BTS Group AB (publ)

Hello and welcome to the BTS Group ABQ1 Report 2020. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Just a reminder, this conference call is being recorded. Today, I'm pleased to present Henrik Ekerlund. Please go ahead with your meeting.

Hello and good morning. This is Michael Walden, Head of Investor Relations at the BTS Group. Welcome, everyone. I'll hand over to Henrik. And he will go through the presentation, and then you will have an opportunity to ask questions afterwards. So, please go ahead, Henrik.

Thank you, Michael. Welcome, everyone, calling in this morning when we present the results of the first quarter of 2020. Up until this quarter, we had had 14 record quarters. 14 record quarters with growing revenues and growing profits. Now, the Q1 of 2020 also became a record quarter, record quarter in terms of dramatic development. We, at BTS, we entered the year in a very strong position, as you could see from the outlook that we gave in our Q4 report in mid-February. We had a record strong order book. During the last week of February, the wind totally changed. Due to the COVID-19, many clients started to postpone or cancel physical deliveries, physical deliveries that turned impossible to have due to social distancing policies and rules. So that was a major change for us. In light of this challenge, we've taken the route of looking at the opportunity. Obviously, some companies would not do their training and change initiatives at all, but many wanted, but they just couldn't use physical delivery. So there was suddenly an opportunity in the marketplace for more virtually facilitated delivery and digital deliveries. The first format is live classroom, but over Zoom or another media. And the digital is a pure self-paced solution that people use without interaction with the facilitator. So suddenly there was a big opportunity for this in the marketplace. And given our investments during many years in this field, and also our acquisitions last year of Swiss VBS, and of the Rapid Learning Institute, we were strongly positioned. So our response to this market challenge was to move a lot of resources, sales, development, and delivery resources over to the virtual and digital side. And we are happy to note that in the time since March 1st, during two and a half months, We have won over 350 million krona for more than 150 customers for virtual and digital. So a huge growth in that revenue category. And this is from delivery from the second quarter and onwards. And in parallel with that, during Q1 and moving forward, we've also taken action to strengthen our cash position combined with, you know, selected savings. And with this strategy and how it has panned out in the two and a half months since March 1st, we feel that we have responded well and seen many positive developments. However, for Q1, if you look at slide number three, the Q1 2020 revenue results, As you can see, we have minor signs, which is very unusual for DCS, who normally presents record quarter after record quarter. Revenue, currency adjusted, declined 4%, and EBITDA declined 59%. So we were in a position where revenue during March declined very quickly due to cancellations and postponements of physical delivery, whereas obviously our cost base It was hard to impact that already during the same month. So this combination has led to the 59% reduction in EBITDA. And if you look at the next slide, the Q1 revenue margin per business unit, you can see that the weakest business we have is other markets. where we had a decline of revenue of 27% and a big negative EBITDA margin. And as we indicated in the Q4 report, we had impact of the COVID-19 in other markets already during January and February in Asia. And obviously, this was – you know, accelerated during March, continuously in Asia, but also in markets like Italy and Spain. BTS North America has also been impacted. There is a, they have a flat revenue development, currency adjusted, so no growth, no negative growth. But obviously, without the cancellations, we would have seen a significant growth in that area. Now, Europe, as you can see, has both a revenue growth and a margin improvement during Q1. And Europe had a very strong position going into the quarter and had also a more beneficial revenue type with less physical deliveries in the quarter. It was, therefore, not as much. If we look at the next slide, profit before tax by quarter, as you can see, over many quarters, a positive development quarter after quarter, but this was in Q1 of 2020, this was changed, and we have our first negative profit development in many, many quarters. And on the next slide, with a rolling 12 months, slide number six, you can see the same impact. If you look at slide number seven, the financial position, which, of course, is very important in times like this to have a very strong cash position. It is important, obviously, for defensive reasons, but equally to have a strong cash position to take advantage of opportunities that come up during a recession. And we've had a strong cash flow during Q1. And as you can see, we also have much more cash on the balance sheet, $429 million compared to $259 compared to last year. And we've achieved a stronger cash position by a number of measures on the cash side particularly, but also on some selective cost savings. Now, let me talk a bit more on slide eight about the stronger digital and virtual capabilities. BTS was early here. We started to invest already in 2010, and we've put a lot of money into this and built an organization of over 100 specialists focused on digital and virtual. These are investments we've taken over the P&L. over the years and that we continue to take this year, actually even increasing them during this year. And this means we have a number of solutions that we've sold to the market and that are very well positioned currently when the market is not demanding physical delivery, but rather digital and virtual. Then in 2019, we made two acquisitions. which we are very, very happy about, a great timing, SwissVBS, which has built custom-made solutions in the digital space, and Rapid Learning Institute, which has a very rich library of ready-made digital solutions in leadership and sales training. So these are two great assets to have in today's market. All customers are demanding digital and virtual capabilities. We also immediately from early March, we upskilled our whole organization of 800 plus employees to be stronger in virtual and digital solutions, to have the capability to