Earnings Call: Q2 2020

Aug 26, 2020

Welcome to the Carnov Group Q2 Report 2020. Throughout the call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Fleming Brenholt and CFO, Dora Brent Clawson. Please go ahead with your meeting. Thank you very much. Welcome everyone to this earnings conference for Canal 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 Fleming Reinhard, president and CEO of the company. With me, I have, as you heard, CFO, Torgrim Clawson, and also our RR specialist, Eric Burke Gren. 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, consent questions in written form via the webcast. With that said, let's get started with presentation of Q2. So 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-nineteen 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 1 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 the new local CEO's North State boutique and Khanal Group, Denmark. During the second quarter, we have onboarding this Molk Hanson as a new local CEO in Denmark, and Alexandra Oakquist as a new CEO in Sweden. The onboarding has gone well, and they are now fully operational. We have continued developing online offering in the second quarter. In Sweden, we have deployed the junior enhancements close operation with our customers. And 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 Dean's online offering. During March, we form, both in Sweden and in Denmark in a special section. This section has driven good traffic to our platform and has been very appreciated amongst customers. As examples from Denmark, the search and marks for epidemic law increased by 34,000 percentage compared to the same month 1 year ago. And bankruptcy law has had a surge since the 11th 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 anti inter taxes within 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 2 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 2 years. Our new case progression to 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 to brings them more value. The number of users 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 6. Our Suites business has had good performance in the second quarter. The growth drivers were good online sales and upselling to existing customers. For instance, our ESS solution, environmental health and safety has developed positively during the first half of twenty twenty. 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 or we cannot hold classroom courses. Next slide, please. Slide 7. The COVID-nineteen pandemic continues to impact the global sciences 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 9 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 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 carton track are progressing according to expectations with very low churn. As said, we can see a delay in new business due to a longer postponed decision process due to the uncertainties of the global impact of the pandemic. We do not use any of the support program 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's contract? Slide 8. To raise awareness and bring inspiration to legal professionals on 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 old respondents showed a focus on transformation, innovation, and motivation in the legal world in public law firm and corporates. In total, award 3500 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 making necessary to adapt to a new reality. I want to encourage all interested to read the report, which is available on both NASDAQ unique Conconnel Group's 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, Fleming. I will now present and discuss the financial outcome. So let's start with an overview, which is slide number 10. The second quarter has had good overall performance in line with the expectation. The top line growth was 3% compared to the same quarter last year, Net sales, SEK178,000,000. Adjusted EBITDA was improved by 5% to SEK 63,000,000. With an improved adjusted EBITDA margin of 35.5 percentage. Next slide, please. The sales grew was mainly due to good online performance. Organic growth was 2.1% currency effect by 0.3% and acquired growth from the Genomics 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 2nd quarter, adjusted EBITDA increased by 5% and adjusted EBITDA margin was 35.5 percent, which is an improvement from last year. The improved margin is due to the higher net sales the better product mix in 2nd quarter and good cost control. 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 second quarter of 2020. First, with the lift you see that the online business increased its shares of our group sales by 4 percentage point to 87%. The COVID 19 pandemic has accelerated this transition. The higher 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 2 percentage points from 91% in q2 2019 to 93 to Q2 2020. Move on to the next slide where we have the presentation of the 2nd quarter in the Danish segment. In Denmark, adjusted EBITDA was on a good level and the adjusted EBITDA 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 trend 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 EBITDA was stable and almost flat at SEK40 1,000,000 with a high EBITDA margin on 40.4% even with the slightly lower net sales and higher personnel 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, organic growth since our reporting currency is in Swedish crumbs. But we also have had a little acquired growth as the Exnodix performance con is consolidated in the second quarter. Adjusted if it's in Sweden improved to 23,000,000,000 rand 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 SEK49 1,000,000 due to improved operating profit and improved working capital. The CAS 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 3 times. In May, we paid the company's 1st dividend of 0.45 per share which was around, 45,000,000. As to our balance sheet, we have a strong bank and credit line, which makes us prepare and have the possibility to act fast if indeed turbulent signs, a good opportunity arises on acquisition. 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 and open for It will now be a brief pause for the questions of being registered. Our first question comes from Daniel Oven from Nordea. Issued the quarter. So first question is around the COVID-nineteen and the impact here. So you clearly stated that there was around 1 percentage point impact on sales, but could you also say something about what the impact was on such a the EBITDA, and if this was higher or lower. And then also a 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 are you 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 as you know, our offline sales has a, that's where we have the biggest impact. And the that has overall a lower gross margin than, than the online. So, so of course, it has impacted at the bottom line as well. But on the other hand, there's also been, cost savings due to us not traveling or stuff like that. So you can't say overall exact how much it has impacted on the, on the, the EBITDA line. But, but, you can, of course, take our gross profit and then you will have, we also have had some savings concerning your second question, you can say that, we do not give, any forecast asked out for, rest of the year. But 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, that a decision process in general business