BTS Group AB

STO:BTS B

Q4-2024 Earnings Call

[Jessica Parisi, executive]

Good morning, everybody. Hello, dear BTS investors. Nice to be with you all. I am calling in from late in the evening in San Francisco, and hope you're all having a good start to your morning. We're going to talk about BTS' Q4 2024 results. But given that Q4 is the end of the year, it feels more natural as well to just open up with a couple of big picture comments on 2024 overall. So from our perspective, 2024 was defined by 6% EBITA growth despite it being a challenging tougher market. So growth despite a tough market, not at the clip we like, but 6% nonetheless. It was also defined by a rebound in BTS Europe and very good momentum on our AI tools from the Wonderway acquisition and bringing that around the world.

If we transition now to just specifically the fourth quarter, and here are some of the details around the overall 2024 results. But if we specifically transition to the fourth quarter, let's talk about really the star of the show, which is BTS Europe. Overall for the company, group net sales grew 3%. Our EBITA was down 2% and EBITA margin was 17% compared to 18.1% the year before. And I'll spend more time on most of the world and North America in just a minute. But first, the star performer of the fourth quarter. So in 2024, BTS Europe had a tough first half. We saw a rebound beginning in the third quarter. It continued into the fourth quarter with really impressive results. So what was behind the continuing of the rebound?

The projects that were postponed in the first half of the year continued to progress nicely. Overall pipeline was up. Profitability improved significantly due to cost efficiency measures that were taken about 4 quarters before that. New projects were won. The pipeline grew in all of the different markets. As a result, net sales increased 22% in the fourth quarter. The profit EBITA increased SEK 35 million from SEK 21.9 million, but it was a tough year the year before. And for 2024, total net sales is SEK 470 million with an EBITA margin improving 1%.

So if we go to BTS North America in the fourth quarter, it only grew 3% and let me share a little bit of the reasons behind the slowdown in the growth there compared to the 3 quarters previously. We had a couple of projects that were rescheduled into 2025 in the fourth quarter. Some of our larger clients continue to do reorganizations, which often stalls some of our work. Of course, at the beginning of the fourth quarter through November, there was quite a lot of uncertainty. Frankly, there's still a lot of uncertainty in terms of what people are expecting in terms of the implications. But anyways, that's -- we felt the uncertainty in the first half of the fourth quarter. And if you look at the industry perspective, the pharma and biotech industry continue to show strength for us. That's been one that's been growing over the last 3 years as did financial services. And the slower growth in the fourth quarter of 3% from our perspective appears to be temporary.

If we go to BTS Other markets, it was negative 1% growth for the year. And if I kind of break down other markets into their pieces, the acquisition we made SEAC, which is a really strong team, bolstering the strength of our Southeast Asia market, they're in Thailand. They continue to show strong development in the fourth quarter, and they have a very robust, healthy sales pipeline for Southeast Asia moving forward. Very similar story to the third quarter with Italy and Spain essentially dragging down the rest of most of the world. So they continued to struggle in the fourth quarter as clients continue to delay projects. Also, fewer global deals were generated out of North America and Europe and some of the large global accounts there, which typically feed BTS Other markets with some services associated with those. And those were down in the fourth quarter compared to the fourth quarter a year before.

And then demand for the government entities in the Middle East leveled off in the fourth quarter after delivering quite a lot of growth in the first 3 quarters earlier in the year. So that's pretty much the story on BTS Other markets. If you look at the summary, of the quarter, you can see the breakdown here. North America, 3%; margins dropping from 18% to 16.8%. The core reason behind this was we had faster growth in the demand for our coaching services. Coaching services are done with external contractors as opposed to full-time employees, and we had lower demand than we were expecting for the work that feeds our full-time employee base. So the mix, the portfolio mix in the fourth quarter is essentially what's behind the drop in margin, and we can take that intelligence as we move into 2025 and do a more accurate job of forecasting the right type of resources for the work.

