BYGGFAKTA GROUP Nordic HoldCo AB

STO:BFG

Earnings Call Transcript 2022-Q3

[Operator]

Good morning and welcome to the Byggfakta Group Q3 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Stefan Lindqvist, please go ahead.

[Stefan Lindqvist, executive]

Thank you very much. Welcome all to this Byggfakta presentation of our Q3 report. [ Meanwhile ] will present today is myself, Stefan Lindqvist who are the former CEO of Byggfakta, and we have our CFO, Johnny Engman and our current and the new CFO -- CEO, Dario Aganovic, who are also presenting today.

This will be my last presentation of -- quarter presentation and I'm extremely happy to hand over the management to Dario. And I know that Dario is a very competent and driven leader, so I'm extremely pleased to have him on board. So please, Dario, go ahead and present and introduce yourself.

[Dario Aganovic, executive]

Thank you very much, Stefan, and hello, everybody. My name is Dario Aganovic and now it's almost 1 month on my new job as the Group Chief Executive Officer of Byggfakta.

My background, just shortly, I'm a mechanical engineer by training. Although having spent a lot of time in mechanical engineering, starting my career with -- in robotics and automation and software development, working very much with the manufacturing industry within the space that's called PLM, product lifecycle management.

I would say quite closely related to what we do in Byggfakta in our product areas, specification of product information, but for manufacturing industry. Obviously, I've sent also couple of years in consulting, working for Accenture. And then after that in general management position, kind of, sales positions within different industries, in facility management for a couple of years and then the last couple of years within life science in the pharmaceuticals, in the medical devices.

And then my latest job is with AddVision and it's a part of AddLife group where I was a CEO and so I resigned earlier this year.

To talk about [ career ] I've been working internationally in the last 20 plus in different international, global positions and been leading complex businesses -- international businesses. Lots of post-merger integration situations and joining change. But basically that's my much like core skills is. And working very much with the various equity owned companies during the last decade.

[indiscernible] I'm very happy to be here and we're very much looking forward the journey ahead.

[Stefan Lindqvist, executive]

Thanks Dario. Next page, please. Today's agenda will be a short company overview, especially for you new in this business or listening for the first time. We'll go through the highlights of the quarter and the financial update and we'll end up with a summary and a Q&A.

Next page, please. If we start with Byggfakta at a glance. As you can see, we are a market leader in most of the areas where we are operating for the moment. It's only in 3 markets where we actually have competition or where we're not the market leader. It's in U.S where we are the #3, it's in Australia and the U.K. where we have some competition when it comes to the project information. But otherwise, we are the #1 player in this area.

And why is this so important? And normally I say that it's extremely difficult if someone has to enter into this market when you once got this position. Normally, we say there's extremely high barriers to entry into this market. And that's due to the fact that you need -- I normally say that you need 3 elements to be able to compete with us in this business.

First, you need a technical platform that needs to be state-of-the-art. Secondly, you need also this unique proprietary data that we partly manually collect and it's difficult to find anywhere else. But also need the customer base. And as you can see, we have a very huge and diversified customer base.

We have more than -- more or less 50,000 different clients, meaning also that we are not depending on one or a few single bigger clients. So it's very huge and diversified. Another thing for our business is also that its subscription-based, meaning that we could predict our revenue very -- for very long time and also do work with extremely good margins. Next page, please.

So what is it then that we are doing? Normally we say that we are working in 4 different product areas. Well, the biggest one is what we call then the project information and data service where we are collecting information about all planned and ongoing building projects. And the good thing with that one is that we are also -- that also gives us the opportunity to also add a number of other services like the product information, the specification information and the e-tendering solution.

Next page, please. And if you go down a little bit deeper in these -- one of these product areas, so start with the project information.

Our public information as I said, is a product where we are collecting information about all planned and ongoing building projects. And normally ask yourself then how do you do that? And that we have a number of different sources to find all this information. Of course, we are scanning the Internet or the net to find information in an early stage and that's important for us.

And one example of that is that we could find out on the Municipality of Gothenburg's homepage that they are planning to explore a piece of land to building industrial buildings. And that's an early stage information for us, meaning then that we are -- that's also generated call from our side. Meaning that we are calling the town of Gothenburg, ask for more information about this project. Hopefully, we get the name of the property owner and continue the interview with the property owner.

