Earnings Call: Q4 2019

Feb 21, 2020

Welcome to the Kind of Group Q4 Report 2019. Throughout the call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Today, I am pleased to present COO Fleming Bienhoef and CFO, Dora Blincklawson. Please go ahead with your meeting. Thank you very much. Welcome everyone to this earnings conference for Carno Group. Where we are going to present I'm feeling Breinhold, President and CEO of the company. Here in Stockholm, I have 3 more people. It is, as in previous earnings conference, our CFO, Doropin Klosin, our Head of Investor Relations, Matt Gutmann, and our IR specialist, Eric Bergren. Dora and I will present the outcome of the fourth quarter and full year 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 to the presentation. So let's turn the page and go to the next slide. Where we have the financial highlights during our 1st year as listed company and where we are in line with our expectations set out in the IPO almost a year ago. During 2019, we have been focusing on, first of all, being a listed company, Secondly, the development and implementation of Juno and thirdly, integration of Nordstrom's USD. Despite all three headed task, we have managed to grow organically by approximately 4% and improved our adjusted EBITDA margin from 2018. Following the IPO and new loan arrangements and thanks to strong cash flow, we do now also have a solid leverage of 2.7. Presenting these results makes me confident that we are on track to deliver on the financial targets set up in connection with the IPO. Both in Denmark and Swedish markets are growing strongly and online, while the trend as expected is a decline in offline. We have invested in Cano's digital offering for many years, and we should be able to harvest from these investments during many upcoming years. Next slide, please. I will now take the opportunity to talk about our operational highlights in Q4 2019. We've spoken a lot about Juno, our new joint platform that has replaced the individual platforms in Sweden of car loan and loss security. During Q4 twenty nineteen, the rollout of Journey was completed and all users are now onboarded. Further, the old platforms are closed. We are currently deploying enhancements to the platform using feedback from all our users and we will continue doing so in first half twenty twenty. That's part of meeting customer expectations and our continuous improvement strategy where we use lessons learned from a project or process to further enhance our value offering and all of partnerships and facilities. With the junior rollout in Sweden completed, the platform technology will be used to upgrade our things offering. Turning the page. Looking at the difference market, starting with Denmark. We achieved an organic growth of 3%, which is accordance with expectation. We are always focused on renewing customer contract and as normal, we have had good outcome during Q4. During the fourth quarter, we have actively decided to invest and take some cost for preparation of Carnor's new offensive steps in Denmark. These market offensive includes an upgrade of a Dean's offering, collaboration with a law firm in promoting ecourses on the Dean's market as well as new investments in the legal tech start ups, procurement link, and ended. Procurement link is advanced legal research within procurement law, and it applies automated editorial processes and AI based search technology to legal information, a solution that enables customers to perform case law search across internal and policy available sources. Together with Canal Group, and they expect to continuously launch new practice area solutions over the coming years. The investments are part of Canal Group's strategy of establishing a broad technology platform that creates increased relevance and efficiency for professionals working with legal information, something I will return to later. Turning the page. Turning to our Swedish market, which has had strong performance in Q4. Top line grew by 5% just as expected and by 6% for the fiscal year. We will continuously work closely with our users to further enhance our Juno platform so the users will get the full benefit of this common new platform. In general, the CEO of North Security Gay noticed that he has decided to step down, which will take place in April 2020. We have managed to find a new CEO in Alexander Oquist, who has a proven track record leading our company to growth and with high satisfaction for both customers and employees, and with relevant background. Currently, she's head of a business that offers legal counsel services, and she has a proven track record as country manager. Fortunately, she will be able to start as a new CEO already in May. In the end of Q4, Our Swedish subsidiary, Nautizum, in the Environmental Health And Safety, launched an AI based recommendation function, which adds value to its users. Next slide, please. Finally, after having completed the integration of Noster Du Dick, I'd like to take some time speaking about the journey forward for Carno Group. This integration work, including the Julu platform, has had the priority absorbing more or less all resources for 2 years. Now we can also focus on other things and lift them higher up on the priority ladder. Canno Group is on the journey to add more value to the platform, enabling decision making better and faster for the professionals using the platform. We want to grow in 2 dimensions. 