Karnov Group AB (publ)

STO:KAR

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Karnov Group Q1 Report 2020. [Operator Instructions]Today, I am pleased to present CEO, Flemming Breinholt; and CFO, Dora Brink Clausen. Please begin your meeting.

[Flemming Breinholt]

Thank you very much. Welcome, everyone, to this earnings conference for Karnov Group, where we're going to present the outcome of our first quarter of 2020. Next slide, please. I'm Flemming Breinholt, President and CEO of the company. With me, I have our CFO, Dora Brink Clausen; and calling in is our IR specialist, Erik Berggren. Dora and I will present the outcome of the first quarter using a few slides, and then we will open up for questions. Those of you who have called in can ask questions verbally, while those of you who are participating via webcast can send questions in written form via the webcast.With that said, let's get started with the presentation of Q1. So let's turn the page and go to the next slide. We have started off 2020 with good results, also considering that the corona pandemic reached our markets in Denmark and Sweden in the quarter. In spite of this, the financial results are in line with our expectations. The first quarter of the year is typically our strongest quarter with a higher amount of off-line sales. Sales grew by 3%, organic growth was 2%; margin almost 42%; and leverage well in line with our targets of not more than 3x.Next slide, please. During March, we have started to provide regulatory information related to the COVID-19 pandemic on our online platform, both in Sweden and Denmark, in a special section. This section has driven good traffic to our platform and has been very well appreciated among customers and users. We have also succeeded in further expanding our business by investments in both Denmark, Sweden and our new market, Norway. These investments will bring more value to our customers when launched in [ our market when ] entering Norway. We have also strengthened our management team by recruiting new local CEOs for Norstedts Juridik and Karnov Group Denmark. This will enable us to focus even more on our future growth.Turning the page. During the first quarter of 2020, we have concluded 3 new investments as I just mentioned. In the beginning of the year, we invested in the Danish legal tech start-up Ante ApS developing new technologies as a stand-alone offering, but it's also expected to be implemented in our platform to provide additional relevance and efficiency for our customers.The second investment, we formed a joint venture 64% in our favor with LEX247 called LEXNordics. LEX247 is a cost-based legal enterprise practice management solution that represents a way for us of delivering even more value to the customers. Further, the joint venture will operate in the whole Nordic region.Our third and latest acquisition this year will be our way of entering the Norwegian market with an agreement to invest in Strawberry Law. This company has now been renamed Karnov Group Norway. Our legal research solution in Norway will be based on a platform collaboration between Karnov Group Norway and Lovdata. This collaboration with Lovdata is an important milestone for us as Lovdata is the most widely used legal information solution in the Norwegian market. The new company, Karnov Group Norway, is expected to launch its offering in the second half of 2021, will focus on commentaries, annotations and new material.Turning the page. Our Danish sales have continued to grow in the first quarter. Based upon our market research in the fourth quarter last year, we have now started to intensify our developments of new solutions to support future growth. We will launch an updated online platform in the second half of 2020. Our new case preparation tool, which we launched during Q1, is up and running and has had a successful rollout. The feedback has been good, and the product is appreciated by the users who confirm the new work tool brings them more value. Already now, we have a few hundred users for this service.We have also recruited a new CEO of Karnov Group Denmark. Up until now, I have held the position in addition to being CEO for the whole Karnov Group, but by strengthening our management resources, we will have further focus on growth for the future.Next slide, please. Our Swedish business has had a good start of the year. The organic growth was 3%, driven by good online sales and upselling to existing customers. We have published a new edition of the classical law book, [ Sveriges Rikes Lag ], which was well, again, received as lawyers continue to use it as an important work tool.During the first quarter, we have continued developing and deploying enhancements to the JUNO platform based on feedback from our users. This will continue during the second quarter as we informed at our Q4 earnings conference.Next slide, please. Speaking about the pandemic, we have taken several precautionary measures. For instance, by letting our employee working from home. We are, of course, strictly adhering to the regulations and recommendations from the authorities. We need to ensure that our employees stay healthy despite the pandemic. Their health and well-being are our overriding concern currently.We have set up a special section on our platform in Denmark and Sweden where we have collected all legal and regulatory information about the COVID-19 pandemic. Currently, these sections comprise more than 60 new laws and law changes and numerous guidelines and advises related to the pandemic in Denmark and Sweden. This service has been well received, and there have been many searches on our platform related to the COVID-19 pandemic.We have chosen not to use any of the support programs that governments have introduced to mitigate the financial consequences for companies of the COVID-19 pandemic. We believe and are confident that Karnov can do without these subsidies. Therefore, the Board of Directors of Karnov is still proposing a dividend to be decided at our Annual General Meeting later today.I will now hand over to Dora, who will tell us more about our financial performance in the first quarter. Next slide, please.