And then we are following the project during the whole lifetime, adding on the architect, the technical consultants, the contractors and the subcontractors. And now the source could be that we are scanning the local newspapers, finding out that there is school in [ Sollentuna ] burned down yesterday. That normally means 2 new projects from our side. First, you need to clean up the old school. Secondly, hopefully, you also need to build a new one. So that's one source for us.

Another source that is also extremely important for us is that we are making all that interviews with all these decision-makers. Not always in the end of the quarter, always asked what else are you doing? And that is actually one of the most important source to find information in the early stage.

Then you normally ask and say, why on earth are they then willing to give you all this information and they are also giving us for free. And then there's -- that's normally 2 main reasons for that. First of all, it's an excellent opportunity for the property owner to market his project. Meaning that they get the best offers, the latest innovation when it comes to product development and so forth.

Secondly, normally they're also extremely proud of talking about these project, because even if you are a professional builder, you don't do just one project during your lifetime. It's almost like they are talking about their own kids.

The third source that we also are using is, we would normally see as our safety net that we also collect the all search building permits and that you have to secure that we actually cover 100% of the market which is also an important effect for us.

But the buildings permit in itself is a little bit too late information for us, because normally when you search for building permit, a lot of the decisions are already made. Meaning that you have already the drawings down. But in over 82% of the cases, we have found the projects before that stage. But as I said and that it's important to have the building permits as well.

Then we're then buying this information, because someone needs to buy all this information, that's we're not collecting all the data. And it's almost every kind of company who could be involved in the construction projects or buying this kind of service.

As we are seeing from banking would like to finance the project. You have the architects, the technical consultants, the contractors and the subcontractors looking for more jobs. You have all the manufacturers who would like to sell the product -- their own products to the project.

And then there are also other kinds of service providers like companies renting out cranes or cleaning up the construction site. So it's an extremely diversified customer base in this case. It is also an important source for us to market all the other products that we have in our product portfolio.

The second product that we have is what we call specification. And we have developed a system for -- mainly then for architects when they are making the specifications in the connection with the drawings. Because when you're making the drawings for a project, you also need to specify it in tech. And here we have actually built the system, helping the architects or the specifiers so that they can built the specification that's direct in the connection with the drawings.

And what we are helping them to do is actually to help them to avoid or actually help them follow the latest norms, rules or regulations, also helps them to avoid mistakes that could occur on the drawing. We know that 1/3 of the mistakes that occur on the construction site could be attributed directly to the drawings.

Other thing is also that it also saves a lot of time for the architect. And in this case it's the architects who pays for this service. So this is a very good tool for them. And it's also integrated directly with the big CAD system, so that's also important, so it's the drop and drag functionality with all the big CAD systems.

The third product area that's where we also call them the product information. And here we have created a database with all the manufacturers' different products. And this is also a tool we've connected that with the specifications, because when you're making a drawing, you could either then specify a neutral CAD detail or you can actually use the product specific or manufacture specific CAD detail.

So what we are collecting in this case is all the kind of information that is necessary for the contractors, for the architects in connection when they are -- either then making the drawing or procure different building materials.

And in this case we have all kinds of information, everything from the 2D and 3D CAD details, we have the BIMobjects, we have the installation instruction, we have the demolition instructions and we have all the environmental information which today is extremely important for -- especially for the property owners, but also for the contractors so they can see what kind of footprint this product have on the project.

And in this case it's actually the manufacturers pays for this service so they could be in the eyes of the architect in connection with -- when they are making the drawings.

And last but not least, the fourth product leg that we have is what we call on the e-tendering. And this is the relationship where we are helping both the property owners and the contractors when they are doing e-tendering and procurement.

And it's not just the public tendering part that we are helping to win, it's actually when they also are tendering for subcontractors and for building material and hence can actually use all the different services that will be helpful.

An example would be, if you're going to build a swimming hall in a small town, we can actually help to find out which contractors have been building swimming hall in the past and help them or actually proposing to them wherever they should send the standard documents to.

Or if they would like to spend the builder specific construction material, we can use our product information service to help us find out which -- when the manufacturers, they are on the market, who can actually fulfill the requirements. So that's the 4 different product areas that we have.

Then if we -- next page, please. If we moving on to the highlights of the quarter, which is a record quarter for our side. Next page, please. If you look at the financial part, our third quarter is a record quarter. For the first time we passed -- our EBITDA is above SEK 200 million which is a milestone for the company which I think is a fantastic figure from our side. And we'll also continue to grow both in ARR and in revenue.

