Karnov Group AB (publ)

STO:KAR

Earnings Call Transcript 2021-Q2

[Operator]

Welcome to the Karnov Group Audiocast with Teleconference Q2 2021. [Operator Instructions] Today, I'm pleased to present CEO, Pontus Bodelsson; and CFO, Dora Brink Clausen. Please go ahead with your meeting.

[Pontus Bodelsson, CEO & President]

Welcome, everyone, to this earnings conference for Karnov Group, where we are going to present the outcome of our second quarter of 2021. Next slide, please.I am Pontus Bodelsson, President and CEO of the company. With me, I have our CFO, Dora Brink Clausen; and our IR specialist, Erik Berggren. Dora and I will present the outcome of the second quarter using a few slides, and then we'll open up for questions.With that said, let's get started with the presentation of Q2. So let's turn the page and go to the next slide, please. We are satisfied with the outcome of the second quarter, having a solid organic growth based on strong online sales. The growth is driven by a combination of an increase in demand for our new and existing offerings from both new and existing customers. We can especially see a growth in the public sector, municipalities and our EHS vertical.Net sales grew by 13%, organic growth was 7%, EBITA margin of 35% and leverage within our target of not more than 3x also after the acquisition of DIB.Next slide, please. I am honored and humbled to have been given the opportunity to become the CEO of Karnov Group. And I've now led the group for the past 3 months. Some of you might want to know more about me and my background. So I would use the next minute or 2 to introduce myself. I am 54 years of age and have been CEO for the past plus 20 years. I have studied the law and also have an MBA. Prior to joining Karnov Group, I have been the CEO of Nationalencyklopedin, the Swedish national encyclopedia, working with approximately 3,000 authors and experts, working with digitalization and reshaping the business model suiting for a digital landscape. I've also been the CEO of the media group, Sydsvenskan, Helsingborgs Dagblad where I was involved in the merger between the 2 companies. I have a great interest in leadership and have given lectures on universities as well as written a few books on the topic. I've also an interest in e-health and have been a Board member in a couple of e-health companies, such as MinDoktor, where I was the Chairman for some years. I've now let the Board in many of the companies to focus on Karnov Group, but still I'm the Chairman in one e-health company focused on artificial intelligence, AI, as I believe that can be useful in the future journey of Karnov Group.Next slide, please. Having been the CEO for the past 3 months, I've been gaining insights from many sources, meetings, customers, employees, authors, experts, shareholders and analysts. Karnov Group plays an important part in a society based on justice and democracy. Our mission is crystal clear. With over 1,500 dedicated legal experts and authors, we provide highly important content and information used daily by judges, lawyers and tax professionals. That is something to be proud of, but also to be humble about.We have long relationships with our customers. We honor the customers' loyalty by providing solutions for their challenges of today and their possibilities of tomorrow. It's crucial that we stay close to our customers. We must take every chance to increase the customer value by putting our unique content in the customer's context. The complexity of legal work is increasing, and the frequency of legislative change is rising. Our quality content is more needed than ever, and we have great goals to achieve. Karnov Group has a solid strategy, and our work is not about changing the strategy, it's about improving the execution.Karnov will continue to be a successful group if we live our current strategy and our important mission to contribute to the justice in our society. I see promising potential to strengthening our offerings even more and to continue growing Karnov Group.Next slide, please. In Denmark, we've had another strong quarter with an organic growth of 5% and an adjusted EBITA margin of 40% in Q2. The growth is driven by a combination of an increase in demand for our new and existing offerings from both new and existing customers. We have continued being active in the market. Our enhanced platform, which was launched in the end of February, is now a standard solution for a majority of our users. We are pleased with the user feedback we've had. We will continue adding more features to the platform.For the past year, we have launched new products, such as our online library and our preparatory work tool. We also plan to launch new products. In the second half of this year, we will launch our offering for municipalities called Karnov [indiscernible]. Turning the page, please. The new segment, Sweden/Norway, continued to have satisfying performance. The organic growth of 9% was driven by online sales, both to new customers and upselling to existing customers. We see good development in our offering for the public sector, municipalities and our EHS vertical, and we can see we are gaining market shares in these areas. DIBkunnskap has performed well in the second quarter in line with our expectations, and the company is now preparing to launch their services in Sweden later this year.Turning the page, please. I will now hand over the microphone to Dora, who will present more of the financial results for the second quarter.

