BTG Consulting (LSE:BTG) — Half Year Results

0:00 Good afternoon, and welcome to the Bugby's Trainer Group PLC Half Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions can be submitted any time via the Q and A tab situated on the right hand corner of your screen. Just click Q and A, scroll to the bottom, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, review all questions submitted and publish responses where appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Rick Tran, executive chairman. Good afternoon, sir.

0:29 Good afternoon. Thank you very much, and thank you, everybody, for joining us. We'd like to give you our half year presentation, but also some background on the business for those of you who may not know us. Looking at page two of the presentation. We are a leading professional services consultancy with a differentiate differentiated service offering. What we do is help clients maximize the value of their assets throughout the economic cycle. So whether that's acting for creditors in the depths of recession, maximizing the dividend from an insolvent company, or we're acting for a successful business or property owner looking to maximize the value of their assets at the height of the boom. Currently, 60% of what we do is insolvency revenues.

1:17 That's corporate and personal insolvency, but the vast majority is corporate. We have a market leading position from a national office network and selective offshore locations. Our business model is to be very much in the heart of the local business community and workers referred to us from local intermediaries like accountants, solicitors, bankers, and corporates directly seeking advice. And we provide that advice and assistance to SMEs and mid market corporates. The other 40% of our revenue is advisory and transactional services, which covers a number of different service lines, financial advisory, transactional support, funding, valuations, projects and development support, asset management, and insurance.

2:04 The bulk of that is done through our Edison's chartered surveyors business focusing on property and plant and machinery. But we also have a corporate finance business operating under the SpringBoard brand. We also have a finance brokerage, which looks at financing specific assets like property and plant and machinery. And then we have BTG advisory services, which covers restructuring, forensic, and debt advisory. And overall, across all of our service lines, 80% of revenue is from insolvency and defensive activities and come from a common network of clients and professionals with centralized support services such as IT, finance, etcetera, supporting the whole organization.

2:50 Turning to the next slide. You can see that over the last ten years, our policy of diversifying the business away from being a pure insolvency practice has meant that we've grown year on year over the last ten years. You can see from this graph that the, the darker block is our insolvency business. So in full year, financial year '14, that was over 40,000,000 turnover and a very small contribution from noninsolvency activities. Over time, we've grown the business. So that proportion of noninsolvency activities is now 40%, and insolvency is the other 60%. And that insolvency turnover is now over 70,000,000, and those other services are over 50,000,000.

3:35 A lot of that growth has been through m and a, buying smaller businesses and rolling them up into our various service lines as well as organic growth. Turning on to the next slide. You can see as a result of that, the position for shareholders and the return for shareholders over that period is a cumulative average growth rate of TSR, so total shareholder return, that share price movement and dividends of 14% year on year over that period, which is something we're very proud of and we're seeking to maintain moving forward. In terms of looking at the numbers for the half year review, I'll hand over to Nick. And if we could turn the slide on to number six, please, that would be great. Thank you. Okay. Thank you. Good afternoon, everyone.

4:31 So starting with the financial highlights on this slide where we've reported double digit revenue growth. So revenue up by 13% on the comparative period. And of that growth, 8% was organic and 5% was coming through acquisitions. We have maintained our operating margins. We've seen improvements in our insolvency and property activities, and that was offset by a drop in financial advisory, and there's a bit more detail further on in the pack on some of those movements. And our adjusted pretax profits are up by 10 to 9,900,000. That's having absorbed increased finance cost in the period. And our EPS growth of 5% reflects the fact we've had the increase in UK corporation tax effective for the whole of the six month period that we're reporting here.

5:25 Turning to the next slide just to explain the adjusting items. So these are the, the items that we exclude from our adjusted results. They all relate to acquisitions. The first group of transaction costs is all consideration for acquisitions. It's not an operating cost or salaries paid to vendors who remain with the business. But IFRS three, which is the business combinations accounting standards under IFRS, which we follow, requires us to charge all the consideration that we pay to profit if there is an obligation for the vendors to remain with the business. And for us, that's fundamentally important. A lot of the goodwill in these acquisitions is with the vendors that stay with the business for a period enables us to retain that goodwill and the value from those businesses. So the acquisition consideration of 4,500,000, which is the the first of those numbers, that's all consideration being amortized over the period of that commitment.