Another thing is that we have secured a new credit facility to ensure that we continue our M&A journey which also is important for the company. We still have plenty of other acquisition targets out there that we could approach, allowing us to secure the opportunity to continue that journey.

From operational point of view, we have completed one acquisition from U.S., which is extremely important for us. It strengthens our further position in U.S. It's a good complementary to our current business in U.S., which also helps us in increasing the market in the U.S. And it also gives us a number of different cross sales opportunities within U.S.

We are also been able to grow our ARR which is mainly then driven by a very strong renewal rate. And that's also really boost up the company strengthen in the current market which I think really shows that how strong this business is -- even in the challenging market.

If we then move over to the market highlights, we can see clear stabilization on price of building materials which creates a more predictable situation for our clients or our customers, and that's good for us, because then they have the time to actually focus on selling more and that's where we are coming in.

But we can also see a clear decline when it comes to the starts of new projects in the market and that also normally means that the demand for our services and products are increasing, because in a downturn that's actually what's happening. That we can see that our customers are actually using our service even more in these markets. Next page, please.

If we then moving over to the financial highlights. We can see that the net sales have increased with 45%. And if you compare that with last -- the same quarter last year, it's a huge improvement. If you can compare it with the last quarter in Q2, we can see it's slightly less revenue this quarter and that's normal, because we have the Summer months where we have no direct sales. So that's normal what's happened and you can also see it in Q2 compared to Q3 in 2021.

Our organic net sales has continued to grow. It is even better than last quarter. Our ARR, as you can see, have been increasing quite nicely over time. And it's now even higher than our organic net sales, so that's also good. It's a good number.

And then our adjusted EBITDA, as I said before, it's for the first time ever above the SEK 200 million which I think is a fantastic number for our business.

And if you look at our margin, it's 36.6%. And then you can say, okay, you're slightly below for the same period last year. But that's due to the fact that the businesses that we have been acquiring is normally have a lower EBITDA margin than we have. So that's actually diluting us in this case.

If you look separately on the different mature markets, however you can see also improvement in all markets. So it's a good improvements in this case.

And cash now wise, we are continuing to deliver good cash flow and our net debt is going in the right direction. You see it's lower and lower for each quarter, even if we've been acquiring companies.

Next page, please. If we then look at the operational highlights. And one of the big things is that I'm leaving the company now or stepping down as the CEO, I'm not leaving the company, hopefully I will also be part of the Board in the future. And this is my baby, so it's a very important company for myself.

We have been appointed Dario as the new CEO, which I think is a fantastic thing. We have done one strategic acquisition in U.S., which is important for us. We strengthened our footprint in the U.S. We continue to look at the synergies that we have with the integration in Australia, meaning that we are merging BCI's Australian business into -- our BCI business in Australia which will generate cost synergies of around SEK 10 million.

If you look at the sales part of it where we actually could also then -- hopefully then increase both sales [Technical Difficulty].

[Operator]

Ladies and gentlemen, we have temporarily lost the connection with the speaker line. Please continue to hold and the conference will recommence shortly.

Ladies and gentlemen, apologies for the delay. You are now reconnected. Please go ahead.

[Johnny Engman, executive]

Okay. Good. Welcome back. Hopefully, we were back on track. We had a bit of connection problems here on our side. So we are starting with the financial highlights on Page 13. I'll restart that page and you might have heard the first half. But again, we will get going from that.

But as you can see, we were trending nicely on reported revenue and you can see from the graph that we acquired a lot of companies in Q4 last year with the big Australian APAC U.S. business, BCI came in and also the 5 smaller acquisitions we did in Europe. That's why we have a jump in the numbers in Q4 last year and then we're growing nicely from there.

Organically, we are delivering 7.4% reported sales in the quarter versus Q3 on a comparable level last year. So we're increasing the momentum in the business from the Q2 period this year. Also, it's nice to see that we are making a good progress on ARR, which is the lead indicator in this business. Our subscription sales, which is now organically growing at 8.2% in the quarter.

So it is an evidence that we are -- we can perform well in a turbulent market. Some of you are worried about the construction market moving down slightly, which is actually good for us. We see an increased demand from our clients to find new business opportunities using our products and services.

Profit wise, we had a good quarter. The margin is strong at 36.6% which is up 8% versus Q2 with a good number. Of course, we always have a slightly stronger Q3 margin due to the vacation effects and we released some of the sellers we have. Also this year our staff on vacation for a month and that has a positive effect on the margin, but also the underlying margin is stronger than we had in the second quarter. So it's not just a vacation effect impacting this margin.