BTS Europe, as I mentioned, it was return to growth, very high utilization visibility of their full-time employees and the overall efficiency measures from 4 quarters earlier that played into their big jump in EBITA margin. And BTS Other markets, it was essentially the lower shrinking revenue performance of BTS, Spain and Italy because they're bigger in total -- in percentage of the market, that's bringing down the margins here, while Southeast Asia continues to be strong demand and the Middle East overall as well.

So in summary, 3% growth in the fourth quarter, 17% margin compared to 18.1% the year before. And APG, you can see is struggling a bit there due to several significant license renewals that were postponed to 2025. Another thing that marks the fourth quarter and 2024 overall is our progress in AI. As you remember, we acquired the Wonderway company last summer. They have a platform named Verity, which delivers AI conversational bots to companies. It's now in all of our global markets, all 3 geographical areas. It's starting to be used at scale. We've had 3 clients who have used it for thousands of people at a time. And it's getting integrated into our core value propositions, proposals. Uptick is taking along very, very nicely.

I would say, internally, last year was the year of a lot of grassroots experimentation across all of our practices, the consultant offices and the functional areas, and we have had a lot of learning. And so starting in the second quarter, it's all hands-on deck licenses for all of the consultants, and we have an intense initiative designed that all projects are using it all at the same time. So we expect to see a lot more productivity gains from that this year compared to last year. And we're already seeing a reduction in contractor spend in our budgets for 2025 as a result of what we've learned in using AI in 2024.

If we look a little bit now into 2025, I would simply say that 2025 is the year that we are very focused on getting back to the place where we deserve what we're used to running, and that's double-digit growth, right, and improved margins. And on this slide is essentially our strategy on the page, which summarizes the major initiatives that have been launched that we've been working on and that we're focusing on for 2025 and beyond and specifically on organic growth and then operational efficiencies at the bottom. So I'll just give you a couple of bullet points on each one of these, but I'll come back to this on a quarterly basis and share the metrics with you. So under organic growth, and this is one of the reasons we feel strongly about pace picking up in terms of organic growth for us in 2025, and that is we have more consultants who are generating revenue than we did a year ago today.

It's very simple. If more consultants have their own client relationships and they're bringing new opportunities to the firm, we will grow. And so that's the first piece of the equation. We have what we're calling apprenticeship 4.0 is an initiative underway that was kicked off here in early January. We're doing a much better job of driving weekly leading indicator discipline from last year carrying forward into 2025. And we are advancing our ability to bring real-time data and insights to our clients, which improves the consulting muscle of our team. The second thing we're working on is continuing to strengthen what we call our client relationship culture as opposed to a culture that believes if we just do extraordinary quality and deliver value for clients, the next projects will flow. We'll be measuring the number of active client buyers per team on a regular kind of in-process measure. And we're -- things that we're doing to drive that include global teaming. So a lot more people from around the world supporting on different opportunities that we can bring the full breadth of our portfolio to the market.

We are focusing on a lot more in-person client roundtable, dinner type of events and key trending topics all around the world. And the increase in revenue on consulting services, specifically on organizational change has been going up. And when we win that work, we are more with our clients in the day-to-day. The second -- the final thing in the equation here for organic growth, obviously, is keeping the full breadth of our portfolio as competitive as possible and bringing the breadth into the account. So here, we're measuring -- we will continue to measure by practice area, the win-loss ratio and then the growth rate of each of the centers of expertise in the company. And we have 3 major priorities when it comes to our overall portfolio. The first one is AI. And from that, there's 2 things that we're doing. Number one is we want the entire portfolio to be using AI in a way that clients are experiencing it with us. The first big push here is obviously the Verity platform designed to deliver the conversational bots as a SaaS offering.

The second thing is helping our clients, of course, and their own change management and adoption of AI implementation inside their organizations. Number two is we're going to continue to innovate and more specifically focus on the innovation across our simulations and our simulation platform. So as we can keep building them as fast as possible together with our clients, and we even have clients starting to ask to build themselves. And so pushing our platforms to be able to do both of those will be a priority this year. And in addition, just thinking even more broadly about innovative partnerships.

