Karnov Group AB (publ)

STO:KAR

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Karnov Group Audiocast Teleconference Q1 2022. [Operator Instructions] And today, I'm pleased to present CEO, Pontus Bodelsson. Please begin your meeting.

[Pontus Bodelsson, executive]

Welcome, everyone, to this earnings conference for Karnov Group. We're going to present the outcome of the first quarter of 2022.

Next slide, please. I am Pontus Bodelsson, President and CEO of the company. With me, I have our CFO, Jonas Olin, and our Head of Investor Relations, Erik Berggren. Jonas and I will present the outcome of the first quarter using a few slides, and then we'll open up for questions.

With that said, let's get started with the presentation. Please go to Slide 3. We are pleased with the outcome of the first quarter. Both our market segments have been successful in growing the business with solid margins.

Further, we have progressed in the contemplated acquisitions in Spain and France. Net sales grew by 9% in the first quarter, and organic growth was 5%. We still see the same drivers as in previous quarters, and those are mainly an increasing demand for our new and existing offerings from both new and existing customers.

The adjusted EBITDA margin was 41%, which is in line with the corresponding quarter the previous year. Our leverage is on the extraordinary low leverage of 0.8x at the end of the quarter, giving us a strong financial position for 2022 and making us prepared to complete the acquisitions in Spain and France.

Let's go to Slide 4. I will now comment a little on our segments, starting first with Denmark. Our Danish businesses have had a solid start to the year. The organic growth was 3.7%, and the adjusted EBITDA margin was 41.0%.

In the first quarter, we have received the first orders for our newly launched municipality solution and onboarded the first customers. We see a market trend with increased demand of no services from both law firms and the public sector. And we are able to deliver on that.

To drive further awareness of our premium-curated contents, we have also launched product-specific value proposition videos as well as videos with a number of our Danish offers.

In the first quarter, we also reached the annual addition of Karnovs Lovsamling, and it is still a very appreciated product among our customers and in society.

Turning to page to Slide 5. In Sweden/Norway. Our businesses continue to perform well. In the first quarter, organic growth was 5.8% and the adjusted EBITDA margin was 40.6%. We keep being on our sales, focusing on developing new features in close collaboration with our customers. The growth drivers are the public sector, municipalities and EHS. And just like in Denmark, we see a market trend with increased demand of law services, both from law firms and the public sector.

Our Norwegian business, DIBkunnskap, has now launched their IFRS service in Sweden and onboarded the first customers. We have also released a document management solution called dflow in Norway and the first sales of the solution.

In the first quarter, we released the annual addition of Sveriges Rikes Lag, and just like in Denmark, this is a very appreciated product among our customers and in society.

Turning the page to Slide 6. In December, we announced that we have signed a binding offer to acquire card out legal information-based businesses in Spain and France. Since the announcement, we have completed consultations with the French and European works councils. In the end of February, we signed a share purchase agreement and have filed regulatory documentation in Spain. We proceed in line with the transaction process, and this transaction is anticipated to be closed during 2022, giving clearance from the Spanish antitrust authority.

We are currently working on a merger plan with relevant work streams, ensuring a successful integration, and we are getting ready to complete the acquisition, both financially and on an operational level.

Next slide, please. I will now hand over the floor to our CFO, Jonas Olin, who will tell us more about the financial results in the first quarter.

[Jonas Olin, executive]

Thank you, Pontus. And as you said, we've had a solid start to the year. So let's start with an overview, switching to Slide 8.

Net sales in the first quarter were SEK 255 million corresponding to a top line growth of 9.2%. We see an increased demand for our services in both our markets, our main markets, which we were able to deliver upon. The organic growth was just below 5% and the acquired growth and currency effects 2% each. The organic growth drivers were mainly sales to new customers and upselling to existing customers within the public sector, municipalities and our EHS vertical.

As DIBkunnskap was acquired in January last year, I just want to remind you that this is now included in our organic growth. The acquired companies -- the remaining acquired companies have performed in line with expectations in the quarter.

