the company in October. I think it was September, October.
Yeah. Mm-hmm.
Of course, the people we hired in the summer and in the fall then hit the increase in numbers, right?
Yeah.
Going into this year. It's a matter of time before then it just looks a lot better. Then also, people quit.
Mm.
People quit in the H1 as well.
We do some replacements, so, so there is an inflow of talent because we always need to be looking at new talent coming in. There is some inflow. It's simply that, the way it's balanced, there is more outflow than inflow. It's not that we have stopped bringing talent. That's, that's continued. Yeah.
It's way slowed down.
Yeah. Yeah, it is. Yeah.
I see. I see. I also had the final question on the guidance. I think, thinking the other way around of the, of the first question, we, we, we heard of the guidance that it could be prudent guidance. I mean, given that you actually downgraded here post Q2, the quarter should have developed somewhat weaker than you expected, while still the guidance implies earnings growth in the H2 of the year, given that it was down in the H1 of the year. Is there a risk to that assumption, given that the market obviously are in a deteriorating trend right now, you have reduced number of employees, top line could face some headwinds, et cetera, which could cause you to miss that guidance on the downside?
Agree. Agree with your points.
Yeah.
The strongest lever right now in 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. That's, that's some of-
Correct.
I wish it was both, but that's the, that's the view at the moment, and we're giving you the most accurate view we have right now, right? We did, we just did the final roundup just yesterday, so.
Yeah, and, and, and I think when we say prudent, what we mean is, yes, you know, we, we know what we can do internally. We see some optimism in clients in terms of as a market general, but we don't know how quickly that may turn into something for us or not. That's the prudency there, also in the guidance.
I would say that optimism is in pockets, right? I think-
Yeah
the market we're most nervous about at the moment is Europe.
Yeah, true. True.
Okay, excellent. That was all for me.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time. I hand the conference back to the speakers.
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 the Q2, or does it continue to deaccelerate?
I from what we experience with our clients, I'll just speak to that, we are not still experiencing a deceleration, right? The, 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, you know, first 100,000 layoffs and the second 100,000 layoffs and the third round of layoffs in the first quarter, that has stopped, right? So the companies, it 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, obviously, they're still struggling, right, as, as an industry and access to capital and pressure on profit improvements and so forth.
Some of our bigger software clients are now starting to implement again some of their core initiatives, and that's starting up in the Q4 . Just to give you a sense of well, at least what we're experiencing.
One last question from the, from, from the web. We have partially discussed this, but can you also discuss a bit how you have been facing inflation during the H1 of the year compared to your pricing?
In terms of client demand or in terms of our internal costs? Or-
Both, I guess. Mm-hmm.
I mean, I can speak to it from a, a cost perspective first. We haven't-- It's very different than 2021 and 2022 in terms of the, 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 Q1 . So --
Yeah, I, I, I think we have, we have decided that, you know, our people is our most important asset, we wanna pay fairly, we wanna be good to them as to, you know, keeping up and being able for them to, to respond in the market. That has meant that we did raises in 2023 at the beginning, you know, 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.
We have worked against it with, you know, 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. Yeah, we, we are very aware, but we tackle it upfront there.
Yeah. One other thing, in general, what we do is we give the inflationary raises more generously in the bottom of the company, right? Less at the top. It also helps to balance.
Okay, great. It seems that all of the questions both from the webcast, from me, and both telephone co-conference has been answered, so I hand over to you for any closing remarks.
No, thank, thank you for your time. Thank you for the long-term support. You know, it's a tough year, 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. In our case, I'm particularly proud and excited that the deals we're getting are more strategic, more CEO-led, and they're higher average sizes. I think I'll leave us, leave us at that.
Thank you, Jessica. Thank you, Philios, and thank you everyone who has been listening and watching.