[Dora Brink Clausen, Group CFO]

Thank you, Flemming.I will now present and discuss the financial outcome. So let's start with an overview, which is Slide #10. The first quarter is typically our strongest quarter of the year, both on top line and on margin. The top line growth was 3% compared to the same quarter last year. Net sales were SEK 212 million. Adjusted EBITA was improved by 3% to SEK 88 million with a high and stable adjusted EBITA margin of 41.6%.Next slide, please. Looking more specifically at our sales growth, organic sales was a little above 2%, while currency effects were approximately 1%. The online business continued its steady growth while the off-line market continued its predicted decline, which was further accelerated by the COVID-19 pandemic. The COVID-19 pandemic is assessed to have reduced overall sales growth by slightly more than 1 percentage point. Both the Swedish and Danish segments contributed to the increased sales.Next slide, please. In the first quarter, adjusted EBITA increased by 3.4% and adjusted EBITA margin was 41.6%, which is unchanged from last year. Numbers of FTEs have declined to 240, even though personnel expenses have increased compared to last year. The reason for this is that we, in 2020, are back to a normal level of split on internal hours between maintenance and capitalization.Next slide, please. On Slide 13, you see the net sales development with 2 different views. And you see that the long-term trend in our sales continued also in the first quarter of 2020. First to the left, you see that the online business increased its share of our group's sales by 4 percentage points to 72%. Some of this shift in sales is probably temporary as the corona effect reduced the off-line sales. The higher share of subscriptions in our sales that you can see from the graph on the right is also particularly a reflection of the effect of the pandemic. Here, the increase was 3 percentage points from 77% in Q1 2019 to 80% in Q1 2020.Move on to the next slide, where we have 1 of our 2 segments. In Denmark, adjusted EBITA improved by 8% to adjusted EBITA margin by 2 percentage points to 42.5%. This improvement was due to a combination of higher sales, good product mix and good cost control. Here, sales increased by almost 4%. A little less than half of this increase came from organic growth and the rest from currency effects. Organic growth was driven by upselling to existing customers. The COVID-19 pandemic has further enhanced the long-term declining trend in the off-line market. Sales were negatively impacted by the corona pandemic as bookstores were closed during most of March.Next slide, please, which is the Swedish segment. Net sales in Sweden increased by 3%, which was in line with expectations. All of the net sales increase are organic growth since our reporting currency is SEK. Adjusted EBITA in Sweden declined a little compared to last year due to higher consultancy costs and higher personnel expenses in this quarter. However, as I explained before in connection with Slide #12, this is not a real increase in the FTEs, but a reflection that we're now back to a normal degree of split between maintenance and development.Next slide, please. Here, we have our cash flow slide. As expected for the first quarter, adjusted operating cash flow was strong or up by 4% and in line with expectations. This is a seasonality effect as the great majority of subscription are renewed in December. In the first quarter of this year, the cash conversion was 173%, up a little from 168% for the same quarter last year. The leverage of 2.3x is well in line with our target of not more than 3x.As for our balance sheet, you may have noted that we have drawn SEK 300 million from our unutilized credit facilities. This is nothing special, but just a way to be prepared and have the possibility to act fast if, in these turbulent times, a good opportunity arises for an acquisition.I'm now handing over to Flemming again, who will present our last slides.

[Flemming Breinholt]

Thank you, Dora.Please switch to the next slide. I just want to conclude this presentation by presenting a summary of the highlights during the first quarter.We have had a good start of the year despite the COVID-19 pandemic, which has affected the whole society. The financial results are in line with our expectations.We have made 3 new exciting investments, one in LEXNordics, one investment in Ante ApS and a geographic expansion to Norway. We have recruited new local CEOs for the Norstedts Juridik and Karnov Group Denmark. This will make it possible for us to focus even more on our growth moving forward.We are focused on taking care of our employees in the COVID-19 pandemic and ensure their safety and well-being. We have also set up a special section on our platform in Denmark and Sweden where we have collected all legal and regulatory information about this COVID-19 pandemic. This has been very appreciated.And by this, I'll end our presentation, and we are now ready to take questions. So I'll hand over the conference again to Alexandra.

[Operator]

[Operator Instructions] Our first question is from Daniel Ovin from Nordea.

[Daniel Ovin, Senior Analyst]

Yes. So first question. You mentioned here that there were some negative impacts from the corona. And you talked about 1 percentage point impact on sales. I just wonder if you would look at adjusted EBITA, is that a similar impact or higher or lower? And also you mentioned here that due to timing, you expect to recoup that. So would that already be in Q2? Or do you see that being recouped later during the year? That's the first question.