Let's move to Slide 9, please. Adjusted EBITDA was SEK 104 million, up SEK 9 million or almost 10% compared to the SEK 95 million previous year. Our margin was stable on a satisfactory level in the first quarter and the adjusted EBITDA margin was 40.8% in the first quarter, which is in line with the previous year. 40.8% is also slightly higher than for the typical full year due to the seasonality of our business.

In the first quarter, we had items affecting comparability of SEK 19 million and these are completely due to the contemplated acquisitions in Spain and France and the post-merger integration plans.

Move on to Slide 10, where you can see the net sales development in 2 different views, and you can also see that in the first quarter, both the online and our subscription-based sales grew.

First, to the left, you see that the online business increased its share of our group sales by 4 percentage points to 79%. The share of subscriptions in our sales to the right on this slide, increased to 85% in the first quarter, which is 2 percentage points higher than last year.

Let's move on to Slide 11, where we have 1 of our 2 segments. In Denmark, we are pleased with the performance that we have seen in the first quarter. In the quarter, sales grew 9% of which organic growth was 3.7%, and the acquired growth amounted to 1.2%. Currency effects had a positive impact of 3.7% on the net sales due to the weaker Swedish kroner.

Organic growth was driven by strong online sales where we see an increased market demand and where our solutions are appreciated among our customers. In the first quarter, we closed the first customer contracts for our new municipality solution in Denmark.

Adjusted EBITDA improved by 4% and the adjusted EBITDA margin was 41.7% in the first quarter. The decreased margin is due to our acquisitions and consolidation of the legal tech start-ups, which are in a scale-up phase. If we adjust for this, the margin was stable compared to previous year.

Move on to Slide 12, which is the Swedish and Norwegian segment. We continue to grow our businesses in this segment, and net sales increased by 9.7%. Organic growth was strong at 5.8%. Acquired growth accounted for 2.8% and the currency effects from the Norwegian business had a positive impact of 1.1%.

The organic growth comes from good online sales to new customers as well as upselling to existing customers. We are proud to say that we continue to gain market shares in the public sector, municipalities and in our EHS vertical.

DIBkunnskap, as Pontus mentioned, launched their IFRS service in Sweden at the end of last year and had its first sales in the quarter. As we acquired the entity in January last year, this is now part of the organic growth also in the segment.

Adjusted EBITDA margin improved by 160 basis points to 40.6%, driven by the increased net sales and the different product mix.

Let's move to Slide 13 and our cash flow. As expected, our adjusted operating cash flow and our cash conversion reached high levels in the first quarter. This is due to our invoicing seasonality where the fourth and the first quarters generate a strong cash flow in our business.

I want to point out that we have adjusted the definition of the adjusted operating cash flow to consider only the cash effect from the items affecting comparability, and this means a slight adjustment of the Q3 and Q4 numbers for '21 as well. That's still a very strong level.

As Pontus mentioned, our leverage was 0.8x at the end of the period and this is due to the strong cash flow from the operating business as well as the net proceeds from the directed share issue we carried out in December. We have secured bridge financing for the intended acquisitions in Spain and France, and with the share issue, then we are ready to execute.

I'm now handing over to Pontus again, who will present our final slides.

[Pontus Bodelsson, executive]

Thank you, Jonas. Please switch to Slide 14. I just want to conclude this presentation by presenting a summary of the highlights of Q1.

We had a solid start to the year with an organic growth of 5%; adjusted EBITDA margin, 40.8%; and the leverage at 0.8x. We grew on both our segments as we managed to deliver on an increased market demand, we see a trend where we sell more licenses to customer groups without formal legal education. We continue to be on our toes, developing with customer centricity in mind. It is of utter importance to provide solutions for their challenges of today and the possibilities of tomorrow. We prepare for future growth as the transaction process in France and Spain proceeds according to plan.

Next slide, please. 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 our host.

[Operator]

[Operator Instructions]

Our first question comes from the line of Erik Moberg from Berenberg.