We kicked off the Total Access partnership a year ago, which was designed to work with our clients at scale with an economic and partnering model that works for them. And we call that the Total Access partnership. It was about 4% of our revenues last year, and we're continuing to go to market with that, which is a subscription-based approach along with consulting. And then we are also, I would say, having an even more abundant open mind around partnerships for technology for different consulting capabilities and for content moving forward.

So that's on the organic growth side. In terms of operational fuel and getting next level efficiencies and productivity gains across the 24 countries, there's 3 things we're going to get done this year. One is automation for scale. That's both across our major service lines, especially more on-demand services like coaching and assessments and so forth, but it's also in our finance department with a big initiative underway there as well. And then the AI, as I already mentioned, taking that across to all of our consultant teams in a very focused Q2 push. And then AI in terms of knowledge management will be a second half focus for the firm. So in addition to these drivers of organic growth, getting us closer and closer to the double-digit organic growth, that's our target. We will also be continuing to focus on acquisitions and increasing the rate with which we're looking to acquire basically to serve both the portfolio, the priorities on the first slide and strengthen the geographical footprint of where we operate.

So in general, for 2025, I mean, we feel like we have a more positive outlook coming out of the more conservative market over the last couple of years. From our perspective, the underlying demand for change, for strategy implementation, for leadership, leadership development, sales enablement, places that we play continues to remain solid. We're excited by the investments that we made in 2024, both with the AI capabilities and the acquisition in Thailand. Both will serve us well in 2025. We see the potential for margin improvement as we can take the lessons learned over the last 18 months with AI and really institutionalize them this year. And I would say the overall market outlook is more positive, and we expect a gradual market improvement in 2025 compared to the last 2 years.

So as you know, for those of you who have been with us for a long time, we're a story of long-term profitable growth year after year. That remains true for 2024. It's our focus to do the same and even better in 2025. We've issued the dividend as well today at SEK 6.1, so up 7%. And as you know, the goal is to distribute 40% to 65% of the profit after tax in the long run. And with that, our outlook for the year is expected to be better than 2024.

I'll turn it over to you now for questions.

[Operator]

[Operator Instructions]

The next question comes from Karl Norén from SEB.

[Karl Norén, analyst]

A couple of questions from my side here. If we start on with Other markets, I mean, it seems to be a bit slower demand, as I mentioned, in Spain and Italy, and I calculate the organic decline to be somewhat close to 10% for the segment, so to say. I'm just wondering really what you can say. You mentioned in the CEO letter that you see some projects coming back at the latter parts of Q4. Do you expect that segment to show growth again here in Q1? Or how should we think about that will be my first question.

[Jessica Parisi, executive]

Yes. I would say that towards the middle of the fourth quarter and kind of towards the end, the -- I think the slowdown started to reverse in terms of the pipelines were growing again in -- both in Netmind, which is the acquisition in Spain, core Spain and in core Italy. Yes, more opportunities. So pipelines were growing. The clip of the opportunities were kind of turning back around. I mean it takes time still to win new work and all of that. But the general feeling was that it was moving in the right direction or turning itself around, if you will.

[Karl Norén, analyst]

Okay. That's good. Sounds promising. And on Europe then, I mean, a very strong quarter here, and it's a bit more volatile maybe than the U.S. where it seems like it's more project based, let's say, with some larger deals happened here in the quarter. I mean, how sustainable do you think that the better development is in the European area? I mean, of course, we don't expect 20% growth going forward. But I mean, do you still expect to see quite solid growth in the coming quarters here in Europe? Or what's the feeling?

[Jessica Parisi, executive]

Yes, I do. I do. The pipeline continues to grow. It was quite strong in the fourth quarter. All the markets pipelines were growing. I think Germany is still a little bit, as you said, volatile. Yes, the team is busy. The win rates are strong. Yes, I expect it to continue.

[Karl Norén, analyst]

Okay. I just find it a bit fun because Europe is maybe the region which people see the worst development right now. So it's interesting that you see quite strong development there right now. That's interesting.