[Dora Brink Clausen, Group CFO]

Yes. The impact on the EBITA -- adjusted EBITA margin or the adjusted EBITA is, of course, the gross profit on the top line and as it is off-line, then you can say that it's normally a little lower than the online gross profit. And due to your question around if we will catch this up already in Q2, first of all, we have said that we expect this to be partly catched up during the year. So I think that all of us are waiting for societies, especially in Denmark, to open up again, but also in Sweden. So when during the year that will be, I think that we need all 9 months to do that.

[Daniel Ovin, Senior Analyst]

Okay. And then another thing, we also discussed before the quarter here that you had some one-off trade last year and that were both for Q4 '19 but also Q1 last year. So I just wonder, can you quantify in any way how much that one-off trade benefited the Q1 last year?

[Dora Brink Clausen, Group CFO]

Trade is normally with also a pretty good gross profit as all are different parties. So I think that you can take our gross profit and say that that's what we are missing on the trade in average.

[Daniel Ovin, Senior Analyst]

Okay. All right. Okay. Final question here then from me. And that is, when I look at the different segments and comparing Denmark and Sweden now, it seems like your margin then rebounded in Denmark from Q4, but then the organic growth came down or seems to be a bit lower. And you also mentioned here that you have done some step-up investments to enhance investments in Denmark. So I just wonder is that something that you expect also going forward that you need to invest a little bit more in Denmark to see organic growth coming back to your target level?

[Flemming Breinholt]

I'll take two questions to your -- two answers to your question. First of all, take into account in Q1, of course, that the book shops in Denmark were closed, which meant that off-line was completely stopped for a period. Secondly, we have initiative and as it has been outlined also since, you could say, the IPO that we knew we were using a lot of resources for actually doing the integration, the launch of JUNO in Sweden. So the real rebound coming up in Denmark, and we will of course see how to provide those changes, as I also said, later this year for our online service in Denmark, while of course also looking into which initiative can bring, at a later stage, more growth in the Danish segment. So we are in the process of identifying where and which areas to put more focus on combined to those we already have announced.

[Operator]

[Operator Instructions] And at the moment, there are no more audio questions. I will hand the word back to you for any other questions.

[Erik Berggren, Investor Relations Specialist]

All right. I have a question here from [ Claus Engberg ] that is directed to Flemming. Flemming, in the report there is an extreme focus to tell about the success with certain legal customers and about new products for legal. Is it part of the strategy of Karnov Group to focus on these customer types for the longer run?

[Flemming Breinholt]

I didn't get -- which customer type, sorry?

[Dora Brink Clausen, Group CFO]

Please repeat the question.

[Erik Berggren, Investor Relations Specialist]

In the report, there is a focus to tell about the success with several legal customers and about your products for legal. Is it part of the strategy for Karnov to focus on these customer types for the longer run and be focused on other customer types?

[Flemming Breinholt]

Okay. First of all, you can say that the [ D&A ] on the background and the core, what we're doing is actually to have with legislation or related matters to do. So it goes without saying that of course our focus is on all what is related to, you could say, legal customers. And beyond that, it is of course the nature also of us to look into other areas in those markets we are in, where you could say we can actually get use of our experience in other verticals, other segments and thereby, actually getting an increased part or area of the market. And a good example is of course in Sweden where we have the full up and running vertical from [ the expenses ] and you could also expect to see our savings in other areas in the future ahead of us. So the answer is yes, it is in that field we will be involved also going forward.

[Erik Berggren, Investor Relations Specialist]

Okay. Thank you. We have another question from the -- Peter Nichols of Vor Capital, and he asks, how much of the organic growth this quarter that was driven by increases in unit pricing?

[Flemming Breinholt]

It's a question which we have -- which we actually cannot explain clearly because what is important for us is to measure the number of users and thereby also to look into which package they actually chose to get. And we of course are very focused on where we see upgrades and downgrades also in terms of which package the customers are entering in. And we still see a good trend that customers actually are interested in the more advanced packages from Karnov Group both in Denmark and in Sweden. Next question?

[Erik Berggren, Investor Relations Specialist]

Thank you. We have no more outstanding questions that have been sent in from the web currently.

[Operator]

And we have no further audio questions. So I will hand the word back to the speakers for any final comments.

[Flemming Breinholt]

Thank you very much. Thank you, everyone, for listening and your questions. We will report our Q2 report on August 26, and I hope to hear from you then, if not earlier. Thank you very much.