1st, highly specific geodictional products and secondly, general geodictional products. We are currently developing new data driven features and tools. We have invested in a few startups with exciting technologies with both standalone potential and with potentials to bring more value to our existing digital platform. Kana also intends to leverage its position in home markets and pursue geographic expansion for future growth. Geographic expansion opportunities is based on delivering legal information services in additional countries as well as international expansion of Carnos due to Dickson's independent services. An example of the latter is the growing EHS environmental health and safety market. We will now move on to our CFO, Doropin Claustin, who will tell us more about our financial performance let's start with an overview, which is Slide number 9. During Q4, our organic growth was 4.1% and during the full year, 4.0%. This was in line with our expectation and our medium term financial targets of 3% to 5%. Next slide, please. Looking at the full year, we improved our adjusted EBITDA margin by 0.2 percentage point. We are happy about being in line with our expectations despite a margin dip in the 4th quarter. Carna is a stable company and we always recommend you to look at the last 12 possible for us to take the active step and take some costs in Q4 to prepare our new market offensive in Denmark. Further a significant trade in Q4 2018 on the Swedish market affect comparability. This explains the decline in margin in Q4. Next slide, please. Returning to the total sales, it increased by 6%. Currency effect were basically the same as before, 1.7% in Q4 and 1.8% in full year. Online sales continued steady. Net sales growth of 9.2% in Q4, which was even a bit better than the 8.2 average growth rate for the full year. Both the Swedish and the Danish segments contributed to the increased sales. Next slide, please. Where we have the profit and margin performance and where you from the graph see the seasonality in our profit. In the fourth quarter, our year over year adjusted EBITDA declined slightly. However, on a full year basis, our adjusted EBITDA increased by 6.5% and our adjusted EBITA margin improved by 0.2 percentage points to 36.8%. This is in line with our expectations. In Q4 twenty nineteen, the adjusted EBITDA margin declined to 31.4% and our adjusted EBITDA declined by SEK 2,000,000. The decline in adjusted EBITDA is due to our active decision to invest and take some costs for preparation of Carnor's new offensive steps in Denmark. And further the significant trade in Q4 2018 affects comparability. Next slide, please. On Slide 13, you see the net sales development with 2 different views. And that the long term trend in our sales continued also in the fourth quarter as well as during the full year. First, to the left, you see that the online business increased its share of our group sales by 3 percentage point to 77%. Also, as you can see, to the right, The trend of a growing share of subscription sales continued. Here in the increase was 2 percentage points from 84% in Q4 2018 to 86 in Q4 twenty nineteen. Move on to the next slide. Thank you, where we have one of our two segments. Our segment Denmark increased its sales by 6%. A little more than half of the increase came from organic growth and the rest from currency effects. Organic growth was driven by upselling to existing customers. Adjusted EBITDA declined due to the reason I mentioned before when we discussed Slide 12. Next slide please, which is the Swedish segment. Net sales in Sweden increased by 5.0 percent, which was in line with the full year growth of 5.6%. All of the net sales increases are organic growth since our reporting currency is SEK and there are no acquisitions in Sweden. Adjusted EBITDA in Sweden grew by 5.3% despite a one time trade in Q4 2018 with good margin that affects comparability. For the full year, the adjusted EBITDA improved by 8.6% driven by higher net sales and good cost control, while higher depreciations and amortization had a negative impact. Next slide please. We have our cash flow slide. As expected for the fourth quarter, which is our invoicing season adjusted operating cash flow was strong and in line with expectations. In total, the cash conversion was 156% in Q4, compared to 177% in Q4 2018. The lower conversion rate for the quarterly mainly reflects a one time change in processes and timing of invoicing following the acquisition of North Security resulting in a significant positive effect on the cash generation in 2018. On a full year basis, Canno generated more than a quarter of SEK1 billion in adjusted cash flow, corresponding to a cash conversion rate of 89% for the full year. The leverage is stable at a 2.7x. And as you can see from the graph, cash flow should continue to be strong in Q1 this year due to our normal invoicing seasonality. And now I'm handing over to Fleming again, who will present our last slides. Thank you, Dora. Please switch to the next slide. As Dora just stated, Kanno generated more than SEK250 1,000,000,000 in adjusted cash flow for the full year 2019. We are a cash generating company with recurring cash from many subscriptions, Therefore, the board has decided to propose our company's 1st dividend, which they propose will be SEK 0.45 per share. The dividend proposal corresponds to approximately 30 percent of the PPA adjusted net profit since the listing, which is in line with our financial target which is to pay an annual dividend in the range of 30% to 50% of this net profit. When proposing the dividend, the board has taken not only Cano's cash generation capabilities and unutilized credit lines into account, but also the stated objective to do additional investments and acquisitions. Next