[Dora Brink Clausen, Group CFO]

Thank you, Pontus. And as you said, a solid quarter for Karnov Group. So let's start with an overview, which is Slide #9.We had a strong second quarter with a top line growth of 13% compared to the same quarter last year. Net sales was SEK 201 million. Adjusted EBITA increased by 11% to SEK 70 million, with an adjusted EBITA margin of 35%. Next slide, please. Looking more specifically at our sales growth. Organic growth was 6.6%, while currency effects had a negative impact on approximately 2.3%. Acquired growth from DIBkunnskap contributed with 8.7%. The online business continues to grow, while offline sales declined in line with the general market trend. The main drivers in the online sales are the public sector, municipalities and our EHS vertical. DIBkunnskap has performed according to expectations in the second quarter.Next slide, please. We are content with the margin for the second quarter. Adjusted EBITA increased by 11%, and the adjusted EBITA margin was 35%, which is a decline of 0.5 percentage points. The decline is due to the acquisition of DIBkunnskap, which has diluted the group margin with approximately 1 percentage point as announced earlier. The increased net sales, predominantly from online sales, better product mix and our strive for operational excellence, has had a positive impact on our margin.Next slide, please. On Slide 12, you see the net sales development with 2 different views. And you see the long-term trend in our sales continued also in the second quarter of 2021. First, to the left, you see that the online business increased its share of our group sales by 2 percentage points to 89%. As you can see, typically, offline sales are on a lower level in the second quarter. As the portion of the online sales was on such a high level also this year, the share of subscriptions in our sales was 93% in Q2 2021, just like last year.Move on to the next slide. Thank you. Where we have 1 of our 2 segments. We are pleased to see that we continue to grow organically in Denmark. In Q2, organic growth was 5%. However, net sales was flat due to the FX effect having an equally negative impact. Organic growth was driven by strong online sales where our new products have been appreciated by our customers with us being able to increase upselling to existing customers as well as attract new customers. In Denmark, adjusted EBITA declined by 1% and adjusted EBITA margin was flat at a high level of 40%. Next slide, please. So the Swedish and Norwegian segment. The performance in the Swedish and Norwegian market was satisfying. Net sales increased by 29%. Organic growth was 9%. Acquired growth accounted for 19%, while currency effect had a positive impact of 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 are gaining market shares in the public sector, municipalities and in our EHS vertical. Adjusted EBITA in Sweden increased by 35% compared to last year, while the adjusted EBITA margin improved by 0.5 percentage points to 30.1%. This was due to the increased net sales, change in product mix and operational excellence.Next slide, please. Here, we have our cash flow slide. Adjusted operating cash flow was, as typical, a little lower in the second quarter as our invoicing season is normally Q4 and Q1. In the second quarter, we had another quarter with good cash flow. However, timing of payment of other liabilities has reduced adjusted operating cash flow by SEK 11 million, causing the cash conversion rate declining to 46%. Looking at the adjusted operating cash flow LTM, it has increased. Our leverage was 3x at the end of the period, which is in line with our target of not more than 3x. As to our balance sheet, we have had -- paid close to SEK 100 million in dividend in the second quarter and still have a solid cash and bank.I'm now handing over to Pontus again, who will present our last slides.

[Pontus Bodelsson, CEO & President]

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 second quarter. Our enhanced platform in Denmark is now the standard solution for a majority of our users. We are planning to launch new products in the second half of 2021. We are happy about the performance in Sweden/Norway, with strong ongoing sales built from our legal services and our closely related verticals. We will stay even closer to the customers and provide solutions for their challenges of today and their possibilities of tomorrow.Next slide, please. Well, then by this, I'll end our presentation. And we are now ready to take questions. So I'll hand over to -- the conference again to our host.

[Operator]

[Operator Instructions] Our first question comes from Predrag Savinovic from Carnegie.

[Predrag Savinovic, Research Analyst]

So firstly, to Pontus, you recently started. Can you talk a little bit about your order of priorities for Karnov now in the coming years and what you hope to bring to the organization?

[Pontus Bodelsson, CEO & President]

Yes. Thank you for the question. Well, I'd like to underline that I see that we have a solid strategy. So I'm planning to steer the organization in the same direction. So just to underline what that is, we will make sure that we're trying hard to expand our core and also, of course, be interested in adjacent verticals. And on the top of that, we are continuously looking at new geographies. I'm impressed by our dedicated employees and not to forget the deep knowledge coming from our authors and experts. So it's important that we stay focused on having a really high quality of the content. That's the baseline.

[Predrag Savinovic, Research Analyst]

And secondly, on the growth in the quarter. So you have 7% organic here compared to roughly 5% in Q1. So this is another acceleration. You talk about the public sector, municipalities among other things driving this growth, which is quite interesting. And Karnov has talked about this before, but we see this really contributing to figures now. So wondering with these, call them, verticals, what do you expect for them in the future? Have we seen this contribution now and now only or should we see more of these elements driving growth going forward as well?