And of course, that has also an effect on our direct revenue in the quarter, that's why you always see a Q3 revenue being slightly lower than the other quarters. You see the same effect in '21 and you also see the same effect this year. Doesn't impact the organic numbers.

The cash flow-wise, it is a good quarter. We always have a slightly lower cash flow in Q2 and Q3 due to the seasonal pattern of our subscriptions and the cash flow is always strongest in Q4 and Q1 and this is also seen this year, so it is a good cash flow quarter-on-quarter presentation, but it's not the strongest quarter during the year due to this season.

The reported leverage is 3.3 turns and that is not pro forma EBITDA, that is the reported EBITDA and we don't report pro forma EBITDA anymore. So the actual pro forma leverage is lower than the reported number.

You need to remember, we acquired and paid for the Quest acquisition in the U.S. at the end of the quarter, roughly a bit over SEK 250 million in cash payments for the acquisition. And that, of course, drives leverage on a reported basis because we don't per forma in the full EBITDA of the Quest business.

And if we move forward to Page 14 which is showing you the ARR development during the quarter on a rolling 12 basis. And as you can see, we are keeping a higher new sales level than the churning, contributing SEK 100 million to the ARR base in the company. And this is a good factor for our organic growth. You see the acquisition impact being big. The companies coming in during this period, especially on the BCI business, the whole segment, APAC, U.S.

We still are seeing a positive effects on the ARR base of SEK 77 million. But this all in all leads to an organic growth level of 8.2% which is a higher level than we reported in Q2 this year. Subscription -- and this covers 85% of our revenue base in the [indiscernible]. 15% direct revenue and 85% subscription based.

Moving to the KPIs on Page 15. A big uptick we see is on the retention level. It is a very strong retention quarter now in Q4. We're up on every reported basis to [indiscernible] uptick versus the Q1 and Q2 during this year.

We're also showing you the like-for-like retention which shows the same trend, but it's a slightly smaller number. And the like-for-like includes then all acquired businesses since the day back in U.S. segment.

And this is driven by a good retention level in a number of clients, but also that we're starting to take some price adjustments in the market. Especially in Continental Europe segment, we have pushed through some price increases on the existing client base which then comes into the net retention numbers of the company. Again, this is particularly strong. But again, the underlying trend is good on retention level.

And then moving into the segments on Page 16. If we start off again in our home markets, the historic core of the group is the Nordic region. We are trending nicely, especially on reported revenue which is 9% organic growth in this segment.

We are helped by a bit of direct revenue, but also some of the smaller businesses are having a very good quarter in the standard B2C business in [indiscernible] for example, which is resulting in a very strong reported sales number, while the organic ARR is slightly more. It is an improvement versus what we saw in the Q2 period and accelerating, but we are not back to the 10% historic number we had previously. But it is trending in the right direction.

Profit delivery is very strong in the Nordic segment. We are reporting SEK 77 million in the quarter which is the margin of 45% versus previous year 43%, which is a good 2 percentage point underlying margin. And again, this evidencing when we are strong in the local markets we are delivering a very good margin above the group target with a nice 5 percentage points.

If we turn to the next segment, U.K. market, it's also a good quarter. And here we are growing reported sales of 8.5% which is slightly lower than in Q4. There are a few one-offs impact where we had a few ones bouncing in the right direction in Q2. Now we had a few ones were bouncing to other quarters.

So the reported sales is slightly lower in the quarter, should come back to the 10% level. While the underlying trend on the subscription business is continuing about 10%. So it got 10.6% on subscription organic development in the quarter.

Margin is also good. We are reporting 43% margin in the quarter which resulted in a SEK 68 million EBITDA level in this segment. We have again, as you know, invested in the U.K. businesses to accelerate growth, which is paying off on the ARR development. But it's also causing a slightly higher cost base versus previous year.

Some of you have followed us for a while, maybe remember that last year we did the headquarter allocation in Q4 for the full year which then had an impact on Q4 margins that you see in the graphs below.

And this year, we are allocating the headquarter costs on a quarterly basis. So we need to adjust for that if you want to compare the margin on a quarter basis versus Q3 last year. And that is roughly 3 -- a bit over SEK 3 million per quarter which is a headquarter component in the U.K. EBITDA. But overall, a good delivery also in U.K.

