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Edited Transcript of BTS B.ST earnings conference call or presentation 13-Nov-19 8:30am GMT

Nine Months 2019 BTS Group AB Earnings Call

Stockholm Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of BTS Group AB earnings conference call or presentation Wednesday, November 13, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Henrik Ekelund

BTS Group AB (publ) - Founder, President, CEO & Director

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Conference Call Participants

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* Marlon Varnik

Erik Penser Bank AB, Research Division - Research Analyst

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Presentation

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [1]

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Good morning, everyone, and welcome to Erik Penser Bank. My name is Marlon Varnik, and I'm the analyst following BTS Group. But today, we have Henrik Ekelund, CEO and Founder of BTS, with us presenting the Q3 report.

So I'll leave it to you, Henrik. Welcome.

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [2]

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Thank you very much, and thank you, everyone, here for coming. Thank you, everyone, for watching. Dear shareholders, I'm very happy and pleased to report another very strong quarter and the 13th record quarter in a row and I'm very happy to share some more details about this quarter with you.

Our vision is to become the global leader in turning strategy into action. So what do we actually do? What's behind those beautiful words? So let's try to explain a little bit. Almost every company today have major changes in strategy and operations that they work on. The world is not standing still. It's constantly changing. And these companies, they work a lot on their strategies, setting their directions. And they do it themselves, but they can also work with different management consultants or specialist advisers to make this happen.

Now once they have set that direction, then comes the difficult part, to implement. And as we know, it is easier to come up with a great idea than to make it happen. And that's our space, and we work with all the leaders and all the people in our client organizations to make strategies happen. We provide services and products for this. The good news is that this is a growing market because companies change more and more and faster and faster, so they need our services more and more. Just a little introduction to clarify our vision.

On the highlights. So this is the 13th record quarter for BTS. And as you know, 13 for some people is a bad luck number. So are we going to deliver any more record quarters after #13? And bad luck does not belong in BTS. And our goal is to continue to deliver many more record quarters going forward.

This quarter, we achieved 16% growth, and 15% of that was organic. So it was a good growth record. In Europe, especially strong, 40% growth. Two reasons: one, BTS Europe is doing very well currently; and also, you might remember from the Q2 report we had some big projects in Germany that was pushed into Q3. So those are the 2 reasons. Also, very strong in North America, 21% overall. We made an acquisition there of a custom online learning business, SwissVBS, a fantastic company. So counting that and just looking organic, 18% in BTS North America, still very strong.

We are continuing the positive trend in our EBITA margin. As you know, since 2016, we're on the journey from 10% to 15%. So every year, we've so far improved the margin between 0.5% and 1%. That's continuing the 9-month and the Q3.

We continue to see a good market. Obviously, if you read the newspapers, there are data and articles indicating possible weaker economy. We have not seen our customers buying less or reducing their demand from us. As you know, acquisitions is a key part. We acquired SwissVBS, and we see going forward very interesting opportunities in our industry. There are many small, midsized companies that are seeking new homes given the rapid digitalization, the globalization that's going on. And overall, we are very well positioned for future growth.

If you look a little bit more in detail, you can see that the revenue growth, currency-adjusted, was 12% the first 9 months, and the profit grew north of 20%. That is a combination of -- I mean, the profit growth is a combination of the revenue growth of the improved margin. We also had some help from the currencies, the weaker krona, compared to last year. So about 1/4 to 1/5 of the profit growth was due to the currency development of the weaker krona.

Looking across the regions, you can see that we are doing very well in North America, a big improvement in Europe and a little bit worse in other markets. And you will see that in Q3, that negative development in other markets have accelerated a little bit. I'll come back to that. Overall, the margin is climbing 0.5% these first 9 months. If you look at Q3, better, stronger numbers in Q3 than the first 9 months, so things are moving in the right direction, both on the revenue and the profit line. And looking per unit for the third quarter, you can see that in other market, we only have 4% growth and a much lower margin.

So as you know, other markets has been for us a growth star. It's been growing roughly 20% per year 4 years in a row. And this year, it's turned out to be a little tougher, particularly in some markets like Mexico and Argentina, where political changes have made our companies very aware of investments. It's a little bit -- some shaky times in Latin America currently, with the exception for Brazil. Brazil is a good market. And as you know, they have a government who is favoring the business climate. And it's a big drop in most of the world margin. We had positioned to grow again this year and we did not. So the margin got hit a little bit. So obviously, we're not happy with most of the world, but we are happy that we are delivering overall results that are very strong despite most of the world going so-so. So that's an opportunity for the future to take them back to growth and back to a very good margin, which we are determined to do.

