Karnov Group AB (publ)

STO:KAR

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Karnov Group Audiocast Teleconference Q3 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]

Thank you. Welcome, everyone, to this earnings conference for Karnov Group, where we're going to present the outcome of our third quarter of 2021. Next slide, please. I'm 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 third quarter using a few slides, and then we'll open up for questions. With that said, let's get started with the presentation of Q3. Please go to the next slide. We are happy to see the outcome of the third quarter where we have had a stable high growth based on our growing online sales, an increase in demand for our new and existing offerings for both new and existing customers. We also believe we have had a catch-up effect in the third quarter as the comparing quarter last year was hit by the COVID-19 pandemic. Net sales grew by 15%. Organic growth was 8%, EBITA margin of close to 40% and leverage within our target of not more than 3x. Next slide, please. I will now comment a little on our segments, starting first with Sweden/Norway, where we have had another strong quarter. We see a clear trend in Sweden/Norway, where our offerings for the public sector, municipalities and our EHS vertical continue to grow well. Our municipality solution in Sweden is broad, with historic content and functionalities widely appreciated among our customers. In the third quarter, the organic growth was 12.5% due to new customers and upselling to existing customers, where also noncore users are using Karnov services. Further, the catch-up effect was a little larger in the Swedish segment as we have had larger portion of online sales in Sweden/Norway -- sorry, off-line sales in Sweden/Norway. DIBkunnskap has performed well also in the third quarter, in line with our expectations, and we launched less services in Sweden into this year. Turning the page, please. We are happy about the performance in Denmark where we now have launched our solution for municipalities, Karnov Kommune. The municipality solution is based on the same platform as our Swedish municipality solution and is our way of broadening our offering in Denmark with an additional product requested by our customers. We have also Karnov Whistleblower, which is our way of helping our customers meeting the demands following new EU regulations. In the third quarter, the Danish segment developed positively with an organic growth of 4% and an adjusted EBITDA margin on the high level of close to 45%. The growth is driven by a combination of an increase in demand for our new and existing offerings from both new and existing customers. Our enhanced platform, which was launched in the end of February, is appreciated among our customers. We will continue adding more feature to the platform. Turning the page, please. Karnov Group has a solid growth strategy, and our ambition is to grow both organically and through selective value-adding acquisitions. In Europe, the market for Environmental Health and Safety, EHS Solutions, is growing due to increasing regulatory demands and need for compliance tools. The EHS vertical is a great opportunity for Karnov Group to grow on non-jurisdictional markets. In Echoline, we have found a great software as a service company with high recurring revenue and a unique focus on regulatory monitoring. Echoline combines legal intelligence with in-house legal experts and thereby, offers tailored made legal registers and compliance tools in an easy-to-understand language. Echoline solution, therefore, makes it much faster and simpler for companies to be compliant. The acquisition of Echoline is not only another way to grow in the EHS vertical but also proves that Karnov Group is able to make acquisitions on an international level. Early October, we also acquired a majority stake in the Danish legal Czech company, Ante, which had cracked the legal Czech code and developed very efficient search algorithms based on artificial intelligence. We have followed the company as a minority holder for 1.5 years and see great synergies in bringing the company closer to Karnov Group. We will now collaborate deeper, both on go-to-market activities and product development strategy. Next slide, please. I will now hand over to Dora, who will tell us more about the financial results in the third 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, switching to Slide #8. We are very pleased with the results in the third quarter as we had a top line growth of 15% compared to the same quarter last year. However, we believe a little portion of the organic growth is a cash flow effect from the COVID-19 pandemic having an impact on the Q3 results last year. Net sales Q3 was -- this year was SEK 222 million, adjusted EBITDA increased by 14% to SEK 88 million with an adjusted EBITDA margin of 39.5%. Next slide, please. Looking more specifically at our sales growth, organic growth was 8.0%, while currency effects had a negative impact of approximately 0.7%. Acquired growth from DIBkunnskap contributed with 8.0%. We assessed that the catch-up effect on group level was approximately 1 percentage point. The online business