If we move to Page 17 and looking at the 2 other construction segments, starting off with Continental Europe. Here you see what we talked about. It is a very good acceleration in the ARR growth. Especially we are now, for the quarter, doing above the 10% level. It's 11.5% organic development in the segment on ARR.

It's coming from 2 main manufacturers, it's Switzerland, they're kind of accelerating a little bit. Switzerland, we have talked about being a weaker market for us. We see some improvement in Switzerland, helping the total segment.

But the main contribution is from a strong delivery in Portugal, Spain and we are taking the opportunity to adjust prices which then helps the retention levels and then ARR for the total segment. Again, this takes some time before it moves into reported sales. So the organic is 7.4% on reported revenue.

And again, the scalability of the business model is kicking in. So the margin in the quarter is 32.4% versus 26% last year. We can see where we go stronger that the margin followed with an increased business size in the different markets.

And the fourth segment then, APAC and U.S. Here you will not see the comparative numbers for the quarter. You will start seeing that in Q4 because we had this business owned in Q4 in '21. So that's the first time you will see comparative growth numbers. And it is a good delivery or decent delivery I would actually say in this quarter. It is a mixed picture.

The U.S. part of the business here is continuing to trend very nicely. We are seeing growth rates in the 20% to 30% level which we have also commented on previous quarters. While the market in Australia in particular is trending weaker. We are not seeing the pickup in the Australian business. Actually the locals were taking some actions to increase momentum in Australia while the Asia markets are doing okay.

But this is probably a slightly weaker component in the group for this quarter. But then it's growing and it's also delivering a decent margin. But as you can see, it's only 18% margin in the quarter. So when you look at the total group, this is of course, reducing the total group margin, Q3 versus Q3 on a total group.

And Page 18 is showing our, what we call previously other segment, but is now calling Healthcare & Media. Again, it's a decent quarter. It's growing 5% organically on the quarter revenue. The ARR has slowed a little bit and that is now flat. But overall, its trending as we are expecting.

Please move to Page 19, looking into the working capital and investment levels. We are keeping our negative working capital position around the SEK 600 million mark in the quarter. It is actually slightly less negative in Q3.

It is coming from the fact that the business volume in the segment is slightly lower than other quarters which we also saw in the reported revenue, resulting in a slightly lower deferred revenue position. So we have a -- we don't have the normal help from a cash impact on the working capital. This is the same trend as previous years. But this is the reason why the cash flow is slightly weaker for the quarter.

If we look at the CapEx level for the quarter, we normally look at the red part of the bar chart on the bottom. We are continuing to invest roughly SEK 30 million per quarter behind our IT platforms which is the level we have been cruising at in the previous 3 quarters. So from Q4 '21 this is the investment level behind the IT platforms and software solutions we go doing.

What is picking up in this quarter? We have previously told you, we are building a new office building in Ljusdal for roughly 200 staff and this staff base we have up there. And we are starting to pay for that construction project. In total, it is a budget around SEK 65 million which we have communicated previously. That is where you see the CapEx having -- level picking up in the quarter slightly.

And that will continue for a few quarters until the building is finished in late Autumn next year. And of course, once we move into that, once you have handover, expenses will be reduced when we'll move into the new office in Ljusdal.

Page 20, our financial leverage. We are reporting, as we said, the 3.3x reported EBITDA and net debt level which is then reducing quarter-on-quarter. We need to remember that we paid for the Quest acquisition in the quarter and that pushed leverage up in September. Of course, if you pay slightly more than SEK 250 million in cash and you get 1 month of EBITDA and revenue from that, it impacts the reported leverage position.

We are pleased that we have signed a new credit facility with Swedish Export Credit, a state-owned bank you can bank in Sweden of EUR 50 million or SEK 500 million which we now have available for further acquisitions because we see a strong M&A pipeline going forward, and we want to take the market opportunities continue to consolidate our segments in the market.

But together with the undrawn funds we have on the older credit facilities and the cash position, we have closed SEK 1 billion of available financing capacity for further consolidation. Then, of course, plus the cash flow we generate month-on-month. We are well funded to continue with the strategy we have in front of us.

You probably asked about interest rates. And as you know, mid-Spring we hedged half of the interest exposure of the company which is now also paying off. So the value of those hedges are increasing quarter-on-quarter as the base rate moves up. So that is a hedge we have and a good timing for us to enter into that in the Spring, given the interest environment in the world.