sell these to clients, to design them because a virtual solution is designed in a different way compared to a classroom solution. You cannot have people's attention as long. It is more challenging to have people virtually buy their laptops than having them in the same classroom. So, design needs to be different to be effective, and also the delivery. So, we spent a lot of time early on during the first weeks of March in upscaling our whole organization. And all of these assets we have, the products, the solutions, and this very, very early upskilling we invested in, all of that has driven the huge success in the market. So we've seen 350 million won in these two and a half months only in digital and virtual solutions to be delivered from Q2 and onwards. So although this – Q1 has presented some big challenges for us. It has given us the opportunity to grow in a different space where we are more competitive than our competitors in the marketplace and to build something that we think long-term will be very valuable for us. On the next slide, well-positioned and strong track record, I just want to highlight the investment case, why we have had 14 record quarters, why we have had 19 years of growth since we came to the stock market, why we have grown profits for 19 years, 2001 to 2019. Why do we have this very strong track record in terms of growing revenue and growing profit and growing our dividends over 19 years? So these three main reasons remain. VTS has a very strong position, and we believe this position has been strengthened by the switch to digital and virtual. Many of our competitors are weaker in that space. It is, over the time, a growing market, and it's fragmented. So this means we can grow with the market, and we can take market share. Secondly, many of our shareholders are very attracted by the fact that year after year after year, we grow double-digit and we have very stable margins. And our long-term financial goals remain. And I will come back to our plan and how we see that we can go stronger out of this recession and explain that a bit more in detail. Now, speaking about the dividend policy, it is unchanged. We decided, or the board has withdrawn its proposal for the AGM, which will take place later today, to give four krona 20 euro per share. And instead, we have expressed, the board has expressed its desire review the possibility of having an extraordinary January meeting during the second half of the year to again look at the dividend decision. And the policy remains the same. Now, speaking a bit about our strategy for 2020 and how we are coming out stronger of the recession. First of all, our plan, which has four. our main plans, security for our people, to protect and refocus revenue, to build a war chest of cash, and to use all our resources for progress and upskilling. We see several competitors making big cuts into their organization, firing a lot of people. That's how they meet the recession. BTS has taken a different strategy. Obviously, we are very frugal with our money. We are, as we're moving into Q2, Q3, Q4, we are absolutely looking and executing cost savings. For Q1, that was not possible due to the quick, very sudden impact of the recession. But we are, of course, looking at cost savings in all kinds of areas very closely and driving that way. However, we are not making the big cuts into our organization. You know, just make an analogy. If your hotel is empty and your response is to tear down half of the hotel in order to save money, you're destroying a lot of value, and it's going to cost you a lot to rebuild that hotel. So our strategy is, And we're convinced we can deliver on that if instead by combining to find new revenue and grow that very quickly, and also by doing selective cost savings, we can keep all the value that is inherent in our organization, its capabilities, its solutions, and its talent, and come through 2020. in a safe and secure way and move out of the recession much stronger than competitors who cut deep into their organization. And this way, we want to come out of the recession with the ability to have a bigger business and a higher profit than we had when we entered the recession. So let me tell you, how we plan to come out stronger. First of all, we will have a business in digital and virtual, which is much bigger than what we come in with. And as we come back to normal times, we know that there is a big pent-up demand for the physical delivery. We have many clients who have postponed their physical deliveries and will make them once it legally expires. and safety-wise possible. Second of all, we are, during the recession, not cutting back on marketing. We are investing more in marketing and sales. And we intend to and see the good signs of exiting the recession with a bigger customer base and better relationships with our current customers. So we're making sure to keep, stay very close to the customers we have, even the ones who are not buying currently. And our marketing is adding new customers. Thirdly, the recession is a great opportunity to find new talent. So we also plan to exit the recession with a stronger talent base. By doing these three things, we have a broader product base, a broader customer base, and a stronger talent base. We are convinced that we can build a bigger and more profitable business once we come back to normal. Now, finally, looking at the slide number 12, outlook for 2020, we have decided to not give a financial outlook. It is too uncertain. in terms of what will happen, and particularly going into the second half of the year. Although we see, we have seen very positive development in our virtually and digitally delivered services, we don't see it as we have enough data to give an accurate outlook of what the year will give. during the year. And as I said, we are focused on delivering a safe 2020 and to come out stronger so that we can deliver more revenue and more profits to our shareholders after the recession. One thing I want as a final point I want to make, one of the strategies that have so far shown successful for us is that during the recession, we focus on selected industries and selected market niches. This is a pattern we see in every recession that occurs. There are fewer industries who have, you know, budget for the services we provide, and by focusing on these particular industries and market niches, we can generate good revenue for the company. And with that, I would like to conclude my presentation, and I'm happy to take any questions. Thank you for listening.