If you look at this picture, you can see that very consistently, every year, profit improves in each quarter. So this is -- has a nice picture. This one, rolling 12 months, a beautiful northeast angle on both revenue and profit. And you can see that if you go back 4 years, the net -- the profit before tax has doubled or even more than doubled. So it's a steady and very positive development.

Now speaking again, why are we doing so well quarter-after-quarter, quarter-after-quarter? So these are the 3 main reasons, and let me go a little bit into those 3. First of all, we are targeting an enormous market. We are not in Sweden. We're not in Nordic. We're all over the world, the 2,000 largest companies globally everywhere, and we have just scratched the surface of this market.

Secondly, it is a growing market. As I mentioned, companies are investing more in this space. And also, it's a fragmented market. And as you know, it's easier to win business when you have many small players.

Secondly, I want to highlight that we are -- we have a very long history of growing the top line and growing the profit and never going below a 10% margin.

So this is -- BTS is -- has a very solid track record of growing and growing and growing and not seeing the big profit drops, staying in double-digit margins. So coming back to this, why are we growing? Well, I mentioned the first factor: We are targeting an enormous market that is fragmented and growing. Secondly, we have a strong competitive position. There are many competitors out there. We do have some strong competitors, but there's a lot of tired competitors with old solutions and old thinking. And we're very innovative. We're very modern and very digital. So we win a lot of business against our competitors.

Third reason for growing is that we invest. Every year, we take your money. We take the shareholders' money, and we invest those kronas and dollars and pounds in growth. We invest in marketing. We invest in R&D, in digital and our people. So every year, we take money, invest to grow the next year. And finally, we are investing in acquisitions. So together, these 4 factors are the reason why we are growing year after year after year.

Also, I want to mention some people see us as a pure consulting company. We're not. We're a combination of a consulting and a product company. So our customers come to us because we have great people who have the expertise they're looking for. But also, we have a lot of intellectual property, a lot of products, simulations, content, solutions, digital solutions. And it's the combination of those 2 that bring the customers. And this means that we have scalability, and we have the opportunity to grow our license revenue where we sell purely the product. And as you can see, that license share has grown from roughly 6% to 7% the first 9 months.

So you saw our historic numbers. And we plan to grow faster, and we plan to have a better margin. Margin, we talked about, we are climbing towards that goal, as you can see here, 2016, 2017, 2018, again, in 2019, going for the 15% EBITA margin. And on the growth side, the 20% growth goal is something that is average. And looking at 2018 and 2019 together, we are delivering at that level.

And so how are we increasing margin? So we are working with 3 things. It's really about scale. As we grow, we drive our margin. It is about our own efficiency with resources and projects. Almost every company, we can find new efficiencies. And thirdly, it's about selling more products as a proportion of our total revenue. And this way, we will climb -- continue to our climb towards 15%.

And the dividend policy. We have a strong cash flow in the company, which means that we can combine fast growth with giving dividends. And our policy is to give 40% to 65% of our profit after tax. And as you can see, our dividend has grown. We came to the stock market in 2001. And now 18 years later, the dividend is 18x higher. So there is a nice dividend growth created by our growth and profit performance.

And the outlook, as you know, after the Q2, we changed. We said we're going to do significantly better than last year, and we stand by that outlook for the year, including the fourth quarter.

And these are the largest shareholders.

And with that, I complete my presentation and welcome any questions.

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Questions and Answers

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [1]

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All right. Henrik, thank you very much for a great presentation and congratulation for another record quarter.

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [2]

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Thank you.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [3]

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So I'll start off with a few questions from my side, and then we'll open up for the audience as well the telephone line and also if you have any questions online via the email function.