continues to grow, while off-line sale was above the general market trend due to the catch-up effect. The main drivers in the online sales are the public sector, municipalities and our EHS vertical. DIBkunnskap has performed according to expectations in the third quarter. Next slide, please. We believe the margin is on a satisfactory level in the third quarter. Adjusted EBITA increased by 14% and the adjusted EBITA margin was 39.5%, which is a decline of 0.4 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 the online sales, better product mix and our strive for operational excellence had a positive impact on our margin. In the third quarter, we have a portion of SEK 7.5 million on items affecting comparability. This is due to our ambitions in executing our local strategy and making acquisitions and includes costs related to our acquisition of Echoline and Ante and other targets. Next slide, please. On Slide 11, you see the net sales development with 2 different views. And you can see that also in the third quarter, the online and subscription-based sales grew. First to the left, you see that the online business increased its shares of our group sales by 2 percentage points to 82%. Off-line sales are typically on a higher level in the third quarter as universities are starting new courses and lawyers have their autumn legal training sessions. Therefore, the catch-up effect had a small impact on this graph. The share of subscriptions in our sales increased to 87% in Q3, which is 1 percentage point higher than last year. Move on to the next slide. Thank you. Here, we have 1 of our 2 segments. In Denmark, we are content to see that we continue to grow organically. In Q3, organic growth was 4.4%, while currency effect had a negative impact of 1.6% on the net sales. Organic growth was driven by strong online sales, especially in legal, where our new products have been appreciated by our customers and we have been able to increase upselling to existing customers as well as attract new customers. The municipality solution was launched on September 1 and will have the same business model as in Sweden with longer contract based on public tenders. Therefore, it will take a little time to see the effect in the net sales. In Denmark, adjusted EBITA improved by 1 percentage point and adjusted EBITA margin was at the high level of 45%. Next slide, please, which is the Swedish-Norwegian segment. The performance on the Swedish and Norwegian market continue to be very good. Net sales increased by 31%; organic growth was 12%; acquired growth announced 8%; while currency effects had a positive impact of 1%. As we have a higher portion of off-line sales in the Sweden/Norway, we believe the catch-up effect was a little larger on this segment than on group level. 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 improved by 27% compared to last year, while the adjusted EBITDA margin declined by 1 percentage point to 34.3%. This was due to deep dilution on 2 percentage points on the Sweden-Norway segment. Next slide, please. Here, we have our cash flow slide. Adjusted operating cash flow was a typically low in the third quarter as our invoicing season is normally Q4 and Q1. In the third quarter, we had a negative cash flow in line with the previous year. Due to timing of payment of other liabilities, the cash conversion rate declined to minus 4%. As you can see on the graph, we will have a strong inflow of cash in the fourth quarter. Our leverage was 2.9x at the end of the period, which is in line with our target of not more than 3x. As for our balance sheet, we have a solid cash and bank and have utilized the power to acquire Echoline and a majority stake in Ante. However, we are still ready to execute should the right acquisition turn up as we have unutilized credit lines and have the possibility to exceed our leverage target if the right acquisition occurs. I'm now handing over to Pontus again, who will present our last slides.

[Pontus Bodelsson, CEO & President]

Thank you, Dora. Please switch to next slide, Slide 15. I just want to conclude this presentation by presenting a summary of the highlights during the third quarter. Number one, we have acquired Echoline in the third quarter and shown our ambition in the EHS field as well as our ability to do international acquisitions. Two, we are happy about the performance in Sweden-Norway, with a strong online sales, both from our core legal services and our closely-related verticals. We look forward to DIBkunnskap launching in Sweden later this year. And number three, our enhanced platform in Denmark is appreciated among our users. We have also launched our municipality solution as another way of providing value to customers in Denmark. 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 please.

[Operator]

[Operator Instructions] Dear speakers, we have no audio questions at this stage.

[Pontus Bodelsson, CEO & President]

Okay. Thank you, everyone, for listening. We will report our Q4 report on the 23rd of February, and we hope to hear from you then, if not earlier. Thank you for listening. Bye-bye.

[Operator]

This concludes today's conference call. Thank you all for attending. You may now disconnect.