6:30 What that then means is because IFRS decrees, we don't have consideration, as a capital item on the acquisitions, we end up with exceptional gains. We exclude those as well from our adjusted profits. That was a gain of naught 700,000. Acquisition costs are the legal and DD costs of completing the transaction. So the total of those transaction costs in the periods were 3.9, and the fact that's gone up year on year is because we have that very material gain in the comparative period to October 22. The next group of adjusting items are the noncash amortization charge of acquired intangibles. These are the intangibles that only get recognized under IFRS, through acquisition accounting.

7:19 For us, they are brands, customer relationships, order books, websites, which are valued through that initial recognition of assets once we've acquired the business.

7:33 This treatment, both of the, the charge to profits of acquisition consideration and the amortization charges will be the same as other listed peers who are who are also acquisitive. So it's a common standard which applies to to all companies under IFRS. If we turn to the next slide and return to our, operating performance where we're seeing the balanced mix of services that we have across the group have driven our double digit growth. Very strong growth from our insolvency team over the course of the six months. We've seen a busier market, which Rick will talk about in a bit more detail. We've increased the size of our team, and that's seen an increase in both revenue and profits, and also our margins have ticked up in the period as well.

8:19 Within property services, the breadth of expertise and the services that we have has enabled us to deliver organic growth and increase our margins. That mix of expertise really gives the resilience to that business. Within our valuation team, we've seen an increase in the advice that we give to banks on revaluing properties and giving them advice on the the value of the security they have against those assets. And for us, that was good work. It's probably higher margin, and that has replaced the valuations we give on new loans. Within asset sales, we've seen the same sort of trend. So we've seen an increase in assets being sold through auction. For us, we auction property and plant machinery assets, and that's offset a drop in the agency sales of both property and small businesses. That just gives an example of the the natural resilience that we have within that business.

9:15 And our building consultancy team has continued to grow in the period, and that's advising clients on their property estate. We've had the contribution from acquisitions in the period. That's both current and prior year transactions. And going the other way, we've had a there was a strong comparative within our financial advisory team, where we benefited from a number of contingent fees at the very start of that period. So we knew we knew there would be some drop off year on year, but we've also seen a pretty headwinds for that team. Our performance has been resilient. In the face of that, we've delivered margins of about 20% overall. We've seen refinancing and restructuring advice mitigating the reduction reduction that we've seen in corporate transactions.

10:02 And within shared and central costs, we've continued to invest in our IT and HR capability across the group. And, again, it's a bit more detail further on in the on that. But overall, we've delivered operating profit growth of £1,200,000 in the period. If we turn to the next slide, Just to report that we have introduced an EBT. We announced this on an RNS, last week. It's the first time we've had an EBT in place in the group, and we intend to use that to satisfy employee share option awards moving forwards, which will reduce dilution from that part of the, remuneration package we offer to some of our senior people. We announced the initial purchase plan, which covers the period to the end of July, like, next year. So that's through beyond our, full year results announcement.

10:57 And, the our target there is a monthly maximum of £750,000 worth of purchases with an overall cap of £3,000,000. And we announced our first purchase of 50,000, shares at the back end of last week, and they were done at 114p. Our balance sheet strength on our free cash flow means that we've got plenty of headroom to carry out funding our growth strategy. So it has no impact on our m and a plans, on our ability to pay dividends, and, we can still fund the the EBT within that.

11:34 Turn to the next slide. We continue to generate a strong cash flow in the in the six month period. Free cash flow is up to 4,000,000 from 1.8 in the comparative period. You can see from last year, there's a very much a half one, half two phasing to our operating cash flows. Our working capital absorption has been broadly unchanged over the, over the six month period. We've maintained our lockup position. And our acquisition payments in the six months of 4,000,000 comprised initial consideration payments of 0.8 and earn outs of 3,100,000, lots of prior year deals. In terms of the balance sheet, we closed with net cash at the end of October of £1,100,000 that compares to a net debt position twelve months earlier of 2.4.