So for new listeners we have on Page 21 our financial targets which are unchanged. We are aiming to grow organically at 10% and complement that with 5% to 15% through acquisition. I want to say 10 plus 10 for the new listeners.

We are aiming to get the margin for the total group up to 40%. And as you can see, we are showing that margin level in the segments where we are the strongest. Both the U.K. segment and the Nordic segments are cruising above this target level, while we still have some work to do in the newer segments, Continental Europe, but also APAC U.S. in particular.

Capital structure, we wanted to keep the level around 3.0x or at that target which we are very close to. If we do a pro forma EBITDA, we would actually be more or less on that level. We have built the mandate from our owners to not pay dividends in the short term, but use our cash flow to continue investing behind the business. But Byggfakta platform could look for more acquisition targets going forward.

Thank you. That was the end of the formal presentation and we are ready to open up for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from Nick Dempsey from Barclays.

[Nick Dempsey, analyst]

I've got 3 questions, please. So the first one, can you explain a bit more about why the Australian business is more hesitant as you put it. Are they still seeing the kind of volatility, uncertainty in the underlying market that you're experiencing in Europe in previous quarters or is it something else?

The second question, there's a re-measurement of contingent earnouts in the items affecting comparability, which of your acquired businesses has driven that change in thinking about earnouts, right?

And the third question, when I'm thinking about Q4, first of all, is there any reason why the kind of organic growth momentum we saw in Q3 shouldn't persist in Q4? And then on adjusted EBITDA margin, of course, you've got a seasonal boost in Q3. But for Q4, should we be thinking broadly about the first half '22 level as a benchmark?

[Stefan Lindqvist, executive]

Let's start with Australia. Now if you look at Australia, I think they were suffering more from the COVID situation in a longer period of time and it's actually a lack of salespeople that have been driven that actually been quite slow. What we have been able to do now is to recruit -- or the staffing is in place, but it takes some time until you see the effect of the new people coming in. But that has been the case in Australia. But I'm not worried in the long-term that we not will be back on track even in Australia.

[Johnny Engman, executive]

To the other questions then, the earnout. We had an earnout for the property, the old construction business in Sweden we bought which we have released SEK 10 million, because we are seeing that with -- is slightly below the acquisition estimate for the earnout. The business is doing well, but again, it's more of the fact that we're coming to the end of that earnout, which will expire in December and we're not hitting a threshold level that's why we are releasing SEK 10 million check from that earnout component.

It is a bit of events-related businesses in that. And in the early year we had also COVID on the event side, giving awards on -- after that. It is a smaller business and down the line [ improve ] as well, but we're not hitting a trigger threshold in earnout calculation.

Q4, we said that the margin now in Q3 is driven by partly the seasonal effect, but it's also an underlying improvement in the margin in the different segments which come from our internal work. And the underlying components should be sticky and going to the coming quarters while the seasonal effect around the 2 percentage points will be normally revert back to the normal trend line. We see the pickup in Q3 and then you will see that seasonal effect coming back down on like-for-like. And the last question was…

[Stefan Lindqvist, executive]

Something about, what was the last question?

[Nick Dempsey, analyst]

So well, my third question was about whether organic momentum from Q3 might continue into Q4. I think you answered my question about the margin in Q4, but not necessarily the organic growth.

[Johnny Engman, executive]

Yes. But you see the ARR growth and that is, of course, what will impact reported sales going forward. And as we commented on the market in the beginning of the presentation, that we see that the prices are now being stable. It's also the availability of material and has improved. If you read some of our clients' Q3 reports, they are commenting also on these items. So we believe the market conditions are better in this quarter than Q2. So we'll be seeing a good momentum in the business during the quarter which we see on our financial delivery.

[Stefan Lindqvist, executive]

We see no reason for that it would be going in the other direction at least.

[Operator]

The next question is from Charles Brennan from Jefferies.

[Charles Brennan, analyst]

Just a few questions from me as well. Firstly, you're talking about normalization of market conditions more broadly. And yet organic growth in ARR, whilst it's improving, it's still below your 10% target. What needs to happen to get us back to 10%? Is it on the net sales side that needs to accelerate or is it the churn that needs to come down to get us back on to double-digit growth?

So are you brave enough to think that given the normalization of market conditions, double-digit growth is achievable for next year?

And then on a separate unrelated matter, Dario, I think in your opening comments you talked about the opportunity to extract more synergies across the organization. Are you in a position to talk about whether you think that's more on the go-to-market side or whether it's more on a deep technology integration side? And how do we think about the cost of achieving that synergy opportunity?

