Earnings Call: Q1 2020

May 5, 2020

Welcome to the Connor Group Q1 report 2020. Throughout the call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I am pleased to present CEO Zemming Branhorn Hunt and CFO, Toyota King Kelsian. Please begin your meeting. Thank you very much. Welcome everyone to this earnings conference for Canal Group where we're going to present the outcome of our first quarter of 2020. Next slide, please. I'm Fleming Reinhard, President and CEO of the company. Whitney, I have our CFO, Thorpe and Clawson, and calling in is our IRR specialist, Eric Bercrine. Doran, I will present the outcome of the first 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 are participating via webcast can say questions in written form via the webcast. With that said, let's get started with the presentation of Q1. So let's turn the page, go to next slide. We have started off 2020 with good results, also considering that the corona pandemic reached our markets in Denmark and Sweden in the quarter. In spite of this, the financial results are in line with our expectations. The first quarter of the year is typically our strongest quarter with a higher amount of offline sales. Sales grew by 3%. Organic growth was 2% margin almost 42% and leverage well in line with our targets of not more than 3 times. Next slide please. During March, we have started to provide regulatory information related to the COVID-nineteen pandemic on our online platform, both in Sweden and Denver, in a special section. This section has driven good traffic to our platform and has been very well appreciated among customers and users. We have also succeeded in further expanding our business by investments in both Denmark treatment and our new market Norway. These investments will bring more value to our customers when launched and will opt for entering Norway. We have also strengthened our management team by recruiting new local CEOs for North Strategic And Carla Brook, Denmark, This will enable us to focus even more on our future growth. Turning the page. During the first quarter of 2020, we have concluded 3 new investment consultations. In the beginning of the year, we invested in the day legal textile on enter. Enter is developing new technologies as a standalone offering, but also expect to be implemented in our platform to provide development and efficiency for our customers. The 2nd investment we formed at joint venture, 64% in our favor, with Next 20 fourseven, called Next Nordics. Next 20 fourseven is a CALP Space Legal Enterprise Practice Management solution that represents the way for us of delivering even more value to the customers. Further, the joint venture will operate in the whole Nordic region. Our 3rd and latest acquisition this year will be our way of entering the Norwegian market with an agreement to invest in strawberry roll. This company has now been renamed Carno Group Norway. Our Eagle Research Solution in Norway will be based on a platform collaboration between Carno Group Norway zone data. This collaboration with LOTA is an important milestone for us as LOTA is the most widely used legal information solution in the Norwegian market. The new company, Carnel Group Norway is expected to launch its offering in the second half of twenty twenty one, with a focus on countries, annotations, and new material. Turning the page. Our daily sales have continued to grow in the first quarter. Based upon our market research in the fourth quarter last year, we announced started to intensify our developments of new solutions to support future growth. We will launch an updated online platform in second half of twenty twenty. Our new case preparation tool, which we launched during Q1, is up and running and has had a successful rollout. The feedback has been good, and the cause is appreciated by the users who confirmed the new work tool brings them more value. Or right now, we have a few 100 users for this service. We have also recruited a new CEO of Cano Group Denmark. Up till now, I have held the position in addition to being CEO for the whole Carnor Group, but by strength in our management resources, we will have further focus on growth for the future. Next slide, please. Our Swedish business has had a good start of the year. The organic growth was 3%, driven by good online sales and off selling to existing customers. We have published a new addition of the classical law book Sureshrigger's Law which was well, again, received as lawyers continue to use it as an important point too. During the first quarter, we have continued developing and deploy enhancements to the Juno platform based on feedback from our users. This was continued during the second quarter. As we informed at our Q4 earnings conference. Next slide please. Speaking about the pandemic we have taken several precautions. For instance, by letting our employees working from home, we are of course strictly to the regulations and recommendations from the authorities. We need to ensure that our employees stay healthy despite the pandemic. Their health and well-being our overriding concern currently. We have set up a special section on our platform in Denmark and Sweden, where we are collected all legal and regulatory information about the COVID-nineteen pandemic. Currently, this section comprised more than 60 new laws and law changes nor of guidelines and advices related to the pandemic in Denmark and Treatment. This service has been well received and there has been many searches on our