12:26 And that gives us plenty of headroom within our facilities. They run through till August 2025, and those facilities are a £25,000,000 committed line and a £5,000,000 accordion for acquisitions and growth. And the final number slide from me, looking ahead for the remainder of the year, if we can just move on to the next slide, we're confident of delivering market expectations within insolvency. We anticipate activity levels will continue to increase. The interest rates and inflation environment continues to cause financial stress for corporates, and we expect that growth will come through the second half of our financial year and beyond.

13:12 Within financial advisory, we'd anticipate a broadly consistent second half. So the the level of corporate transactions that we're seeing, we don't anticipate benefiting the the second half, but we're hopeful that we'll see some return to more normal levels in our new financial year.

13:31 Within property services, the second half, we expect to be ahead of the comparative period, but will will be lower than the first half due to the seasonality of some of the project where we do those notably in our school work where we're advising schools on their property estates, and the bulk of that work gets done in in the summer holidays, which falls within our first half. But we expect to report another year of strong growth for the property team.

13:59 We're confident of continuing to build on our strong track record in the current year and beyond, and we'll do our next update on q three trading at the back end of February in the new year. So all in all, it's another good set of numbers, which we're very pleased with. The outlook looks good for the second half, and I'll now hand back to Rick to talk through the operating view in a bit more detail. Thank you, Nick. If we could move to slide 13, which we have now on the screen. This is looking at The UK insolvency market and our recent performance. Insolvencies are now higher than the pre pandemic level. They went down during the pandemic as a result of government support measures and various other matters. But a lot of that rise has been from liquidations, which tend to be the smaller businesses, but we are now starting to see administrations, which tend to be the larger businesses, start to be impacted as well. So those administration now numbers, are somewhere along the lines of, pre pandemic levels, still somewhere below those levels we saw at the last recession, so we do anticipate an increase in due course.

15:09 In terms of our own performance, the, the graph on the top right shows our increase in turnover since, the nineteen year, which is just pre pandemic, up to the year we just reported on at the end of April, where our turnover has doubled from 35,000,000 to over 70,000,000, and that compares with a 37% increase in the market, which shows that, we've taken market share over that period.

15:36 We do anticipate higher levels coming into next year with interest rates, the inflation starting to have an increased, impact on businesses as well as other headwinds. And, again, we expect to see those administration numbers, the slightly bigger businesses, actually starting to be impacted. In terms of, meeting the requirements of that additional work, we've increased the size of the team by 12%, half of that being in the just in the half year we're reporting on. That's mainly junior recruits who are coming in to support the insolvency practitioners practitioners who who are are our senior people, who are the qualified license holders who win the work and have the expertise to, to actually administer it. We have increased that number of insolvency practitioners by six, so we've got over 90 now.

16:25 And in terms of turnover per insolvency practitioner, we're up to a run rate of about 900,000. We anticipate that going to over 1,000,000 in due course, subject to the, support of those junior, members of staff. Looking at some of the things that we've done over the period, we've certainly had some larger appointments in the mix generally, which is a result of more administrations in the market. But, also, we've been undertaking a bounce back loan project with one of the major banks, looking at some of that government support where bounce back loans were given to businesses, and it's been inappropriately used. So we are investigating those cases and seeing if that money should come back into the insolvent estate of the company to be distributed to creditors.

17:12 So far, that pilot scheme is being successful, and we're anticipating a further flow of work from the banks in respect of those particular types of assignment. We're also seeing an increase in fraud and investigation cases, which is typical when insolvency numbers increase. This also means that we can use the skills of our forensic team as well as insolvency practitioners on these cases. So it gives us a a bigger breadth of services across the across the, the team. But overall, we expect further progress in the second half of the year and into the next financial year. If we move on to the next slide, just to look at our, advisory services and particularly property. This is the hidden gem within BTG. It's been growing quietly, along the sidelines, but now is a 40,000,000 turnover business in property.