[Stefan Lindqvist, executive]

If I start with the first question about the opportunity to get to the double-digit growth, again I think -- if you look at the situation right now, I think we can say that the renewal rate or the churn is one area where we actually have been improving. Where we are still slightly behind is what we call new sales which always is a little bit difficult to predict.

But there are no reason why we shouldn't be able to come back to the same level. If it's already the beginning of next year or if it takes in the end of next year, it's difficult to judge. But it's actually the new sales part that we need to improve in this case.

I think when it comes to renewal rates, you can see in the figures that were in the numbers that they have been improving. And I think that's also proven that the business is in very resistant especially in this kind of market conditions.

[Dario Aganovic, executive]

And I'll answer the second question or not are a second question because one month ago and, obviously I'm still in the phase of forming my hypothesis and learning about the business. What I can say the opportunities are wide ranging. And then there is a broad agreement within the management and any organization, but there are opportunities in several different areas. But I will get back to that once I've learned enough to be able to make conclusions and priorities. But anyways thank you for your question.

[Operator]

The next question is from Dennis Berggren from Carnegie.

[Dennis Berggren, analyst]

So a follow-up question on the market development. Will you be it possible for you to comment on the month-by-month development during the quarter?

And then also some general thoughts on the market development for next year. I mean, I get your point on sales crews becoming increasingly important in tougher times with lower volumes. But I mean, do you expect this to hold for all of your product offerings and deals and what's the historical support for this?

And then secondly, how should we think regarding the sort of deviation on organic and sales growth in Nordic. Our organic growth now at 4.6% compared to 4.7% in Q3 despite positive comments revolving the improving market trends.

[Johnny Engman, executive]

Yes. We don't give you details, Dennis, on the monthly performance during the quarter. But I think if you look at how we position it, we see the stabilization coming into effect during the quarter and we'll be coming out of Q2, maybe we saw that being quite a volatile quarter. And given now that we'll be seeing the market trend, the conditions are improving, especially on client availability.

And when they are not concerned about the volatile market prices or availability of material, it's easier to speak to our clients and we see that gradually improving during the quarter. The new sales wasn't fantastic in the quarter, but I must say retention being very strong, but also a decent new sales performance. So there is more to pick up on the new sales side going into next year when we see it being fully back on track and that goes for the 10% question we had previously as well.

[Stefan Lindqvist, executive]

Yes. But if you look at the -- even new sales, if you compare Q2 to Q3, we can see an improvement in Q3 even in new sales. And I would expect that to continue to improve over time. But then you asked about the different segments in the downturn in the market.

And normally, we see a clear uptick in -- especially in the lead services like the project information and in the tender service, that's something that is very sticky when it comes to -- in the downturn in the market. And we can also see that the number of logins is improving and so forth, because the need of the information and the services are improving.

When it comes to the specification platform, you could think that it should have some kind of impact due to the fact that a number of projects is actually going down. But on the other hand, in this case when we are selling subscriptions, it's something that they need to have it. It's a really need to have service. They don't really cancel the license for the service just in case just because the market is turning down.

I would rather see that we probably would like to look into how they can improve their own processes within the company. So I don't see that we should have a major problem even in those areas. But we can see that normally when it's coming to this kind of market conditions, the need for the lead services are actually improving. That's the historical situation at least.

[Johnny Engman, executive]

And your last question on the Nordic report the net sales versus ARR. And here we need to get a bit technical, I think. Look, there is 2 effects there. The first one is last year in the [ corridor ] we had some one-off items and an adjustment kicking into the weak Q3 and in 2021 and now we don't have those effects in this year. So that helps the reported number.

And then as I said on our smaller business units are having a good quarter, still subscription business. But for technical reasons if you read the note on how we measure ARR, we're not reporting in the ARR number, due to data quality issues. It will come in eventually once we have broken up fully on to the system and it's a healthier business which helps reported sales. But its included in the ARR component. It is the subscription business, but we're not measuring it due to the data there.

It will come in, but I would have shown a higher ARR number as well if we would have included that base in the ARR measurement. Sorry for the technical answer, but that's the impact.

[Dennis Berggren, analyst]

Very though. And then this is final one from my side. Would it be possible to quantify the organic ARR growth impact from the price increases? And I mean, how much have come through during Q3 and how large effects do you think remains to be captured?

