Welcome to the Karnov Group Q2 report 2020. Throughout the call, all participants will be in listen only mode. Afterwards, there will be a question and answer session. Today, I'm pleased to present CEO Flemming Breinholt and CFO Dora Brink Clausen. Please go ahead with your meeting.
Thank you very much. Welcome, everyone, to this earnings conference for Karnov Group. I hope you all are well and are staying safe. Today, we are going to present the outcome of our second quarter of 2020. Next slide, please. I'm Flemming Breinholt, President and CEO of the company. With me I have, as you heard, CFO Dora Brink Clausen and also 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. 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 presentation of Q2. Let's turn the page and go to the next slide.
In the second quarter, we have had solid growth in our offering, where especially the Swedish market has influenced positively. The COVID-19 pandemic has impacted offline sales and delayed decision process in new business. The net sales growth was 3% and organic growth was 2%. The COVID-19 pandemic is estimated to have impacted the group's top line growth with one percentage. The adjusted EBITDA margin is 0.8 percentage points stronger than last year, and the leverage is well in line with our target of not more than three times. Next slide, please. In the first quarter, we announced that we had recruited new local CEOs for Norstedts Juridik and Karnov Group Denmark. During the second quarter, we have onboarded Niels Munk Hansen as the new local CEO in Denmark and Alexandra Åquist as the new CEO in Sweden. The onboarding has gone well, and they are now fully operational.
We have continued developing our online offering in the second quarter. In Sweden, we have deployed the JUNO enhancements in close operation with our customers. At the end of the second quarter, we finalized most of these deployments. Moving forward, we will continue to add more value to our platforms. Later this year, we will also launch the upgrade to our Danish online offering. During March, we have started to provide regulatory information related to the COVID-19 pandemic on our online platform, both in Sweden and in Denmark in a special section. This section has driven good traffic to our platform and has been very appreciated among customers. As examples from Denmark, the search in March for epidemic law increased with 34,000% compared to the same month one year ago. Bankruptcy law has had a search since 11th of March this year of more than 115,000 hits.
Turning the page. In the second quarter, we have had decrease in growth in Denmark following a decrease in offline, partly due to general market trends and partly due to the COVID-19 pandemic. The COVID-19 also impacted the demand for products within HR, tax, and indirect taxes within the SME market and delayed decision processes in new business in general. Our online market growth has been less strong in Denmark as earlier predicted because the product development focus has been on Sweden for the past two years. However, the spend on development activities is normalized in Denmark, with our development resources now working on providing new solutions to support the future growth in Denmark compared to the past two years. Our new case preparation tool 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. The number of users is growing for this service. In the second half of this year, the upgrade of our Danish platform will be launched. This will have an improved UX, more intuitive user interface, and better search capabilities, which will help our customers in making better decisions faster. Turning the page, slide six. Our Swedish business has had good performance in the second quarter. The growth drivers were good online sales and upselling to existing customers. For instance, our EHS solution, Environmental Health and Safety, has developed positively during the first half of 2020. During the second quarter, we have deployed the vast majority of the wish list from users to the JUNO platform.
We will continue adding more value and help our users in becoming even more effective. We have continued running our training courses in Sweden virtually in the second quarter. This has been appreciated by our customers who have given us positive feedback. This is a good solution to continue educating lawyers even in a pandemic where we cannot hold classroom courses. Next slide, please. Slide seven. The COVID-19 pandemic continues to impact the global societies and therefore also our business. We continue to take several precautionary measures for our employees, and we are of course still strictly adhering to the regulations and recommendations from the authorities.
Our special section on the platforms in Denmark and Sweden, where we have collected all legal and regulatory information about the COVID-19 pandemic, has high activity and easy access to relevant content. This service has been very well received, and there have been many searches, as I said earlier, on our platform related to the COVID-19 pandemic. The prolonged pandemic has impacted our offline sales in the second quarter, and it also has delayed decision process in new business in general. Our latest assessment is that this will continue the rest of the year. The renewals of our subscription-based contracts are progressing according to expectations with very low churn. As said, we can see a delay in new business due to a longer or postponed decision process due to the uncertainties of the global impact of the pandemic.