So Henrik, we touched a bit about it, but BTS Europe had a great quarter. As you said, in Q2, you saw some major projects that got postponed. Did all those major projects got delivered in Q3? Or are some still left to get delivered?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [4]

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Well, first of all, I'm very happy that BTS Europe is strong. We have a great momentum in our European business, many great clients. We have a strong organization that's really performing well. So I'm very happy with that. It's true, we had some extra help in Q3. We had some problems in Q2, small problems because of some projects were moved, particularly in Germany, to the third quarter. I mean, to answer your questions, we have many existing projects. We have many new projects in Europe, so we are looking to a positive future.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [5]

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All right. And besides the postponed projects for BTS Europe, what other growth drivers did you see not only for BTS Europe but for North America in the quarter?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [6]

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I mean, it's really the 4 things I mentioned. The market is positive. Our clients are investing in these services. We are very competitive. We win a lot of business. We invest in growth, invest in our people and R&D and so on, then we do acquisitions. That's really the story. There's nothing particular about the quarter. It's just the explanations why we grow year-after-year, quarter-after-quarter.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [7]

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All right. You mentioned also in the report that you saw or you see an increasing demand for major projects. Can you please comment a bit about this? What kind of sectors or regions do you refer to?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [8]

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It's really across many sectors. What's happening is that many of the large companies in the world, instead of doing different training and change initiatives in different countries and on different levels of management, they are more and more saying let's have one global consistent approach so that across geographies, across levels of management, we have a consistent message, consistent methods. So they provide bigger opportunities to make this happen. It's more effective for them. That's good news for us because we can handle many levels. We can handle many countries.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [9]

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Cool. Do we have any questions from the audience?

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Unidentified Analyst, [10]

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Yes. Hello. I have one question regarding the acquisitions. What trend do you see in acquisition multiples? Are people asking more, to get paid more or less or the same during the quarter and year-on-year?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [11]

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Yes. That's a good question. I think we see somewhat higher demands, and I think it's typical towards -- the stock market is very positive. We are in the later stage of the business cycle. Typically, valuations go up. So we see a little bit of an uptick there in demands, possibly. At the same time, we work primarily with smaller companies. So we don't see at all the same multiples as if you want to acquire larger companies. So we still see interesting opportunities to partner up with new companies who join our family and who -- obviously, we need to pay, attractive for them, but still a quite attractive for us.

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Unidentified Shareholder, [12]

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(inaudible) shareholder. Do you care to comment a little bit or elaborate a little bit more on other markets? It's even bigger in sales in Europe, right? And my question is, you haven't mentioned about Asia at all in your presentation. And I'm little bit interested in how it is today and also where you see -- where will it go in the future? Culture-wise, do they buy your products? Do you see acquisitions in that area, et cetera?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [13]

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Yes. Yes. Very good questions. So thank you for being a shareholder and trusting us. Yes, Asia is very interesting. I'm flying there in a week or so to spend some time. We have good businesses in Asia. There are -- China is the second-biggest economy in the world; Japan, the third; Korea, the 12th, 3 very interesting markets. And Singapore, where we are also -- it's a bit of a hub. India, very interesting, and we have a good business there. It's been growing very nicely over the years but huge opportunities for the future. Our businesses there are still very small compared to the market potential, but I would say that these markets obviously are different to Europe and the U.S. There are similarities, but we're learning about them. We're growing there. We're still way too small. But overall, our Asian business is not that small but very small compared to market potential. We're learning. We're trying to really get the formula right so that we can become significantly bigger. We're looking for acquisitions there. Again, we only acquire if we are convinced that it's a good deal for our shareholders in the long term. So we're very picky. But thank you for highlighting that. It's a big growth opportunity, and I'm going there myself in a week.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [14]

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Do we have any questions from the telephone line or the e-mail?

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Operator [15]

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(Operator Instructions) There are no questions on the phone.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [16]

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All right. So I'll proceed by myself. We spoke about BTS Other markets already a bit, and you have invested in BTS Other markets. Can you somehow quantify it, how much in terms of investment have you made? And when can we expect results from this?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [17]

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Yes. It's -- so other markets is a huge growth opportunity, and we've grown 20% roughly per year the last 4 years. And we aim to continue to grow that business. Now in 2019, we had a bit of hiccup. As you can see, growth is slower. And since we invested in growth, that hits our margins. But we are a long-term business. So we will continue to invest, and our clear goal is to get back to fast growth in 2020 in other markets. There are so many opportunities there. So we will continue to invest.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [18]

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All right. And you also saw some difficulties in Mexico and Argentina. How big of a share of the biggest other markets stands for from Mexico and Argentina?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [19]

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Good question. However, we don't share those details.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [20]

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I tried.