[Jessica Parisi, executive]

Yes. Thanks. I can also say America right now, it's seeming very attractive in Europe.

[Karl Norén, analyst]

Yes. Last question maybe then on North America. I mean, in Q3, I think you mentioned there was some -- you saw some postponements and uncertainties related to the election, which now is done, of course. I mean do you think that, that impacted Q4 in any meaningful way or...

[Jessica Parisi, executive]

Yes. I mean when I look back at Q4, there was 2 particular deals or 2 clients who do usually big sales kind of kickoffs in January, which leads to a lot of revenue in the fourth quarter, and they just both canceled their events. It wasn't that they were canceling BTS, they just canceled the big spend in January compared to -- I think they had done it for 3 or 4 years in a row basically. And so that essentially was the big difference in delta between our forecast and actual. Now we should be able to make up for it. It's a big market. We have a lot of sellers, but that was a big thing.

[Karl Norén, analyst]

Yes. And if you compare, you still have one on the U.S. as well. I mean, compared now to 1 year ago, would you say more or less positive about the development here going forward?

[Jessica Parisi, executive]

More. Yes. It's less delays. It's deal flow moves more quickly, right? There's more energy, I would say. Look, you still have some companies doing pretty big. One of our energy clients announced like a 15% layoff 3 weeks ago. So you still have things like that, but it's -- from a year ago, the market feels stronger.

[Karl Norén, analyst]

Yes. That's good. And maybe if I can squeeze in one more on AI and I mean the cost or the possibilities to save cost. I mean, I saw that you reduced your number of personnel a little bit from the end of third quarter. I'm just wondering a little bit how much more efficient do you think AI can make BTS or if you could put that in numbers, it would be very interesting. It's still very early days, but...

[Jessica Parisi, executive]

I know. I mean -- so I think the last year, we did a nice job, as I mentioned, of more grassroots. Like anybody who wanted to have AI, they had it and they could run experiments and we were capturing what they were learning. And so you have -- we have a lot of data on the various projects across the system and what the efficiency gains were within those pockets, right? And I would say on average, and I would report this out to the Board every quarter, they would run from 1% to 17% productivity gain. That's kind of a range, right? And then we would extrapolate well, how many people would actually do that task. And then what could we expect across the entire system. And this is -- I'm going to give you a very boring number, okay? But even a 1% gain is a decent number of consultants, right?

And so we have a fairly conservative view, let's say, 1%, 1.5% right now in our planning, right, for this year. And we have all 24 heads of offices on deck to -- we have 2 out of the 24 who measured it for 6 months now, and they have much higher productivity gains than 1%, okay? So I mean, I will -- I'd be happy to keep you every quarter, I can tell you what we're seeing, right? And then it's a matter of what percentage are actually using it. So I think there's quite a bit of opportunity for more lift, right? And we should kind of be gaining it quarter-by-quarter. And it's both with the full-time consultants. It's then with the functions. And then it's also with the contractors specifically in our assessment practice. They are the ones furthest out ahead and actually the contractor budget associated with that practice, we were able to reduce by SEK 300,000 this year now. It's not a ton of money, but it is SEK 300,000. And so it was 25% savings of that particular service line.

[Karl Norén, analyst]

Sounds very promising -- [indiscernible] to follow this.

[Jessica Parisi, executive]

Yes, I think that's the point. It's like let's -- we're both -- we still need to push it, and we need to get full adoption and really, really change how we work. And it's still somewhat early days, but I agree with you that it feels promising.

[Operator]

The next question comes from Rikard Engberg from Carnegie Investment Bank.

[Rikard Engberg, analyst]

So I have one question regarding Verity. It's annual report that you have a couple of -- you have 3 clients that use them for 7,000, 5,000, 4,000 participants. What is basically like a revenue profile for a participant for Verity? And also, should this revenue be seen as a subscription revenue?