[Erik Moberg, analyst]

To start off, if you please could dive into the underlying drivers. And if we start with Sweden and Norway, organic growth accelerated during 2020, and this appears to have been sustained here in Q1. If you could sort of bridge that effects of the price versus volume, it would be really helpful.

[Pontus Bodelsson, executive]

Well, we can see a slightly different product mix in this quarter. We have growth in our online products, and in our online products, we have a higher margin. So that's contributing.

On the other hand, normally, every second year, we publish an EU content handbook, and we published it in 2021, not in 2022. So that minimizes in a way our off-line sales during this quarter.

So by saying that, I refer to a slightly different product mix with more sales from online products. So therefore, also a higher margin, so to say.

When it comes to prices, well, as you know, we constantly strive to make our customer benefit and the value of our products even stronger day by day. So there are no specific comments to pricing actually. But constantly, as we try to make our customers more and more efficient. Over time, there will, of course, be an opportunity to raise prices as well.

[Erik Moberg, analyst]

Understood. And sort of if we just think about the year-over-year increase for this segment, percentage-wise, why is it fair to assume that environmental health and safety constituted?

[Pontus Bodelsson, executive]

The EHS is an interesting vertical and we can expand these thoughts not only in Sweden but actually getting into Europe as a whole.

As you know, we made an acquisition for Echoline in 1st of October. And we can see that the whole EHS vertical is performing very well, not only Echoline in France, but of course, also our Swedish company, Notisum.

So it's a vertical that we have a strong belief in and the French acquisition of Echoline is sort of a foothold in Europe. So we will constantly be looking out for new possibilities in Europe.

So yes, correct, EHS is something we do have a strong belief in.

[Erik Moberg, analyst]

And while we're on the subject, your ballpark number, percentage-wise, how much of full group was this in Q1? And where could you see this head over the longer term?

[Jonas Olin, executive]

We don't disclose the separate numbers for individual companies, but it's a smaller part of the business.

[Erik Moberg, analyst]

All right. And then if we move to Norway, obviously, it is recently launched, but if you could just perhaps go over your offering how you differentiate yourself versus your key competitors and how we should perceive this option over the longer term?

[Pontus Bodelsson, executive]

Yes. I assume you mean the DIBkunnskap in Norway. They have a strong brand with a long history of making life easier, so to say, for the tax and accounting employees in many companies. They have a very strong position on listed companies at the Oslo Stock Exchange market. So they have both really big companies customers, but also smaller ones.

So I'd say that it's a workflow tool, but also incorporating a lot of knowledge in making said life easier for those.

So what we can see is that this opportunity in getting into Sweden with DIBkunnskap IFRS product is really, really exciting to see. Also happy, of course, that we have had our first customers onboarded in Sweden.

Apart from that, they are working hard to be really innovative also back in their home market, so to say, in Norway.

So they released the dflow product document management solution in this quarter, and they've also received their first customer on that. So they strive very hard to make sure that they currently improve the working life for their customers and making their workflow tool even more efficient going forward. So high hopes for DIBkunnskap in Norway and Sweden.

[Erik Moberg, analyst]

And then to follow up on that, I mean, in terms of growth rate, where do you see this go over there over the coming years, so to speak? I assume it will grow faster than the remainder of the group. Is there any color you could -- if there is any color you could add there would be really helpful.

[Pontus Bodelsson, executive]

Well, they are growing, of course. I shouldn't make any prognosis there. But I can say that -- well, we look forward to what they can do in Sweden. They have, as I said, a large portion of the listed companies in Oslo. And I do believe that the will get that in Sweden as well. But no numbers. It's way too early.

[Erik Moberg, analyst]

Understood. And then just lastly on Denmark. You mentioned your new municipality solution. If you perhaps could elaborate a bit more on the reception from the clients that you have onboarded as well as the overall outlook, and do you see potential to accelerate growth in Denmark in the same manner as you did in Sweden during 2021?

[Pontus Bodelsson, executive]

Yes, it's interesting, definitely. We launched the municipality product in Denmark by the 1st of September last year. And it's built on all the learnings that we have had from the launch of the municipality product in Sweden. So it's a very good example of how we try to learn from experiences in 1 market and then starting to launch an even better product, so to say, in Denmark already from the beginning. So it's a nice way of seeing how we work over the borders from different markets.