We do not use any of the support programs that government have introduced to mitigate the financial consequences for companies of the COVID-19 pandemic, both in Denmark and Sweden. Neither have we terminated any employee contract. Slide eight. To raise awareness and bring inspiration to legal professionals and law firm, last year we established and published the report, The Future Lawyer Survey. The report is published to drive the legal sector in Sweden and Denmark forward. This Monday, we published the second edition. This year, the reply from all respondents showed a focus on transformation, innovation, and motivation in the legal world, in public law firm and corporates. In total, towards 3,500 lawyers and legal educated people from Denmark and Sweden has answered the survey.
The Future Lawyer Survey shows that a clear majority of the respondents perceive the industry as conservative and that several factors make it necessary to adapt to a new reality. I want to encourage all interested to read the report, which is available on both Norstedts Juridik and Karnov Group Denmark's respective websites. I will now hand over to Dora, who will tell us more about our financial performance in the second quarter. Next slide, please.
Thank you, Flemming. I will now present and discuss the financial outcome. Let's start with an overview, which is slide number 10. The second quarter has had good overall performance in line with expectation. The top-line growth was 3% compared to the same quarter last year. Net sales, 178 million SEK. Adjusted EBITA was improved by 5% to 63 million SEK, with an improved adjusted EBITA margin of 35.5%. Next slide, please. The sales growth was mainly due to good online performance. Organic growth was 2.1%, currency effect were 0.3%, and acquired growth from Lexnova added 0.2%. The offline market continued its predicted decline, which was further accelerated by the COVID-19 pandemic. The COVID-19 pandemic is estimated to have reduced overall sales in this quarter by approximately 1%. Next slide, please.
In the second quarter, adjusted EBITA increased by 5% and adjusted EBITA margin was 35.5%, which is an improvement from last year. The improved margin is due to the higher net sales and the better product mix in the second quarter and good cost control. Next slide, please. On slide 13, you see the net sales development with two different views, and you see that the long-term trend in our sales continued also in the second quarter of 2020. First to the left, you see that the online business increased its shares of our group sales by four percentage point to 87%. The COVID-19 pandemic has accelerated this transition. The highest share of subscription in our sales that you can see from the graph to the right is also partially a reflection of the effect from this pandemic.
Here, the increase was two percentage points from 91% in Q2 2019 to 93% in Q2 2020. Move on to the next slide where we have the presentation of the second quarter in the Danish segment. In Denmark, adjusted EBITA was on a good level, and the adjusted EBITA margin was just above 40%. The COVID-19 pandemic has enhanced the long-term declining trend in the offline market, and the pandemic impacted sales of books and print in Denmark, and also demand from the SME market, where companies delay their decision process as their business are more uncertain than law firms. The EBITA was stable and almost flat at 40 million SEK with a high EBITA margin on 40.4%. Even with the slightly lower net sales and higher personal expenses due to a normalized split on development activities, this shows an overall good cost control on the Danish segment.
Next slide, please, which is the Swedish segment, where we have had a good performance. Net sales in Sweden increased by 7%, which was in line with expectations. Most of the net sales increases are organic growth since our reporting currency is in SEK. We also have had a little acquired growth as Lexnova's performance is consolidated in the second quarter. Adjusted EBITA in Sweden improved to 23 million SEK due to the higher net sales, better product mix, and the good cost control. Next slide, please. Here we have our cash flow slide. In the second quarter, we have had strong cash conversion. The adjusted operating cash flow improved to 49 million SEK due to improved operating profit and improved working capital. The cash conversion rate was 66% compared to 25% in the last year.
