BTS Group AB (publ)

Good morning, everyone. My name is Richard Engberg, and I'm an equity research analyst here at Eric Penzer Bank. With me, I have Henrik Ekeland, CEO of BTS, to present a quite unique and challenging quarter for BTS. Henrik, the stage is yours.

Thank you very much, and thank you, everyone, for listening in to this presentation of the second quarter. As you will see, the numbers do not look pretty. It's been many, many years that we delivered such low profit numbers, although they are profit. However, our focus, which I will explain, is on succeeding in the long term. We have during 18 years at the Stock Exchange delivered significant continuous profit improvements. Profit has doubled or is 20-fold during those years. And our focus during this quarter has been on making the moves so that we can continue to grow profit going forward after the crisis. So let me tell you the story. It's been quite a dramatic quarter, very dramatic. With the pandemic, all physical deliveries of training has ended. You can see that in all parts of the education sector. Every university in the U.S., for example, is closed except one single, thousands of universities. No physical deliveries have happened. And this has led to 70% of the revenues disappearing for the whole quarter overnight. Quite a dramatic situation. Now we moved early and said let's refocus, let's convert our clients into virtual and digital solutions instead. This way we can save a lot of revenue and we can make an important move forward towards the digital and virtual world where we're all heading. And we have actually compensated for more than half of the lost revenues by this move. And since March 1st, when we started this plan, we have won over $70 million in new digital and virtual business. And this is really what has made it possible for us to get to a profit during the second quarter. What we also have done is to change the focus of our sales force. If you look at the market, it's quite different. There are some industries, for example, tech and pharma, and also to some extent, financial services, a few others that are still strong and still investing. There are also some areas where companies continue to invest. And we have moved our sales resources towards those more promising sectors. We've also reduced costs. Obviously, one option in such a tough market is to reduce personnel. We have chosen not to do that. We have a very efficient organization with great people, and that's the organization that has delivered 20-fold increase in profit over 18 years. We don't want to demount that. We want to keep that organization. Instead, we have saved on some volume-related costs. We've saved on subcontractors and on some expenses. And in total, we are happy to report that we are actually delivering a profit. despite being in a very, very tough industry. And starting the quarter with 70% less revenue, we have, through digital and virtual, and through selected savings, achieved true profit. And so, even though the numbers don't look pretty, we have made the right moves for the long term. Our focus now is long-term. We want to continue our very strong track record of growing the profit significantly, many years. And once we're out of this crisis, because we will come out of this crisis just the way we have come out of all other crises for many, many, many years. How can we be stronger? That's what we're looking at. The first thing we are working on is to grow the customer base. So we are now, through marketing and sales, taking in many new customers. They are not so big when they come in, these are tougher times, but we are getting a foothold into those new customers. Also, we are working very hard to maintain relationships with existing customers, also the ones that are not buying. So our plan is that once we're out of the crisis, we would have many more customers. This is a good time to take customers because it's the time of change where customers actually are willing to rethink who they work with. When we started this year, we were very focused on physical deliveries. As we now move forward, we have physical plus virtual and digital. We've increased our capabilities there. So we have a bigger overall offering. Finally, a stronger organization and keeping our people is key to that. But we are also recruiting a top talent. Right now is the time to find the top talent. And by combining a bigger customer base, a larger total offering and a stronger organization we are confident that we will get to a situation with a larger revenue base and a larger profit once we move out of the crisis and this is our main focus for sure we are working on creating a profit also this year absolutely but the main focus is to deliver growing profit to our shareholders after the crisis, which are higher than the ones we had in 2019. If we then look at the actual numbers for the first half, we've seen a 20% decline in revenue and a 76% decline in the EBITDA number and bigger declines as we go lower down. If we look at the regions, we can see that we have had the biggest drop in other markets. And that is really because they came first into the crisis in markets such as Italy and in Asia and so on. And also because it's been a little bit slower, quite significantly slower, to convert clients in these markets to the digital and virtual solutions. That has worked better in Europe, and in particular in North America. If we then look at the second quarter, we see that revenue decline is faster, which is quite normal. We had two good months, two very strong months in January and February. Then we had a tough March and also tough April, May and June. However, as we write in the report, we've seen the market improve towards the end of the second quarter. And during the third quarter, we see that the market is improving and we expect that improvement to continue. So what is really what's the background behind that? Well, physical deliveries are not back. Physical deliveries will not come back. until we have a solution so that people can meet again. But what we see is that clients that before said, let's wait, perhaps physical deliveries will come back. They are now seeing that for their important projects, they have to move and they have to go virtual and digital. So that movement is creating an improvement in the market. And since we have a strong position in digital and virtual, that trend is providing an advantage for BTS. And as we can see here in the Q2, what I told you about the regions actually is the same for the Q2, with North America doing better and other markets having the toughest time. We have built up our cash position significantly. As you can see, we have 600 million roughly in cash. One year ago, we had 200 million. So we see this as important. In a time of crisis, you want to have financial flexibility. for security reasons, but also to be able to make the investments, potential acquisitions and moves that come up typically during a crisis such as this. So we have very, very strong financial position and we're super happy about that. Just looking at this long term, and I think that's very important. It's easy in a crisis that suddenly everything looks negative and everything is gloomy, but we've been there before. And we've seen the same thing that the feeling of being gloomy that we have during the crisis will go away because we come back to normal times. That's a pattern we've been into for 200 years. And for sure that pattern will happen also here. We will come out of this crisis. And these three main drivers on this slide that are behind the fact that we have 20-folded our profit since we came to the market are still there. We have a very strong position in a market that is huge and that is growing. We're global, we're virtual, we're digital, we're physical. We have top clients. That's a very, very strong position. And if I look at the moves my competitors are making, which is more focused on cutting personnel and making shorter moves, That tells me that we will be even stronger competitively after this crisis. And so the strong position remains and we'll be stronger when we move into a more normal world. Now looking at the second half, as I mentioned, we have seen the market improve during the end of the Q2. and early Q3, and that is true for all regions. And as I said, what is happening is that clients that were waiting and wondering Will physical come back? How will the crisis turn out? They've had the time to now set their plans. And our clients, the biggest companies of the world, they're not standing still. They are thinking long term. And they all have important strategic projects. They all have important training. And they're not standing still. So now they're moving forward. And they're moving forward with virtual and digital. And we are strong there. That's the background to the improved market position. Again, shareholder position, not a big change since the last time. So thank you for listening and welcome any questions from the moderator or the audience.