Thank you. Ladies and gentlemen, if you would like to ask a question to our speakers, please press 01 on the telephone keypad. If you would like to withdraw your questions, you might do so by pressing 02 to cancel. Once again, it is 01 on your telephone keypad if you would like to register for any questions, and there will be brief pause whilst any questions are registered. And our third question comes from the line of Daniel Torsson from ABG. Please go ahead, Daniel. Your line is open.

Yes. Thank you very much, Daniel, here from ABG. Thank you, Henrik. Good presentation. I start with two questions. Have you seen any troughs in any regions like Asia? Have you seen any improvements in the last couple of weeks? And then secondly, on the 350 million, 6 million digital and virtual orders, how does that relate to lost business during 1st of March up until today? Thanks.

Well, thank you so much, Daniel. Well, what I can say in general about how customers react to the pandemic is, At first, early on, when cases are growing in a region, many clients tend to be somewhat naive and think that they can run their physical sessions or just postpone them in a month or two. In the second phase, we see that clients panic and they basically want to postpone and cancel everything. And then it's our job to educate them about the fact that they can actually do important trainings virtually and digitally and that many of their people are at home with actually quite a lot of time available and that we can and with quite some time then we succeed in convincing quite a number of these clients to instead do digital and virtual and but still you know it's it's It's a difficult time for many of them. We see as regions move out of the acute face of the pandemic, when the number of cases have gone down and they move out of lockdown and so on and restrictions ease, we see that clients start to take action and come back to us, more requests, ask for more business. And, you know, companies cannot stand still, and they all have important things that they need to get done. They have new product launches, or they have new strategies, they have new initiatives. So, for sure, as companies move out of lockdown restrictions, come back to the offices, and so on, we see clearly more activity. Sure. On your second question, Daniel, you know, since we have not, you know, given any financial guidelines for the rest of the year, I do not want to comment on that in a mathematical way, then I would break. But what I can say is that the business we're winning for digital and virtual, I mean, it is significant. It is substantial. And we hope to win a lot more as we move into the second half. And possibly we could during the second half, be supported by more countries going back a bit to normal. As we see now in Europe and the U.S., you know, restrictions on lockdown are easing gradually, and we believe that this will mean that companies, our clients, have the chance to take more actions and act more normally.

Okay. I see. Fair enough. If I just rephrase my first question a little bit about the trust in some regions, if we think of Asia as a specific region, even if you don't report on that now, but the growth rate or the declining rate now in Asia, has that been higher or lower than what you saw in February, for example, year over year?