[Pontus Bodelsson, CEO & President]

Well, for the second quarter, we can see that we have gained market shares in those sectors. And it's -- thanks, obviously, to our being on the -- active on the markets and successful in public biddings, I would say. So hopefully, we will stay successful, but I shouldn't predict the future.

[Predrag Savinovic, Research Analyst]

All right. And finally, we're almost through August now. You probably have a good idea of what Q3 is looking like. Can you just broadly talk about the market trends you're seeing right now? Whether this Q2 performance is also representative for Q3 as well?

[Pontus Bodelsson, CEO & President]

Well, I can talk a bit about what we currently are doing in Denmark because that's very promising. We have, as you know, launched our new enhanced platform in Denmark. We did that in the beginning of -- the end of February. And from the end of June, this is the default solution. So we are happy to see that our customers do appreciate what we have done there with the enhanced platform. On top of that, we are waiting to see the launch of our municipality service in Denmark. So that's 2 really interesting things happening on the market right now in Denmark.When it comes to Sweden/Norway markets, we are looking forward to see DIBkunnskap launching their services in Sweden later this year. And we can also see that Karnov Group Norway are close to launching their services in Norway and that's legal information services.

[Operator]

[Operator Instructions] Our next question comes from Daniel Ovin from Nordea.

[Daniel Ovin, Senior Analyst]

We have first a question on Sweden. So looking at the really strong organic growth are up 9%. And perhaps can you elaborate a little bit more what is driving the growth here? And I also wonder if there is a positive effect from COVID due to easy comparable last year when offline sales were very weak and if there is any support from that factor? Perhaps you can just highlight in what size that is roughly, if that's possible. That's the first question.

[Pontus Bodelsson, CEO & President]

Yes. Thank you, Daniel. Well, let me just point out, we have been talking about the public sector and municipalities so far during your questions. But we mustn't forget the environment, health and safety, the EHS vertical, which have done really good during this quarter #2. So it's 2 things, I would say. It's [ doing ] for municipalities, and that's regarding public sector and municipalities, obviously, and also not to be forgotten, the EHS vertical. That's 2 parts, I would say.

[Dora Brink Clausen, Group CFO]

Yes. And Daniel, when you asked about if it's comparable with the second quarter last year. And as you know, we are not disclosing numbers for online, offline on the 2 segments. And overall, you can say that 93% of our business is subscription this quarter. So there is very low seasonality effect in the second quarter.

[Daniel Ovin, Senior Analyst]

Great. Perfect. Then another question on Sweden also when it comes to the adjusted EBITA margin. So it's up 0.6% despite having a 2 percentage points negative impact from incorporating DIBkunnskap. And that is a quite much higher margin expansion than what we have seen in the last few quarters. So can you maybe elaborate on what is so much stronger this quarter than the previous quarters, if that's possible?

[Dora Brink Clausen, Group CFO]

Thank you for the question, Daniel. I believe that our Q1 in Sweden/Norway segment actually had an even higher adjusted EBITA margin. But the fact is that when we are having a really strong organic growth and acquired growth, when we are good in our product mix, when we have a good cost control and driving operational excellence, then we see also strong adjusted EBITA, both in the actual numbers and also in adjusted EBITA margin. So I think that the focus we have always to optimize our business as you can see that also in the numbers also this quarter.

[Daniel Ovin, Senior Analyst]

Perfect. And then the last question here on Denmark, where you now have the new platform, I guess, it's the JUNO also now in Denmark is a standard default platform here for your customers. So how is the new platform compared to the old one? Is there also more services? Are there more additional services that you can pay for? And in that case, is monetization per customer in Denmark now higher than it was for the older platform? If it's possible to say anything around that would be interesting.

[Pontus Bodelsson, CEO & President]

Well, I can say that the new platform, Karnov Online, is an enhanced platform from the old one. And it's also giving us opportunities to launch new products in connection with that platform, so to say. So it's a huge step for us, and we are really, really glad to see that our customers are appreciating it. And we can see that our customer react positively. We could see that the Net Promoter Scores, the NPS scores are at least as high as they were earlier. So that's a good start for a new platform. So we are really happy with that.

[Operator]

There appear to be no further audio questions. I'll return the conference back to you, speakers.

[Pontus Bodelsson, CEO & President]

Thank you, everyone, for listening and for your questions. We will report our Q3 report on the 4th of November, and we hope to hear from you then, if not earlier. Thank you.

[Operator]

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.