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [21]

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You tried, good try there. It was interesting. Mexico, as you know, has a new President, Obrador, and the whole business climate in Mexico has changed. Companies do not invest, and there's a lot of uncertainty. And so that's hit us as well. And as you know, Argentina has had a very volatile economic development and some political changes, and we've seen impact in those markets, clearly.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [22]

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Okay. Looking at APG, the unit, the smallest units, you mentioned a report that you -- the APG unit is under review of business. Can you please comment a bit more about this?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [23]

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So APG has something we've not integrated because it's a bit different and it has financially been a better deal for us. And you can see in those numbers because they pay some of our group costs, and they also sell some of our licenses. We're not happy with the negative growth. So that's why we're looking at how can we get this business back to growth, how can we optimize it.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [24]

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All right. You also mentioned a report that you won several joint projects with your new acquisition, SwissVBS. Can you dig into it? Give us an example of a project, for example.

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [25]

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Yes. So there's a big trend among our customers that they want to use digital tools more both to complement face-to-face meetings before and after to create the journey of learning but also to substitute sometimes. So many of our clients are asking us to do more and more digital solutions. So we have that, but SwissVBS really plugged the hole in our service portfolio. They can build world-class customized digital solutions. We didn't really have that specific capability. And now we have them, and that's a great, great company. They're both in Europe and in North America. So now -- before, we had customers asking for their type of services. We had to bring in outsiders. Now we can bring them in. So it's a wonderful synergy, really a great start to our relationship. They -- their profit in Q3 is -- was very, very small, but we see that's growing as we go forward.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [26]

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All right. And can you also comment a bit about the competition in the market? I mean your ability to raise prices in terms of looking at the management consulting companies, BCG, McKinsey, et cetera. So both the competition from those players as well as the price level you see in the market?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [27]

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Yes. Yes. I mean, obviously, our clients, these big companies, they are very professional when they buy our services. So they look at every dollar or krona in our proposals, which they should do. And what we need to do then, obviously, is to create more value for them to have the -- really the best solutions out there. And I think in general, you can say that what we provide -- of course, price is important, but price is possibly not the most important factor. If you have a new strategy and you want to train 5,000 leaders, the actual result and impact of what is done is more important than 10%, 20% on the price. So if we can prove that we do a faster job and we create more results, then their clients will be willing to pay a bit of a premium. And I think also, we see that customers gradually are looking more at quality and results and less at price for our type of services. Having said that, of course, our clients look at our prices, our pricing, and they want super competitiveness.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [28]

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All right. And the last question from my side. I mean, BTS were found 1986. You've been through a few economic crisis, but you still managed to perform stable or positive growth during those periods. Can you talk us through the lessons from those financial crisis in the past as well as tell us about -- a bit about your strategy and if the -- if we see an economic major downturn?

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [29]

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So yes, of course, it's a very important question. Our business is not impacted by smaller shifts. So if it's a really strong economy or a little bit weaker growth, doesn't really impact us that much because the -- what we provide is long-term for our clients. In a crisis such as the global financial crisis or the Internet crisis in the early 2000s, then we are hit. So -- but as you mentioned, even in those tough periods, we've managed to keep our margin. We've managed not -- to keep our revenues in a -- reasonably flat. And of course, ups and downs, they come and go. One lesson is to be -- to watch out for it, to really be prepared, to try to see it early and to act quickly. We don't see our clients buying less from us now. We don't see those signs.

The second learning point is then to -- in the downturns, it's really a big opportunity. That's when you can invest for the future. Just like in the real estate, when there's a crisis in the real estate, that's when one should buy houses. It's the same here. When we -- when there's a crisis in the economy, that's when we can get the best talent. That's when we can win some clients from competitors who panic. So it's really -- the downturns are an opportunity in that way, and we always try to, in downturns, focus on the industries and the companies where there still are opportunities. That's important. But we never cut anything long term. We always think about the long-term future. So those are some of the learning points when it comes to downturns.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [30]

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Perfect. So do we have any final questions from the audience or the e-mail or the telephone line?

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Operator [31]

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There are no questions from the phones.

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Marlon Varnik, Erik Penser Bank AB, Research Division - Research Analyst [32]

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All right. So I'll leave it back to you, Henrik, for some closing remarks. Thank you.

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Henrik Ekelund, BTS Group AB (publ) - Founder, President, CEO & Director [33]

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Thank you for your questions. Thank you, the audience, for questions. Again, very pleased to report the 13th record quarter in a row. It's not going to be a bad luck number. We plan to -- our goal is to report many record quarters going forward. We are very grateful to our shareholders. There's a growing number of shareholders who believe in our company. So we're grateful for that trust, and we will do our utmost to give you a good, continuous long-term return. Thank you very much.