So from the launch in 1st of September, we could see that the municipalities are really interested, but it's public bidding. So it takes some time. But they have been enthusiastic, and we now received the first customer, and they are now onboarded. It's [indiscernible] which is really interesting to see, and we will follow them closely, and they are more on their way.

So we are really, really excited about these products. And again, as I said, now starting to use the learnings from one market, all the learnings from the Swedish municipality product and trying to replicate those improvements, so to say, already from the beginning when we launched by the 1st of September.

[Operator]

[Operator Instructions]

Our next question comes from the line of Daniel Ovin from Nordea.

[Daniel Ovin, analyst]

I had a first question also on the organic growth, which was strong, close to 5%. And you also mentioned that it's driven both by new customers and upselling. So I thought maybe could you break down how much of that growth is basically driven by customers just for us to get an idea? That's the first question.

[Pontus Bodelsson, executive]

Well, yes, you're totally right. It's upselling to existing customers and sales of new products and also, of course, some new customers. But we don't disclose the number between new and existing customers. But yes, I agree. It's good sales for the first quarter.

[Daniel Ovin, analyst]

Just perhaps which is largest driver, which primarily of the 2?

[Pontus Bodelsson, executive]

It's upselling to existing customers.

[Daniel Ovin, analyst]

All right. Okay. Great. That's very helpful. And then another question on the Danish margin, which was down a bit versus last year. And you also mentioned here that it's due to acquisition and consideration of legal start-up. So maybe you can give a little bit more information around what that exactly means?

And also, how should we think about that going forward? Is that a work that is now completed? Or is it something that's going to bear on the margin also in Q2? That's the second question.

[Pontus Bodelsson, executive]

Yes. The companies that we are discussing here is BELLA intelligence, which is a start -- legal tech start-up that works with workflow for bankruptcy law and BELLA, which is an AI search legal tech start-up. It's a way -- as we might have discussed before, it's a way of constantly being on toes to make sure that we improve and using all these new ideas from legal tech start-up firms. And yes, these are 2, but it's a part of our strategy to make sure that we stay close to those interesting new lease tech start-ups. So it might be other cases in coming quarters. But this time, it's BELLA, and I don't know, Jonas, if you have any numbers on that.

[Jonas Olin, executive]

The numbers of -- I mean, in the total picture, they are fairly small, but of course, that impacts on the margin side with about SEK 1.5 million that has affected the results in the quarter.

[Daniel Ovin, analyst]

Great. That's very helpful. Then just one last question also when it comes to the acquisition of the Spanish and the French assets here. It seems like on the -- on what you write in the report that you're now only waiting for clearance by the Spanish antitrust. Is that correct? Is that the only part here that you're still waiting for?

[Pontus Bodelsson, executive]

That's correct, yes.

[Daniel Ovin, analyst]

Okay. And on timing-wise, I think I heard you say previously that you submitted the application in February. Was that correct?

And also, do you have any sense of what is the average time? How long does it used to take for these type of decisions?

[Pontus Bodelsson, executive]

Well, it's a long and complicated process, and you could always argue at the exact time you file the application, so to say. We have been in discussions with them for many months and then with them, I mean the antitrust authorities in Spain. The very large filing part of the process was actually made this week yesterday. But nevertheless, the process has been going on and we have tried to be really close to the antitrust authorities to make them get all the information they need. So we do think that we have a good process together with them.

Regarding the exact time of a go ahead from them, we can't be sure. We hope to have it in the later part of the summer, it could be even longer. But we still have a very good feeling that this is going to happen in 2022. So we are very positive on that fact.

[Operator]

And as there are no further questions, I'll hand it back to the speakers.

[Pontus Bodelsson, executive]

Thank you very much. Thank you all for listening, and thank you for the questions. We will disclose our Q2 report on the 18th of August. So we hope to hear from you then, if not earlier. Thank you very much.

[Operator]

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.