slide, please. I just want to conclude this presentation by summarizing Carno's 1st year as a listed company. First, the performance during the full year 2019 has followed plan and we are in line with the expectations that we communicated at the listing. Secondly, we have developed and completed the rollout of a new platform platform using feedback that we had received. Thirdly, we have created a strong financial base to grow from and can now focus on making our growth strategy happen. Fourthly, the board has decided to propose a first dividend to the ATM. By this, I'll end our presentation, and we are now ready to take questions. So I'll hand over the conference again to the host. Thank you very session. The first question is from Daniel Oven, Nordea. Yes. Good morning. So, I would like to start off with the extra investments that you're doing in Danmark. So I wonder maybe you can give some kind of indication of how much that impacted the margin and also if that margin would have been up if you exclude this And then also on that same topic, maybe you can talk about, if there is more to come in terms of these investments and also if this is in response to increased competition? For example, should adding more services going forward? That's the first question. Yes. Thank you. We have, we have been, working for actually, the last 24 months in actually looking into what would we do in improving the offering in Denmark when we were finalizing the, all the work done in Sweden And therefore, it's natural for us actually to, to put very much focus on this. And, this is also, as we have explained during earnings conference along the year. What has actually been going on is that we have implemented new go to market strategies. We have been validating products and also thereby getting a good grab on what we actually want to, offer extra in the Danish market. And, it is, correct that there are also, tendency of a new competitive situation in the Danish market. But we also believe that with the, position we have with the strong, offered content builder offer for more than 150 years, that we still have a very, very competitive offering for the Danish market. And for us, it's actually a matter of how to continuously improve this and thereby need our customers in 2 aspects, giving them even more certainty in their research and also further efficiency. So I hope this is actually answering your question. Yeah. Okay. It was just two parts on that also. And post the question, would the margin in Denmark have been up excluding these investments? And also how much more is there to come over the next few quarters? First of all, of course, Martin would have been up if we hadn't taken these offensive steps, And secondly, going forward, I would say that, we are still sticking to our financial, targets And therefore, you could say that, we are still in line and, improving our margins in the midterm as we have also outlined at the IPO. Okay, great. Thank you very much for that. And just turning over to Sweden and also trying to get a sense there. If you would have, can you give any flavor of how much that one time trade, the positive one tried time trade last year, how much that impacted the comparability? And also, maybe you can talk about now that you've done extra investments in Denmark? Is there also on the agenda that you will do the same in Sweden? That's the second question. I can start by saying that, as, as you know, trade comes and goes, and, and, that is the may main one off thing that is really, one off. We we we can't control that one. So in Q4 2018, that was a significant, that's why we are mentioning it. And, and that had a significant impact on the on the EBITA margin, I would say in the range of of between 1 and 2 percentage points. Because I think the last part of your question, It is, our intention actually to, be and be seen and, take our responsibility as the leading company in both Denmark and Sweden. And therefore, we will continuously develop our pursuit we will develop our offering, and we will also be looking into how actually, to develop, to get into new segments a lot. And that is unchanged. And with all the integration job behind us, we will also get more muscles in order to actually do so also in the Swedish market going forward. Great. That's perfect. Thank you very much. And then just a final question from me, if I may. On this you know, integration, now when we have onboarded and that's more than completed. Previously, you've been talking about 7,000,000 in synergies for 2019 and then 19,000,000 for 2020. So if if we just try to, talk about how this phases, I mean, first of all, I mean, have we delivered on on this guidance and and also the 7,000,000, are they coming through already Q1 and also how are the SEK 19,000,000 for 2020? How are they playing out over the year 2020? That's my 3rd and last question. Well, the first part about if we have actually finalize the synergy expectations. I would say yes, also as mentioned earlier, It came a little later this year than we expected from set out back in 2017, but we have finalized all part of the synergies within IT organization living at one premises and only harvest 1 set of of, sources. So yes, we have finalized that part. And therefore, of course, we expect to have the full year effect of these synergies in 2020. Coming in. With that said, of course, you are not supposed to just add the full synergies at the bottom line because we also have to take into, to expectations that there are also costs, coming in. We have also noticed that there is now we have the full picture of the cost and