[Jessica Parisi, executive]

Yes. It's -- yes, it's a license per user, subscription per user revenue model. And there's 2 different ways of using the product. One is what we call a conversational chatbot practice, so we can very quickly customize if you want to practice a client conversation or customer success conversation or engineering or internal conversation. And then there's actually the more heavy-duty SaaS offering that it was actually designed for, which is a plug-in to Zoom or Teams and listening to the client conversations directly and providing the assessment data right afterwards. So we go to have a light and heavy. But in both cases, it's a per user license subscription model.

[Rikard Engberg, analyst]

And given that it seems that it's been quite well received by the numbers of users, will this growth continue during 2025? And will it be possible to see a contribution from subscription sales going forward?

[Jessica Parisi, executive]

Yes, that's the plan. I mean, given that our first priority under the competitiveness of the portfolio is to embed AI that our clients are experiencing it in our simulations, in our assessments, in our consulting services. And this right now is kind of the leader of that. I expect the usage of an adoption of it to grow quite quickly, actually.

[Rikard Engberg, analyst]

Okay. Great. And one more question. You mentioned in your presentation that you are looking for acquisitions. What is your main focus area? Is it new tech like Verity? Or is it to gain a more geographic foothold where we are not as strong yet?

[Jessica Parisi, executive]

Yes, it's a great question. I would say it's both, and I will add a couple of comments to this. It makes -- given the 24 countries that we're in, there are some that are hyper growth or even huge markets that we're still very small, right? So that one is an absolute no-brainer. It just a matter of finding the right firms all around the world. On the other hand, to your point around what is the next Wonderway in acquiring some of the latest tech. The only caveat I would say there is, yes, I think we're very interested and open in that. And I'm also just as open in partnering. And it may make a lot of sense to also partner before you buy, right, or keep -- I think our portfolio is getting quite broad. And so we need to be very thoughtful about which of our own platforms and tech are we innovating internally, who are we partnering with and what are we acquiring. So -- but you're right. I mean those are the 2 big buckets that I'm spending a lot of time in right now.

[Rikard Engberg, analyst]

And also, just a brief follow-up on North America. If you could quantify these 2 projects that were canceled during Q4, are they canceled? Or are they, so to say, that will be done in 2025, so to say?

[Jessica Parisi, executive]

So we had some projects that were postponed to 2025. The 2 projects that I mentioned, the sales kickoffs where the companies actually canceled those events, they canceled the events because that's -- those are usually done in January as a kickoff to the year. And they bring in either their top executives or all their sellers into an event, and they just didn't -- they didn't prioritize it this time. They did something much smaller, like a memo or a town hall or something like that.

[Operator]

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

[Michael Wallin, executive]

We have a written question here from Alexander. And it says, can you say something about those 2 canceled events from 2 large clients in the U.S. in Q4? Do you expect those to be back in 2025? And how much did BTS grow in the U.S. in Q4, excluding those 2 events?

[Jessica Parisi, executive]

So I would expect them to be back, but not until the fourth quarter 2025, right? I would say there's greater than 50% chance they would do them again. And I can tell you that the value between both was over SEK 2 million in the fourth quarter. But I am not going to be able to tell you exactly how much it grew outside of the SEK 2 million. You just have over SEK 2 million lower than the fourth quarter revenues.

[Michael Wallin, executive]

Okay. No more written questions so far.

[Jessica Parisi, executive]

Okay. Shall we give it another minute or so, Michael, to see if any more come in? Or what do you think?

[Michael Wallin, executive]

Yes, you can write in also if you have any questions by e-mail. We'll give it a minute.

[Jessica Parisi, executive]

Okay.

[Michael Wallin, executive]

I don't know. That seems to be it.

[Jessica Parisi, executive]

Okay. Great. Well, thank you, everybody. Thanks, Michael. Appreciate everything. And Michael, the next one is tomorrow, right, or this evening for you.

[Michael Wallin, executive]

I think we should end the call.

[Jessica Parisi, executive]

Okay. I have no problem. Thank you. Bye.

[Michael Wallin, executive]

Bye-bye.