platform related to the COVID-nineteen pandemic. We have chosen to use any of the support programs that governments have introduced to mitigate the financial consequences for companies of the Code 19 pandemic. We believe and are confident that Carno can do without these subsidized. Therefore, the Board of Directors of Carno is still proposing a dividend be decided at our Annual General Meeting later today. I will now hand over to Dora who will tell us more about our financial performance in the first 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 first quarter is typically our strongest quarter of the year, both on top line and on margin. The top line growth was 3% compared to the same quarter last year. Net sales were SEK212 1,000,000. Adjusted EBITDA was improved by 3% to SEK88 1,000,000, with a high and stable adjusted EBITDA margin of 41.6 percentage. Next slide, please. Looking more specifically at our sales growth, organic sales was a little above 2% while currency effect or approximately 1%. The online business continued a steady growth, while the offline market continued, it predicted decline, which was further accelerated by the COVID 19 pandemic. The COVID 19 pandemic is assessed to have reduced overall sales growth by slightly more than one percentage point. Both the Swedish and Danish segments contributed to the increased sales. Next slide please. In the first quarter, adjusted EBITA increased by 3.4% and adjusted EBITA margin was 41.6% which is unchanged from last year. Numbers of FTEs have declined to even though personal expenses have increased compared to last year. A normal level of split on insulin allowance between maintenance and capitalization. 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 con continued also in the first quarter of 2020. First to the left, you see that the online business increased its shares of our group's sales by 4 percentage point to 72%. Some of this shift in sales is probably temporary as the Corona effect reduced the offline sales. The higher share of subscriptions in our sales that you can see from the graph on the right is also practically a reflection of the effect of the pandemic. Here's the increase was 3 percentage points from 77% in Q1 2019 to 80% in Q1 2020. Moving on to the next slide where we have one of our two segments. In Denmark, adjusted EBITA improved by 8% to adjusted EBITA margin by 2 percentage point to 42.5%. This improvement was due to a combination of higher sales, good product mix, and good cost control. Here sales increased by almost 4% a little less than half of this increase came from organic growth and the rest from currency effects. Organic growth was driven by upselling to existing customers The COVID-nineteen pandemic has further enhanced the long term declining trend in the offline market. Sales were negatively impacted by the corona pandemic as booked over closed during most of March. Next slide, please, which is the Swedish segment. Net sales in Sweden increased by 3% which was in line with expectations. All of the net sales increase are organic growth since our reporting currency is Adjusted EBITDA in Sweden declined a little compared to last year due to higher consultancy costs and higher personnel expenses in this quarter. However, as I explained before in connection with slide number 12, this is not a real increase in the FTEs, but a reflection that we're now back a normal degree of split between maintenance and development. Next slide, please. Here we have our cash flow slide. As expected for the 1st quarter, adjusted operating cash flow was strong or up by 4% and in line with expectations. This is a seasonality effect as the great majority of subscription are renewed in December. In the first quarter of this year, the CAS conversion was 173% of a little from 168 for the same quarter last year. The leverage of 2.3 times is well in line with our target of not more than 3 times. As to our balance sheet, you may have noted that we have drawn SEK300 million from our unutilized credit facilities. This is nothing special, but just a way to be prepared and have been possibility to act fast if in these turbulent times a good opportunity arises for an acquisition. I'm now handing over to Fleming again, who will present our last slides. Thank you, Nora. Please switch next slide. I just want to conclude this presentation by presenting a summary of the highlights during the first quarter. We have had a good start of the year, despite the COVID-nineteen pandemic, which has affected the whole society. The financial results are in line with our expectations. We have made 3 new exciting investments: 1 in VIX Nordics, 1 investment in end, and a geographic expansion to Norway, We have recruited new local CEOs from North Asia and Karnataka, Finland. This will make it possible for us to focus even more on our growth moving forward. We are focused on taking care of our employees in the COVID-nineteen endemic and ensured their safety and well-being. We have also set up a special section on our platform in Denmark and Sweden, where we have collected all legal and regulatory information about the COVID-nineteen pandemic. This has been very questions. So I'll hand over the conference again to Alexandra. Our first question is from Daniel Levine from Nordea. Please go ahead. Your line is open. So first question, you mentioned here that were some negative impact from the corona. And you talk about 1 percentage point impact on sales. I just wonder if you would