18:07 It's got a multiple service lines across the the various activities, and they're active across the cycle. Nick has mentioned some of them when he went through the numbers. In terms of organic growth initiatives, we've invested in sustainability capability in building consultancy. So that's where we're giving advice to property owners, both private property owners and public sector property owners in terms of upgrading their businesses to and their property facilities to meet new environmental requirements, and that's likely to be an increased workload for for many years to come. In terms of property auctions, we've been recruiting into that business following the acquisition of a business in Sheffield recently, which augmented our existing properties property auction business in the Northwest of the country. And very recently, in fact, announced last week, we've, bought another auction business in The Midlands.

19:11 And we've strengthened our property insolvency position, sorry, insolvency position by building on the, increased insolvency markets, of course, looking at the sale of assets, both property and plant and machinery in insolvencies, both for our own insolvency business and some of our competitors. We provide those services. And as a result of that general increase in the market, we've increased the size of that business. Looking at three acquisitions that we've done recently, all in the insolvency arena Excuse me. All in the property arena. Banks long and co, which is a multidisciplinary chartered surveyors business in the Lincoln area. That, offers property agency, property building consultancy, and valuation services.

20:03 It's got a strong offering across Lincolnshire and Humberside, and it strengthens our business across the East Of England, South Yorkshire in the chartered surveyors business. Andrew Forbes was a business that we bought, in November, so, just last month, a valuation specialist in the Southwest. That gives us a presence in the Southwest for the property business, and it also gives us a platform to grow that from just being a valuations business into being a multiservice, property business. And we're able to tie in with our existing offices in that region in the insolvency advisory side in order to tap into their contacts and generate increased, work for that business. And very recently, announced last week, our auction business in The Midlands adds to the existing Northwest and now Yorkshire practice, and we'll be looking to merge all of that together to get those economies of scale, and that makes us one of the largest auction houses in the country.

21:05 And there are excellent opportunities for further organic and acquired growth in what is a large and fragmented marketplace. Moving on to slide 16. Just looking at that proven growth strategy enhancing the shareholder value overall. In terms of organic growth, the initiatives that are strategic hires across the group, that's to expand expertise and capacity, to enhance our cross selling of our service lines and expertise to a wider client base, our investment in technology and process to enhance working practices, customer service, and deliver efficiency gains, so that's better service to clients and better margins, retention and development of our existing partners and employees, giving them the scarce supply of qualified IPs, training our own, and, promoting them through the ranks is, a very big part of, the growth of the business. And I'm pleased to say that, six have been promoted to what we call partner level. That's the insolvency practitioners who win the work and take the appointments.

22:13 Six have been promoted in the last half year. In terms of our acquisition strategy, it's value accretive acquisitions in any of the following market segments. So that's insolvency to increase our market share, in our current non insolvency services to enhance expertise or geographical coverage, and other complementary professional service businesses to continue the diversification of the group and its service offering. Significant importance attached to the cultural fit and the strength of the management team, so we've got to make sure these businesses actually will fit in with us and stay with us for the long term, and there's quality management in order to be able to manage those businesses effectively and to to grow them both organically and by acquisition.

23:05 So we're looking to continue to to build on the track record of our growth so far, both in existing service lines and new service lines. Moving on to the next slide. If we look at our record since 2019 in terms of that growth, you can see here that that sixty million pounds with a turnover in in 2019 is now a 122. So that's doubled over that period, of which 38,000,000 has been through acquired. That's a number of acquisitions, as you can see on on the right over that that four year period. All those, acquisitions we've made across the various service lines, in addition to £24,000,000 worth of organic growth.

23:57 This has significantly increased the scale of the group, and we intend to do more of these. They are they are available in what is fragmented marketplaces, and we are generating appropriate cash in the operations of the business to both pay the dividends and an enhanced dividend policy as we've exercised to date, but also to provide the cash to fund these bolt on acquisitions. Moving on to the next slide. This is looking at the last five year track record, and I think these graphs speak for themselves. The one to probably focus on is the, middle of the bottom row, adjusted diluted earnings per share. So returns to to shareholders ultimately where we've achieved more than 21% cumulative average growth rate in that diluted EPS figure over the course of the last five years.