The leverage of 2.4 times is well in line with our target of not more than three times. In May, we paid the company's first dividend of SEK 0.45 per share, which was around SEK 45 million. As to our balance sheet, we have a strong bank and credit line which makes us prepared and have the possibility to act fast if in these turbulent times a good opportunity arises for an acquisition. Next slide, please. By this, I'll end our presentation, and we are now ready to take questions. I'll hand over the conference again to our host and open for questions.
Thank you. If you would like to ask a question, please press zero one on your telephone keypad. If you would like to withdraw your question, it is zero two. There will now be a brief pause while the questions are being registered. Our first question comes from Daniel Ovin from Nordea. Please go ahead. Your line is now open.
Yes, good morning, Flemming and Dora, and congratulations on a well-executed quarter. First question is around the COVID-19 and the impact here. You clearly stated that there was around one percentage point impact on sales. Could you also say something about what the impact was on adjusted EBITDA, and if this was higher or lower? Also follow up on COVID. You're talking about the rest of the year here being negatively impacted, but as we've seen in other industries, how were you running throughout Q2, and did you go into Q3 on a better note, so to speak? Thank you.
I can start by the first part, Daniel.
Yep.
As you know, our offline sales, that's where we have the biggest impact. That has overall a lower gross margin than the online. Of course it has impacted at the bottom line as well. On the other hand, there's also been cost savings due to us not traveling or stuff like that. You can't say overall exact how much it has impacted on the EBITDA line. You can of course take our gross profit and then we also have had some savings.
Concerning your second question, you can say that we do not give any forecast out for rest of the year. Of course, you can say that continuously we don't see that classroom training will be held for lawyers, as I mentioned. We also see that a decision process in general business is taking longer time, and therefore of course it will somehow also be impacted on the rest of the year.
Okay, great. Then just a few questions on Sweden and Denmark here. Starting with Sweden. Strong organic growth here and over 300 basis points margin expansion. Can you comment on how much of this is from eventual price increases and also Norstedts synergy gains, if any, and also if there is any other one-offs on the Swedish business?
You know that we don't do specific price increase. We improve our value for our customers all the time. Our organic growth in Sweden is mainly due to us upselling to existing customers and of course also gaining some market shares. For instance, within municipalities where we have grown our business within the latest year. That is the reason for our strong growth in Sweden. As you also know, we had a goal of fully effect of the synergies from the integration work on Norstedts from 2018 and 2019. As you can see, we are overall the group from last year, 250 to this year, 240 full-time employees. I think also there you can see that we have gained the synergies as we wanted to, also as you can see on our EBITDA.
Great. Okay, last question from me on the Danish segment. Here we see now declining organic growth and also some margin contraction. I wonder, is this mainly COVID-19 driven, and is Sweden faring better from a COVID-19 perspective? Is it mainly driven by that you focus less on product development in Denmark over the last few years?
You can say that the most important is actually that we have deliberately chosen to have our developing activities focusing on the Swedish market, and therefore we have not introduced the same number or same level of new products in the Danish market in the past years. This is also what we now are putting full speed into. We are actually getting back to full and we'll launch more products in the Danish market.
Okay, great. That's all questions for me. Thank you very much.
Thank you. I remind you that if you do wish to ask a question, you can press zero one on your telephone keypad. Our next question comes from Predrag Savinovic from Carnegie. Please go ahead. Your line is now open.
Thank you, operator. Good morning, Flemming, Dora, and Erik. First question on the net financials in this quarter, it's very positive. I understand there is a currency effect, but this is merely transactional or translational, right?
Yeah. Absolutely mostly, yes.
Super. On tax, asking for some guidance here. It is Below what we have estimated, and it has been so for quite some quarters, that the tax rate has been quite beneficial for you guys. If you would recommend us, what kind of tax rate would you guide us to use in forecasts for the coming years?
Yeah. Predrag, the tax rate to estimate is, of course, always depending on if we are doing better in Denmark or in Sweden. As you know, we have a big tax loss carry forward in the Swedish. It's always that fine line where we actually earn the most. As you also know, we have in the last half year or all the time we've been on the market, guiding that we will be a little below statutory tax rate. I still think that that would be the most proper guidance to do. Of course, I hope that we can save a little more, use our tax loss faster or better. To be on the safe side, I better say a little lower than the statutory tax rate. Tax rate, sorry.