So thank you, Henrik. And I will start with this question. Is recovery that you see in the later part of the quarter and the start of Q3 related to any specific geographic market or industry, or is it a general recovery as a whole?

There is geographically, we see it in all regions. In terms of industries, there are some industries that are very strong. and we are focusing on those industries, we do see that the vast majority of companies out there, clients, they have now settled down, and they have a plan to get out of the crisis, and they have projects that they are moving forward with. So in that sense, it is general. But it is still true that some industries, such as tech and pharma and some others, are investing more than harder-hit industries. The toughest hit industries in this crisis, which is travel and leisure and so on, there we have very few clients. I think that sector is still investing very little, but that is not really impacting us.

Okay, and can you please talk a bit about the profitability in virtual and digital delivery compared to physical delivery?

Yes. That has been lower during the second quarter for the simple reason that we've had to retrain our whole organization in doing virtual deliveries. And we have also had to redesign all physical deliveries into virtual, and it's different. A two-day training program, you don't run that two days over Zoom. You run it in a number of sessions. And it's a different design. You cannot use the same. So retraining, redesigning, and also the first time you deliver, it takes longer time. So for sure, during the second quarter, even though our revenues have dropped, our people have been very busy. Now, once we're through this initial development phase, and get down the learning curve, the virtual solutions can also be very profitable. And we shouldn't also foresee that clients save quite a bit of money when they go virtual instead of physical. Their total cost, including all expenses, goes down 30 to 40%. So it's a very interesting saving potential for the client that I think there is a possibility to share as we move forward. So we believe that this will be good news for profitability going forward, although for Q2 it has been less profitable.

Okay, fair enough. And my next question is, looking at the industry as a whole, do you believe that many competitors or potential acquisition objects have been worse hit than you have during Q2?

We, in our industry, you know, it's been hit hard. And some of our competitors are doing, I think, the same as we are, but many competitors are doing worse. That is what we're hearing. And it is a challenging time for our industry. And we do think that there will come acquisition opportunities later in this year as a result of this crisis.

Okay, fair enough. And my last question is, can you please describe the selective cuts you have made? And will the cost base be similar during the rest of the year as this quarter?

Yeah, so as I mentioned, our focus is long term. We have delivered fantastic profit growth over all years to our shareholders. We want to continue to do that for many years ahead. So we have not cut in anything long term. Our long-term R&D into digital and others remains the same. Our long-term marketing remains the same. We've actually increased our marketing. Our focus on people remains the same. We have not reduced any salaries. We're really taking care of our people. What we have done is, I mean, some costs are volume related. And they've gone down because volume has gone down. Then we have made savings on expenses, on the use of subcontractors. And we will continue, of course, in a year like this to be frugal. But we will also continue to invest long term.

That was all for me. Are there any questions from the telephone conference or the web?

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now. We have one question in the queue so far. That's from the line of Daniel Torsen of SEP. Please go ahead. Your line is open.