24:54 And our ambition is to maintain the growth track record, and our medium term revenue target is 200,000,000 while maintaining existing margins or indeed improving those margins if we can. So turning to slide 20, the last slide of the presentation. We're strongly positioned for growth. We have a strong track record of cash generative, profitable growth with a well established progressive dividend policy. We're strongly positioned for growth with market leading insolvency practice benefiting from the impact of higher inflation interest rates and that perceived growth in the insolvency market. Long established referral network across the group leading to a high level of repeat business. There's over 4,000 introducers to us, particularly accountants, lawyers, bankers, etcetera, who introduce work to us when their clients have a problem.

25:52 And we have a steady growth of non insolvency activities. This diverse income stream provides multiple sources of growth across the economic cycle in fragmented markets, and we have a proven financial track record with a growth strategy of continued organic investment complemented by value accretive acquisitions across our service lines, and we're confident of performance of the business for this year and beyond. Can I hand back to Paul now, and we'll be delighted to take any questions? Great. Thank you very much indeed. I'll just bring your cameras on. There we go. Thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions just using the Q and A tab situated on the right hand corner of the screen. Just while the team take a few moments to review those questions submitted today, I'd like to remind you that recording of the presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

26:47 Rick, Nick, as you can see, we've received a number of questions throughout today's presentation. Nick, if I may just hand over to you just to read out the questions where appropriate to do so, and I'll pick up from you at the end, please. Okay. Great. Well, thank you very much. So we'll go through these, and we'll answer them between us. So first question is how operationally geared is the business, and are you investing in tech to aid growth and margin? Nick, do want to answer that? So I can take that. So, yeah, the the operational gearing comes through the fact that we're a people business. About 75% of our cost base is people. I guess that what that means on the upside as we see growth, we'd expect to see margin accretion coming from that.

27:34 In terms of the the tech angle, we have geared up our in house IT team over the course of the the last eighteen months. You can see that investment, as you look at our shared central costs to invest in our IT team and our people team. And the sorts of areas that we're looking at is how we can how we can use tech smarter and better within the the property arm. Then that's something which we can do through using third party software products, which enable us to improve our processes, make ourselves more efficient, should improve margin. Slightly harder on the insolvency side. It's a smaller industry, so those third party solutions aren't necessarily available, but we're looking at how we can use available solutions, things from the Microsoft suite of products to to do the same. So, yep, very, very much part of what we're doing, and we see the use of tech as being one of the key areas that we can self help to improve margin as well as looking at growing market share.

28:44 Okay. So hopefully that answered that question. The next question is, when making acquisitions, are you looking to expand offering or bolster market share? And how much cross selling do you see? Shall I take that one? Yeah. Well, we're certainly intending to to to look at more acquisitions, which will bolt on to existing services, but also to look to expand those services over time. There's lots of opportunity to do that. We're in very fragmented marketplaces. Typically, the sort of acquisitions we're doing are 1 to 3,000,000 turnover. There are some larger ones. The auction business we just bought last week is over 4,000,000 turnover, and potentially, there's some even larger ones in the in the property arena, less less so in insolvency.

29:36 In terms of cross selling, that's something that that we've started to see the benefit of. There's certainly work that goes, as I mentioned in the presentation, from our insolvency business to our property business to dispose of assets. But, also, it's looking at those sources of work for us, that 4,000 plus intermediaries who refer clients in when they have an insolvency problem, also referring clients into us who have property related services or corporate corporate finance needs, etcetera. So we think there's a good opportunity to do that. It is the holy grail in professional services, actually getting your professionals to concentrate on selling something other than their own particular area of expertise, but we think that there is real headway we can make in that over the course of the next few years, and it's something we are making a concerted effort to do.

30:29 Okay. And the next question is how do you plan to sustain the growth momentum given the strong performance? Again, shall I take that one? Yes. Thanks, sir. We think there's plenty of opportunity to do more of the same. In terms of organic growth, the things that we identified, it's ensuring we make the most of the the resource we've got. So that's retaining our people. It's training them appropriately, giving them the skill sets to be promoted and actually be work winners and, work managers in due course. Lots of of acquisition opportunities along the lines of things we've done and and I've just mentioned. And looking at that that year on year growth in in value for shareholders, that total return of 14%, that's something that we're keen to try and maintain over time. And our aim to be a 200,000,000 turnover business in the medium term, we think, eminently achievable through a mixture of organic growth and smaller bolt ons. If we find a a significant additional service line and acquisition to make, then obviously that will turbocharge that growth.