is taking longer time. And therefore, of course, it's it will somehow also be impacted on the rest of the year. Okay, great. And then just a few questions on Sweden and Danmark here. So starting with Sweden, so strong organic growth here and over point margin expansion. So can you comment on how much of this is from eventual price increases and also Nordest synergy gains, if any? And also if there is any other one offs on the Swedish business? You know, you know that we don't do specific price increase. We improve our value for our customers all the time. So, so 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, where we have grown our business within the the latest year. That is the reason for our strong growth in in Sweden. Then, as you also know, we had a goal of fully effect of the synergies, from the integration work on Noster from 'eighteen and 'nineteen. And as you can see, we are overall with the group, from last year 250 to this year, 240. Full time employees. So 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. And then last question from me on the Danish segment. So I heard see now organic decline in organic growth and also some margin contraction. So I wonder if this mainly COVID-nineteen driven? And is Sweden fairing better from a COVID-nineteen perspective? Or is it mainly driven by that focused 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 on the Swedish market. And therefore, we have not introduced the same number, same level of new work products in the Danish market in the past years. And this is also what we now are, putting full speed into. So we are actually getting back for full and we'll launch more products in the teams market. Thank Our next question comes from Pedro Sivanovich from Carnegie. Please go ahead. Your line is now open. Thank you, operator. Good morning. Fleming Dorn Erik. First question on the next financials in this quarter. It's a positive. I understand there is a currency effect, but this is merely transactional or a translational, right? Yeah. Absolutely, mostly. Yes. Super. And then on tax, asking for some, some guidance here. It is, it is low, below what we have estimated. And it has been so far, for quite some quarters that the tax tax rate has been quite beneficial, for you guys. If you would recommend kind of tax rate would you would you guide us to to use in in forecast to in the coming years. Yeah. Pedro, the the tax rate to to estimate is, of course, always comp depending on if if we are doing better and then we're going to Sweden as you know, we have a big tax laws carried forward in in the Swedish. So so so it always, that fine line where where we actually, earn the most. And as you also know, we have in the last half year or all the time we've been on on the market, guidance that we will be a little below salary, 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, but but to be on the safe side, I've I've gotta say a little lower than the salary of concrete. Thanks, Rachel. All right. Super. And I guess the question here a bit on your future plan. Yeah. I mean, you have clearly a cemented position in Denmark and also in Sweden. The integration of NJ I mean, it's it's been according to plan. And, surely, you must be exploring some some potential M and A at this point. I know you've done a deal, of course, in Nora already, so it makes sense I guess, to increase your presence here. And 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, we also have discussed earlier that, always needs to be a buyer and a seller green, otherwise you can't do with you. And, what we are focusing on is actually from an acquisition point of view, geographical expansion, which we start locked with in the Norwegian market. And of course, if opportunities arise out of that, we will also look into this, of course. It's a matter of, looking into, a bolt on acquisitions, it's also to see where in those adjacent areas are actually a good win for us to be in. So you will actually see the same, you know, from from the strategy we have, lined up where we are, where we wanna be, that this is actually also what we trying to pursue also in, in the years and the months ahead of us. And, you know, the pace of it is very dependent on, is it actually a a good asset. This is a, something where we believe it's possible to get good synergies out of both in the short and the long term. And thereby also, of course, is it possible to find, someone who also has something to sell when he will accept the price to pay for. So I think you could say that all in all, it is actually around the same elements we are focusing on our M and A strategy. All right. I know you mentioned that there has been a high degree of renewals in Q2. Does this rate differ to to to the rate you've seen? For example, for the last year, is it better? Same, same worse? Any any comments to, to that? You can say all of what we want to, send out signal is that it is the same thing. And again, also to, to say that despite that we, have things focusing and are now focusing on new products to be launched. We still have a very high, renewal rate and also in, in the Swedish market, have continued to have a very high rate. So it is exactly on the same team, though. Okay. Super. And, final one, going into the pandemic a bit. You mentioned earlier that you've had some, some cost reductions I mean, due to COVID-nineteen, but 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 or for the future, so to speak? I think it's important to to emphasize that we haven't done anything dramatically in in in either as, as we mentioned here in the presentation, we haven't terminated enough any employee's contract, and we haven't germinated any contracts on on leasing or anything. The, the thing that where we have been saving cost here is in Q2 is due to our, how we can operate. Francings within traveling, or that we haven't had the classroom training or stuff like that, but we haven't taken any, any, actions, to, to reduce costs, other than in restrictions to the regulations that we have got from the official sites. Thank this is Eric from Garner Group. We have gotten a question in the mailbox and the question is how we look at the, outlook in the Norwegian markets. If it say that, we, stepped into Norway in March when it was announced and, where we also said we have a platform collaboration, with load data, and then we will actually be, building up, 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 encometries on, legislation in the Norwegian market. And in order to build this up, we have also clearly stated that we will be launching have up and running in second half of twenty twenty one. And that means that we have now on boarded, many authors and they are now starting off actually, writing those new countries. And we also were looking into how we actually will get the benefit out of the strong EU can or we have from Denmark, and thereby also have that as a part of the loans when we do that in second half of twenty twenty one. So all in all, with see that Norway is an interesting market as we also said when we entered. And we also believe that we will have an ability actually to launch a very strong offering but it is still early days to give any kind of outlook estimates on the on on this. It is actually in second half of twenty twenty one. 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.