Well, I will, again, do not disclose any data that I do not have in my report. I can just give you the general conclusion that as we see regions moving out of lockdown, opening up their businesses, we see a more positive development as they come back into business than we've seen when they've been in the more heavy crisis. And, you know, that's, something that I think everyone can guess, that when offices are closed and companies are focused on safety, they spend less time on the more future-oriented business issues than when the company is up and running. So clearly, as countries open up gradually and business returns more to normal, we expect every region to behave in a similar way.

Yeah. Okay. Fair enough, Henrik. I understand. And then a question on digital versus physical delivery in terms of your pricing power versus customers and then perhaps profitability on that type of delivery. How does it differ between a digital and a physical delivery for you?

You know, we've actually taken a We actually taken an interesting marketing strategy here. We told our clients that we will deliver at the same rate virtually as physically to make decisions easy for them. There are some exceptions where there is major, major redesign needed, but in the vast majority of the cases, that is the approach we have taken. Obviously, for the customers, there are cost savings because they don't need to travel. They don't need to lodge people. They don't need any facilities and so on. So there is a cost saving for the client, whereas we get, you know, the same pricing. And in terms of the profitability, there's always – that varies quite a bit. In some cases, there's quite, there's some rework we need to do. In others, we can actually run it more efficiently. So it has varied. But pricing, I stayed the same to make sure to win as much business as possible. And from the profitability perspective, you know, it has varied. And the longer we come into this, and the more we go down the experience curve, the more profitable virtual becomes. Digital, of course, is more profitable because that is not dependent on work from the VTSs. So there we have a better margin.

Okay. Very good answer. And final one on the cash flow here. You got a plus 72.5 million SEK from financing cash flow in the quarter. It looks like interest-bearing debt. Is that correct? Is it the normal bank loan that you took during the quarter? Correct. Correct.

We have extended our credit facilities to have more cash at hand. you know, for both short and longer-term reasons mentioned.

Okay, thanks. I'll jump back and let someone else ask questions. Okay, thank you, Daniel. Thanks for the great question.

Thank you. Our next question comes from the line of Richard Engberg from Eric Pencer Bank. Please go ahead. Your line is open.

Morning, guys. I have one question. Morning. I have one question. If you look, since the trading update you gave in late April, you won approximately $100 million in delivering contracts. Would you say that this pace will continue for the rest of the quarter, or will you see an effect of, let's say, holidays and seasonal effects during the later part of the quarter?

I mean, that's a good observation, yeah. If you do the math, you can see that the pace per week actually has gone up a bit since – since the last couple of weeks, the pace has been a bit higher than the previous time from March 1st. I mean, that's obviously very hard to say how we will evolve. It's always hard to forecast how sales develop. I would hope, I mean, there's a clear the majority of the markets where we operate, economies are gradually opening up. Offices are gradually opening up, which means that companies come back more to normal. So that's an opportunity for us to actually win more business per week. Also, you know, we put a lot of effort into marketing more than before March 1st, and hopefully that will also pay off because it takes time, particularly to win new customers. So our goal certainly is to increase sales as we move forward and increase and let's see what we can accomplish. Obviously, during the typical summer season, it could be a little bit slower, but again, you know, that's not such a long period.

Okay, fair enough.

Thank you. Once again, if anyone does have any questions, please press 01 on your telephone keypad to register. And if we have no more questions, I'll hand back to our speakers for any closing comments.

So thank you, everyone, for calling in and listening. And thank you for your very relevant questions. As I've described, we have a very clear strategy. This recession combined with pandemic is obviously devastating. a bigger challenge because of the difficulties for the physical delivery. We have set a strategy that we are convinced is the right one, and that will help us through a safe and good 2020, and more importantly, take us to a situation where we can deliver more revenues and more profit than before we went into the recession. And, you know, with the simple mathematics of more customers and more products and better talent, that in our space translates to higher revenues and higher profit. And we are looking forward to the rest of the year. It is clear that The whole world economy has been through a couple of very difficult months, and we now see the gradual opening up of businesses and of economies, and we hope that this gradually will move us into a more of a normal situation. So with that, thank you, everyone, for calling in, and goodbye.

This now concludes our conference. Thank you all for attending, and you may now disconnect your lines.