31:46 But we feel confident that we'll be able to maintain that track record that we've seen over the last ten years. Okay. I've got a suspicion the next question is probably one for me, which is around the acquisition consideration or the deemed remuneration, which, hopefully, the the slide which was in the deck explained, but I'll just reiterate in response to the question, which is, can you explain what it covers? And in particular, is it only performance related to acquisition payments, or does it cover any any element of salary? So as as I've said in the presentation, the amount that gets charged to profit is purely consideration payments. So it's amounts which are defined in the sale and purchase agreement.

32:35 And the reason it gets treated as a p and l item rather than a capital item is because we require vendors to stay with the business for a period. For us, that is typically a five year period. We're obviously paying those people a salary over over the time they're with us as well, and that is charged above the line and within operating profits. So the amount that we're excluding is purely the consideration element for for buying those businesses. So, hopefully, that's that's clear for you. And I think we've got one one more question here, which is around our acquisition strategy and approach to acquisitions. It's quite a long question, but they're saying, BTG trainer appears to be undervalued.

33:26 How do we think about the opportunity cost of acquiring other businesses relative to doing share buybacks with cash in its place? There's a follow on question, but maybe pick that one up in in the first instance. Yes. Well, in in terms of buying businesses, we're typically buying businesses which are on an after tax fee of between 5 and 7, and some of the consideration we pay is deferred over a two or three year period. So I I think in in terms of those businesses being immediately accretive, income accretive, they are. In terms of them being at a discount to to our own valuation, they are. And all of those businesses, we think, also have growth potential once we bought them. So I think it clearly makes sense to continue to buy those businesses where they are available and to to expand our own business.

34:23 That is a more sensible use of funds at the moment rather than increasing the dividend or or share buybacks, etcetera. You know, that's something that we'll we'll review in due course. But in terms of looking forward for the next two years at least, we think that continuing with that strategy of organic and acquired growth is a sensible one for shareholders. Okay. I think that answered the second part of the question as well, which was how to consider the opportunity cost of paying dividends rather than doing buybacks or or acquisitions. So hope hopefully, that's covered that question. And then there's a further question, which is what percentage of senior staff leave after deferred acquisition payments are completed?

35:13 The answer to that is very, very few. In percentage terms, it certainly would be less than 10%. Yeah. What we find is that that five year lock in ensures, a, that people who join us want to actually join us as well as sell their business because five years is a long term commitment. And we find that at the end of five years, those people are happy where they are, effectively institutionalized, and have no desire to to move on elsewhere. So we've been extremely pleased over the years with the retention of of senior people once that five year lock in has come to an end. Obviously, if it's a retirement scenario and somebody retires, then that's something that we respect and indeed expect given their age. But in terms of people leaving to to go to a competitor or start up a business again, that's extremely rare.

36:10 That's fantastic. Look, thank you both very much indeed. You've addressed all the questions that have come through today. And, course, any further questions do come through, the team will be able to review those, and we can publish those questions back on the Investor Meet company platform. Britt, perhaps just before redirecting investors to provide you with their feedback, which I know is particularly important to you and the team, I shall ask you for a few closing comments, please. Yes, of course. I'd just like to reiterate, we're very pleased with the half year performance we've just reported on. We're confident of performance for the rest of the year, and we're confident of maintaining that ten year growth record we have both across the insolvency business, which has continued to grow. Obviously, it's subject to the economic cycle. But overall, our breadth of services, the fragmented marketplaces we operate, and the ability to to grow by acquisition as well as organic growth means that we think that track record is something we can continue to achieve moving forward.

37:07 And I'd like to thank everybody for listening to us. And, indeed, if there are any further questions, obviously, you know where we are, and we'd be delighted to, to speak to shareholders at any point in time. Fantastic, Rick. Thank you very much indeed, Nick, well. Thank you for updating investors today. Please could ask investors not to close the session. It should be automatically redirected to provide your feedback in order the management can better understand your views and expectations. May take a few moments to complete. I'm sure it's greatly valued by the company. On behalf of the management team at Bugby's Trainer PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all. Thank you.