[Johnny Engman, executive]

It is always a component in the net retention. We've been running with good price increases across all segments. But what is picking out in this quarter then is the additional price adjustments we have done in Continental Europe, which you see on the ARR growth in that segment and also the retention level in that segment which is increasing significantly in the third quarter and that is mainly coming from -- the increases is mainly coming from price all of it. In that segment.

[Operator]

The next question is from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

So I think we've touched upon these topics. But can you say anything about what you're hearing from different customer group across your various segments and what is driving incremental spending on your platform despite, so to say cloudier construction markets?

[Stefan Lindqvist, executive]

No, but if we talk to the client situation or our customer situation then it's still -- for the moment, they are not suffering yet. But we can see that and they are worrying about the future because you can see that the number of construction start is actually going down and that's in all our markets, that that's actually going down, especially when it comes to building flats. I mean, that's the first step where you can see that it has been going down quite dramatically.

So they are preparing for times where they will be slightly tougher, and that's where we are coming in. They need ourselves our service even more those tougher times. So I think that's the background to it. But from a profit situation right now, they are fully occupied because there are still a huge number of ongoing projects in the market.

But a number of new startup products is actually going down quite dramatically. I would assume that, that actually will continue for 1 or 2 quarters, but the underlying need in the market is still there. So I think it will be picking up in the beginning or in the -- during the spring next year. That's my estimation.

[Johnny Engman, executive]

If you hear from some of the time before they are looking at their booking pipeline when it comes to projects that we're expecting to start in the coming quarters and there we're seeing weakening of their pipeline and that means they need to look for more sales opportunities and then we can measure that on incoming leads and discussions we're having. So we see that effect starting to pick through, that's the interest in our services are actually increasing out there in the market now when it slows down.

[Joachim Gunell, analyst]

Understood. And when it comes to a quite a sizable share of your OpEx base coming from employee expenses, how well positioned are you to mitigate cost inflation into next year?

[Johnny Engman, executive]

For both quarter we see the cost inflation, we need to take up on milestone for 2023. We are seeing -- again, you have seen some of the demand from the new workers coming Ljusdal for example that are coming out that [indiscernible]. So that is not fully -- so there might see a slight increase in salary inflation going into next year. And but with our pricing power and the strength of our products, we should be able to compensate on price to keep the margin or move the margin over the line. So far not the massive push.

[Joachim Gunell, analyst]

And finally just if you can give some sort of update on the M&A pipeline and your main priorities and where you see the biggest opportunities where to stand right now?

[Johnny Engman, executive]

Well, as you saw, we are gearing up because we see good M&A opportunities going forward. I think price levels are keeping stable and probably coming down a bit on expectations from the sellers. That's why we also arranged additional credit facilities, so we have the available capital to continue on the M&A journey. But the targets are where we normally see them both in Europe and also U.S. We were starting to see an increased availability of potential midsized or smaller targets which would fit nicely into the business. So the pipeline is good going forward.

[Operator]

The next question is from Viktor Hogberg from Danske Bank.

[Viktor Högberg, analyst]

So a question for Dario. Just historically with your experience and the few weeks you've been with the company, just your philosophy on M&A versus organic growth, especially in 2023. Given the uncertainties in the market, what made you think it would make more sense to us to focus fully on organic growth, get that right maybe and do we get the valuation with you and acquisitions would make even more sense from a financial point of view. What's your thought on that?

[Dario Aganovic, executive]

The way I see it is, M&A is a part of the growth strategy. And this is a work that we are continuously doing in historically, in all businesses now where I've been. You take a look at what strategically makes sense to do and then you have organic opportunities, you have opportunity to M&A there. You put up a roadmap of the work with that. And then, of course, it is very much driven by the availability of the target.

So it is a mix that I see going forward. And yes -- and again, it is -- I know still too little about the business to be more specific about how we have big factor group -- see the -- what you're asking for my philosophy is that M&A is a component in a growth strategy and that we will definitely continue to pursue and I'm very happy that we have a financial muscles to do that.

[Operator]

There are no further questions at this time. I'll now hand back for closing remarks.

[Stefan Lindqvist, executive]

Dario, would you like to?

[Dario Aganovic, executive]

Yes. So thank you all for joining this call. And thank you very much, Stefan, handing over a fantastic company for me to take over leadership. And guys see you all on Q4. Thank you very much.

[Stefan Lindqvist, executive]

Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.