Okay. All right, super. I guess a question here a bit on your future plan. You have clearly a cemented position in Denmark and also in Sweden. The integration of NJ, it's been according to plan, and surely you must be exploring some potential M&A at this point. I know you've done a deal, of course, in Norway already, so it makes sense, I guess, to increase your presence here. If you can walk us through a bit of your thinking here on the acquisition side in the coming years.
I think you can say, all, that as we also have discussed earlier, that there always needs to be a buyer and a seller agreeing, otherwise you can't do a deal. What we are focusing on is actually from an acquisition point of view, geographical expansion, which we started off with in the Norwegian market. Of course, if opportunities arise out of that, we will also look into this, of course. It's a matter of looking into bolt-on acquisitions. It's also to see where in those adjacent areas are there actually a good win for us to be in. You will actually see the same from the strategy we have lined up, where we are, where we want to be, that this is actually also what we are trying to pursue also in the years and the months ahead of us.
The pace of it is very dependent on, is it actually a good asset? Is it something where we believe it's possible to get good synergies out of, both in the short and the long term? Thereby also, of course, is it possible to find someone who also has something to sell and he will accept the price to pay for? I think you could say that all in all, it is actually around the same elements we are focusing on our M&A strategy.
All right. I know you mentioned that there has been a high degree of renewals in Q2. Does this rate differ to the rate you've seen, for example, for the last year? Is it better, same, worse? Any comments to that?
You can say, what we wanted to send out signal is that it is same. Again, also to say that despite that we have been focusing and are now focusing on new products to be launched, we still have a very high renewal rate, and also in the Swedish market have continued to have a very high rate. It is actually on the same trend level.
Okay, super. A final one, going into the pandemic a bit. You mentioned earlier that you've had some cost reductions, due to COVID-19. We've also seen companies debate on reducing the amount of office space due to adapting to new ways of working, which would be more of a long-term benefit as well. Is this anything you have been looked into as well on the cost side for the future, so to speak?
I think it's important to emphasize that we haven't done anything dramatically in either, as we mentioned here at the presentation, we haven't terminated any employee's contract, and we haven't terminated any contracts on leasing or anything. The thing where we have been saving costs here in Q2 is due to how we can operate. For instance, within traveling, or that we haven't had the classroom training or stuff like that. We haven't taken any actions to reduce costs, other than in restrictions to the regulations that we have got from the official sides.
All right. Super. That is all for me. Thank you very much.
Thank you. Once again, a reminder that if you do wish to ask a question, you can press zero one on your telephone keypad now.
This is Erik from Karnov Group. We have gotten a question in the mailbox. The question is, how we look at the outlook in the Norwegian markets.
Yeah. You could say that we stepped into Norway in March when it was announced, and where we also said we have a platform collaboration with Lowdata, and then we will actually be building up a service on top of that, focusing on the EU part and also where we see there is actually a possibility to have a good presence in commentaries on legislation in the Norwegian market. In order to build this up, we have also clearly stated that we will be launching and have up and running in second half of 2021. That means that we have now onboarded many authors, and they are now starting off actually writing those new commentaries.
We also were looking into how we actually will get the benefit out of the strong Karnov Group Denmark we have from Denmark, and thereby also have that as a part of the launch when we do that in second half of 2021. All in all, we see that Norway is an interesting market, as we also said when we entered. We also believe that we will have an ability actually to launch a very strong offering. It is still early days to give any kind of outlook estimates on this. It is actually in second half of 2021, we will be up and running with the product.
Thank you. As there are no further questions at this time, I will now hand back to the speakers for any final remarks.
Thank you very much. Thank you, everyone, for listening and also for your questions. We will report our Q3 report on November 5th, and I hope to hear from you then, if not earlier. Thank you very much and have a good day.