Yes, thank you very much. Good morning, Henrik. First, can you explain the 10% EBITDA margin in North America in Q2, which I find particularly strong? What is that driven from?

North America, BTS North America has a profitable business. They operate at a good scale and they can tackle a revenue decline better than our other regions just because of scale. They've also been very good in controlling their costs and they've been very good in converting to virtual and digital.

Okay. And do you think that it's reasonable to also do in other regions for the business in the second half?

Well, we haven't given any forecasts regarding the numbers, so I cannot comment that question. The only thing we've said about that can indicate of the future is we see the market is improving during the end of the second, the early third, and we think that improvement will continue.

Okay, that's fine. And then another question on employees. They are down roughly 2% versus Q1, so that is nothing. But is that roughly the trend across all the regions, or have you done any differences between North America, Europe, and other markets in terms of recruitment and reducing personnel?

So we have not. As I said, our ambition is to keep our organization active. and we have not gone to reduce personnel. Some people have left. We always have also an ongoing performance management, and that we have continued through the crisis. All regions are moving in the same direction here.

Okay. Okay, that's good. And you say that after the crisis, you are targeting to make higher profits than we saw in 2019. Is it possible to do that already in 2021, or is that too early, or is that too uncertain to talk about at all?

I mean, we don't give any profit forecasts for 2021. But once we are back to a situation where physical deliveries can be done, which – I think we can assume that once we have a vaccine, the world will go back more to normal situation. We can't afford to continue with a partly closed world economy. So the question is, when do we have that vaccine? And then our clients are telling us that they will go back to physical deliveries. And what we see, the simple logic is, that if we have a bigger base of customers, more customers to sell to, and we now have a wider offering, and we strengthen our team, all of those three factors will lead to a bigger business and a higher profit. So we aim to continue our long-term growth in revenues and growth in profit, and we're convinced we can do that once we are back to a more normalized situation.

Okay, I see. A final one on the strong cash position that you mentioned in the presentation. It seems to be partly improved by some more interest-bearing debt in the quarter of around $120 million. Is that correct? And what type of debt is that?

Yes, we've taken some interest-bearing debt. In a crisis like this, you know, you want to have strong financial position. So very early in March, when we started the campaign externally and internally to go virtual and digital, we were very fast and early with that. At the same time, we said, let's raise cash. So we are secure no matter what happens. And once we have that cash, interesting acquisition opportunities may come up, and we can use that in a good way. So that's another strength for us.

Okay. Thank you. That was all for me.

Thank you for your question. Thank you once again. If there are any further questions on the phones, please dial 01 on your telephone keypad now. There seems to be no further questions from the phones at this time.

Can you please talk a little more about the conversion from physical to digital? For example, what are the main challenges and problems or perhaps opportunities? You've talked about the opportunities, but how do you see that process? A little more about the conversion process.

So, I mean, there are two answers to that. One is how do you deliver a fantastic education virtually? And you cannot take a two-day physical training program and just run it. I see a lot of people doing that. You know, you go to Zoom and there's a talking head showing some slides. That is not effective. So I think BTS, with our creativity and being so innovative, we have taken virtual delivery to the next level. It is a show. Everyone is activated. There's maximum 10 minutes of speech available. Then there are pollings, there are competitions, there are games, interactions, small teams. And our clients are telling us that we excel at virtual delivery. And I'm sure all of us have experienced on Zoom all these boring sessions where we stop following them. That is not BTS. We make it a show and we make it better. And we've seen many of our clients come to us when we've converted from physical to virtual, come to us and say, wow, this is the best. Can you also take these projects? So we're very, very good at this. And looking forward, what's going to be interesting, we believe, is that clients in the future will say everything we build, if we build a program for 3,000 leaders, we want it to be available in all formats. so we can use it flexibly, in a flexible way. Again, BTS has the strength, and we think we will be able to win more business because of this. Did I answer your question?

Okay. When you go digital, there should be a fair amount of synergies. For example, cloud service as a software. Is that more possible, would you say?

That is also an option. We see that the virtual solutions, where we have a facility present, is growing, but also the digital, where people are doing it by themselves. And we see this as an opportunity going forward, of course, for services with much higher margins.

Thank you.

Thank you for your question. So there are no more questions on the telephone line, and therefore I will say thank you to you, Henrik.

So to conclude, what I want to stress to all the shareholders that are listening, that the numbers in the second quarters are not pretty. It is the worst quarter for many, many, many years. But we are still pleased with the progress we've made that has made it possible for us to still report positive numbers. we see the improving market, the end of second quarter, early third, and we see progress for the long term. That would make it possible to deliver new record profits once we come back to a more normal time. Thank you. Thank you.