look at the adjusted EBIT Is that the similar impact or higher or lower? And also you mentioned here that, due to timing, you expect to recoup that. So would that already be in Q2, or do you see that being recouped later during the year? That's the first question. Yeah. The impact on the EBITDA, adjusted EBITDA margin or the adjusted EBITDA is, of course, the gross profit on the top line. And and and and as it is offline, then then you can say that it's normally a little lower than the online gross profit. And, due to your question around if, if we will, catch this up already in, in Q2, first of all, we have said that we expect this to be partly cashed up during the year. So I think that all of us are waiting for societies, especially in Denmark to open up again, but also in Sweden. So So when during the year? That will be, I think, that we need all 9 months to do that. Okay. Thank you. And then another thing, we also did gap, before the quarter here that you have some one off, trade last year and that were both for Q4 'nineteen but also Q1, last year. So I just wonder, can you quantify in any way how much that one off trade benefited the Q1 last year? Trade is is normally, with, also a pretty good gross profit as all our different parties. So I think that, that you can, you can take our gross profit and say that that's what we are missing on the trade in average. Okay, all right. Okay, final question here then for me. And that is when I look at the different segments on comparing Denmark and Sweden now, it seems like your margin then rebounded in Denmark from 4, but then the organic growth came down or seems to be a bit lower than when you also mentioned here that you have done some step up investments or, to enhance investments in Danbury. So I just wonder if that's something that you expect also going forward that you need to invest a little bit more in that mark to see organic growth coming back to your target level? I'll take 2 questions to your 2 answers to your question. First of all, take into account in Q1, of course, that the book show in Denmark were closed, which meant that the offline was completely stopped for a period. Secondly, we have, initiative and as it has been outlined also since you could say the IPO that we knew we were using a lot of resources by actually doing the integration, the launch of Juno in Sweden. So the real estate rebound coming up in Denmark and we will, of course, see how to provide those changes. As I also said, later this year for our online service in Denmark, but of course, also looking into which initiatives can bring, at a later stage, more growth in the daily segment. So we are in the process of identifying where I wish areas to, put more focus on combined to those we already have, announced. Okay, perfect. And at the moment, there are no more audio questions. I will hand the word back to you for any other questions. Alright. I have a question here from, Klaus Ng direct to Fleming. Fleming in the the reporter is an extreme focus to tell about the success we serve as legal customers and about new products. For legal. Is it part of the strategy of Carno Group to focus, to, focus on these, customer types for the long run? I I didn't get the which customer touch? Sorry. Please repeat the question. In in the report, there isn't a focus to tell about the success with servers beagle customers and about new products for legal. Is it part of the strategy for Carniv to focus on these customer types for the longer run and the the focus on other customer types. Okay. First of all, you can say that the DNA on the background and the court, what we're doing is actually to have with legislation or related matters to do So it goes without saying that, of course, our focus is on, on all what is related to, you could say, legal customers And, beyond that, it's, of course, the nature of also of us to look into other areas in those markets we are in. Where you could say we can actually get use of our experience in other verticals or the segments and thereby actually getting a increased part of the area of the market. And a good example is, of course, in Sweden, where we have a full, oven running vertical for millions balances. And you could also expect to see our segment in all areas in the future ahead of us. So the answer is yes, it is in that field. We will be, be involved also going forward. Okay. Thank you. We have a another question from Peter Nichols of the board capital, and he asks how much of the organic growth this quarter that was driven by increases in unit pricing It's a question which we have, which we actually cannot explain clearly because what is, important process to measure the number of users, and thereby also to look into which package they actually chose to, get And we are of course very focused on where we see upgrades and downgrades also in terms of which package customers are are interested in. And we still see a good trend that the customers actually are interested in the more advanced packages from Kam to go Denmark and Sweden. Thank you. We have no more outstanding questions. That has been sent in from the web currently. And we have no further audio questions. So I will hand the web back to the speakers for any final comments. Thank you very much. Thank you everyone for listening and your questions. We will report our Q2 report on August 26, and I hope to hear from you then, if not, pleasure. Thank you very much. And you're back in the private speaking area? Okay, good. Very