consequences of being a lithic company, also with higher attention to us. So therefore, we also have to have added custom, marketing, IT, security, etcetera. So so, therefore, you can't just take all the synergies and and put them at the in the in the at the bottom line in the spreadsheet. Okay. But but excluding that, so the 90,000,000 for 2020, you know, if you try to isolate the extra costs, so just in terms of synergies, how do you expect those to play out over 20? When when are you kind of realizing them and start seeing them in in the numbers? We we expect them them to to be the full year effect of actions taken in 2019. So therefore, they will be rather equal over the over the year. Okay, perfect. That's all my questions. Thank you very much. The next question is from Craig Sieveni Beach, Carnegie. Your line is now open. Hi. Thank you very much. This is Ted Ag from from Carnegie. Thank you for letting me on. Just following up on the previous discussion on the competitive landscaping in Denmark, did you mention shoots entering the market? You do not really believe they can take market share from you since you're probably stronger, but could it potentially distort your plans on pricing increases going forward, which I assume you have some expectations of in the coming years? First of all, it's important for me to outline that we, of course, always look carefully after what competitors are doing. And, this we also do with this new attempt from juice, which has been in the market for many years. Secondly, you can say, we still believe, and, we have a very strong offering. And with the offensive steps we're taking that we will also continuously be able to keep our position and thereby also still developing our markets. And also, you could say our relationship with customers, whether it will have, any impact on possibilities of higher price increases, lower price increase. I think that is actually based on how much value are we able to bring forward to our clients and thereby seeing how much are they actually willing to, to pay for this? And that is a little too early to say what would be outcome in, you know, years to come, but we are quite confident that our offering is still strong. And with all the new extra elements that we are actually creating more value of our users. Okay. Super. So one could say this, this slide is entirely in your hands pretty much on on how how well your product offering develops more than than the market dynamic of them entering. I think one also always have to have a great respect of all new things happening from competitors But on the other hand, also, believe in what we are doing and all the info we are getting from market and so on. And we have the confidence that we will still be able to develop our offer. So it will not only be good. It will bring more value to our clients and thereby also live up to a very high net promoter score in the Danish market. Okay. Thank you very much. And on product launches, you did mention some, some earlier are you more targeting to upsell on your existing client base, or could you potentially even add a new client segment, say say grow your strength in the finance sector, etcetera. What are your ideas ideas here? We have a, a 2 folders approach. 1 is, to, put the necessary strength into existing offering and also thereby, upselling and more sales of services to existing customers. And the other hand also look into what are new developments capable of. For instance, mentioned in, the new verticals in procurement law will also open up for new segments, which today is not part of Carno's natural customer base. So it is a combination of both doing more for existing and also looking into new segments. And this is also something we will be reverting to during the year. Okay, great. And again, a follow-up on Daniel's question earlier on the investments taking Denmark and, and, and rightfully so, you did say that the margin would have been up in Denmark but can you quantify more so we just get get a little more sense of of how, what the difference would have been? Is it 39% adjusted or what are we looking at in terms of the figure? I don't think it's, it's, we will step in actually, giving further. You could take guidance on that. We even say that It is a matter of that we have used, technological resources for actually preparing, and that means, it has, less capital season in Denmark. We have, subsets being, outspending, quite some energy and cost for actually preparing, and and all in all, you can say that it had had an effect on the result, but, I don't want to get into more details around that. Okay. Thank you. And then a final one for me, if we can get some more flavor, maybe I missed it earlier in the conference, but, on the right of the subsidiary you do in the quarter, of the older subsidiary. What what is the status of this acquisition now and and and going forward? Eagles cross border? Yeah. It's, yeah, that's a subsidiary we invested in in 20 17. And, we have done this write down due to accounting principles, but, we have absolutely faith in in the the revenue and the and the product to to to be delivered and the revenue to come it has been delayed compared to our first expectations. Okay. Super. Thank you. Thank you very much for answering my questions. Further questions. As there are no further questions, I would like to hand back to the speakers for some closing words. Thank you. Thank you everyone for listening and your questions. We will report our Q1 on May 5th, and I hope to hear from you then, if not earlier. You very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded.